vojvoĐanska banka a.d., novi sad · assembly adopted the decision to merge its business operations...

Translation of the Auditors’ Report issued in the Serbian language

VOJVOĐANSKA BANKA A.D., NOVI SAD

Financial Statements Year Ended December 31, 2018 and Independent Auditors’ Report



CONTENTS Page Independent Auditors' Report 1 Financial Statements:

Statement of Financial Position 2 Income Statement 3

Statement of Other Comprehensive Income 4 Statement of Changes in Equity 5

Statement of Cash Flows 6

Notes to the Financial Statements 7 – 88

Appendix: Annual Business Report


INDEPENDENT AUDITORS’ REPORT To the Board of Directors and Owners of Vojvodjanska banka a.d., Novi Sad We have audited the accompanying financial statements of Vojvodjanska banka a.d., Novi Sad (hereinafter: the “Bank”) enclosed on pages 7 to 88, which comprise the statement of the financial position as of December 31, 2018 and the related income statement, statement of other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the International Financial Reporting Standards, as well as for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Law on Audit and standards on auditing applicable in the Republic of Serbia. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as at December 31, 2018, and its financial performance and cash flows for the year then ended in accordance with the International Financial Reporting Standards. Emphasis of Matter We draw attention to Note 45 to the accompanying financial statements which states that the Bank’s General assembly adopted the Decision to merge its business operations with OTP Bank Serbia a.d, Novi Sad as of April 26, 2019. Our opinion is not modified in respect of this matter. Report on Other Legal and Regulatory Requirements Management of the Bank is responsible for the preparation of the annual business report in accordance with the requirements of the Law on Accounting of the Republic of Serbia. In accordance with the Law on Audit of the Republic of Serbia and Decision on Amendments and Supplements to the Decision on External Audit of Banks, it is our responsibility to express an opinion on the compliance of the Bank's annual business report for the year 2018 with its audited financial statements for the same financial year. In our opinion, the financial information disclosed in the annual business report for 2018 is consistent with the Bank's audited financial statements as of and for the year ended December 31, 2018. Belgrade, March 20, 2019

Nada Suđić

Certified Auditor


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BALANCE SHEET As at 31 December 2018 In RSD thousand

Note

2018

2017

ASSETS

Cash and balances with Central Bank 22 26,095,401 21,416,477

Receivables under derivatives 23

1,115

39,569 Securities 24

11,616,075

16,327,647

Loans and receivables from banks and other financial organisations 25

5,448,097

5,729,058

Loans and receivables from customers 26 85,221,777 73,504,393 Intangible assets 27

151,681

172,693

Property, plant and equipment 28

4,192,552

4,248,264 Investment property 29

122,515

134,835

Deferred tax assets 19

273,849

301,874 Other assets 30

509,182

852,983

TOTAL ASSETS

133,632,244

122,727,793

LIABILITIES

Liabilities under derivatives 31

7,667

17,392 Deposits and other liabilities to banks, other financial organisations and central bank 32

16,297,549

6,030,108

Deposits and other liabilities to other customers 33

98,187,115

97,149,605 Provisions 34

577,461

757,207

Current tax liabilities 18

3,531

1,447 Deferred tax liabilities 19

98,230

83,559

Other liabilities 35

928,975

718,746 TOTAL LIABILITIES

116,100,528

104,758,064 EQUITY

Share capital 36

16,337,550

16,337,550 Profit 36

595,504

-

Loss 36

-

(2,107,478) Reserves 37

598,662

3,739,657

TOTAL EQUITY

17,531,716

17,969,729 TOTAL LIABILITIES AND EQUITY

133,632,244

122,727,793

The accompanying notes form an integral part of these financial statements.

These financial statements have been approved by Management of Vojvođanska banka a.d. Novi Sad on March 20, 2019. Signed on behalf of Vojvođanska banka a.d. Novi Sad: Predrag Mihajlović Spyridon Ntallas Dragana Šarenac President of the Executive Board

Member of the Executive Board/CFO

Head of Аccounting and tax Department


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INCOME STATEMENT For the year ended on December 31, 2018 (in RSD thousand)

Note

2018

2017

Interest income 5

5,456,487

5,620,328

Interest expenses 5

(672,841)

(817,138) Net interest income 5

4,783,646

4,803,190

Income from fees and commissions 6

2,102,989

1,928,842

Expenses on fees and commissions 6

(174,797)

(168,990) Net fee and commission income 6

1,928,192

1,759,852

Net gains / (losses) from change in fair value of financial Instruments 7

(19,016)

7,279

Net gains from de-recognition of the financial instruments recognized at fair value 8

-

45,768

Net gains / (losses) from hedging 9

243

(818) Net exchange rate gains and gains from agreed currency Clause 10

231,700

455,132

Net expenses on impairment of financial assets not recognised at fair value through income statement 11

(423,889)

(2,263,153)

Net gains from de-recognition of the financial instruments recognized at amortised cost 12

31,119

-

Other operating income 13

56,471

48,776 Total net operating income

6,588,466

4,856,026

Salaries, salary compensations and other personal expenses 14

(2,481,860)

(2,399,855)

Amortisation and depreciation 15

(293,521)

(336,972) Other income 16

376,523

63,363

Other expenses 17

(3,544,859)

(4,240,699) Profit / (loss) before tax

644,749

(2,058,137)

Profit tax 18

3,531

1,447 Gains from deferred taxes 18

1,795

90,243

Losses from deferred taxes 18

(47,509)

(138,137)

Profit / (loss) for the period

595,504

(2,107,478)

Basic earnings per share

365 -






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STATEMENT OF OTHER COMPREHENSIVE INCOME For the year ended on December 31, 2018 (in RSD thousand) 2018. 2017. PROFT FOR THE PERIOD 595,504

-

LOSS FOR THE PERIOD -

(2,107,478)

Actuarial gains (Note 39) 22,415

9,234 Positive effects of change in value of equity instruments measured at fair value through other comprehensive income -

102,610

Negative effects of change in value of equity instruments measured at fair value through other comprehensive income (233,391)

-

Positive effects of change in value of debt instruments measured at fair value through other comprehensive income 176,486

7,199

Tax gains relating to other comprehensive income for the period 3,019

- Tax losses relating to other comprehensive income for the period -

(17,855)

TOTAL POSITIVE COMPREHENSIVE INCOME -

101,188 TOTAL NEGATIVE COMPREHENSIVE INCOME (31,471)

-

TOTAL POSITIVE COMPREHENSIVE INCOME FOR THE PERIOD 564,033

- TOTAL POSITIVE COMPREHENSIVE INCOME FOR THE PERIOD -

2,006,290






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Statement of changes in Equity For the period from January 1st do December 31st, 2018 (in RSD thousand)

Share and other

capital

Premium on issue of shares

Reserves from profit and other reserves

Revaluation reserves Profit Loss Total

Balance as of January 1st of the previous year 16,337,430 120 3,207,254 130,178 301,037 - 19,976,019 Total other positive result for the period - - - 101,188 - - 101,188 Losses of current year - - - - - (2,107,478) (2,107,478) Distribution of profit from previous year - - 301,037 - (301,037) - - Balance as of December 31st of the previous year 16,337,430 120 3,508,291 231,366 - (2,107,478) 17,969,729 Balance as of January 1st of the current year 16,337,430 120 3,508,291 231,366 - (2,107,478) 17,969,729 Effects of the first implementation of new IFRS - - - 16,553 - (717,562) (701,009) Adjusted opening balance as of January 1st of the current year 16,337,430 120 3,508,291 247,919 - (2,825,040) 17,268,720 Total other negative result for the period - - - (31,471) - - (31,471) Profit of current year - - - - 595,504 - 595,504 Loss coverage - - (2,825,040) - - 2,825,040 - Payment of dividend - - (301,037) - - - (301,037) Balance as of December 31st of the current year 16,337,430 120 382,214 216,448 595,504 - 17,531,716






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CASH FLOW STATEMENT For the period from January 1st do December 31st, 2018 (in RSD thousand) 2018.

2017.

CASH FLOW FROM OPERATING ACTIVITIES Cash inflow from operating activities 8,342,047

8,295,470

Inflows from interest 5,653,511

6,222,784 Inflows from fees 2,177,392

1,955,487

Inflows from other operating income 510,538

116,929 Inflows from dividends and profit sharing 606

270

Cash outflow from operating activities 6,978,458

7,330,886 Outflows from interest 713,466

864,202

Outflows from fees 176,258

170,134 Outflows from gross salaries, salary compensations and other personal expenses 2,485,002

2,450,569

Outflows from taxes, contributions and other duties charged to income 801,014

813,777 Outflows from other operating expenses 2,802,718

3,032,204

Net cash inflow from operating activities before an increase or decrease in financial assets and financial liabilities 1,363,589

964,584

Decrease in financial assets and increase in financial liabilities 18,821,701

6,140,797 Decrease in receivables under securities and other financial assets not intended for investment 4,746,260

6,140,797

Increase in deposits and other financial liabilities to banks, other financial organisations, central bank and clients 14,075,441

-

Increase in financial assets and decrease in financial liabilities 15,627,495

7,536,897 Increase in loans and receivables from banks, other financial organisations, central bank and clients 15,617,770

6,090,309

Decrease in deposits and other financial liabilities to banks, other financial organisations, central banks and clients -

1,446,079

Decrease in other financial liabilities 9,725

509 Net cash inflow from operating activities before profit tax 4,557,795

-

Net cash outflow from operating activities before profit tax -

431,516 Profit tax paid 1,447

11,134

Dividend paid 301,037

- Net cash inflow from operating activities 4,255,311

-

Net cash outflow from operating activities -

442,650 CASH FLOW FROM INVESTING ACTIVITIES

Cash inflow from investing activities 74,533

38,290 Sale of intangible investments, property, plant and equipment 62,779

35,549

Sale of investment property 11,754

2,431 Other inflow from investing activities -.

310

Cash outflow from investing activities 262,801

282,689 Purchase of intangible investments, property, plant and equipment 262,801

275,168

Purchase of investment property -

7,521 Net cash outflow from investing activities 188,268

244,399

CASH FLOW FROM FINANCING ACTIVITIES Cash inflow from financing activities -

264,718

Loans taken -

264,718 Cash outflow from financing activities 2,410,920

-

Loans taken 2,410,920

- Net cash inflow from financing activities -

264,718

Net cash outflow from financing activities 2,410,920

- TOTAL CASH INFLOW 27,238,281

14,739,275

TOTAL CASH OUTFLOW 25,582,158

15,161,606 NET INCREASE IN CASH 1,656,123

-

NET DECREASE IN CAS -

422,331 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR (Note 22) 17,901,733

17,868,930

EXCHANGE RATE GAINS 231,698

455,134 CASH AND CASH EQUIVALENTS AT END-PERIOD (Note 22) 19,789,554 17,901,733





Notes to the Financial Statements For the Year Ended 31 December 2018 Vojvodjanska banka a.d. Novi Sad

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1. Corporate Information

Vojvodjanska banka a.d. Novi Sad (hereinafter the “Bank”) was established on 31 December 1989. by the transformation of Vojvodjanska banka – Udruzena banka (Associated Bank), Novi Sad. In 1995 the Bank changed its legal form into a joint stock company and became Vojvodjanska banka a.d. Novi Sad. As of 01 December 2017, OTP Bank Serbia a.d Novi Sad (hereinafter: “Parent Bank or Owner) became 100% owner of Vojvodjanska Banka a.d Novi Sad bought shares from National Bank of Greece, Athens. From 01 December Bank is member of OTP group. The bank is in the process of legal and operational merger with OTP Bank Serbia and it is planned that this process will be completed by the end of April 2019. The Bank’s Head Office is located in Novi Sad, 7, Trg Slobode. As of 31 December 2018, the Bank operated through its Head Office located in Novi Sad and 103 branches (31 December 2017: 105 branches). As of 31 December 2018, the Bank had 1,395 employees (31 December 2017: 1,473 employees). The Bank’s registration number is 08074313. Its tax identification number is 101694252. As of 31 December 2018, the Board of Directors consisted of the following members:

- Gábor Kolics Director of Acquisitions and Coordination Department OTP Group

- Imre Bertalan Managing Director of Human Resources Management Directorate of OTP

Bank

- Ferenc Böle IT Project management, IT subsidiary management and IT Architecture of

OTP - Peter Bese Head of International Retail banking of OTP - Darko Spasic Lawyer, one of the owners of “Spasic i partneri” o.d. - Milan Parivodic Lawyer, “Foreign Investors Services” d.o.o. The Board of Directors’ members are elected by the General Assembly, in accordance with valid Statute of limitations. Members are elected for the period of 3 years with the re-election option. The financial statements are adopted by the Bank’s General Assembly.


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2. Basis of Preparation and Presentation of the Financial Statements

2.1 Basis of Preparation and Presentation of the Financial Statements

Legal entities and entrepreneurs incorporated in Serbia are required to maintain their books of account, to recognize and value assets and liabilities, income and expenses, and to present, submit and disclose financial statements in conformity the Law on Accounting (hereinafter referred to as the “Law”, Official Gazette of the Republic of Serbia no. 62/2013). As a large legal entity, the Bank is required to apply International Financial Reporting Standards (“IFRS”), which as per the aforementioned law comprise the following: the Framework for the Preparation and Presentation of Financial Statements (the “Framework”), International Accounting Standards (“IAS”), International Financial Reporting Standards (“IFRS”), as well as the related interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”) and additional related interpretations issued by the International Accounting Standards Board (“IASB”), the translations of which to the Serbian language were approved and issued by the competent Ministry of Finance. In addition, in accordance with the Amendments and Supplements to the Law on Banks (Official Gazette of the Republic of Serbia no. 14/2015), upon preparation of the annual financial statements, banks in the Republic of Serbia are obligated to apply the International Financial Reporting Standards, subsequent revisions and amendments thereto and related interpretations as from their issue date by the competent authorities. The accompanying financial statements are presented in the format prescribed under the Decision on the Forms and Contents of the Items in the Forms of the Financial Statements of Banks (Official Gazette of RS nos. 71/2014, 135/2014,101/2017 and 103/2018). These financial statements were prepared at historical cost principle, except for the measurement of the following significant balance sheet items: • financial assets at fair value through other comprehensive income, • financial assets at fair value through income statement; and • derivative financial instruments stated at fair value. Historical cost is generally based on the fair value of consideration paid in exchange for goods and services. Fair value is the price that can be received for the sale of an asset or paid for the transfer of a liability in a normal transaction between market participants on the date of measurement, regardless of whether the price is directly determined or estimated using another valuation technique. When assessing the fair value of an asset or liability, the Bank takes into account the characteristics of a given asset or liability if other participants in the market would take those characteristics into account when determining the price of that asset or liability on the date of measurement. In the accompanying financial statements, for valuation purposes and / or disclosures, fair value is determined in the manner described above, except for leasing transactions that are within the scope of IAS 17 and valuations that have some similarities with fair value but are not fair values, such as the net sales value in IAS 2 or the value in use in IAS 36. Also, for financial reporting purposes, the fair value measurement is categorized into stages 1, 2 or 3 based on the degree of determination of the parameters for determining the fair value and the significance of the stated parameters for measuring the fair value as a whole, as follows: • Stage 1 – parameters are prices for identical assets or liabilities quoted (uncorrected) in active markets that are available to the entity on the date of measurement; • Stage 2 – parameters are parameters which are not quoted prices classified at stage 1, and which are determinable for the asset or liability, directly or indirectly; • Stage 3 – parameters are undeterminable for a given asset or liability. The Bank’s financial statements are stated in thousands of dinars unless it is otherwise stated. Dinar (RSD) represents the Bank’s functional and presentation currency. All transactions denominated in other than functional currencies are treated as foreign currency transactions. In the preparation of the accompanying financial statements, the Bank adhered to the accounting policies described in Note 3. Standards and interpretations issued that came into effect in the current period, as well as the standards and interpretations in issue but not yet in effect are disclosed hereinafter in Note 2.


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2. Basis of Preparation and Presentation of the Financial Statements (Continued)

2.1 Basis of Preparation and Presentation of the Financial Statements (Continued)

. a) Initial application of new standards and amendments to the existing standards effective for the current reporting period

The following new standards and amendments to the existing standards issued by the International Accounting Standards Board (IASB) have been effective over the current reporting period: • IFRS 9 “Financial Instruments” (effective for annual periods beginning on or after 1 January 2018), • IFRS 15 “Revenue from Contracts with Customers” and further amendments (effective for annual periods

beginning on or after 1 January 2018), • Amendments to IFRS 2 “Share-based Payment” - Classification and Measurement of Share-based Payment

Transactions (effective for annual periods beginning on or after 1 January 2018), • Amendments to IFRS 4 “Insurance Contracts” - Applying IFRS 9 “Financial Instruments” with IFRS 4 “Insurance

Contracts” (effective for annual periods beginning on or after 1 January 2018 or when IFRS 9 “Financial Instruments” is applied first time),

• Amendments to IAS 40 “Investment Property” - Transfers of Investment Property (effective for annual periods

beginning on or after 1 January 2018), • Amendments to IFRS 1 and IAS 28 due to “Improvements to IFRSs (cycle 2014-2016)” resulting from the annual

improvement project of IFRS (IFRS 1, IFRS 12 and IAS 28) primarily with a view to removing inconsistencies and clarifying wording (amendments to IFRS 1 and IAS 28 are to be applied for annual periods beginning on or after 1 January 2018),

• IFRIC 22 “Foreign Currency Transactions and Advance Consideration” (effective for annual periods beginning on

or after 1 January 2018). The adoption of these new standards, amendments to the existing standards and interpretation has not led to any material changes in the Bank’s financial statements.

b) New standards and amendments to the existing standards in issue not yet adopted

At the date of authorization of these financial statements the following new standards, amendments to the existing standards and new interpretations were in issue but not yet effective:

• IFRS 16 “Leases” (effective for annual periods beginning on or after 1 January 2019), • IFRS 17 “Insurance Contracts” (effective for annual periods beginning on or after 1 January 2021), • Amendments to IFRS 3 “Business Combinations” - Definition of a Business (effective for business combinations for

which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2020 and to asset acquisitions that occur on or after the beginning of that period).

• Amendments to IFRS 9 “Financial Instruments” - Prepayment Features with Negative Compensation (effective for

annual periods beginning on or after 1 January 2019),


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b) New standards and amendments to the existing standards in issue not yet adopted (Continued)

The Bank’s management has elected not to adopt these new standards, amendments to existing standards and new interpretations in advance of their effective dates The management anticipates that the adoption of these Standards, amendments to existing standards and new interpretations will have no material impact on the financial statements of the Bank in the period of initial application. The accounting policies and estimates used in preparation of these financial statements are consistent with the those applied upon preparation of the Bank's annual financial statements for 2017, except for newly adopted IFRS, their amendments and interpretations, the application of which had no effect on the Bank's financial position or performance. Preparation of the financial statements in accordance with IFRS requires the Bank’s management to make certain key accounting estimates. It also requires management to use their judgement in applying the Bank’s accounting policies. The areas demanding greater extent of or more complex judgements, i.e., areas where assumptions and estimates are material to the financial statements are disclosed in Note 2.2. Use of Estimates Preparation of the financial statements in accordance with IFRS requires the Bank’s management to make the best possible estimates and reasonable assumptions that affect the application of the accounting policies and the reported amounts of assets and liabilities, as well as income and expenses arising during the accounting period. These estimations and assumptions are based on information available as of the of the financial statements’ preparation date. Actual results may vary from these estimates. Estimates and assumptions are subject to constant review and when adjustments become necessary, they are stated within the income statement for periods in which they became known.

First-Time Adoption of IFRS 16 “Leases” IFRS 16 as adopted by EU shall be effective for annual periods beginning on or after January 1, 2019. It will supersede IAS 17 “Leases”, IFRIC 4 “Determining whether an Arrangement Contains a Lease”, SIC 15 “Operating Leases – Incentives” and SIC 27 “Evaluating the Substance of Transactions Involving the Legal Form of a Lease“. The aim of the new standard is to ensure easier comparability of the financial statements through presentation of both the finance and operating leases within the statement of the financial position (balance sheet) and and provide reliable information to the users of the financial statements on the risks associated with the lease contracts. IFRS 16 eliminates the distinction between the operating and finance leases for the lessee and requires recognition of the right-of-use asset and the relating lease liability per all lease contracts of the lessee. In accordance with IFRS 16, a contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The main element of the lease definition that makes the difference between IAS 17 and IFRS 16 is the requirement that there is control over the identified asset, designated either explicitly or implicitly in the lease contract. Costs relating to the use of leased assets, most of which were previously recognized within the external expenses, will be classified as depreciation/amortization charge and interest expenses. The right-of-use assets are amortized on a straight-line basis, while the lease liabilities are settled by applying the effective discount rate. In the statement of cash flows, the lease principal cash flows will be classified within cash flows from financing activities, while as the payments for short-term leases, small-value leases and variable lease payments, which are not included in the measurement of the lease liabilities, will be classified within cash flows from operating activities. Payments of interest on the lease liabilities will be classifies in accordance with IAS 7. The lessee shall apply IAS 36 “Impairment of Assets” to determine whether the right-of-use asset has suffered impairment and recognize impairment, as appropriate.


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b) New standards and amendments to the existing standards in issue not yet adopted (Continued) First-Time Adoption of IFRS 16 “Leases” (Continued) For lessors, the recognition and measurement criteria of IFRS 16 are similar to those of IAS 17. Leases will continue to be classified as finance and operating leases under IFRS 16. Compared to IAS 17, IFRS 16 requires that lessors disclose more comprehensive information but the main accounting treatment features have remained unaltered. Transition The Bank will use the cumulative catch-up approach, i.e., a modified restrospective approach in adoption of IFRS 16. Such an approach requires the lessee to present the cumulative effect of IFRS 16 as adjustment within equity at the beginning of the first-time adoption period..

The Bank will apply the following practical expedients as transition reliefs under IFRS 16: - use of a single discount rate for a portfolio of leases with reasonably similar charactersitics; - adjustment of the right-of-use assets at the initial application date by amount of any previous onerous lease

provision within the statement of financial position; - use of a simplified method for the lease contracts expiring within 12 months from the initial application date; - exclusion of initial direct costs from measurement of the right-of-use assets at the initial application date; - use of hindsight in determining the lease term for lease contracts that contain lease renewal or termination

options. Impact of IFRS 16 First-Time Adoption on the Bank’s Unconsolidated Financial Statements IFRS 16 Project At the time of these unconsolidated financial statements’ preparation, the Bank had already completed most of the activities on implementation otf the newly adopted IFRS 16. IFRS 16 Implementation Project (the “Project”), commenced in Q4 2017, was carried out in three phases: Phase I – Analysis of lease contracts and collection of data Upon analysis of all the executed contracts, the Bank classified the contracts into the contracts for purchase of services and lease contracts. The contract analysis encompassed all the relevant contracts despite their current classification. In addition, in order to calculate the values of the right-of-use assets and lease liabilities, all the relevant information and data were collected. The Bank presents the right-of-use assets within the statement of financial position for the following underlying assets:

• business premises, offices, • branch office building, • ATM space, and • Advertising space

The average lease terms (useful lives of the presented underlying assets for the right of use from 01 January 2019.):

• business premises, offices ~2 years, • branch office buildings ~4 years, • ATMs -2.5 years, • Advertising space – 4.8 years.


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IFRS 16 Project (Continued) Phase II – Evaluation of lease contracts, calculations In accordance with IFRS 16, the Bank conducted an assessment that included:

- the effect of IFRS 16 adoption on the statement of financial position (balance sheet) at the initial application date (January 1, 2019), and

- the effects of the lease contracts recognized and measured in accordance with IFRS 16 in the statement of financial position (balance sheet) and the profit or loss (income statement) (including future effects).

Using the lease calculation tool, the Bank determined the values of the right-of-use assets, lease liabilities and relating deferred taxes. Phase III – IFRS 16 implementation based on the developed concept Development of the appropriate accounting poiciy and the required disclosures. Description of Adjustments a) Recognition of the lease liabilities Following IFRS 16 adoption, the Bank will recognize lease liabilities relating to the leases previously classified as operating leases unde IAS 17. These liabilities will be measured at the present value of the lease payments at the date of IFRS 16 initial application. Lease payments will be discounted using the interest rate inherent in the lease or, if such a rate cannot be easily determined, using the increased borrowing interest rate. The interest rate applied by the Bank is a weighted average lessee borrowing rate of ~ 2.32% At the initial recognition date, lease payment included in the measurement of the lease liabilities encompass the following types of payments for the right of use assets during the lease terms:

- fixed lease payments reduced by any lease incentives; - variable lease payments dependent on the market index values; - amounts expected to paid by the lessee as residual value guarantees; - the price of purchase option if it is reasonably certain that the purchase option will be exercised; and - payments of penalties for lease contract termination, if the lease term reflects the fact that the lessee has

used the otion to terminate the lease. The Bank uses both short-term (under 12 months) lease assets and small-value lease assets (below USD 5,000), for which lease contracts it does not recognize financial liabilities or any relating right-of-use assets. Such lease payments will be recognized as costs using the straight-line method during the respective lease terms. b) Recognition of the right-of-use assets The right-of-use assets are initially measured at cost. The cost of a right-of-use asset includes:

- amount of the initial measurement of the lease liability; - any lease payments made to the lessor at or before the commencement date, less any lease incentives

received from the lessor; - any initial direct costs incurred by the lessee as a result of the executed lease contract; and - estimated costt that will be incurred by the lessee arising from the obligation to dismantle and/or remove the

underlying asset or the obligation of reconstruction/restoration. c) Use of estimates IFRS 16 implementation requires the management to make certain estimates and calculations that affect measurement of the lease liabilities and right-of-use assets. These include, among other things, the following:

- determining lease contracts to which IFRS 16 will apply; - determining duration of such contracts (including indefinite-term contracts and contracts with renewal

options); - determining interest rate to be used for discounting of the future cash flows; and - determining amortization rates.


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IFRS 16 Project (Continued) Effect on the Statement of Financial Position Effect of IFRS 16 implementation on the recognition of additional financial liabilities and relating right-of-use assets was assessed based on the Bank’s arrangement in effect as of December 31, 2018. As of January 1, 2019, the Bank had in its statement of the financial position the following items:

Estimated financial impact

In thousands of RSD 01/01/2019

Right-of-use asset Lease liability

758,569

758,569

Total impact is recognised as adjustment on capital as of the date of first application. The Bank also included, in the value of the asset with the right of leasing, pre-paid leasing liabilities performed before January 1, 2019. Advance paid prepayments amounted to RSD 4.219 thousand. For this amount, the Bank subsequently reduced its lease liabilities from January 1, 2019. Average weighted amount of included interest rate / increased borrowing rate applied on January 1, 2019 to recognize lease obligations: ~ 2.32%

2.2 Comparative Figures Comparative figures represent the audited financial statements of the Bank as of and for the year ended 31 December 2017, prepared and presented in accordance with IFRS and the valid forms of the financial statements. In accordance with the Decision on Form and Content of Items in Forms of the Financial Statements for Banks (“RS Official Gazette”, no. 71/2014, 135/2014,101/2017 and 103/2018), the National Bank of Serbia has prescribed the forms of financial statements and content of items presented in the balance sheet, income statement, statement of other comprehensive income, statement of changes in equity and statement of cash flows.

2.3 Going Concern The accompanying financial statements of the Bank are prepared in accordance with the going concern principle, which assumes that the Bank will continue its operations in the foreseeable future.

2.4 Functional and Reporting Currency Items included in the financial statements of the Bank are expressed in RSD thousand, unless otherwise stated. Dinar (RSD) is the functional and official reporting currency in the Republic of Serbia. All transactions in currencies that are not functional currency are considered to be transactions in foreign currency.

2.5 Use of Estimates The preparation of the financial statements in accordance with the IFRS requires that the Bank’s management makes best estimates and reasonable assumptions that affect assets and liabilities’ amounts at the date of preparation of the financial statements, as well as the income and expenses arising during the reporting period. These estimates and related assumptions are based on information available as of the date of preparation of the financial statements. Actual results could deviate from those estimates. These estimates and underlying assumptions are reviewed on an ongoing basis, and changes in estimates are recognized in the periods in which they become known. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are materially significant to the financial statements are disclosed in Note 4.


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2.6 Reconciliation of Receivables and Liabilities

Pursuant to Article 18 of the Law on Accounting, the Bank performed reconciliation of receivables and payables with its debtors and creditors, and it maintains credible documentation on the circularization process. The Bank submitted the confirmations to its customers and debtors with the outstanding balance of receivables/payables as of 31 October 2018. In addition, during the course of the annual audit, the independent confirmation procedure with the major customers was performed as of 31 December 2018. Based on the exchanged confirmations, the total amounts of non-reconciled confirmations relating to balance sheet assets is RSD 59,081 thousand. Moreover, confirmations returned due to the failure in delivering include the amount of RSD 4,379 thousand.

2.7 Consolidated Financial Statements As of 31 December 2018, the Bank has no control over other legal entities, and accordingly, does not prepare the consolidated financial statements.

3. Summary of Significant Accounting Policies

3.1. Interest Income and Expense

Interest income and expense, including penalty interest and other income and other expenses from interest bearing assets, i.e., liabilities are recognized on an accrual basis based on obligatory terms defined by a contract signed between the Bank and a customer. Interest income includes interest on loans and advances to customers, coupons earned on fixed income investment and trading securities and accrued discount and premium on treasury bills and other instruments. Fees and direct costs relating to a loan origination or acquiring a security, financing or restructuring and to loan commitments are deferred and amortised to interest income over the life of the instrument using the effective interest rate method. Interest revenue shall be calculated by using the effective interest method. This shall be calculated by applying the effective interest rate to the gross carrying amount of a financial asset except for: • purchased or originated credit-impaired financial assets. For those financial assets, the Bank shall apply the credit-adjusted effective interest rate to the amortised cost of the financial asset from initial recognition. • financial assets that are not purchased or originated credit-impaired financial assets but subsequently have become credit-impaired financial assets. For those financial assets, the Bank shall apply the effective interest rate to the amortised cost of the financial asset in subsequent reporting periods.

3.2 Fee and Commission Income and Expenses The Bank earns/pays fees and commissions from rendering and using the banking services. Fees and commissions are generally recognized on an accrual basis when a service has been provided, i.e. rendered. Fee income from loans and guarantees, which refer to a longer period, are deferred over the period of loans and guarantees.

3.3 Foreign Exchange Gains/Losses Transactions denominated in foreign currency are translated into Dinars at the official exchange rate determined on the Interbank Foreign Currency Market, prevailing at the transaction date. Monetary assets and liabilities denominated in foreign currency are translated into Dinars at the official median exchange rate determined on the Interbank Foreign Currency Market, prevailing at the balance sheet date. Foreign exchange gains or losses arising upon the translation of assets, liabilities and transactions in foreign currency are credited or debited as appropriate, to the income statement, as foreign exchange gains or losses (Note 10).


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3. Summary of Significant Accounting Policies (Continued)

3.3 Foreign Exchange Gains/Losses (Continued)

Receivables and liabilities with foreign currency clause are translated at median exchange rate prevailing at the balance sheet date. Gains or losses arising upon the translation to Dinars of financial assets and liabilities indexed with foreign currency clause are recorded in the income statement within foreign exchange gains/losses and effects of contracted foreign currency clause (Note 10). Commitments and contingencies denominated in foreign currency are translated into dinars at the official median exchange rate of the National Bank of Serbia prevailing at the balance sheet date. The official exchange rates of the National Bank of Serbia, determined on the Interbank Foreign Currency Market, used in the translation of balance sheet items denominated in foreign currencies as of 31 December 2018 and 2017 into Serbian Dinars (RSD), for the major currencies were as follows:

In RSD

31 December

2018 31 December

2017 EUR 118,1946 118,4727 USD 103,3893 99,1155 CHF 104,9779 101,2847

3.4 Financial Instruments

3.4.1 Recognition of Financial Instruments A financial instrument is any contract on the basis of which a financial asset of one entity arises and a financial liability or an equity instrument of another entity. Financial assets and financial liabilities are recognized in the Bank’s balance sheet on the date when the Bank committed to the contractual provisions for a specific financial instrument. 3.4.2 Regular Purchases and Sales Regular way purchases and sales of financial assets and liabilities (i.e., those that involve the delivery within the time period defined by regulation or market convention) are recognized on the settlement date, with the exception of commercial and investment securities and derivative financial instruments, which are recognized on the trade date, which is the date on which the Bank commits to purchase or sell the asset. Other purchases and sales of trading securities are treated as derivatives until the settlement. 3.4.3 Recognition of Deferred Day 1 Profit or Loss When determining the fair value by using valuation models for which not all inputs are market observable prices or rates, the Bank initially recognizes a financial instrument at the acquisition price, representing the best indicator of fair value, although the value obtained from the relevant valuation model may differ. Such difference between the acquisition price and the model value is commonly referred to as “Day 1” profit. The Bank does not immediately recognize that initial difference in the income statement. Deferred Day 1 profit is amortized over the life of the instrument. Any unrecognized Day 1 profit or loss is immediately released to the income statement if the fair value of the financial instrument in question can be determined either by using market observable acquisition model inputs or by reference to a quoted price for the same product in an active market or upon settlement. After entering into a transaction, the Bank measures the financial instrument at fair value, adjusted for the deferred Day 1 profit or loss. Subsequent changes in fair value are recognised immediately in the income statement without reversal of deferred Day 1 profits and losses. 3.4.4 Classification of Financial Instruments

Two steps are required to classify financial assets under IFRS 9: • the Business Model assessment and • an evaluation as to whether the contractual cash flows of each financial asset originated or purchased are Solely Payments of Principal and Interest (“SPPI”).


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3.4 Financial Instruments (Continued)

3.4.4 Classification of Financial Instruments (Continued)

The Bank shall classify financial assets as:

1.subsequently measured at amortised cost, 2.fair value through other comprehensive income or 3.fair value through profit or loss

On the basis of the Bank’s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset.

A Bank’s business model reflects how it manages its financial assets in order to generate cash flows and to achieve defined business goals. Its business model determines whether cash flows will result: • from collecting contractual cash flows, • selling the financial assets • or both.

3.4.5 Measurement of Financial Instruments

Financial assets

A financial asset shall be measured at amortised cost if both of the following conditions are met:

• the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and • the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

A financial asset shall be measured at fair value through other comprehensive income if both of the following conditions are met:

• the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and • the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

In this type of Business Model, the Bank has made a decision that both collecting contractual cash flows and selling are fundamental to achieving the objective of the business model. Compared to the aforementioned business model with an objective to hold loans to collect contractual cash flows, this business model involves greater frequency and value of sales. This is because selling financial assets is integral to achieving the business model’s objective rather than only incidental to it.

A financial asset shall be measured at fair value through profit or loss unless it is not measured at amortised cost or at fair value through other comprehensive income.

Purchased or Originated Credit Impaired (“POCI”)

IFRS 9 introduces another business model in measurement of loans - purchased or originated credit impaired loans, so called POCI loans. These loans are credit impaired upon initial recognition. Bank is performing assessment whether the loan upon initial recognition should be classified as POCI.

Financial asset can be classified as POCI if it is: 1. impaired at the moment of origination 2. suffered substantial modification as credit impaired 3. purchased as credit impaired.

Modification of contractual cash flows

Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment period as well as changes in the loan conditions. The management continuously monitors renegotiated loans to ensure that all criteria are met and that future payments are likely to occur.

When the contractual cash flows of a financial asset are renegotiated or otherwise modified and the renegotiation or modification does not result in derecognition of that financial asset in accordance with IFRS 9, the Bank shall recalculate the gross carrying amount of the financial asset and shall recognise a modification gain or loss in profit or loss.


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3. Summary of Significant Accounting Policies (Continued) 3.4 Financial Instruments (Continued)

3.4.5 Measurement of Financial Instruments (Continued) Financial liabilities The Bank shall classify all financial liabilities as subsequently measured at amortised cost, except for: • financial liabilities at fair value through profit or loss. • financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the

continuing involvement approach applies. • financial guarantee contracts etc. Issued financial instruments and other financial liabilities are initially recognized at fair value net of transaction costs incurred. Subsequent measurement is at amortized cost (unless they are designated as at fair value through profit or loss) and any difference between net proceeds and the redemption value is recognized in the income statement over the period of the borrowing using the effective interest rate method. Deposits from other banks and customers and interest-bearing financial liabilities are initially recognized at the fair value of the consideration received, net of transaction costs except for financial liabilities through profit and loss. Subsequent to the initial recognition, interest-bearing deposits and borrowings are measured at amortized cost. Loan commitments are recognized initially at fair value net of transaction costs incurred. Loan commitments are subsequently stated at amortized cost. Loan commitments are classified as current liabilities, unless the Bank has the indisputable right to settle the obligations for at least 12 months after the balance sheet date. Trade payables and other current liabilities are measured at amortized value, which approximates their nominal value due to the short-term nature of these liabiltities. Financial Derivatives

The Bank uses financial instruments such as currency forward contracts, currency swap and interest swap contracts for hedging and trading purposes. The Bank has chosen to apply trade date accounting for these transactions. Upon closing forward contracts, the Bank records spot transactions from the contract when they have occurred, recognizing concurrently financial assets and liabilities arising from forward transactions which will be realized in the following period. On daily basis, the Bank measures unrealized forward transactions of forward contracts by crediting/debiting them to accrual accounts and the income statement. During 2018. and 2017. the most common financial derivatives in the Bank were currency swaps used to balance short-term gaps in the Bank’s currency positions and to provide the necessary currency structure on the accounts held abroad. 3.4.6. Reclassification of Financial Assets The Bank reclassified the financial assets only in the case of change of business model for managing financial assets it shall reclassify all affected financial assets. If the Bank changes its business model for managing financial assets, it shall apply the reclassification prospectively from the reclassification date. The Bank shall not restate any previously recognised gains, losses (including impairment gains or losses) or interest. The Bank shall not reclassify any financial liability. 3.4.7. Fair Value of Financial Instruments Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between the market participants at the measurement date under current market conditions regardless of whether that price is directly observable or estimated using another valuation technique. Upon estimating the fair value of assets or liabilities, the Bank takes into account characteristics of assets or liabilities that other market participants would also consider upon determining the price of assets or liabilities at the measurement date. Fair value for measurement and/or disclosure purposes in the accompanying financial statements was determined in the aforesaid manner, except for share-based payment transactions, which are in the scope of IFRS 2, leasing transactions, which are in the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as the net realizable value in IAS 2 or value in use in IAS 36.


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3.4.7. Fair Value of Financial Instruments (Continued)

In addition, for financial reporting purposes, fair value measurements are categorized into Stage 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

• Stage 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; • Stage 2 - inputs are inputs other than quoted prices included within Stage 1 that are observable for the asset or liability, either directly or indirectly; and • Stage 3 -inputs are unobservable inputs for the asset or liability. The fair value of financial instruments traded in active markets as of the balance sheet date is based on their quoted market prices of supplies and demand, without any deductions for transaction costs. For all other financial instruments not listed in an active market, the fair value is determined using the appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist and other relevant valuation models. When market inputs are not available, they are determined by estimates that include a certain degree of assumptions in the estimate of fair value. Valuation models reflect the current market conditions at the measurement date and they do not have to represent market conditions before and after the date of measurement. Consequently, all valuation techniques are revised periodically, in order to appropriately reflect the current market conditions. 3.4.8. Impairment of Financial Assets and Provision for Risks The impairment requirements of IFRS 9 are based on an Expected Credit Loss (ECL) model. This impairment model recognizes impairment losses before they are realized. The guiding principle of the ECL model is to reflect the general pattern of deterioration or improvement in the credit quality of financial instruments. At each reporting date, the Bank shall measure the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses if the credit risk on that financial instrument has increased significantly since initial recognition. If, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, the Bank shall measure the loss allowance for that financial instrument at an amount equal to 12-month expected credit losses. The Bank shall recognise in profit or loss, as an impairment gain or loss, the amount of expected credit losses (or reversal) that is required to adjust the loss allowance at the reporting date to the amount that is required to be recognised in accordance with IFRS 9. At each reporting date, the Bank shall assess whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, the Bank shall use the change in the risk of a default occurring over the expected life of the financial instrument instead of the change in the amount of expected credit losses. To make that assessment, the Bank shall compare the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default occurring on the financial instrument as at the date of initial recognition and consider reasonable and supportable information, that is available without undue cost or effort. IFRS 9 requires the classification of all financial assets into three stages. The amount of ECL recognised as a loss allowance or provision depends on the extent of credit deterioration since initial recognition. Under the general approach, there are two measurement bases: • 12-month ECL (stage 1), which apply to all items as long as there is no significant deterioration in credit risk; and • lifetime ECL (“LT ECL”) for stages 2 and 3, which apply when a significant increase in credit risk has occurred on an individual or collective basis. All exposures not classified in either stage 3 or stage 2, or not recognized as credit impaired when purchased or originated, are classified in stage 1. As soon as a financial instrument is originated or purchased it is classified into stage 1. (if the asset is not impaired at initial recognition - POCI). A more detailed description of the methods and criteria for classification of financial assets into s, as well as the methodologies for calculating the expected loss is given in Part 43. Risk Management Note 43.2. Credit risk (IFRS 9).


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3.4.9. Reserves for Estimated Losses on Bank Balance Sheet Assets and Off-balance Sheet Items Reserves for estimated losses on balance sheet assets and off-balance sheet items are calculated in accordance with the National Bank of Serbia’s Decision on the Classification of Bank Balance Sheet Assets and Off-balance Sheet Items (“RS Official Gazette”, no, 94/2011, 57/2012, 123/2012, 43/2013, 113/2013, 135/2014, 25/2015, 38/2015, 61/2016, 69/2016, 91/2016, 101/2017 and 114/2017). Total receivables from one debtor (balance sheet assets and off-balance sheet items) are classified into categories from A to E based on prescribed criteria for the assessment of receivables’ collectability degree. The collectability of receivables from one debtor is assessed based on the debtor’s regular performance of obligations, financial position and quality of obtained collateral. The degree of documented applied criteria, i.e. completeness of a debtor’s credit file also affects the determination of the classification category. Based on the classification of receivables, and pursuant to the stated Decision of the National Bank of Serbia, the reserve amount for estimated losses is calculated by applying the following percentages: 0% for placements classified into category A and B, with the exception for placements classified into category B on the basis of contracts concluded until 30 September 2016, provided that it is not refinancing or restructuring lending, for which percenting of 2% applied, than 15% for placements classified into category C, 30% for placements classified into category D and 100% for placements of category E. Through its internal enactments, the Bank specified in more detail the criteria and methodology for determining a debtor’s classification category, depending on the type of debtor (legal entity, entrepreneur, natural person, categories of receivables for the purpose of additional monitoring of asset quality etc.) as well as the procedures of regular updating of credit files. The Bank determines the required reserve for estimated losses of each borrower as the sum of positive differences between the estimated loss reserve calculated in accordance with the above mentioned decision of the National Bank of Serbia and the established amount of allowances for impairment of balance sheet assets and provision for off-balance sheet items, which are, in accordance with the Bank’s accounting policy disclosed in Note 3.4.8, charged to the income statement (Note 12). As of 31st December 2018, the Bank has decreased amount of required reserves for estimated losses up to zero based on decrease of NPL below 10%, in line with Decision of National Bank of Serbia, so required reserve for estimated losses on balance sheet assets and off-balance sheet items is not included as deductible item from the Bank’s capital in accordance with the National Bank of Serbia’s decision governing banks’ capital adequacy. 3.4.10. Derecognition of Financial Assets and Financial Liabilities Financial assets cease to be recognized when the Bank loses control of the contractual rights governing such instrument, which occurs when the rights of use of such instruments have been realized, expired, abandoned, and/or ceded. When the Bank has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Bank’s continuing involvement in the asset. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the income statement as a gain or loss from the derecognition. Gain or loss from derecognition is calculated at the date of derecognition as a difference between the fair value of the new financial instrument and the carrying amount of the old (before derecognition). 3.4.11. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount reported in the balance sheet if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.


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3.5 Cash and Cash Equivalents

For the purposes of the Statement of cash flows, cash and cash equivalents include cash, balances on current accounts held with other banks, gyro account balances and other cash equivalents (Note 22).

3.6 Repurchase Agreements (“Repo Transactions”) Securities bought under agreements to repurchase at a specified future date (‘repos’) are recognized in the balance sheet. The corresponding cash given, including accrued interest is recognized in the balance sheet. The difference between the sale and repurchase prices is treated as interest income and is accrued over the life of the agreement. Securities purchased from the National Bank of Serbia under agreements to resell, pursuant to the provisions of the General Agreement on the Sale of Securities with an obligation to repurchase, are stated at amortized cost at the balance sheet date.

3.7 Investments in Subsidiaries Subsidiary is a legal entity in which the reporting entity 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. As of 31 December 2018, the Bank does not have investments in subsidiaries.

3.8 Property, Plant and Equipment

Property, plant and equipment mostly consist of buildings, equipment and leasehold improvements. Property, plant and equipment are initially recognized at cost, which includes all costs that are required to bring an asset into operating condition. Subsequent to initial recognition, property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses (Note 28). Costs incurred subsequent to the acquisition of an asset which is classified as property and equipment are capitalised only when it is probable that they will result in future economic benefits to the Bank beyond those originally anticipated for the asset, otherwise they are expensed as incurred. Depreciation of an asset begins when it is available for use and ceases only when the asset is derecognised. Depreciation and amortization are provided on a straight-line basis in order to fully write off the cost/revaluated amount of the assets over their estimated useful lives. The Bank apply the residual value of the property and the estimated lifetime of the property of 50 years. The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already at the end of the useful life and in the condition expected to be at the end of its useful life. As of 01.01.2018, the Bank applies a residual value to real estate in the amount of 25% of the net book value. Residual value represents a percentage of the net book value of buildings and their difference represents the basis for the calculation of depreciation

Land No depreciation Buildings own used Not exceeding 50 years Buildings (investment property) Not exceeding 50 years Leasehold improvements Residual lease term, not exceeding 5 years Furniture and other relevant equipment Not exceeding 12 years Vehicles Not exceeding 12 years Hardware and other equipment Not exceeding 5 years

The impairment test of the property is carried on a annual basis in order to determine whether there are indications which suggest that there is no impairment loss of property. Where there is an indication of impairment, the asset must be tested for impairment by calculating its recoverable amount and comparing this to its carrying value. Where there is partial impairment of an asset such that it still has some value to the Bank, an impairment test is carried out by comparing the recoverable amount of the asset to its carrying amount. The recoverable amount is the higher of the asset’s value in use and its fair value less costs to sell. An impairment loss is recognized as an expense in the amount of the difference, as required by IAS 36 "Impairment of Assets".


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3.8 Property, Plant and Equipment (Continued)

Gains from the disposal or sale of property and equipment are credited directly to other operating income, whereas any losses arising on the disposal of property and equipment are charged to other expenses. The calculation of the depreciation and amortization for tax purposes is determined by the Law on Corporate Income Tax of the Republic of Serbia (“RS Official Gazette” no. 25/2001, 80/2002, 43/2003, 84/2004 and 18/2010,101/2011 and 119/2012, 47/2013, 108/2013, 68/2014,142/2014, 91/2015,112/2015, 113/2017 and 95/2018) and the Rules on the Manner of Fixed Assets Classification in Groups and Depreciation for Tax Purposes (“RS Official Gazette”, no. 116/2004,99/2010 and 104/2018). Different depreciation methods used for the financial reporting purposes and the tax purposes give raise to deferred taxes (Note 19).

3.9 Intangible Assets Intangible assets are non-monetary assets without physical substance from which an inflow of future economic benefits to the entity is expected. The main conditions for the asset to be identified as an intangible asset are:

• identifiable; • existence of the control; and • existence of the future economic benefits.

If the item does not fulfil the requirements set out in the definition of intangible assets, expenses of its acquisition or internal generation are recognized as an expense when incurred. Intangible assets consist of licenses, software and similar rights as well as other intangible assets. Intangible assets are initially recorded at cost less accumulated amortization and accumulated impairment losses, if any (Note 27). The cost of purchased intangible asset includes:

• cost (including import duties and non-recoverable taxes, after deducting trade discounts and rebates); and • all directly attributable costs which are incurred to prepare the asset for its intended use (costs of employee

benefits; professional fees and costs arising directly from testing its operating condition) Costs associated with developing and maintaining computer software programs are recognized as an expense as incurred. The following represent examples of costs that do not meet criteria to be recognized as intangible asset:

• expenditure on training staff to operate the asset • initial operating costs and maintenance costs • reorganizational costs • internally generated brands, and • controlling and advertising costs.

The testing of intangible assets on impairment is performed by comparing the amount of assets that can be recovered to the carrying amount of the assets, as follows:

• on the annual basis, and • whenever there is an indication that an intangible asset may be decreased.

The impairment test for intangible assets (both with definite and indefinite useful life) requires that the Bank assesses the asset’s recoverable value that is higher than its fair value decreased by costs for sale and its value in use. The asset is not impaired if one of these two values is higher than its carrying amount. IAS 36 “Impairment of Assets”, measures impairment loss based on an assumption that the Bank will choose to recover the carrying amount in the most beneficial way. In case an asset’s recoverable value is lower than its carrying amount, the asset’s carrying amount is decreased to its recoverable amount. This decrease represents the impairment loss which should be immediately recognised in the income statement.


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3. Summary of Significant Accounting Policies (Continued) 3.9 Intangible Assets(Continued)

If it is not possible to estimate the recoverable amount of an individual asset the Bank shall determine the recoverable amount of the cash-generating unit to which the asset belongs. In case of newly recognised intangible asset, an impairment test must be carried out before the end of the current annual period.

An impairment loss of an asset recognised in previous years should be reversed if and only if a change has occurred in assessments used for determining the recoverable amount of this asset, after the impairment loss was recognised for the last time. This increase means reversal of the impairment loss and is immediately recognised in the Income Statement.

3.10 Investment Property

The Bank owns property as investments with intention to generate profits from rents and/or increases in property value on the market. Subsequent to initial recognition, investment property is stated at cost less accumulated depreciation and any accumulated impairment loss (Note 29). Depreciation of investment property is calculated using the straight-line method and from 01.01.2018 the basis for the depreciation calculation is the net book value on 01.01.2018 reduced by the residual (Residual value represents a percentage of the net book value 25%) by applying the annual depreciation rate of 2%. The difference between the present value and the residual is the basis for calculating depreciation. The impairment test for investment properties is performed on the annual basis in order to assess whether there are any indications of the impairment of investment property.

3.11 Assets Held-for-Sale A non-current asset is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use for the purpose of performing the activities. Non-current assets held for sale are measured at the lower of carrying amount and fair value less costs to sell and shall not be depreciated In order for property to be reclassified to asset held for sale, it is necessary that non-current asset must be available for immediate sale in its present condition and that the recoverability of the carrying amount through sale transaction must meet the following criteria:

• the appropriate level of management must be committed to a plan to sell the asset; • an active program to locate a buyer and to complete the sales plan must have been initiated; • the asset must be actively marketed for sale at a price that is reasonable in relation to its current fair value; • the sale should be expected to be completed within 12 months from the date of classification as “held for

sale”; and • actions required to complete the sales plan should indicate that it is unlikely that significant changes to the

sales plan will be made or that the plan will be withdrawn.

In case where there are no more prescribed criteria and it has been more than 12 months since asset is reclassified, the legal entity should stop to classify the asset to held for sale and perform reclassification to:

• investment assets if property is leased • or on assets to where it was before reclassification on asset held for sale

When a non-current asset ceases to be classified as held for sale, it is measured at the lower of:

• its carrying amount before the asset was classified as held for sale, adjusted for any depreciation, amortisation or revaluations that would have been recognised had the asset not been classified as held for sale; and

• its recoverable amount at the date of a subsequent decision not to be sold.


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3.11 Assets Held-for-Sale (Continued)

Recoverable amount is the higher of the fair value less costs to sell and the value in use, where the value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Property clasifed as asset held for sale is recorded per acquisition value.During reclassification it is necessary to calculate amount of depreciation for the period that asset has not been amortized and perform posting of depreciation As of December 31, 2018 the Bank didn’t have assets held for sale.

3.12 Foreclosed Assets

The property (land and buildings) which is repossessed following the foreclosure on loans that are impaired is reported within Other assets (Note 30). Assets acquired through foreclosure temporarily held for liquidation are stated at the lower of the carrying amount and the fair value less costs to sell. If the property foreclosure asset is not sell in the period of 5 (five) years from the acquisition, 90% impairments Bank books, no matter of the valuation of external appraisers. If the other equipment foreclosure asset is not sell in the period of 3 (three) years from the acquisition, Bank books 100% impairments.

3.13 Leases

Lease is defined as an agreement whereby the lessor transfers the right to use the asset for an agreed period of time to the lessee, in exchange for a payment or series of payments. There are two main types of lease:

(a) Finance Lease – Bank as a Lessee Finance leases, which transfer substantially all the risks and benefits incidental to ownership of the leased item to the Bank, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments, and are included in property and equipment, with the corresponding liability to the lessor included in other liabilities. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the assets and the lease term, if there is no reasonable certainty that the Bank will obtain ownership by the end of the lease term. Initial direct costs of the lessee (transport costs, approval requirements, installation costs, costs of legal assistance and consultation, etc.) are added to the amount recognised as an asset. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income statement in interest expense.

(b) Operating Lease – Bank as a Lessee Operating lease has the characteristics of a classic rent in which the contract does not transfer all the risks and rewards incidental to ownership of the object of the lease, but the lessor retains the right of ownership, i.e. remains the owner of the lease also after the contract expires. The total payments made under operating leases are charged to other expenses in the income statement on a proportional method basis over the period of the lease.

3.14 Provisions and Contingencies

Provisions are recognized when the Bank has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be determined (Note 34). In order to be maintained, the best possible estimates of provisions are considered, determined and, if necessary, adjusted at each balance sheet date.


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3. Summary of Significant Accounting Policies (Continued) 3.14 Provisions and Contingencies (Continued)

When the outflow of the economic benefits is no longer probable in order to settle legal or constructive liabilities, provisions are derecognised in income. Provisions are taken into account in accordance with their type and they can be used only for the expenses they were recognized initially for. Provisions are not recognized for future operating losses. Contingent liabilities are not recognized in the financial statements. They are disclosed in the financial statements (Note 41), unless the possibility of an outflow of resources embodying economic benefits is small. Contingent assets are not recognized in the financial statements. They are disclosed in financial statements when an inflow of economic benefits is probable.

3.15 Equity Equity consists of share capital (ordinary shares), share premium, reserve from profit, revaluation reserves and unallocated profit for the current year - (Note 36). Gains and losses arising from fair value adjustments of securities available-for-sale, as well as actuarial gains/losses are recorded within revaluation reserves (Note 37).

3.16 Financial Guarantees In the ordinary course of business, the Bank gives financial guarantees, consisting of payment guarantees and performance bonds, letters of credit, acceptances and other warranties. Financial guarantees are contracts which obligate the issuer of a guarantee to perform the payment or compensate the loss to the holder of a guarantee, incurred if a certain creditor fails to settle its liabilities in due time as required under the terms of the contract. Financial guarantees are initially recognized in the financial statements at fair value as of the date the guarantee is given. Subsequent to initial recognition, the Bank’s liability under each guarantee is measured at the higher of the amortized premium and the best estimate of expenditure required for settling any financial obligations arising as a result of the guarantee. Any increase in the liability relating to the financial guarantees is recognized in the income statement. The premium received is recognized in the income statement within net fees and commissions income on a straight-line basis over the life of the guarantee.

3.17 Funds Managed on Behalf of Third Parties The funds that the Bank manages on behalf of, and for the account of third parties, are disclosed within off-balance sheet items (Note 40). The Bank bears no risk in respect of repayment of these placements.

3.18 Employee Benefits

(а) Employee Taxes and Contributions for Social Security In accordance with the regulations prevailing in the Republic of Serbia, the Bank has an obligation to pay tax and contributions to various state social security funds and by these means it provides social security to employees. These obligations involve the payment of contributions on behalf of the employee and by the employer in amounts calculated by applying the specific, legally-prescribed rates. The Bank is also legally obligated to withhold contributions from gross salaries to employees, and on their behalf to transfer the withheld portions directly to the appropriate government funds. These taxes and contributions payable on behalf of the employee and employer are charged to expenses in the period in which they arise.

(b) Retirement Benefits

In accordance with Labour Law, Bank has obligation to pay retirement benefits to employees at least in the amount of two average gross salaries in the Republic of Serbia according to the latest published data of the authority responsible for statistics.


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3. Summary of Significant Accounting Policies (Continued) 3.18 Employee Benefits (Continued) (b) Retirement Benefits (Continued)

The Bank’s Collective Agreement prescribes payment of retirement benefit to employee in case of retirement or termination of employment by force due to loss of working capability in the amount of three salaries that employee would gain for the month that is prior to month in which severance is paid. Severance payment calculated in that way cannot be lower than three average monthly salaries per employee paid by employer for the month prior to month in which severance is paid, i.e. three average salaries per employee paid in Republic of Serbia in accordance with latest announcement of relevant organization if this is more favourable for employee. Bank performs severance payment to employees in accordance with the Collective Agreement. The Bank recognizes long-term provisions for retirement benefits based on actuarial calculation in the amount of present value of expected future payments. Provisions for retirement are closed at the moment of severance payment to individual employee and difference is booked as severance expense. Cost of services is recognized in the income statement when incurred, while the actuarial gains and losses are recognized in the statement of other comprehensive income.

At the balance sheet date, the Bank has made provisions for severance payments for retirement using the following assumptions:

31.12.2018 31.12.2017

- Discount rate 4.8%

6.25%

- Inflation rate 2.50% 2.50% - Average earnings growth 3.50% 3.50%

(c) Short-term Compensated Absences

Accumulating compensated absences may be carried forward and used in future periods if the current period’s entitlement has not been fully used. In the instance of non-accumulating compensated absences, no liability or expense is recognized until the time of the absence. There are two types of compensated absences:

• cumulative absences that could be carry forward and used in future periods (for example: annual leave and sick leave); and

• non-cumulative absences that expire if they are not used in total (for example: right to maternity leave). Employees usually earn cumulative absences when they work while non-cumulative absences are not work-related. Expected expenses for compensated absences are recognized as following:

• cumulative compensated absences are recognized when employees work, i.e. provide services that increase their right on future paid absences; and

• non-cumulative absences are recognized at the moment when they are realized.

(d) Defined Benefit Plan A defined benefit plan is a post-employment benefit plan that defines an amount of benefit to be provided, determined using a number of financial and demographic assumptions. The most significant assumptions include age, years of service or compensation, life expectancy, the discount rate, expected salary increases and pension rates. For defined benefit plans, the liability is the present value of the defined benefit obligation as at the reporting date. The defined benefit obligation and the related costs are calculated by independent actuaries on an annual basis at the end of each annual reporting period. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows in the currency in which the benefits will be paid. Net interest is calculated by applying the discount rate at the beginning of the period to the net defined liability/(asset). Service cost (current service cost, past service cost, including the effect of curtailments and gains or losses on settlements) and net interest on the net defined benefit liability/(asset) are charged to the income statement and are included in staff costs. The defined benefit obligation is recorded in the balance sheet, with changes resulting from remeasurement (comprising actuarial gains and losses) recognized immediately in other comprehensive income.


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3. Summary of Significant Accounting Policies (Continued) 3.18 Employee Benefits (Continued) (e) Pension Funds

The Bank does not have own Pension Funds or share-based remuneration options, and therefore there are no recognized liabilities with respect to these benefits as of 31 December 2018.

3.19 Taxes and contributions

3.19.1 Income Taxes

(a) Current Income Tax Current income tax is calculated and paid in accordance with the effective Corporate Income Tax Law of the Republic of Serbia (“RS Official Gazette”, no. 25/2001, 80/2002, 43/2003, 84/2004, 18/2010, 101/2011, 119/2012, 47/2013, 108/2013, 68/2014, 142/2014, 91/2015, 112/2015,113/2017 and 95/2018) and relevant by-laws. Income tax is calculated at the rate of 15% (applicable for 2017 and 2018) on the tax base reported in the annual corporate income tax return, and can be reduced by any applicable tax credits. Calculation of the tax base includes a result from the income statement that is adjusted in accordance with the Republic of Serbia’s tax regulations. Pursuant to the Law on Amendments and Supplements to the Corporate Income Tax Law (“RS Official Gazette”, no. 108/2013), starting from determining the income tax for 2014, the tax payers are no longer able to use the tax incentive in the form of a tax credit for investment in fixed assets. A taxpayer that had qualified for the right to a tax incentive - tax credit by 31 December 2013 and presented details in the tax return for 2013 is entitled to use that right until the expiry of the deadline prescribed by law (not more than ten years). The tax regulations in the Republic of Serbia do not provide for the possibility that any tax losses of the current period are used to recover taxes paid within a specific previous period. Losses recognized in the tax return in the current accounting period may be transferred to the account of profit determined in the annual tax return from the future accounting periods, but not longer than five ensuing years.

(b) Deferred Taxes Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The currently-enacted tax rates or the substantively-enacted rates at the balance sheet date are used to determine the deferred income tax amount. For calculation of deferred taxes the rate of 15% was used. Deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised for all deductible temporary differences, carry forwards of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available, against which the deductible temporary differences, as well as unused tax credits and unused tax losses carried forward can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilised. Current and deferred taxes are recognized as income or expense and are included in net profit for the period. Deferred income taxes related to items that are recorded directly in equity are also recognized in equity.

3.19.2 Taxes and Contribution not related to Operating Result

Taxes and contributions that are not related to operating result include property tax, employer contributions on salaries, and various other taxes and contributions paid pursuant to republic, local and municipal regulations. These taxes and contributions are included in other expenses (Note 17).

3.20 Earnings per Share

The Bank discloses basic earnings per share. Basic earnings per share is calculated by dividing net profit attributable to ordinary equity holders of the Bank by the weighted average number of ordinary shares outstanding during the reporting period.


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3. Summary of Significant Accounting Policies (Continued) 3.21 Related Parties Transactions

Related parties of the Bank include members of the Group the Bank belongs to (OTP Group) and entities in which the Bank has the controlling and significant investment. Parties related with the Bank are persons who can have a significant influence on the Bank’s financial and business decisions. Parties related with the Bank include members of the management bodies, the Board of Directors and the Executive Board of the Bank, their close relatives and companies they own or control, as well as the companies on which financial and business policies they have influence Outstanding balances of receivables and liabilities at the reporting date, as well as transactions occurred with related parties during the reporting periods, are separately disclosed (Note 44).

4. Summary of Significant Accounting Estimates The preparation of the financial statements requires the Bank’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as income and expenses for the reporting period. These estimations and related assumptions are based on information available as of the date of preparation of the financial statements. Actual results could differ from those estimates. These estimates and underlying assumptions are reviewed on an ongoing basis, and changes in estimates are recognized in the periods in which they become known. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are stated in the text below.

4.1 Impairment of Financial Assets The amount of the allowance set aside for loan losses is based upon management’s ongoing assessments of the probable estimated losses inherent in the loan portfolio. Assessments are conducted by members of management responsible for various types of loans employing a methodology and guidelines, which are continually monitored and improved. This methodology has two primary components: individual assessment and collective assessment and is described in Note 43.2 Applying this methodology requires management to make estimates regarding the amount and timing of the cash flows, which are expected to be received. In estimating these cash flows, management makes judgments about the counterparty’s financial situation and the net realizable value of any underlying collateral or guarantees in favour of the Bank. Each impaired asset is assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable are independently reviewed. In assessing the need for collective loan loss allowances, management considers factors such as credit quality, portfolio size, concentrations, and economic factors. In order to estimate the required allowance, assumptions are made both to define the way inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions. The accuracy of the allowances and provisions depends on the model assumptions and parameters used in determining collective allowances. While this necessarily involves judgment, Management believes that the allowances for loan losses and provisions are reasonable and supportable.

4.2 Fair Value of Financial Instruments

The fair values of financial instruments that are not quoted in active markets are determined by using valuation techniques. These include present value methods and other models based mainly on observable input parameters and to a small extent to non-observable input parameters. Valuation models are used primarily to value derivatives transacted in the over-the-counter market and certain government bonds and debt securities that are not traded in an active market. These models take into consideration the impact of credit risk if material.


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4. Summary of Significant Accounting Estimates (continued)

4.2 Fair Value of Financial Instruments (continued)

All valuation models are validated before they are used as a basis for financial reporting, and periodically reviewed thereafter, by qualified personnel independent of the area that created the model. Wherever possible, the Bank compares valuations derived from models with quoted prices of similar financial instruments and with actual values when realised, in order to further validate and calibrate its models. A variety of factors are incorporated into the Bank’s models, including actual or estimated market prices and rates, such as time value and volatility, market depth and liquidity, and changes in own credit risk for financial liabilities.

The Bank applies its models consistently from one period to the next, ensuring comparability and continuity of valuations over time, but estimating fair value inherently involves a significant degree of judgment. Management therefore establishes valuation adjustments to cover the risks associated with the estimation of unobservable input parameters and the assumptions within the models themselves.

Although a significant degree of judgment is, in some cases, required in establishing fair values, management believes the fair values recorded in the statement of financial position and the changes in fair values recorded in the income statement are prudent and reflective of the underlying economics, based on the controls and procedural safeguards employed.

4.3 Useful life of Property, Plant, Equipment and Intangible Assets

The determination of the useful life of property, plant, equipment and intangible assets is based on historical experience with similar assets as well as any anticipated technological development and changes in broad economic or industry factors (Notes 3.8 and 3.9).

The appropriateness of the estimated useful lives is reviewed annually, or whenever there is an indication of significant changes in the underlying assumptions.

4.4 Impairment of Non-financial Assets

At each balance sheet date, the Bank’s management reviews the carrying amounts of the Bank’s fixed assets, intangible assets, investment property, foreclosed assets and current assets held for sale presented in the financial statements. If there is any indication that such assets have been impaired, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss.

If the recoverable amount of an asset is estimated to be lower than its carrying value, the carrying amount of the asset is reduced to its recoverable amount.

An impairment review requires management to make subjective judgments concerning the cash flows, growth rates and discount rates of the cash generating units under review.

4.5 Retirement and Other Post-Employment Benefits to Employees

The costs of defined employee benefits payable upon the termination of employment, i.e. retirement in accordance with the legal requirements are determined based on the actuarial valuation. The actuarial valuation includes an assessment of the discount rate, future movements in salaries, mortality rates and fluctuations in the number of employees. As these plans are long-term ones, significant uncertainties influence the outcome of the assessment.

Actuarial assumptions are disclosed in Note 3.18(b) to the financial statements.

4.6 Provisions for Litigations

The Bank is subject to a number of claims incidental to the normal conduct of its business, relating to and including commercial, contractual and employment matters, which are handled and defended in the ordinary course of business. The Bank routinely assesses the likelihood of any adverse judgements or outcomes to these matters as well as ranges of probable or reasonable estimated losses.

Reasonable estimates involve judgement made by the Bank’s management after considering information including notifications, settlements, estimates performed by legal department, available facts, identification of other potentially responsible parties and their ability to contribute to resolution, and prior experience. A provision for litigations is recognised when it is probable that an obligation exists for which a reliable estimate can be made after careful analysis of the individual matter. The required provision may change in the future due to new developments and as additional information becomes available. The Bank quarterly reassesses the estimated provision for litigation.

Matters that are either possible obligations or do not meet the recognition criteria for a provision are disclosed, unless the possibility of transferring economic benefits is remote.

4.7 Income Taxes

Income tax is calculated in accordance with legal regulations of the Republic of Serbia. The Bank does not make provisions for income tax calculation (Note 18).

Deferred tax assets are recognized for all unused tax losses and (or) tax credits to the extent to which taxable profit will be available against which the unused tax losses/credits can be utilized.

Significant estimate of the management is necessary to determine the amount of deferred tax assets which can be recognized, based on the period in which it was created and the amount of future taxable profits (Note 19).


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5. Interest Income and Expense (a) Interest income/( expense) per type of financial instruments

In RSD thousand

2018 2017 Interest income from:

Loans 4,926,482 4,902,456 Deposits 12,279 4,739 Securities 350,666 523,421 Other placements 167,060 189,712

Total income 5,456,487 5,620,328 Interest expense from:

Loans (1,031) (4,366) Deposits (671,588) (812,513) Other (222) (259)

Total expense (672,841) (817,138) Net interest income 4,783,646 4,803,190

(b) Interest income/(expense) per sector

In RSD thousand 2018 2017 Interest income:

Finance and insurance 224,413 206,215 Public companies 87,635 163,399 Public sector 380,627 516,391 Corporate 869,439 995,102 Entrepreneurs 85,556 76,017 Retail 3,738,377 3,606,138 Foreign persons 12,912 5,325 Private households and agricultural 6,570 7,654 Other clients 50,958 44,087

Total income 5,456,487 5,620,328 . Interest expense:

Finance and insurance (36,433) (7,467) Public companies (53,939) (58,641) Public sector (22,907) (26,209) Corporate (151,362) (200,051) Entrepreneurs (2,180) (3,492) Retail (207,380) (276,749) Foreign persons (12,373) (15,500) Private households and agricultural (4,799) (5,894) Other clients (181,468) (223,135)

Total expense (672,841) (817,138) Net interest income 4,783,646 4,803,190


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6. Net Fee and Commission Income

In RSD thousand

2018 2017

Net fee and commission income related to: Loans 64,057 67,450 Deposits 770,647 697,609 Securities 25,495 25,136 Guarantees, letters of credit 47,687 56,665 Cards 369,695 285,074 Local and international payments 530,206 521,837 Buying and selling foreign currency 9,596 222 Other 110,809 105,859

Total 1,928,192 1,759,852

7. Net gains / (losses) from change in fair value of financial instruments

In RSD thousand

2018 2017

Net gains / (losses) from: Financial assets at FVTPL 9,714 - Changes in the value of other derivatives (28,730) 7,279

Net (losses)/gains (19,016) 7,279 In 2018 Bank realized gains of RSD 9,714 thousand on the valuation of securities at fair value through profit and loss-shares, and loss of RSD 28,730 thousand on valuation of financial derivatives-currency swap transactions and forward FX sales.

8. Net gains from the derecognition of financial instruments recognized at FVTOCI

In RSD thousand

2018 2017

Net profit / loss from the recognition State bonds 45,768 Net gains from the derecognition of financial instruments - 45,768 In 2018, there were no sales of securities measured at fair value through other comprehensive income.

9. Net gains / (losses) from hedging

In RSD thousand

2018 2017

Net gains / (losses) based on valuation of loans, receivables and securities 243 (818) Net gains / (losses) from hedging 243 (818)

10. Net exchange rate gains and gains from agreed currency clause

In RSD thousand

2018 2017 Net gains / (losses) from:

Foreign exchange 195,910 2,305,129 Effects of foreign currency clause 35,790 (1,849,997)

Net exchange rate gains and gains from agreed currency clause 231,700 455,132 Significant deviation in 2018 compared to 2017 was caused mainly by the transfer of loans and receivables (in foreign currency and with a currency clause) from the balance sheet into off-balance sheet records, where transactions were stopped to take place, which had a significant impact on income and expense from exchange rate differences.


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11. Net expenses on impairment of financial assets not recognised at fair value through income statement

(a) (Charged)/Credited to the Income Statement

In RSD thousand

2018 2017

Net (impairment expenses) / income: Financial assets at FVTPL (Note 24) - (913) Financial assets at Amortized cost (Note 24) (1,838) (6,554)

Financial assets at FVTOCI 7,589 - Total net impairment income / (expenses) on securities 5,751 (7,467) Net (impairment expenses) / income:

Loans and receivables from banks (Note 25) 35,905 (7,100) Loans and receivables from customers (Note 26) (550,726) (2,218,499) Other placement and assets (Note 30) (42,724) (42,730)

Total net impairment expenses on loans and receivables and other assets (557,545) (2,268,329) Reversal of provisions for credit risk-weighted off-balance sheet items 18,950 4,366 Total reversal of provisions for off-balance sheet items (Note 34) 18,950 4,366 Recovery of written-off receivables 108,955 8,277 Total recovery of written-off receivables 108,955 8,277 Net impairment expenses (423,889) (2,263,153)

(b) Reserve for Estimated Losses

Based on the classification of placements determined pursuant to the regulations of the National Bank of Serbia as of 31.December 2018, the Bank has calculated required reserve for estimated losses in amount of RSD 0 using the option prescribed in the Decision on Classification of Bank Balance Sheet Assets and Off-Balance Sheet Items (“RS Official Gazette”, no. 94/2011, 57/2012, 123/2012, 43/2013, 113/2013, 135/2014, 25/2015, 38/2015, 61/2016, 69/2016, 91/2016, 101/2017 and 114/2017), that required reserve for estimated losses can bi determined in amount of RSD 0 if participation of non-performing loans to non-financial and non-government sectors in total loans to these sectors is 10% or less.

In RSD thousand

2018 2017

Calculated reserve for estimated losses pursuant to the NBS Decision under:

Balance sheet positions 8,411,764 8,620,158 Off-balance sheet positions 108,501 109,708

Total 8,520,264 8,729,866 Allowance for impairment and provisions calculated in accordance with internal methodology (IFRS 9):

Balance sheet positions (5,734,029) (5,607,194) Off-balance sheet positions (48,279) (22,466)

Total (5,782,308) (5,629,660) Difference between the calculated reserve pursuant to NBS Decision and allowance for impairment pursuant to internal methodology (IFRS 9) 2,737,956 3,100,206

Excess allowance for impairment and provisioning under balance sheet and off-balance sheet items pursuant to internal methodology (IFRS 9) in relation to the NBS Decision 908,566 547,920 Decrease the amount of required reserves for potential losses using the coefficient of correction required reserves for estimated losses (3,646,522) (3,648,126) Total required reserve for estimated losses as of 31 December - - Allowances for impairment and provisions calculated in accordance with the internal methodology include only the allowance for impairment which pertains to items being classified in this overview.


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11. Net expenses on impairment of financial assets not recognised at fair value through income statement

(Continued) (b) Reserve for Estimated Losses (Continued)

As of 31 December 2018, the required reserve for estimated losses which may arise under balance sheet assets and off-balance sheet items, calculated pursuant to the stated NBS Decision (Note 3.4.9.) amounts to RSD 0 thousand (31 December 2017: RSD 0 thousand). As of 31 December 2018, the Bank decreased the required reserve, based on the decrease of NPL as of June 30,2016 in accordance with Decision of the National Bank of Serbia, in the amount of RSD 3,646,522 thousand.

12. Net gains from derecognition of the financial instruments recognized at amortised cost

In RSD thousand

2018 2017

Net income / expense based on : Cessation of recognition of financial instruments 31,119 -

Net gain from the from the derecognition of financial instruments 31,119 -

13. Other operating income In RSD thousand

2018 2017

Revenue from leasing property 45,016 36,720 Dividend income and participation 606 270 Other operating income 10,849 11,786 Total 56,471 48,776 In the remaining business income of the Bank in 2018, profits from leasing property dominate in the amount of RSD 45,016 thousand.

14. Salaries, salary compensations and other personal expenses

In RSD thousand

2018 2017 Salaries 1,477,027 1,490,327 Compensations 258,685 238,330 Payroll taxes 213,482 217,392 Payroll contributions 436,751 429,267 Fees for temporary employments 891 2,440 Other personal expenses 104,981 19,267 Net provisions for retirement benefits and other employee benefits (9,957) 2,832

Total 2,481,860 2,399,855 The average number of employees in 2018 and 2017 was 1,433 and 1,475 respectively. The increase of other personal expenses in 2018 compared to 2017 refers to the accumulated costs of the bonus for the integration and retention of employees in accordance with the appropriate Bank Management Decision.


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14. Salaries, salary compensations and other personal expenses (continued)

Pension Costs – Defined Benefit Plans Provisions for retirement benefits have been recognized in the Bank’s financial statements on the basis of an independent actuary’s report as of 31 December 2018, and are stated in the amount of present value of the estimated future payments. The assumptions used for the calculation of the present value of expected outflows are disclosed in Note 3.18(b).

In RSD thousand

2018 2017

Income / Service cost (24,445) (14,476) Net interest expense on the net defined benefit liability/(asset) 14,487 17,308 Total (9,958) 2,832

Present Value of the Liability In RSD thousand 2018 2017

Present value of the liability 199,429 231,802 Total 199,429 231,802 Movement in the Net Liability In RSD thousand 2018 2017 Net liability at the beginning of the period 231,802 240,383 Benefits paid directly - (2,179) Total expense recognised in the income statement (Note 34) (9,958) 2,832 Amount recognized in OCI (Note 39) (22,415) (9,234)

Net liability at the end of the period 199,429 231,802

Reconciliation of Defined Benefit Obligation

In RSD thousand

2018 2017

Defined benefit obligation at the beginning of the period 231,802 240,383 Income / Service cost (24,445) (14,476) Interest cost 14,487 17,308 Benefits paid directly - (2,179) Remeasurement - (gains)/losses: - (Gain)/loss - financial assumptions (22,415) (9,234) Defined benefit obligation at the end of the period (Note 34) 199,429 231,802

Cumulative Amount Recognized in Other Comprehensive Income In RSD thousand 2018 2017 Cumulative amount recognized in OCI - income/(expense) 61,328 38,913 Deferred tax for actuarial gains/losses (8,871) (5,837) Total 52,457 33,076

15. Amortisation and depreciation

In RSD thousand

2018 2017

Amortisation/depreciation charge: Intangible assets (Note 27) 94,753 86,608 Property and equipment (Note 28) 196,839 247,220 Investment property (Note 29) 1,929 3,144

Total 293,521 336,972


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16. Other income

In RSD thousand

2018 2017

Release of unused provisions for litigations 119,037 5,112 Gains from the sale of property, plant and equipment and intangible assets 25,135 17,323 Liabilities waived 27,179 2,837 Surpluses 2,220 809 Other income 202,952 37,282 Total 376,523 63,363

17. Other expenses

In RSD thousand

2018 2017

Material 135,053 136,841 Manufacturing services 1,293,158 1,173,079 Non-material costs (without taxes and contributions) 1,214,195 1,222,029 Taxes 377,383 367,835 Contributions 396,462 389,016 Other costs 7,023 7,881 Provisions for litigations (Note 34) 84,769 103,097 Provisions for the coverage of liabilities (Note 34) - 255,657 Expenses from other provisions (Note 34) - 5,657 Write offs of fixed and intangiable assets 536 9 Shortages and damages 817 3,731 Other expenses 19,559 76,158 Valuation of fixed assets, investment property and intangible assets 15,904 499,708 Total 3,544,859 4,240,699 The most significant amount of non-material costs in 2018 refer to cost of deposits' insurance in the amount of RSD 511,784 thousand (2017: RSD 506,240 thousand).

18. Income Taxes

(a) Components of Income Taxes Total tax income consists of the following taxes: In RSD thousand

2018 2017

Current income tax (3,531) (1,447) Deferred taxes:

Deferred tax income 1,795 90,243 Deferred tax expenses (47,509) (138,137)

Net effect of deferred taxes – (losses)/ income (45,714) (47,894) Total tax (losses)/income (49,245) (49,341)


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18. Income Taxes (Continued)

(b) Numerical Reconciliation of the Tax Income/(Expense) Recognized in the Income Statement and Result for the

Year Before Tax Multiplied by the Statutory Income Tax Rate

In RSD thousand

2018 2017

Profit before tax 644,749

(2,058,137) Tax calculated at rate of 15% - - Tax losses to carry forward based on profit before tax (96,712) 308,720 Tax effect of expenses adjustment in tax return 14,667 (116,295) Tax effect of transfer pricing correction (5,802) (578) Tax effects of income adjustment in tax return 83,508 70,328 Tax effect of adjusting the first application of IFRS 9 21,527 - Effect of temporary differences - - tax depreciation and revaluation (17,673) 39,336 Effect of temporary differences - provisions for litigations (9,475) 14,698 Effect of temporary differences – provisions for retirement benefits (20,360) 36,210 Effect of temporary differences - unrecognized tax losses (17,187) (262,175) Effect of temporary differences - deferred taxes - tax credit - (134,850) Effect of temporary differences - other deferred taxes 1,793 (3,288) Tax effect of capital gains (5,270) (2,160) Used tax credits for investments in property, plant and equipment 1,739 713

Total tax (losses)/ income (49,245) (49,341) Effective tax rate 7.64% 2.40%

(c) Unused Tax Losses Carried Forward The following table presents the year of expiration of the Banks’ unused tax losses carried forward:

In RSD thousand

Year of expiration 31 December 2018 2019 525,174 2020 460,304 2021 396,281 2022 1,747,835 2023 114,583

Total tax losses 3,244,177 As of 31 December 2018 Bank had tax losses carried forward in the amount of RSD 3,244,177 thousand.


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19. Deferred tax assets and liabilities

Deferred tax assets/liabilities were recognized on the following grounds:

In RSD thousand

31.12.2018 31.12.2017

Deferred tax assets Temporary differences based on unpaid taxes 1,975 195

Recognized tax losses from previous years 192,820 192,820 Temporary differences on retirement benefits 51,907 72,267 The effect of temporary differences - deferred tax provisions for litigations 26,463 35,938 Temporary differences - employee benefits unpaid in the year 668 654 Deferred tax assets - participation in capital 16 -

Total 273,849 301,874 Deferred tax liabilities

Temporary differences between net book value and tax value of properties, plant, equipment and intangible assets (60,403) (42,730) Deferred tax funds related to reserves in equity for actuarial gains/losses (8,871) (5,837) Deferred tax liabilities - debt securities (28,956) (34,992)

Total (98,230) (83,559) Net deferred tax assets 175,619 218,315 Movements in net deferred tax assets during the year were as follows:

In RSD thousand

2018 2017 Balance as of 1 January 218,315 284,066

Temporary differences between net book value and tax value of properties equipment and intangible assets (17,673) 39,336 Temporary differences based on unpaid taxes 1,780 (3,247) Temporary differences – employee benefits unpaid in year 14 (41) Temporary differences for retirement benefits (20,360) 36,210 Recognized tax credit for investment in fixed assets - (134,850) Temporary differences-provisions for litigations (9,475) 14,698

Deferred taxes in income statement (45,714) (47,894)

Deferred taxes recorded in capital 3,018 (17,857) Net movements in deferred taxes (42,696) (65,751) Balance as of 31 December 175,619 218,315

20. Earnings per share

In RSD thousand

31.12.2018 31.12.2017

Share capital – ordinary shares 16,337,430 16,337,430 Share nominal value 10 10 Total number of shares (a) 1,633,743 1,633,743 Result for the period – net profit/ (losses) (b) 595,504 (2,107,478)

Earnings per share (in Dinars) (b/a) 365 -

Notes to the Financial Statements For the Year Ended 31 December 2018

Vojvodjanska banka a.d. Novi Sad

37


21. Classification of financial assets and financial liabilities

(in thousand RSD)

Held for trading Value through PL Value through OCI Loans and

receivables Other measured at

amortized value Total Cash and cash equivalents with the Central Bank - - - 26,095,401 - 26,095,401 Receivables for derivatives 1,115 - - - - 1,115 Securities - 41,166 11,558,184 - 16,725 11,616,075 Loans and receivables from banks and other financial organizations - - - 5,448,097 - 5,448,097 Loans and receivables from clients - - - 85,221,777 - 85,221,777 Other assets - - - 263,877 - 263,877 Total assets as of 31. December 2018 1,115 41,166 11,558,184 117,029,152 16,725 128,646,342 Liabilities based on derivatives 7,667 - - - - 7,667 Deposits and other liabilities towards banks, other financial organisations and the Central Bank - - - - 16,297,549 16,297,549 Deposits and other liabilities towards other clients - - - - 98,187,115 98,187,115 Provisions for losses on off-balance sheet assets - - - - 48,279 48,279 Other liabilities - - - - 601,642 601,642 Total liabilities as of 31. December 2018 7,667 - - 115,134,585 115,142,252



38


21. Classification of financial assets and financial liabilities (Continued)

(in thousand RSD)

Held for trading

Value through PL

Value through

OCI Loans and

receivables

Other measured at

amortized value Total

Cash and cash equivalents with the Central Bank - - - 21,416,477 - 21,416,477 Receivables for derivatives 39,569 - - - - 39,569 Securities - 90,829 16,177,632 - 59,186 16,327,647 Loans and receivables from banks and other financial Organizations - - 5,729,058 5,729,058 Loans and receivables from clients - - - 73,504,393 - 73,504,393 Other assets - - - 516,160 - 516,160 Total assets as of 31. December 2017 39,569 90,829 16,177,632 101,166,088 59,186 117,533,304 Liabilities based on derivatives 17,392 - - - - 17,392 Deposits and other liabilities towards banks, other financial organisations and the Central Bank - - - - 6,030,108 6,030,108 Deposits and other liabilities towards other clients - - - - 97,149,605 97,149,605 Provisions for losses on off-balance sheet assets 24,507 24,507 Other liabilities - - - - 587,272 587,272 Total liabilities as of 31. December 2017 17,392 - - - 103,791,492 103,808,884


39


22. Cash and balances with Central Bank

In RSD thousand

31.12.2018 31.12.2017

Gyro account 10,904,746 9,079,176 Cash on hand 6,377,857 4,613,634 Gold and other precious metals 15,165 14,922 Total 17,297,768 13,707,732 FX obligatory reserve with National bank of Serbia 8,797,633 7,708,745 Total 8,797,633 7,708,745 Balance as of 26,095,401 21,416,477 The obligatory reserve represents the minimal reserve allocated in line with the Decision on Banks’ Required Reserves with the National Bank of Serbia (“RS Official Gazette”, no. 3/2011, 31/2012, 57/2012, 78/2012, 87/2012, 107/2012, 62/2013, 125/2014, 135/2014, 4/2015, 78/2015,102/2015 and 76/2018). The Bank calculates the required reserve against liabilities in respect of dinar and foreign currency deposits, credits and securities, as well as other liabilities, excluding dinar deposits received under transactions performed on behalf of and for the account of third parties that are not in excess of the amount of the Bank’s placements made from such deposits. Notwithstanding the foregoing, the Bank does not calculate the required reserve against:

- the liabilities due to the National Bank of Serbia; - liabilities due to banks allocating required reserves with the National Bank of Serbia; - subordinated liabilities recognized by the National Bank of Serbia as eligible for inclusion into the Bank’s

supplementary capital; - dinar liabilities in respect of funds received by banks from international financial institutions, governments and

financial institutions founded by foreign states, through the intermediation of the government as the main debtor and/or owner of these funds or received directly,provided that the agreed principles of setting interest spreads are complied with on reinvestment of those funds;on conditional when reinvesting these funds, loan margins are lower than the average margins on loans approved by the bank from other sources of funds.

The Bank is obliged to calculate the obligatory reserves in Dinars based on the average daily balance of liabilities in Dinars in the prior month applying 5% (December 2017: 5%) on the portion of the dinar base and 20% (December 2017: 20%) on the portion of foreign currency base composed of liabilities maturing in less than two years, and 0% (December 2017: 0%) on the portion of the dinar base and 13% (December 2017: 13%) on the portion of foreign currency base composed of liabilities maturing in the period of over two years. Exception is the portion of dinar liabilities with the foreign currency clause- maturing in the period of over two years on which 100% is applied (December 2017: 100%) The Bank allocates the calculated dinar required reserves to its gyro account in Dinars held with the National Bank of Serbia, while the foreign currency obligatory reserve is allocated on the special-purpose account held with the National Bank of Serbia. The Bank calculates the obligatory reserve on the 17th day of the month. The required reserve calculated in such a way is effective for the maintenance period from the 18th day of the month until the 17th day of the following month (the “maintenance period”). During the maintenance period, the Bank is obliged to keep the average daily balances of allocated dinar and foreign currency required reserve at the level of calculated dinar/foreign currency obligatory reserve requirements. All days of the maintenance period are taken into account when calculating the average daily balance of allocated (dinar and foreign currency) obligatory reserves. The calculated obligatory reserve in Dinars for December 2018 amounted to RSD 8.135.501 thousand (December 2017: RSD 6,561,807 thousand), while the calculated foreign currency obligatory reserve amounted to EUR 81,963 thousand (December 2017: EUR 65,011 thousand) and they were in line with the aforementioned Decision of the National Bank of Serbia. In 2018 interest rate on the average daily balance of allocated dinar reserve requirement ranged from 1,75% to 1,25% p.a. The average interest rate was 1,38%.(2017: was 1.75%)


40


22. Cash and balances with Central Bank (Continued)

The National Bank of Serbia does not pay interest on the amount of the average balance of the allocated foreign currency reserves. In the cash flow statement, cash includes: cash on the giro account, cash in hand and cash in foreign currency accounts.

23. Receivables under derivatives

In RSD thousand

31.12.2018 31.12.2017 Financial derivatives (Note 40v) 1,115 39,569 Balance as of 1,115 39,569 Detailed information on financial derivatives is disclosed in Note 40v.

24. Securities

a) Fair value

In RSD thousand

31.12.2018 31.12.2017

Securities valued at fair value through profit and loss 41,166 90,829 Securities valued at fair value through OCI (RS government bonds ) 11,541,405 16,177,632 - Government bonds - debt securities in RSD 4,007,732 7,153,390 - Government bonds - debt securities in foreign currency 7,533,673 9,024,242 Other investments - participation * 16,779 16,893 Balance as of 11,599,350 16,285,354

b) Amortised value

In RSD thousand

31.12.2018 31.12.2017 Discounted bills of exchange 52,293 97,080 Less: Allowance for impairment (35,568) (37,894) Balance at 31 December 16,725 59,186

The changes in the impairment which are measured at amortised value are presented in the following table:

In RSD thousand

2018 2017 Balance at 1 January 37,894 38,291 Effect of IFRS 9 782 - Impairment during the year (Note 11 (a)) 3,195 10,221 Reversal of impairment(Note 11 (a)) (1,357) (3,668) Write-offs (4,947) (6,950) Balance at 31 December 35,568 37,894



41


24. Securities (Continued) Changes in securities during the year are presented as follows:

In RSD thousand 2018 2017

Fair value securities

through PL

Fair value securities through OCI-Government

bonds RS

Fair value securities through

OCI-Equity investments

Fair value securities through OCI-

Government bonds RS

Fair value securities through PL - Equity

investments Balance at 1 January 90,829 16,177,632 16,892 21,614,875 83,722 Purchase - - - 5,304,828 - Selling - - - (8,839,143) - Maturity - (4,365,053) - (1,259,037) - Change in fair value 9,715 (49,041) (109)

101,873 8,020

Discount / premium depreciation - (31,023) - (148,233) - Interest - (172,234) - (139,817) - Exchange rate - (18,876) (4) (457,714) - Impairment (Note11(a)) - - - - (913) Reclassification * (59,378) - - - - Balance at 31 December 41,166 11,541,405 16,779 16,177,632 90,829

Equity securities that the Bank has recorded in its books in accordance with IAS 39 as securities available for sale are at the beginning of 2018, reclassified in accordance with IFRS 9, into securities that are valued at fair value through profit and loss.

The valuation of these securities is carried out at the market value established on the Belgrade Stock Exchange for those securities for which there is an active market. For securities that were not traded for more than one year, the value was reduced to zero dinar at the time of the first application of IFRS 9, which are shares of the following issuers: Imos a.d. Šid, Globos ADO Beograd i Ratko Mitrović a.d. The total amount of the reclassification consists of RSD 59,271 thousand (of which: RSD 30,771 thousand - the effect of the first application of IFRS 9 and RSD 28,500 thousand - reclassification to reserves) and RSD 107 thousand (price correction on the day of posting)


42


25. Loans and receivables from banks and other financial organizations

In RSD thousand

2018 2017 Foreign currency account 2,491,786 4,194,001 Cheques 3,406 5,728 Loans 2,111,069 1,536,486 Deposits 841,008 4,739 Other placements - 1 Interest and fees 1,987 3,554 Gross loans and advances 5,449,256 5,744,509 Less: Allowance for impairment (1,159) (15,451) Balance as of 31 December 5,448,097 5,729,058

During 2018, interest rates on USD interbank placements were from 1,90% to 2,60% and from 1,75% to 2,70% on RSD placements. Interest rates on interbank RSD deposits were from 2,50% to 2,65% for EUR deposits were from -0,36% to 0,52% and for CHF deposits from -0,16% to -0,75%. During 2017, interest rates on interbank placements were from 0.01% to 0.05% on foreign currency placements and from 2.00% to 3.40% on RSD placements. Interest rates on interbank RSD deposits were from 2.70% to 3.00% and on EUR deposits were from 0.44% to 0.37%.. Movements in the allowance for impairment of loans and receivables from banks and other financial institutions during the year were as follows:

In RSD thousand

2018 2017

Balance as of 1 January 15,451 50,289 Effect of IFRS 9 16,825 - Impairment losses during the year (Note 11(a)) 91 10,900 Reversal of impairment losses during the year (Note 11(a)) (35,996) (3,800) Write-offs 4,159 (38,526) Foreign exchange 629 (3,412)

Balance as of 31 December 1,159 15,451 26. Loans and receivables from customers

In RSD thousand

31.12.2018 31.12.2017

Retail receivables Housing loans 15,777,589 14,080,909 Consumer and Cash loans 28,441,046 23,602,443 Overdraft and Credit cards 2,042,096 2,069,503 Other loans 112 1,426

Total receivables 46,260,843 39,754,281

Corporate receivables Corporate sector loans 43,647,242 38,232,503 Other sectors loans 543,044 293,983

Total receivables 44,190,286 38,526,486 Gross loans and receivables 90,451,129 78,280,767

Less: Allowance for impairment (5,229,352) (4,776,374) Balance as of 85,221,777 73,504,393 As of 31 December 2018, the gross loans in Dinars include loans with a contracted foreign currency clause in the amount of RSD 86,103,248 thousand (31 December 2017: RSD 74,060,709 thousand). During 2018 corporate customers in large and commercial clients segments were granted loans for working capital, investments, overdrafts etc. The most significant part of granted and realized loans relates to loans for working capital, continuing the trend from 2017.


43


26. Loans and receivables from customers

During 2018, after a slight decrease in interest rates, the interest rates on the Serbian market stabilized. This applies to all types of loans respectively for real loans in Dinars, loans in Dinars with a contracted foreign currency clause and for loans in EUR. The average interest rate on loans with a contracted foreign currency clause and loans in foreign currencies for large and commercial clients was 2.30% per annum (31.December 2017: 2.71% per annum) . The average interest rate on loans in Dinars for large and commercial clients was 4.55% per annum (31.December 2017: 5.33% per annum). In the next year it is expected to continue the trend of stabilization of interest rates on loans, with the tendency of a slight increase in interest rates As of 31 December 2018, loans and advances to retail customers were mostly granted as cash loans, overdraft loans, loans based on the use of credit cards, and housing loans Cash loans over one year were approved at interest rates ranging from 6M belibor+4,30% to 15,50% per annum (31.December 2017: 9.61% to 16.92% per annum). Overdrafts on citizens’ current accounts are approved at interest rates ranging from 23.30% to 25% per annum (31.December 2017: 23.30% to 25% per annum), while the usage of Dina credit cards bears interest at the rate of 26% per annum (31.December 2017: 26% per annum). VISA credit cards 20%per annum (31.December 2017: 20% per annum), and MasterCard Gold credit cards at the interest rate of 6m Belibor+14% per annum (31.December 2017: 6m Belibor+14% per annum). Long-term housing loans were granted at interest rates ranging from 6M euribor +2,80% to 6M euribor + 4,95% for Euro foreign currency clause and 6M belibor + 5,90% for RSD loans per annum. (31.December 2017: 2.53% to 9.12% per annum). During 2018, SBB placements were mostly disbursed as loans for working capital (up to two years), as well as overdrafts with one year maturity. Loans for working capital purposes were granted with interest rates ranging from 6m +2% belibor (variable IR) tо 9% (fixed IR) per annum for Dinars (31.December 2017: 6m +2% belibor (variable IR) tо 9% (fixed IR)), and from 6m+2.9% euribor (variable IR) tо 6.95% (fixed IR) per annum for Euro foreign currency clause(31.December 2017: 6m+2.9% euribor (variable IR) tо 6.95% (fixed IR)). Overdrafts were approved in Dinars, at the interest rate of 21% (fixed IR) per annum (31.December 2017: 21% (fixed IR)) . Movements in the allowance for impairment of loans and receivables from customers during the year were as follows:

In RSD thousand

Loans and receivables from retail customers

Loans and receivables from

corporate customers

Loans and receivables from public

sector Total Balance as of 1 January 2017 2,967,452 8,089,975 1,051 11,058,478 Impairment losses during the year (Note 11(a)) 1,489,344 1,715,006 1,055 3,205,405 Reversal of impairment losses during the year (Note 11(a)) (505,585) (481,321) - (986,906) Write-off (1,984,090) (6,205,660) (1,051) (8,190,801) Foreign exchange (50,083) (259,707) (12) (309,802) Balance as of 31 December 2017 1,917,038 2,858,293 1,043 4,776,374

Effect of IFRS 9 419,907 103,333 46,536 569,776 Impairment losses during the year (Note 11(a)) 1,013,219 307,250 39,977 1,360,446 Reversal of impairment losses during the year (Note 11(a)) (580,138) (208,754) (20,828) (809,720) Write-off and sale of receivables (120,376) (580,060) - (700,436) Foreign exchange 17,040 15,447 425 32,911 Balance as of 31 December 2018 2,666,690 2,495,509 67,153 5,229,351


44


27. Intangible assets

In RSD thousand

Software Licences

Other rights

Investment in development

Intangible assets under construction Total amount

Cost Balance as of 1 January 2017 904,778 150,880 15,698 42,264 151,917 1,265,537

Additions 71,911 - - - 51,358 123,269 Transfer from assets under construction 198,112 - - - (198,112) - Transfer from fixed assets under construction (Note 28) 1,351 - - - - 1,351 Disposals and write-offs (5,684) (19,804) - - - (25,488) Other - - - - (5) (5)

Balance as of 31 December 2017 1,170,468 131,076 15,698 42,264 5,158 1,364,664

Accumulated amortisation Balance as of 1 January 2017 603,607 150,880 - - - 754,487

Amortization charge (Note15) 86,608 - - - - 86,608 Disposals and write-offs (5,684) (19,804) - - - (25,488) Impairments 360,666 - 15,698 - - 376,364

Balance as of 31 December 2017 1,045,197 131,076 15,698 - - 1,191,971 Net book value as of 31 December 2017 125,271 - - 42,264 5,158 172,693 Cost

Balance as of 1 January 2018 1,170,468 131,076 15,698 42,264 5,158 1,364,664 Additions 25,170 - - - 47,286 72,456 Transfer from assets under construction 52,444 - - - (52,444) - Transfer from fixed assets under construction (Note28) 1,285 - - - - 1,285 Disposals and write-offs (54,079) - (15,698) - - (69,777)

Balance as of 31 December 2018 1,195,288 131,076 - 42,264 - 1,368,628 Accumulated amortisation

Balance as of 1 January 2018 1,045,197 131,076 15,698 - - 1,191,971 Amortization charge (Note15) 94,753 - - - - 94,753 Disposals and write-offs (54,079) - (15,698) - - (69,777)

Balance as of 31 December 2018 1,085,871 131,076 - - - 1,216,947 Net book value as of 31 December 2018 109,417 - - 42,264 - 151,681

28. Property, plant and equipment

In RSD thousand

Land Buildings Equipment

Leasehold improvements

Assets under construction

Total amount

Balance as of 1 January 2017 9,917 7,014,184 1,845,332 790,235 93,379 9,753,047 Additions - 2,162 14 754 122,655 125,585 Transfer from assets under construction - 56,778 139,581 17,084 (213,443) - Transfer to intangible assets (Note 27) - - - - (1,351) (1,351) Sales (3,463) (25,725) (3,406) - - (32,594) Other - - (371) - (729) (1,100) Disposals and write-offs - - (140,225) (47,396) - (187,651) Balance as of 31 December 2017 6,454 7,047,399 1,840,895 760,677 511 9,655,936

Accumulated amortisation Balance as of 1 January 2017 - 3,112,420 1,483,732 757,440 - 5,353,592

Depreciation charge (Note 15) - 101,571 126,706 18,943 - 247,220

Impairments - 6,635 65 - 6,700 Sales - (8,762) (3,242) -

(12,004)

Disposals and write-offs - - (140,246) (47,396) - (187,642)

Other - - (194) - - (194) Balance as of 31 December 2017 - 3,211,864 1,466,821 728,987 - 5,407,672 Net book value as of 31 December 2017 6,454 3,835,535 374,074 31,690 511 4,248,264


45


28. Property, plant and equipment (Continued) In RSD thousand

Land Buildings Equipment Leasehold

improvements

Assets under

construction Total

amount Balance as of 1 January 2018 6,454 7,047,399 1,840,895 760,677 511 9,655,936 Additions - 1,769 9,156 339 183,246 194,510 Transfer from assets under construction - 7,010 145,236 - (152,246) - Transfer to intangible assets (Note 27) - - - - (1,285) (1,285) Sales (6,019) (67,960) (39,208) - - (113,187) Disposals and write-offs - - (41,737) (13,829) (186) (55,752) Balance as of 31 December 2018 435 6,988,218 1,914,342 747,187 30,040 9,680,222 Accumulated amortisation Balance as of 1 January 2018 - 3,211,864 1,466,821 728,987 - 5,407,672 Depreciation charge (Note 15) - 57,250 125,905 13,684 - 196,839 Impairments - 6,463 - - - 6,463 Sales - (32,152) (36,232) - - (68,384) Disposals and write-offs - - (41,438) (13,482) - (54,920) Other - - - - - - Balance as of 31 December 2018 - 3,243,425 1,515,056 729,189 - 5,487,670 Net book value as of 31 December 2018 435 3,744,793 399,286 17,998 30,040 4,192,552

The Bank does not have encumbrances established over its buildings as collateral for borrowings.

Based on the Bank’s management assessment, in 2018 the Bank impaired its buildings by RSD 6.463 thousand. As of 31 December 2018, due to incomplete cadastral records, the Bank does not have title deeds for buildings with the net book value of RSD 120,331 thousand (31 December 2017: RSD 128,717 thousand). The Bank’s management has taken all the necessary measures in order to obtain these title deeds. As of 31 December 2018, the carrying value of equipment under the finance lease arrangements amounted to RSD 5,503 thousand (31 December 2017: RSD 366 thousand).

29. Investment property

In RSD

thousand

Buildings

Cost Balance as of 1 January 2017 214,363

Sales (1,307) Reclassification from foreclosed assets 7,522

Balance as of 31 December 2017 220,578 Accumulated depreciation

Balance as of 1 January 2017 82,776 Depreciation charge (Note 15) 3,144 Sales (177)

Balance as of 31 December 2017 85,743

Net book value as of 31 December 2017

134,835 Cost

Balance as of 1 January 2018 220,578

Sales (11,250) Balance as of 31 December 2018 209,328 Accumulated depreciation

Balance as of 1 January 2018 85,743 Depreciation charge (Note 15) 1,929 Sales (859)

Balance as of 31 December 2018 86,813 Net book value as of 31 December 2018 122,515


46


29. Investment property (Continued)

Investment property consists of leased buildings. Rental income from the lease of investment property amounted RSD 7,388 thousand in 2018 (31 December 2017: RSD 8,554 thousand) and total rental income from the lease of property is RSD 41,653 thousand (31 December 2017: RSD 36,720 thousand) . As of 31 December 2018, due to incomplete cadastral records, the Bank does not have title deeds related to the investment property with the net book value of RSD 15,553 thousand (31 December 2017: RSD 15,780 thousand). The Bank’s management has taken all the necessary measures in order to obtain these title deeds.

30. Other assets

In RSD thousand

31.12.2018 31.12.2017

Other investments - 16,892 Foreclosed assets - assets acquired through collection of receivables 163,751 173,794 Inventory 11,167 15,996 Due interest and fees receivable 2,700 15,338 Advances paid 22,806 36,132 Receivables from employees 23,508 716 Deferred expenses 47,314 93,607 Other 237,936 500,508 Balance as of 509,182 852,983 The major part relates to receivables from payment operations (receivables from the Pension Fund for Pre-Paid Pension), claims arising from litigations and suspense and temporary accounts.

In the table below are presented other assets classificated as financial assets ( Note 21):

In RSD thousand

31.12.2018 31.12.2017 Receivables for calculated fee and commission for other assets 2,592 15,028 Receivables for sale 1,112 638 Receivables for accrued interest for other assets 108 310 Receivables from employees 23,508 716 Other operating receivables 186,610 96,476 Temporary accounts 47,984 394,530 Receivables in the calculation 1,963 8,462 Total 263,877 516,160 As of 31 December 2018 assets obtained by foreclosure of loans (repossessed property) include commercial buildings, residential buildings, land and equipment. As of 31 December 2018, net book value of foreclosed buildings amount to RSD 162,977 thousand, out of which the amount of RSD 8,402 thousand relate to 3 (three ) properties acquired in 2018. The present value of buildings assets acquired through collection as at 31 December 2017 is RSD 172,112 thousand. As of 31 December 2018, due to incomplete cadastral records, the Bank does not have title deeds related to the foreclosed assets with the net book value of RSD 36,402 thousand (31 December 2017: RSD 43,912 thousand). The Bank’s management has taken all the necessary measures in order to obtain these title deeds. The remaining amount of foreclosed assets mostly consist of agricultural and industrial land, meadows, fields and pastures (119.497 m2) with the net book value of RSD 435 thousand; orchards (19,203 m2) with the net book value of RSD 201 thousand and well forests (18,456 m2) with the net book value of RSD 137 thousand. During 2018 Bank didn’t have reclassification foreclosed assets to investment properties (note 29). Other investments in which the stake were recorded were reclassified in accordance with IFRS 9 in 2018 and transferred to Securities at fair value through other results (Note 24).


47


30. Other assets (Continued)

In tables below are presented movements on foreclosed assets during the years 2018 and 2017:

Types of assets acquired through collection of receivables

Residential property

Other property

Оther assets acquired through

collection Total Gross value as of 01.January 2018. 285,731 8,054 1,951 295,736 Impairments as of 01.January 2018. (113,619) (6,372) (1,951) (121,942) Acquired 9,756

- 9,756

Sold (11,467) (908) - (12,375) Reclassified

- -

Impairments (7,424)

- (7,424) Gross value as of 31. December 2018. 284,020 7,146 1,951 293,117 Net value as of 31. December 2018 162,977 774 - 163,751

Types of assets acquired through collection of Receivables

Residential property

Other property

Оther assets acquired through

collection Total Gross value as of 01.January 2017. 256,430 8,082 1,951 266,463 Impairments as of 01.January 2017. (5,266) (31) - (5,297) Acquired 44,210 - - 44,210 Sold (7,387) (28) - (7,415) Reclassified (7,522) - - (7,522) Impairments (108,353) (6,341) (1,951) (116,645) Gross value as of 31. December 2017. 285,731 8,054 1,951 295,736 Net value as of 31. December 2017 172,112 1,682 - 173,794

The table of changes in the value impairments of other assets is below.

Balance as of 1 January 2018 (346,669) Effect of IFRS 9 (11,778) Impairment losses during the year (Note 11(a)) (78,276) Reversal of impairment losses during the year (Note 11(a)) 35,552 Write-offs 69,434 Foreign exchange (6,849) Balance as of 31 December (338,586) 31. Liabilities under derivatives

In RSD thousand

31.12.2018 31.12.2017

Financial derivatives held for trading (note 40v) 7,667 17,392 Balance as of 7,667 17,392 Fair value of financial assets and liabilities is disclosed in more details in Note 43.10.

32. Deposits and other liabilities to banks, other financial organisations and Central Bank

In RSD thousand

31.12.2018 31.12.2017

Transactional deposits 1,044,351 1,739,088 Special purpose deposits 82,400 35,168 Other deposits 14,957,243 1,811,917 Overnight deposits 209,952 - Borrowings (note 40g) - 2,410,919 Other liabilities 3,603 33,016 Balance as of 16,297,549 6,030,108


48


32. Deposits and other liabilities to banks, other financial organisations and Central Bank (Continued)

Based on the Revolving Credit Agreement which the Bank concluded in October, 2013 with the EBRD, London, one disbursements for EUR 4.000 thousand was realized in 2018 with three months maturity and interest rate 3M EURIBOR plus 0,6 points. During 2018, EUR 24.350 thousand was repaid. There is no balance of this obligation on December 31, 2018.

33. Deposits and other liabilities to other customers

In RSD thousand

31.12.2018 31.12.2017

Transactional deposits 40,120,656 30,311,350 Savings 46,049,015 49,829,707 Deposits as loan collaterals 1,411,726 1,300,495 Special purpose deposits 935,702 958,659 Other deposits 8,991,804 13,965,317 Overnight deposits 504,765 591,000 Other liabilities 173,447 193,077 Balance as of 98,187,115 97,149,605 Demand deposits in dinars mostly consist of current accounts of corporate customers, entrepreneurs and retail customers held with the Bank. Demand deposits of legal entities segmented as large and commercial clients in dinars and in foreign currencies are non-interest bearing, except for special arrangements defined by individual contracts with very important clients Exceptions are demand deposits in Dinars of beneficiaries of the budgetary funds of the Republic of Serbia and local authorities, to which the Bank calculated and paid interest. During 2018, the average interest rate on transaction deposits of legal entities segmented as large and commercial clients in Dinars was 1.16% (31.December 2017: 1.39%) and in a foreign currency 0.08% (31.December 2017: 0.13%) annually. The everage interest rate in 2018 for deposits of local authorities was 2.65% per annum (31.December 2017: 3.35%). Interest rates on transactional deposits show a decline compared to 2017. Retail customers’ current accounts are non-interest bearing. On Retail a vista deposits opened until July 2017, Bank applies interest rates in range from 0.1% to 0.8% on annum basis , depending on the currency (31.December 2017: from 0.1% to 0.8%). For accounts opened after that period, Bank doesn’t calculate interest. As of 31 December 2018, the major transaction depositors of the Bank are: JP Elektroprivreda Srbije,Telekom Srbija a.d. Belgrade,Sokoj – the music authors’ organization, Biospringer RC Doo Senta, Fudbalski savez Srbije, EUO-Pravoslavne Crkve, Sportsko-rekreativno-banjski kompleks Bailo doo Novi Sad. Time deposits of legal entities segmented as large and commercial clients in Dinars earn interest at rates depending on the period and the amount for which the funds have been deposited. The interest rates on time deposits in Dinars are adjusted in accordance with market trends. During 2018 the average interest rate on time deposits in Dinars was 2.85% annually (31.December 2017: 2.98%). Interest rates on term deposits in Dinars were in decline during the first half of 2018, after which the period of stabilzation followed. During 2018 the Bank had dinar deposits in focus. It is expected that in 2019 the trend of stabilization of interest rates on RSD deposits will continue. None-purpose time deposits of SBB customers in Dinars during 2018 were deposited with an average interest rate of 2.69% annually, and time deposits of physical persons-citizens with an average interest rate of 3.11% annually. Time deposits of legal entities segmented as large and commercial clients in foreign currencies earn interest which depends on the currency, the period and the amount for which the funds have been deposited. Interest rates on foreign currency time deposits are adjusted in accordance with market trends. The average interest rate on time deposits in foreign currencies in 2018 was 0.19% annually, which is a decrease compared to 2017. None-purpose time deposits of SBB customers in foreign currencies during 2018 were deposited with an average interest rate of 0.26% annually, and time deposits of physical persons-citizens with an average interest rate of 0.53% annually. As of 31 December 2018, the major depositors of the Bank with time deposits are: OTP bank NYRT, Borska banka - bankruptcy, KMG Trudbenik A.D. – in bankruptcy, Messer Tehnogas a.d. Beograd, Udruzenje osiguravaca Srbije, BB Minakva d.o.o Novi Sad, Kompanija Dunav osiguranje a.d.o Beograd.


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34. Provisions In RSD thousand

31.12.2018 31.12.2017

Provision for litigations 176,419 239,584 Provision for covering liabilities 147,677 255,657 Provision for Retirement 199,429 231,802 Provisions for credit risk off-balance sheet items 48,279 24,507 Provisions for other liabilities 5,657 5,657 Balance as of 577,461 757,207 Litigations: The Bank acts as a defendant in certain number of claims and legal actions and proceedings arising in the ordinary course of business (Note 41(b)). These actions and proceedings are generally based on alleged violations of consumer protection, banking, employment and other laws. None of these actions and proceedings is individually material. The Bank establishes provisions for all litigations, for which it believes it is probable that a loss will be incurred and the amount of the loss can be reasonably estimated. These provisions may change from time to time, as appropriate, in light of additional information. However, in the opinion of management the ultimate disposition of these matters is not expected to have a materially adverse effect on the Bank’s financial position, results of its operation or its cash flows above the amount for which the provisions have been recognized. Provisions for covering liabilities: they relate to provisions for restructuring costs and severance payments calculated in 2017 in accordance with the Management Decision. Part of these provisions for covering the liabilities was paid in 2018. The provisions for retirement benefits have been recorded in the Bank’s financial statements on the basis of an independent actuary’s calculation as of 31 December 2018, and are stated in the amount of present value of the future outflows. The assumptions disclosed in the Note 3.18(b) have been used for the calculation of the present value of the expected outflows. Movements in provisions during the year are presented in the following table:

2018 In RSD thousand

Provisions for

litigations

Provisions for covering liabilities

Provision for retirement

benefits

Provisions for off-balance sheet

items

Provisions for other liabilities

Balance as of 01. January 239,584 255,657 231,802 24,507 5,657 Effect of IFRS 9 - - - 42,577 - Release of provisions (119,037) - (42,977) (52,226) - Charge for the year 84,769 - 33,020 33,276 - Paid during the year (28,897) (107,980) - - - Actuarial gains - - (22,415) - - Exchange rate - - 1 145 - Balance as of 31. December 176,419 147,677 199,429 48,279 5,657

RSD thousand

2017

Provisions for

litigations

Provisions for covering liabilities

Provision for retirement

benefits

Provisions for off-balance sheet

items

Provisions for other liabilities

Balance as of 01. January 141,599 - 240,383 29,071 - Release of provisions (5,112) - (26,285) (7,568) - Charge for the year 103,097 255,657 29,117 3,202 5,657 Paid during the year - - (2,180) - - Amount recognized in OCI - - (9,234) - - Exchange rate - - 1 (198) - Balance as of 31. December 239,584 255,657 231,802 24,507 5,657


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35. Other liabilities

In RSD thousand 31.12.2018 31.12.2017

Liabilities to suppliers 110,242 105,596 Advances received 19,349 20,808 Finance lease liabilities 4,896 403 Liabilities for salaries and other liabilities to employees 4,497 4,410 Taxes payable 27,774 4,097 Deferred expenses 280,210 106,569 Other liabilities 482,007 476,863 Balance as of 928,975 718,746

Table display assets which make financial liabilities during 2018. and 2017.

In RSD thousand

31.12.2018 31.12.2017 Liabilities to suppliers 44,952 93,093 Finance lease liabilities 4,896 403 Other liabilities from business relationships 470,574 439,074 Liabilities in the calculation 10,125 19,217 Temporary accounts 1,308 18,572 Other liabilities to employees 4,497 4,410 Liabilities to suppliers in foreign currency 65,290 12,503 Balance as of 601,642 587,272

36. Equity

In RSD thousand

31.12.2018 31.12.2017

Share capital 16,337,550 16,337,550 Profit / (losses) 595,504 (2,107,478) Reserves (Note 37) 598,662 3,739,657

Balance as of 17,531,716 17,969,729 As of 31 December 2018 and 2017, subscribed and paid in share capital of the Bank consist of 1,633,743 ordinary shares, with nominal value per share of RSD 10,000. The Bank’s shareholders are entitled to take part in the Bank’s decision-making commensurately with their interest in the total amount of the Bank’s ordinary shares, in the distribution of profit, priority purchase rights of shares from subsequent issuances, priority collection rights in the event of the Bank’s bankruptcy or liquidation. In December 2006, in accordance with the terms of the Agreement on the Purchase and Sale of Share Capital, the National Bank of Greece, Athens became the major owner of the Bank through the acquisition of an equity interest of 99.43%. The aforementioned acquisition was duly registered with the Central Securities Depository and Clearing House on 12 December 2006. Pursuant to the Articles of Incorporation no. 1.0-10340/2 and Decision on Increase in Capital no. 1.0-10340/3 dated 29 November 2007, the share capital of the Bank was increased through the issue of 410,000 ordinary shares with the individual par value of RSD 10,000. The National Bank of Greece, Athens purchased the entire share issue, and thereby became the sole owner of the Bank. In accordance with the Decision issued by the Bank’s General Assembly dated 3 January 2008, the Bank enacted the Decision on the Merger of Vojvodjanska banka a.d. Novi Sad with the National Bank of Greece a.d. Belgrade, in effect from 31 December 2007. The aforementioned merger was registered with the Serbian Business Registers Agency on 14 February 2008 under the registry number BD 6190/2008 (removal of the business entity “National Bank of Greece a.d. Belgrade” as the acquired bank due to a merger) and the change in the core capital of Vojvodjanska banka a.d. Novi Sad was inscribed based on the Decision numbered BD 6210/2008. The National Bank of Greece a.d. Belgrade was fully owned by the National Bank of Greece, Athens.


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36. Equity (Continued)

Pursuant to the aforesaid Decision dated 3 January 2008, enacted by the Bank’s General Assembly, the Bank’s capital increased through the issue of shares without public offer for the amount of RSD 7,419,535 thousand (741,953 ordinary shares with the individual par value of RSD 10,000), i.e., in the amount equal to the share capital of the National Bank of Greece a.d. Belgrade. These shares were transferred to the shareholder of the entity which discontinued its operations, i.e., the National Bank of Greece, Athens, Greece. Vojvodjanska banka a.d. Novi Sad is the legal successor of all rights and liabilities of the National Bank of Greece a.d. Belgrade existing before the merger date, i.e., 31 December 2007. In 2017, the Bank carried out the allocation of retained earnings from previous years in the amount of RSD 301,037 thousand to other reserves (reserves from profit). As of 01 December 2017, OTP Bank Serbia a.d Novi Sad became 100% owner of Vojvodjanska Banka a.d Novi Sad.

37. Reserves

In RSD thousand

31.12.2018 31.12.2017

Reserves from profit 382,214 3,508,291 Revaluation reserves based on changes in the fair value of securities 163,991 198,290 Actuarial gains/losses for defined benefit plans (Note 14) 52,457 33,076 Balance as of 598,662 3,739,657 As disclosed in Note 36 to the financial statements, based on the Decision of the Bank's General Assembly from December 2017, reserves from profit covered the losses from the previous year in the amount of 2.825.040 thousand dinars. Based on the Decision of the Bank’s General Assembly from December 2018, other reserves were allocated to unallocated profit from previous year.

38. Dividends The Bank’s Assembly adopts the annual financial statements and passes the decisions on profit/losses allocation. According to decision The Bank paid dividends to shareholder from unallocated profit from previous year in amount of 301.037 thousand dinars. The bank fulfilled conditions for dividends payment

39. Tax Effects Related to Other Comprehensive Result

In RSD thousand 2018 2017 Gross Tax Net Gross Tax Net Items of other comprehensive result that cannot be reclassified to profit or loss:

Actuarial gains (Note 34) 22,415 (3,034) 19,381

9,234 (1,385) 7,849 Total 22,415 (3,034) 19,381

9,234 (1,385) 7,849

Items of other comprehensive result that may be reclassified to profit or loss: Unrealized (losses)/gains on securities available for sale (56,905) 6,053 (50,852) 109,809 (16,470) 93,339 Total (56,905) 6,053 (50,852) 109,809 (16,470) 93,339 Total other comprehensive result for the period - loss (34,490) 3,019 (31,471) 119,043 (17,855) 101,188


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40. Off-balance Sheet Items

In RSD thousand

31.12.2018 31.12.2017

Funds managed on behalf of third parties (a) 676,596 660,107 Irrevocable commitments (b) 6,462,784 6,618,161 Financial derivatives (c) 5,947,152 13,426,778 Other off-balance sheet assets (d) 279,017,175 252,897,484 Written off funds(e) 5,248,364 6,535,165 Balance as of 297,352,071 280,137,695 (a) Funds managed on behalf of third parties as of 31 December 2018 and 2017, mostly relate to funds received from the public sector customers and entrusted to the Bank’s management.

In RSD thousand

31.12.2018 31.12.2017

Funds managed on behalf of third parties: - in RSD 622,385 604,787

- in foreign currency 54,211 55,320 Balance as of 676,596 660,107

Assets managed on behalf of third parties mostly include loans based on the Loan for Economic Revival of Serbia, loans from the Development Fund of the Republic of Serbia for financing registered farms, loans disbursed from funds of the Ministry of Agriculture, Forestry and Water Management and the loans approved by companies to their employees or other businesses through the Bank as an intermediary. The Bank charges fees for performed services on this basis. The loans that the Bank, as administrator, disbursed to registered farmers from the funds received from the Ministry, the debtors are not returned in a timely manner, in accordance with the covenants of Agreement or related Annexes. The Ministry procedure of collecting the due receivables from debtors transferred to the State Attorney's Office. The State Attorney's Office has taken over the obligation to call the debtor to pay the remaining amount of the loan plus accrued interest. Also, in contact with the debtor, the competent Public Attorney's Office has been authorized to offer payment of the debt in instalments. After the expiry of the agreed period for payment of debt on offer, or if the debtors does not accept the conditions of offer, the Public Attorney's Office launch a procedure in front of the competent court, in order to collect debts increased by the costs of the proceedings. Contacted debtors are mainly carried out restitution claims required in order to avoid additional costs on the loan. Unpaid loans from the funds of the Development Fund of the Republic of Serbia are recorded in the books of the Bank as administrators, in the off-balance sheet, and each month, default interest on the accounts is calculated and credited. (b) Irrevocable commitments relate to contractual commitments that cannot be cancelled unilaterally and without prior notification if certain conditions are not met. These amounts are included in the basis for calculation of credit risk-weighted off-balance sheet items. Irrevocable commitments relate to guarantees issued by the Bank on order of its clients based on contractual commitments to make loans that cannot be cancelled unilaterally, such as: overdrafts, revolving loans to companies, multi-purpose revolving loans and other irrevocable commitments. Irrevocable commitments usually have fixed expiry dates or other stipulations with respect to expiry dates.

Since irrevocable commitments may expire without being drawn upon, the total contracted amounts do not necessarily represent future cash requirements. The Bank monitors maturity periods of credit commitments and undrawn credit facilities as longer term commitments have a greater degree of loan risk than short-term commitments.


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40. Off-balance Sheet Items (Continued) In RSD thousand

31.12.2018 31.12.2017

Issued guaranties and other warranties 3,598,678 3,462,512 Warranty for liabilities (EBRD) - 17,771 Irrevocable loan limits 2,817,819 3,137,878 Other irrevocable commitments 46,287 - Balance as of 6,462,784 6,618,161 In the total amount of the Bank’s irrevocable commitments as of 31st December 2018 the following occurred as compared to the same reporting date in the year 2017:

- the total number of issued letters of guarantee (dinar and foreign currency letters of guarantee) was reduced in comparison to December 31, 2017, but the decrease is not significant;

- the product Letter of Intent is obligatory as of December 31, 2017 as shown in the position of the given letter of

guarantee and other guarantees, and as of December 31, 2018 on the position of other irrevocable committments;

- letters of guarantee from EBRD funds were closed during the year 2018;

- the number of letter of credit batches was decreased as compared to the previous year and there are clients

who had an active contract for a letter of credit in the year 2017;

- in the year 2018, the letter of credit contract was not renewed to client Planeta Sport doo Belgrade;

- there was an active letter of credit contract in the year 2018, but no active batch exists for client Obuća Metro.

As of 31 December 2018 the Bank did not have pledged financial assets.

(v) Financial derivatives as of 31 December 2018 are derivatives held for trading and include future liabilities and receivables of the Bank related to term foreign currency sale/purchase, and currency swaps.

In RSD thousand

31.12.2018 31.12.2017

Nominal

value Fair value of receivables

Fair value of liabilities

Nominal value

Fair value of receivables

Fair value of liabilities

Financial derivatives held- for- trading: Term foreign currency sale/purchase 42,567 - 13 3,570,549 2,312 755 Currency swaps 5,904,585 1,115 7,654 9,856,229 37,257 16,637

Total 5,947,152 1,115 7,667 13,426,778 39,569 17,392

40. Off-balance Sheet Items (Continued)

(g) Other off-balance sheet items as of 31 December 2018 mostly consist of received collaterals for disbursed loans,

cross border loans, suspended interest and issued revocable limits etc. In RSD thousand

31.12.2018 31.12.2017

Received collaterals 225,314,092 200,659,376 Credit lines received from EBRD 3,545,838 1,125,491 Revocable commitments 9,163,657 6,395,298 Cross border loans 27,182,297 26,011,528 Spot purchase/sale of foreign currency 2,119,974 5,755,498 Suspended interest 7,898,953 8,485,402 Other 3,792,364 4,464,891 Balance as of 279,017,175 252,897,484

EBRD Trade Facilitation Programme signed in 2013, was not in use as of 31 December 2018.. The unused part of the EBRD arrangement is 3,545,838 thousand RSD as of 31 December 2018.


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40. Off-balance Sheet Items (Continued)

(g) Written-off Financial Assets In RSD thousand

31.12.2018 31.12.2017

Written-off Financial Assets: - in RSD 3,856,160 4,274,724

- in foreign currency 1,392,204 2,260,441

5,248,364 6,535,165 Total

On August 10, 2017, the National Bank of Serbia adopted the Decision on the accounting write-off of the balance sheet assets of the Bank, related to the accounting write-off of balance-sheet assets of a low level of collection. The accounting write-off implies the transfer of balance sheet assets to the off-balance sheet of the Bank.

In accordance with the NBS Decision, the Bank performs accounting write-off, transfer from on-balance to off-balance evidence of non-performing loans that is 100% impaired and are defined as non-performing in accordance with the Decision that regulates classification of balance sheet assets and off-balance sheet items of the bank.

In the books of the Bank in 2017, the records of non-performing loans transferred to off-balance evidence were within the other off-balance records. In accordance with the amendments to the Chart of Accounts for banks, with the application from 1.1.2018, special accounts have been defined in off-balance sheet records for written-off financial assets in dinars and foreign currency.

The transfer of non-performing loans from the balance sheet into off-balance sheet evidence does not imply the Bank's waiver of contractual and legal rights based on these loans, but the Bank continues to undertake activities for collecting receivables from debtors of the Bank.

Further activities on collecting receivables from debtors are undertaken in accordance with the corresponding Procedure for Collection of Troubled Assets and the Corporate/Retail/Small Business Banking Credit Policy. In cases when non-performing loans transferred to off-balance evidence cannot be collected, a Decision on final removal of non-performing loans from business books is proposed.

During 2018 Bank performed transfer of non-performing loans to off-balance evidence data and also performed final removal of non-performing loans from off-balance evidence, in accordance with the adopted decisions of the competent bodies.

d) Written-off Financial Assets

As of 31.12.2018 Bank didn’t transfer to off-balance evidence following 100% impaired receivables classified as non-performing loans:

Amount in thousand RSD

Non-performing loans – legal entities

255.718 Non-performing loans – individuals 788.905

Total 1.044.623 Non-performing receivables related to current accounts amount 444.281 thousand RSD out of the above total amount of non-performing loans.

41. Commitments and Contingent Liabilities

(a) Operating Lease Commitments The Bank has entered into commercial operating lease agreements on certain business premises. The future minimum lease payments are as follows:

In RSD thousand

31.12.2018 31.12.2017

Up to 1 year 241,254 242,718 From 1 to 5 years 467,326 534,623 Over 5 years 139,134 171,639 Balance as of 847,714 948,980


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41. Commitments and Contingent Liabilities (Continued)

(b) Litigations

As of 31 December 2018, the Bank acted as a defendant in a certain number of legal proceedings. The total estimated value of damage claims arising from the litigations, including court expenses and interest, amounts to RSD 835,735 thousand (31 December 2017: RSD 907,762 thousand). The final outcome of the legal proceedings is assessed by the legal representatives of the Bank. As disclosed in Note 34 to the financial statements, as of 31 December 2018, the Bank recognized provision of RSD 176,419 thousand (31 December 2017: RSD 239,584 thousand) for potential losses that might arise as a result of the litigations with estimated negative outcome. The above stated amount includes penalty interest from damage claims together with court expenses calculated throughout 31 December 2018. The Bank’s management considers that no material losses will arise from the remaining litigations still in course, other than those provided for.

42. Tax Risks The tax system of the Republic of Serbia is in a process of constant revision and changes. In the Republic of Serbia the tax period is open during the course of five years. In different circumstances, the tax authorities may have different approach to certain issues and may establish additional tax liabilities along with additional penalty interests and penalties. As a result of the above, transactions can be contested by tax authorities and certain additional amounts of taxes, fines and interests can be imposed to the Bank. The prescription period of a tax obligation is five years. Besides that, the Bank performs a certain number of business transactions with its related legal entities in the country and abroad. The Bank presented the effects of transfer prices on the basis of transactions with its related legal entities on the calculated corporate income tax for the year 2018 to the best of its knowledge. Furthermore, pursuant to the tax regulations of the Republic of Serbia, the Bank is committed to submit the tax return for the year 2018 and other prescribed documentation to the tax authorities of the Republic of Serbia by 29th June 2019. Interpretations of tax laws by the tax and other authorities with respect to transactions and activities of the Bank may differ from the interpretation of the Bank’s management. There is uncertainty as to whether the interpretations of the

Bank’s management and the accompanying documentation are sufficient, and whether they correspond to requirements and interpretations of the tax and other authorities. The Bank’s management is of the opinion that any different interpretation will not have materially significant consequences on the Bank’s financial statements. During the last five years the Bank did not have tax audit of the corporate income tax presented in the tax returns and paid. Starting from the tax return for the year 2013, tax returns can be subject to tax audit. The Bank’s management is of the opinion that the tax liabilities recorded in the accompanying financial statements are correctly stated.

43. Risk Management

43.1 Introduction

Mission The risk management-related activities at all organisational levels are led by the mission to achieve value for shareholders by optimising the risk to return ratio, taking into account interests of both clients and employees in accordance with the best practice and in conformity with regulatory requirements. Тhe Bank has established a comprehensive risk management system, which includes the following comprehensive objectives: • Establishment of a set of basic principles and standards for risk management in the Bank to maximally use the

potential for revenue and opportunities enabling to achieve the value for shareholders; • Support to the Bank’s business strategy by ensuring that business goals are achieved with a controlled risk in

order to preserve the revenue stability by way of hedging from unexpected losses; • Improvement of the use and allocation of capital and increase of revenue from invested capital adjusted to risks

by including risk in the measurement of business performance; • Support to the decision-making process by providing necessary risk-related assessments; • Providing harmonisation with best practice as well as with local regulatory, quantitative and quality requirements;

and • Providing cost-effectiveness of risk management by reducing overlaps and by avoiding inadequate, excessive or

outdated policies, processes, methodologies, models, controls and systems.


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43. Risk Management (Continued)

43.1 Introduction (Continued)

Management and Organisational Framework The Bank’s Board of Directors is responsible for the establishment of a singular risk management system and its supervision. In terms of this, the Board of Directors adopts strategies and policies for identifying, measuring, monitoring and controlling risk, it determines the Bank’s internal organisation which ensures segregation of duties, authorities and responsibilities of employees in the manner that prevents conflict of interest and it undertakes other activities with reference to defining goals and risk management principles. The Committee for monitoring bank’s operations (Audit Committee), formed by the Board of Directors, contributes to the efficiency of supervision over the risk management system. On a monthly basis it analyses and performs supervision over the application and proper implementation of adopted risk management strategies and policies and implementation of the system of internal controls, and it analyses and adopts proposals of those strategies and policies which are submitted to the Board of Directors for adoption. The Bank’s Executive Board is responsible to identify risks to which the Bank is exposed and to perform control of such risks in accordance with the framework defined by the Board of Directors. The Bank’s Executive Board adopts procedures and other internal acts which govern in more detail the processes and procedures for risk identification, measurement, monitoring and control. An independent monitoring and control of the efficiency of functioning of the Bank’s internal control system and regularity of work, including the implementation of the risk management framework, is ensured by the establishment of the Internal Audit Division which is accountable for its operation to the Board of Directors. The Bank’s internal organisation is determined in a manner that ensures a functional and organisational separation of risk management activities from regular business activities, up to the Bank’s Executive Board level. Risk management is implemented within three divisions and one department: • Risk Management Division (Portfolio and Classification Management Department; Credit RiskModels Department;

Market Risk Management Department and Operational Risk Management Department); • Credit Risk Management Division (Corporate Credit Risk Department; Retail Credit Initiation Department); • Troubled assets management divsion and • IT Security Department within Compliance and Security Division of the Bank

The Compliance Division is in charge for compliance risk identification, monitoring and management.

43.2 Credit Risk (IFRS 9) Listing into stages According to the requirements of the IFRS9 standard Bank allocates the financial assets measured at amortized cost and at fair value through other comprehensive income into three stages: - stage 1 – performing assets without significant increase in credit risk since initial recognition - stage 2 – performing assets with significant increase in credit risk since initial recognition but not credit-impaired - stage 3 – non-performing, credit-impaired assets Performing (Stage 1) assets include all financial assets in the case of which the events and conditions specified in respect of stage 2 and stage 3 do not exist on the reporting date. A financial asset shows significant increase in credit risk and is became allocated to stage 2, if in respect of which any of the following (quantitative or qualitative) triggers exist on the reporting date, without fulfilling any of the conditions for the allocation to the non-performing stage (stage 3): • the payment delay exceeds 30 days, • the asset is classified as performing forborne, • the transaction/client rating exceeds a predefined value falls into a determined range, or compared to the historic value it deteriorates to a predefined degree,


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43.2 Credit Risk (IFRS 9) (Continued)

Listing into stages (Continued) • monitoring classification of corporate and municipal clients is above different thresholds defined on group level (without aiming to give an exhaustive list): - financial difficulties at the debtor (capital adequacy, liquidity, deterioration of the asset quality), - significant decrease of the liquidity or the activity on the active market of the financial asset can be observed, - the rating of the client reflects high risk but it is better than the default one, - significantly decrease in the value of the recovery from which the debtor would repay the loan. A financial asset is non-performing, the asset is became allocated to stage 3 when any of the following events or conditions exists in respect thereof on the reporting date: • defaulted (based on the group level default definition), • it is classified as non-performing forborne (based on the group level forborne definition), Quantitative criteria and thresholds used as triggers for allocation in stage 2 related to change in transaction/client rating per segments of loan portfolio are the following: • corporate loans segment (large and medium enterprises): PD parameter applicable as of reporting date has increased more than 10% compared to PD parameter assigned to the client at the origination date of the transaction, • small business loans segment, housing loans, credit cards, (authorized and unauthorized) overdrafts in private individuals segment: PD parameter applicable as of reporting date has increased more than 20% compared to PD parameter assigned to the client at the origination date of the transaction, • unsecured loans to private individuals segment: rating assigned based on behavioral scorecard to the transaction equals to 9, i.e. 12-month PD exceeds 19,78%.

A financial asset is non-performing and is classified into level three when any of the following events or conditions exist on the reporting date: • the status of default is assigned to the asset; • the asset is identified as non-performing forborne; The status of default must be assigned to a client or loan if they meet one or both of the following conditions: • if the client is in default of more than 90 days (objective criteria); • if the Bank finds it unlikely that the client will settle all of client’s obligations (the subjective criterion being examined on the basis of the probability of failure to fulfil obligations). Exposures (balance and off-balance) are the subject of assigning the default status, which produce credit risk (that is, stem from credit liabilities, agreement on assuming risk). Loss allowance under financial assets categorized into levels is determined as follows: - stage 1 (performing assets): loss allowance at an amount equal to 12-month expected credit loss should be

recognized, - stage 2 (assets with significant increase in credit risk): loss allowance at an amount equal to lifetime expected

credit loss should be recognized, - stage 3 (non-performing assets): loss allowance at an amount equal to lifetime expected credit loss should be

recognized. For lifetime expected credit losses, an entity shall estimate the risk of a default occurring on the financial asset during its expected life. 12-month expected credit losses are a portion of the lifetime expected credit losses and represent the lifetime cash shortfalls that will result if a default occurs in the 12 months after the reporting date. The Bank measures expected credit losses of a financial asset in a way that reflects: - an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes - the time value of money and - reasonable and supportable information that is available without undue cost or effort at the reporting date about

past events, current conditions and forecasts of future economic conditions.


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Defining the expected credit loss on individual and collective basis

On individual basis:

On the individual basis the Bank assesses exposures towards legal entities (large and medium-sized legal entities) and exposure under debt securities which are according to the significant amount on a stand-alone basis: • exposure classified in stage 3, • exposure within the competence of the workout management organisational unit, • purchased or originated as credit-impaired which fulfil the conditions mentioned above

The calculation of impairment must be prepared and approved by the risk management functional areas. The calculation, all relevant factors ( gross AC value, original and current EIR, contracted and expected cash flows (from business and/or collateral) for the individual periods of the entire lifecycle, other essential information enforced during the valuation) and the criteria thereof (including the factors underlying the classification in stage 3) must be documented individually, i.e. by receivables.

The impairment of the receivable , i.e. impairment amount determined on an individual basis, equals the difference of the receivable's AC (gross book value) on the valuation date and the present value of the receivable's expected cash flows discounted to the valuation date by the exposure's original effective interest rate (EIR) (calculated at the initial recognition, or in the case of variable rate, recalculated due to the last benchmark interest rate change).

The estimation of the expected future cash flows should beis forward looking, it must also contain the effects of the possible change of macroeconomic outlook.

At least two scenarios are used for the estimation of the expected cash flow One of the scenarios anticipates that realised cash flows will be significantly different from the contractual cash flows. Probability weights are allocated to each scenarios. For the calculation of the impairment of the transaction, the present value of expected cash flows which represents the weighted average of individual scenarios must be applied. The estimation must reflect the probability of the occurrence and non-occurrence of the credit loss, even if the most probable result is the non-occurrence of the loss.

On collective basis:

The Bank assesses the following financial assets on collective basis:

• retail exposures, regardless of the amount (material significance) and classification level, • exposures to micro and small enterprises, regardless of the amount (material significance) and classification level, • exposures to legal entities (large and medium sized entities) and exposures under debt securities which are not materially significant on a stand-alone basis, regardless of the classification level, • exposures to legal entities (large and medium sized entities) and exposures under debt securities which are not materially significant on a stand-alone basis, and are not classified into stage 3, • purchased or originated impaired financial-assets which are in accordance with the conditions mentioned above . The collective impairment assessment methodology (i.e. of expected losses under credit risk) and the change of credit risk level require an understanding of the risk characteristics of the credit portfolio. For the purpose of this, the main credit risk factors are identified and used to form homogeneous segments of the credit portfolio having similar risk characteristics. The segmentation is expected to stay stable from month to month whit a regular (at least yearly) revision of the segmentation process to capture possible changes of risk characteristics. The segmentation is performed separately for each parameter, since in each case different factors may have relevance. The Bank's Headquarter Group Reserve Committee stipulates the guidelines related to the collective impairment methodology at group level. In addition, it has right of agreement in respect of the risk parameters (PD -probability of default, LGD - loss given default, EAD – exposure at default) and segmentation criteria proposed by the group members.

The review of the parameters is performed at least annually. Local Risk Managements are responsible for parameter estimations / updates, macroeconomic scenarios are calculated by OTP Headquarter for each subsidiary and each parameter. Based on the consensus proposal of Local Risk Management and OTP Headquarter, the Group Reserve Committee decides on the modification of parameters (all parameters for provision calculation). At least on a yearly basis the provisioning parameters should be back tested as well.

In the case of performing (stage 1) exposures a 12-month probability of default (PD) is to be calculated. In the case of exposures showing significant increase in credit risk (stage 2) or non-performing (stage 3) exposures, lifetime PD must be used. The lifetime PD must be calculated by multiplying the transition matrices according to the remaining contractual maturity or the expected lifetime of the exposure. During the multiplication the same matrix should be used for the full lifetime, except when the "number of years elapsed since disbursement" is a portfolio segmentation factor; in this case, the matrices related to the various years of the remaining duration are different.


59



Defining the expected credit loss on individual and collective basis On collective basis (Continued): The migration matrix methodology applied in the Bank is based, on the payment delay buckets, default flag, restructured flag and rating information (if available for a certain portfolio segment) but other segmentation parameters (LTV, etc.) may also be used. The migration matrix iscalculated on the basis of the number of transactions. The Bank uses two different methods for collectively assessed exposures: - Retail mortgage loans : modified LGL methodology based on the Asset Quality Review (AQR). The primary source

of the data is the collateral itself. - Portfolio of legal entities, consumer loans and unsecured retail exposures: recovery based LGL methodology

estimated from historical data PD and LGD parameters are consistent in terms of healing and cure rates i.e. their impact on both parameters. The expected loss calculation on collective basis is forward looking, including forecasts of future economic conditions. This is achieved by applying 3-5 different macroeconomic scenarios, which are integrated in the PD parameter by way of a model which is developed based on historical data on the movement of a set of macroeconomic indicators and performances of certain portfolio segments. Macroeconomic indicators that are used in assessing the PD parameter are as follows: • exposures to legal entities (large and medium-sized legal entities): 1M BELIBOR and inflation rate, • exposures to micro and small enterprises: GDP growth rate. • exposures based on mortgage loans: inflation rate, EUR/RSD exchange rate, 1M EURIBOR and 1M BELIBOR, • exposures under credit cards: 1M BELIBOR and GDP growth rate, • exposures under unsecured retail loans: GDP growth rate and, • exposures under current accounts and current account with overdraft: 1M BELIBOR. Remeasurement effects due to reclassification and impairment regarding transition from IAS 39 to IFRS 9

(In RSD thousand) Remeasurement due to impaired

Carrying amount as of 31 December

2017

Remeasurement due to

reclassification Unallocated

profit

Carrying amount as of 01 January

2018 Reserves Cash, amounts due from banks and balances with the National Banks 21,416,477 - - 21,416,477 - Placements with other banks,net of allowance for placement losses 5,729,058 - 16,825 5,712,233 - Trading instruments at fair value through profit or loss 39,569 - - 39,569 - Trading instruments are mandatory at fair value through profit or loss - 90,829 30,771 31,558 28,500 Securities at fair value through other comprehensive income - 16,177,632 45,053 16,177,532 (45,053) Securities available for sale 16,268,461 (16,268,461) - - - Securities at amortized cost 59,186 - 782 58,404 - Loans at amortized cost 73,504,393 - 569,776 72,934,617 - Other assets 53,691 - 11,778 41,913 - Financial liabilities designated at fair value through profit or loss 17,392 - - 17,392 - Provision on loan commitments 14,108 - 32,591 46,699 - Provision on financial guarantee contracts 8,357 - 9,986 18,343 - Total - - 717,562 - (16,553)



60



43.2 Credit Risk (IFRS 9) (Continued) Gross carrying amount and accumulated impairment of financial assets at amortized cost and of interest bearing securities at fair value through other comprehensive income by stages as at 31 December 2018.

In RSD thousand

Gross carrying amount Accumulated impairment

Stage 1 Stage 2 Stage 3 Poci Total Stage 1 Stage 2 Stage 3 Poci Total

Carrying amount

Placements with other banks 5,449,142 - 113 - 5,449,255 (1,102) - (58)

(1,159) 5,448,096

Mortgage loans 10,330,175 4,351,954 1,158,605 14,969 15,855,703 (54,169) (247,938) (670,352) (9,071) (981,530) 14,874,172 Loans to medium and large corporates 35,509,166 4,096,648 2,778,764 345,542 42,730,120 (58,572) (39,231) (2,068,392) (287,743) (2,453,939) 40,276,181 Consumer loans 27,702,993 1,016,271 1,685,163 - 30,404,427 (127,138) (105,926) (1,451,398) - (1,684,462) 28,719,965 Loans to micro and small enterprises 787,848 63,963 65,310 - 917,122 (7,441) (946) (33,183) - (41,570) 875,552 Car-finance loans - - 713 - 713 - - (697) - (697) 17 Municipal loans 475,940 - 67,104 - 543,044 (49) - (67,103) - (67,153) 475,891

Loans at amortized cost 74,806,123 9,528,836 5,755,659 360,511 90,451,129 (247,369) (394,042) (4,291,126) (296,815) (5,229,351) 85,221,778 Interest bearing securities at fair value through other comprehensive income 1* 11,558,185 - - - 11,558,185 (37,405) - - - (37,405) 11,520,780 Interest bearing securities at at amortized cost 4,957 - 47,336 - 52,293 (7) - (35,561) - (35,568) 16,725 Financial assets total 91,818,407 9,528,836 5,803,108 360,511 107,510,862 (285,882) (394,042) (4,326,745) (296,815) (5,303,483) 102,207,379

Loan commitments

11,212,709 764,102 4,665 - 11,981,476 (32,424) (3,308) (3,230) - (38,962) 11,942,514 Financial quaranties 3,325,470 308,477 11,018 - 3,644,965 (4,116) (161) (5,039) - (9,316) 3,635,648 Financial liabilities total 14,538,179 1,072,579 15,683 - 15,626,440 (36,540) (3,469) (8,269) - (48,278) 15,578,162 1*The impaired values for interest-bearing securities that are recognized in proportion to the residual result are identified within the capital buffer reserves Revaluation reserve


61


43.2 Credit Risk (IFRS 9) (Continued) Transfers between stages of the gross carrying amount of financial assets at amortized cost and of interest bearing securities at fair value through other comprehensive income by stages as at 31 December 2018

In RSD thousand Placemenets to other Banks Stage 1 Stage 2 Stage 3 POCI Total Gross carrying amount as at 31 December 2017 5,744,123 - 386

5,744,509

Application of IFRS 9 (2,570) - 2,569

- Gross carrying amount as at 1 January 2018 5,741,553 - 2,955 - 5,744,509 Changes in the gross carrying amount

Transfer to stage 1 -

- Transfer to stage 2

-

Transfer to stage 3 7,742

(7,742)

- Increases due to creation and acquisition 1,608,516

1

1,608,516

Reduction due to cessation of recognition

- Reduction due to write-off (452,537)

(452,537)

Other changes (1,456,133)

4,900

(1,451,233) Gross carrying amount as at 31 December 2018 5,449,142 - 113 - 5,449,255 Calculated impairment as at 31 December 2018 (1,102) - (58) - (1,159)

* Other adjustments include changes in the carrying amount incurred between two dates that are not the result of the

creation and acquisition, termination of recognition or write-off of financial assets and include, for example, increase / decrease in the amount of receivables or change based on exchange differences.

In RSD thousand

Loans at amortized cost Stage 1 Stage 2 Stage 3 POCI Total Gross carrying amount as at 31 December 2017 71,783,728 - 6,497,039 - 78,280,767 Application of IFRS 9 (7,990,751) 7,689,145 301,606 - - Gross carrying amount as at 1 January 2018 63,792,977 7,689,145 6,798,644 - 78,280,767 Changes in the gross carrying amount

Transfer to stage 1 (1,417,392) 1,165,109 252,283 - - Transfer to stage 2 1,056,168 (1,300,121) 243,953 1,929 1,929 Transfer to stage 3 77,487 75,395 (223,097) 70,215 -

Increases due to creation and acquisition 47,301,055 4,232,264 479,616 288,366 52,301,302 Reduction due to cessation of recognition (29,310,925) (1,739,606) (847,788) - (31,898,319) Reduction due to write-off (1,926) (16,052) (564,379) - (582,357) Other changes (6,691,321) (577,299) (383,574) - (7,652,195) Gross carrying amount as at 31 December 2018 74,806,123 9,528,836 5,755,659 360,511 90,451,129 Calculated impairment as at 31 December 2018 (247,369) (394,042) (4,291,126) (296,815) (5,229,351)

Transfers between stages of the gross carrying amount of financial assets at amortized cost and of interest bearing securities at fair value through other comprehensive income by stages as at 31 December 2018

In RSD thousand Interest bearing securities at fair value through other comprehensive income and securities at amortized cost Stage 1 Stage 2 Stage 3 POCI Total Gross carrying amount as at 31 December 2017 16,220,810 - 53,902 - 16,274,712 Application of IFRS 9 (17,197) 17,197 - - - Gross carrying amount as at 1 January 2018 16,203,613 17,197 53,902 - 16,274,712 Changes in the gross carrying amount

Transfer to stage 1

- - - - Transfer to stage 2 - - - - - Transfer to stage 3

-

Increases due to creation and acquisition 21,736 -

21,736 Reduction due to cessation of recognition (4,594,470) (17,197) - - (4,611,667) Reduction due to write-off - - (5,266) - (5,266) Other changes (67,739) - (1,300) - (69,038) Gross carrying amount as at 31 December 2018 11,563,141 - 47,336 - 11,610,477 Calculated impairment as at 31 December 2018 (37,412) - (35,561) - (72,973)


62




In RSD

thousand Loan commitments Stage 1 Stage 2 Stage 3 POCI Total Gross carrying amount as at 31 December 2017 9,532,887 - 290 - 9,533,176 Application of IFRS 9 (226,900) 215,514 11,386 - - Gross carrying amount as at 1 January 2018 9,305,987 215,514 11,676 - 9,533,176 Changes in the gross carrying amount

Transfer to stage 1 (250,368) 245,117 5,251 - - Transfer to stage 2 82,277 (82,591) 314 - - Transfer to stage 3 160 141 (301) - -

Increases due to creation and acquisition 8,279,087 490,762 2,234 - 8,772,082 Reduction due to cessation of recognition (6,101,283) (81,740) (10,823) - (6,193,846) Reduction due to write-off

-

Other changes (103,150) (23,101) (3,685) - (129,936) Gross carrying amount as at 31 December 2018 11,212,709 764,102 4,665 - 11,981,476 Calculated impairment as at 31 December 2018 (32,424) (3,308) (3,230) - (38,962)

Transfers between stages of the gross carrying amount of financial assets at amortized cost and of interest bearing securities at fair value through other comprehensive income by stages as at 31 December 2018

In RSD thousand Financial guarantees Stage 1 Stage 2 Stage 3 POCI Total Gross carrying amount as at 31 December 2017 3,462,512 - - - 3,462,512 Application of IFRS 9 (92,295) 83,015 9,280 - - Gross carrying amount as at 1 January 2018 3,370,217 83,015 9,280 - 3,462,512 Changes in the gross carrying amount

Transfer to stage 1 (60,483) 60,483 - - - Transfer to stage 2 341 (341) - - - Transfer to stage 3

-

Increases due to creation and acquisition 3,020,937 232,748 4,500 - 3,258,186 Reduction due to cessation of recognition (2,987,081) (52,789) (3,032) - (3,042,902) Reduction due to write-off

- - - -

Other changes (18,462) (14,638) 269 - (32,831) Gross carrying amount as at 31 December 2018 3,325,470 308,477 11,018 - 3,644,965 Calculated impairment as at 31 December 2018 (4,116) (161) (5,039) - (9,316)

Transfers between the level of allowance for impairment are carried at amortized cost and interest bearing securities at fair value through other results by levels as at 31 December 2018.:

In RSD thousand

Credit impaired placemenets to other Banks Stage 1 Stage 2 Stage 3 POCI Total Balance at 31 December 2017 (15,269) - (182) - (15,451) Application of IFRS 9 (15,652) - (1,173) - (16,825) Balance at 1 January 2018 (30,920) - (1,356) - (32,276) Changes in Impairments Transfer to stage 1 - - - - - Transfer to stage 2 - - - - - Transfer to stage 3 - - - - - Increases due to creation and acquisition (66) - - - (66) Reduction due to cessation of recognition 10,401 - - - 10,401 Reduction due to write-off - - - - - Other changes 19,483 - 1,299 - 20,782 Balance at 31 December 2018 (1,102) - (58) - (1,159)


63




In RSD thousand Credit impaired loans at amortized cost Stage 1 Stage 2 Stage 3 POCI Total Balance at 31 December 2017 (368,619) - (4,407,754) - (4,776,374) Application of IFRS 9 140,626 (362,344) (348,057) - (569,776) Balance at 1 January 2018 (227,994) (362,344) (4,755,811) - (5,346,150) Changes in Impairments Transfer to stage 1 257,863 (94,245) (163,618) - Transfer to stage 2 (12,128) 177,907 (164,609) (1,169) - Transfer to stage 3 (713) (11,829) 24,931 (12,389) - Increases due to creation and acquisition (125,532) (80,832) (407,316) (283,256) (896,937) Reduction due to cessation of recognition 86,281 46,656 683,119 - 816,056 Reduction due to write-off 1 15,990 509,755 - 525,745 Other changes (225,146) (85,343) (17,577) - (328,066) Balance at 31 December 2018 (247,369) (394,042) (4,291,126) (296,815) (5,229,351)

Transfers between the level of allowance for impairment are carried at amortized cost and interest bearing securities at fair value through other results by levels as at 31 December 2018.: (continued) Credit impaired interest bearing securities at fair value through other comprehensive income and securities at amortized cost Stage 1 Stage 2 Stage 3 POCI Total Balance at 31 December 2017 (16) (557) (37,323) - (37,894) Application of IFRS 9 (45,121) (57) (656) - (45,835) Balance at 1 January 2018 (45,137) (614) (37,979) - (83,729) Changes in Impairments

Transfer to stage 1

- - - - Transfer to stage 2 - - - - - Transfer to stage 3 - - - - - Increases due to creation and acquisition (7) - -

(7)

Reduction due to cessation of recognition 12,936 614 -

13,549 Reduction due to write-off - - 5,266

5,266

Other changes (5,204) - (2,849)

(8,053) Balance at 31 December 2018 (37,412) - (35,561) - (72,973)

In RSD thousand Credit impaired loan commitments Stage 1 Stage 2 Stage 3 POCI Total Balance at 31 December 2017 (13,829) - (279)

(14,108)

Application of IFRS 9 (24,916) (1,247) (6,464) - (32,627) Balance at 1 January 2018 (38,746) (1,247) (6,743) - (46,735) Changes in Impairments

Transfer to stage 1 1,558 (1,517) (41)

- Transfer to stage 2 (497) 502 (5)

-

Transfer to stage 3 (146) (98) 244

- Increases due to creation and acquisition (17,233) (616) (1,221)

(19,070)

Reduction due to cessation of recognition 18,218 509 5,977

24,704 Reduction due to write-off

-

Other changes 4,421 (842) (1,441)

2,138 Balance at 31 December 2018 (32,424) (3,308) (3,230) - (38,962)


64



43.2 Credit Risk (IFRS 9) (Continued) Transfers between the level of allowance for impairment are carried at amortized cost and interest bearing securities at fair value through other results by levels as at 31 December 2018.: (continued)

In RSD thousand Credit impaired financial guarantees Stage 1 Stage 2 Stage 3 POCI Total Balance at 31 December 2017 (10,399) - - - (10,399) Application of IFRS 9 (6,310) (48) (3,588)

(9,946)

Balance at 1 January 2018 (16,709) (48) (3,588) - (20,344) Changes in Impairments

Transfer to stage 1 200 (200) -

- Transfer to stage 2 (0) 0

-

Transfer to stage 3 -

- Increases due to creation and acquisition (3,661) (75) (1,729)

(5,465)

Reduction due to cessation of recognition 15,843 26 414

16,284 Reduction due to write-off

-

Other changes 210 136 (137) - 209 Balance at 31 December 2018 (4,116) (161) (5,039) - (9,316)

Modified assets

Among the possible contract amendments modified financial assets are those ones where the net present value of the contracted cash-flow changes. According to the defined Group policy these can be restructuring, using that exemption that for portfolios, frameworks can be evaluated and if the modification is immaterial it can be handled as if there hadn’t been net present value change.

The Bank identified forborne exposures at the moment of classification and classifies them into non-performing forborne exposures (stage 3) and those not considered being non-performing (stage 2). The Bank has also established a corresponding framework for monitoring and reclassifying forborne exposures, including also exiting from the forborne status.

Forborne loans in 2018, balance as of 31. December 2018

In RSD thousa

Gross amount Impairment

Corporate 118,438 (111) Retail 76,480 (41,240) Total 194,918 (41,351)

In accordance with the criteria for monitoring and reclassification of forborne loans, none of the forborne cases in 2018 acquired conditions for reclassifiaction into stage 1, i.e. for recognising the expected credit loss for a period of 12 months



65


43. Risk Management (Continued) 43.2 Credit Risk (IFRS 9) (Continued)

Gross carrying amount as of 31.12.2018

Impairments as of 31.12.2018

Impairments as of 31.12.2017

Gross carrying amount as of 31.12.2017

Not due 87,376,624 (713,476) 75,314,766 (381,167) Due up to 30 days 2,261,895 (69,563) 2,054,718 (58,712) Due from 31-60 days 760,995 (132,867) 744,231 (72,530) Due from 61-90 days 332,500 (143,016) 262,991 (53,159) Due from 91-180 days 498,781 (326,370) 458,562 (250,081) Over 180 days 4,669,590 (3,845,217) 5,190,007 (3,976,176) Total 95,900,385 (5,230,509) 84,025,275 (4,791,825)



66


43. Risk Management (Continued) 43.2 Credit Risk (IFRS 9) (Continued) Credit risk exposure per class of financial asset, internal rating and stage

In RSD thousand Year ended 31.12.2018

Ended 2017 Total CUm Loans and advances to banks at amortised cost

Stage 1 12-month ECL CUm

Stage 2 Lifetime ECL CUm

Stage 3 Lifetime ECL CUm POCI CUm Total

Not due 5,449,142 - - - 5,449,142 5,744,123 Due up to 30 days - - - - - - Due from 31-60 days - - - - - - Due from 61-90 days - - - - - - Doubtful - - 113 - 113 386

Not due - - 1 - 1 - Due up to 30 days - - - - - - Due from 31-60 days - - - - - - Due from 61-90 days - - - - - - Over 90 days - - 113 - 113 386

Total gross carrying amount 5,449,142 - 113 - 5,449,255 5,744,509 Impairments (1,102) - (58) - (1,159) (15,451) Carrying amount 5,448,041 - 56 - 5,448,096 5,729,058



67


43. Risk Management (Continued) 43.2 Credit Risk (IFRS 9) (Continued) Credit risk exposure per class of financial asset, internal rating and stage

In RSD thousand

Year ended 31.12.2018

Ended 2017 Total CUm Loans to retail Stage 1 12-month

ECL CUm Stage 2 Lifetime

ECL CUm Stage 3 Lifetime

ECL CUm POCI CUm Total Not due 36,583,306 4,429,661 49 1,929 41,014,946 35,162,192 Due up to 30 days 1,449,849 168,245 - - 1,618,094 1,291,190 Due from 31-60 days - 561,430 - - 561,430 496,945 Due from 61-90 days - 208,888 - - 208,888 177,299 Doubtful 14 - 2,844,432 13,040 2,857,485 2,626,656

Not due 14 - 198,479 - 198,492 164,782 Due up to 30 days - - 27,179 - 27,179 15,430 Due from 31-60 days - - 52,414 - 52,414 27,912 Due from 61-90 days - - 115,826 - 115,826 61,851 Over 90 days - - 2,450,535 13,040 2,463,575 2,356,681

Total gross carrying amount 38,033,169 5,368,224 2,844,481 14,969 46,260,843 39,754,282 Impairments (181,307) (353,865) (2,122,447) (9,071) (2,666,689) (1,917,038) Carrying amount 37,851,862 5,014,359 722,034 5,898 43,594,154 37,837,244



68


43. Risk Management (Continued) 43.2 Credit Risk (IFRS 9) (Continued)

Credit risk exposure per class of financial asset, internal rating and stage

In RSD thousand Year ended 31.12.2018

Ended 2017 Total CUm Loans to corporate

Stage 1 12-month ECL CUm

Stage 2 Lifetime ECL CUm

Stage 3 Lifetime ECL CUm POCI CUm Total

Rejting 1 - - - - - - Rejting 2 941,844 77 - - 941,921 3,782,894 Rejting 3 9,933,193 4,451 - - 9,937,644 4,927,593 Rejting 4 4,419,516 138,520 - - 4,558,036 10,522,185 Rejting 5 10,961,907 1,624,349 - - 12,586,256 5,690,932 Rejting 6 2,750,966 1,600,684 - - 4,351,650 4,310,241 Rejting 7 1,088,270 655,262 - - 1,743,532 957,352 Rejting 8 259,805 40,253 - - 300,058 668,662 Rejting 9 18,636 43,506 - - 62,142 22,103 Default - - 2,911,178 345,542 3,256,720 4,129,086 Without rating 6,398,817 53,509 - - 6,452,326 3,515,435 Total gross carrying amount 36,772,954 4,160,612 2,911,178 345,542 44,190,286 38,526,485 Impairments (66,062) (40,177) (2,168,679) (287,743) (2,562,662) (2,859,335) Carrying amount 36,706,892 4,120,434 742,499 57,799 41,627,624 35,667,149



69



43.2 Credit Risk (Continued)

Maximum Exposure to Credit Risk Maximum exposure to credit risk, without taking into account collateral or other means of reducing such risk, as of 31 December 2018 and 2017 are presented in the following table. For balance sheet items, the exposures represent the net book value of receivables in accordance with the balance sheet positions.

(In RSD thousand)

Bank assets exposed to credit risk

Bank assets not exposed to credit risk

Balance sheet value 31.12.2018 Gross value

Accumulated allowances for

impairment/provisions Net value Cash and assets held with the central bank 19,702,379 - 19,702,379 6,393,022 26,095,401 Receivables under derivatives 1,115 - 1,115 - 1,115 Securities 11,651,643 35,568 11,616,075 - 11,616,075 Loans and receivables from banks and other financial organisations 5,449,255 1,159 5,448,096 - 5,448,096 Loans and receivables from clients 90,451,129 5,229,351 85,221,778 - 85,221,778 Intangible investments - - - 151,681 151,681 Property,plants and equipment - - - 4,192,552 4,192,552 Investment property - - - 122,515 122,515 Deferred tax assets - - - 273,849 273,849 Other assets - - - 509,182 509,182 On-balance sheet exposureIssued 127,255,521 5,266,078 121,989,443 11,642,801 133,632,244 Off-balance items Issued guaranties and warranties 3,644,965 9,316 3,635,648 - 3,635,648 Contingent liabilities 2,817,819 38,962 2,778,857 9,163,657 11,942,514 Off-balance sheet exposure 6,462,784 48,278 6,414,505 9,163,657 15,578,162 Total exposure 133,718,305 5,314,356 128,403,948 20,806,458 149,210,406



70




Maximum Exposure to Credit Risk (Continued)

Bank assets exposed to credit risk

31.12.2017 Gross value

Accumulated allowances for

impairment/provisions Net value

Bank assets not exposed to credit

risk Balance sheet

value Balance sheet items

Cash and assets held with the central bank 16,787,921 - 16,787,921 4,628,556 21,416,477 Financial assets recognised at fair value through income statement and held for

trading 39,569 - 39,569 - 39,569 Financial assets available for sale 16,295,171 26,710 16,268,461 - 16,268,461 Financial assets held to maturity 97,080 37,894 59,186 - 59,186 Loans and receivables from banks and other financial organisations 5,744,509 15,451 5,729,058 - 5,729,058 Loans and receivables from clients 78,280,767 4,776,374 73,504,393 - 73,504,393 Intangible investments - - - 172,693 172,693 Property, plant and equipment - - - 4,248,264 4,248,264 Investment property - - - 134,835 134,835 Deferred tax assets - - - 301,874 301,874 Оther assets - - - 852,983 852,983 On-balance sheet exposureIssued 117,245,017 4,856,429 112,388,588 10,339,205 122,727,793 Off-balance items

Issued guaranties and warranties 3,462,512 10,398 3,452,114 - 3,452,114 Contingent liabilities 3,137,878 14,108 3,123,770 6,395,298 9,519,068 Off-balance sheet exposure 6,600,390 24,506 6,575,884 6,395,298 12,971,182 Total exposure 123,845,407 4,880,935 118,964,472 16,734,503 135,698,975

In terms of credit risk exposure, the main source of exposure relates to loans and receivables from customers, banks and financial organizations whose structure by quality, branch and geographical concentration, by sectors, categories of claims, security status, delinquency, problematic and forborne claims will be shown in the tables below on this credit risk note. At the positions of securities and cash and balances with the central bank, the largest part relates to receivables from the Republic of Serbia (Note 24) and the National Bank of Serbia (Note 22) that bear a low level of credit risk



71


43. Risk Management (Continued) 43.2 Credit Risk (Continued)

Loans and Receivables from Customers

Exposure per Industry and geographical concentration as of 31 December 2018 and 2017 are presented in the following table:

(In RSD thousand)

Vojvodina region Belgrade region Sumadija and Western

Serbia region Southern and Eastern

Serbia region Kosovo and Metohia region Foreign country

31.12.2018 Performing receivables

Non-performing receivables

Performing receivables










Retail receivables 18,200,426 934,542 10,976,078 836,187 10,533,894 802,406 3,674,667 281,109 13,164 1,796 5,128 1,444 Housing loans 5,096,498 298,074 5,098,355 442,909 3,540,632 355,667 936,540 74,866 6,911 - 5,123 128 Consumer and cash loans 12,355,987 350,296 5,670,295 283,873 6,667,348 254,882 2,630,053 142,512 5,968 1,732 - - Transaction loans and credit cards 747,941 286,172 207,428 109,294 325,914 191,856 108,074 63,731 285 64 5 1,316 Оther receivables - - - 111 - 1 - - - - - - Corporate receivables 17,967,711 1,799,831 14,908,351 315,057 6,459,764 1,025,332 1,595,110 116,498 - 1 2,629 - Sector А 2,925,019 165,128 69,032 147 135,470 85,589 25,842 2,141 - - - - Sector B, C, Е 8,196,743 446,158 2,971,510 102,684 4,296,047 432,544 931,828 37,611 - 1 - - Sector D 3,595,042 - 229,490 679 39,952 - 3 - - - - - Sector F 1,016,593 315,703 744,103 22,316 268,656 25,267 51,683 6,674 - - 2,625 - Sector G 1,812,129 524,525 5,212,616 87,105 1,367,304 412,641 524,650 46,604 - - - - Sector H, I, J 335,527 329,918 4,965,982 34,917 337,735 51,986 49,850 11,355 - - - - Sector L, M, N 86,658 18,399 715,618 67,209 14,600 17,305 11,254 12,113 - - 4 - Receivables from banks and other financial institution 972,818 - 1,659,783 - - - - 113 - - 2,816,541 - Total exposure 37,140,955 2,734,373 27,544,212 1,151,244 16,993,658 1,827,738 5,269,777 397,720 13,164 1,797 2,824,298 1,444 Loan commitments 3,119,778 2,627 6,209,159 1,250 2,159,407 442 487,951 346 516 - - - Financial quaranties 824,304 3,000 1,401,291 8,018 808,061 - 65,880 - - - 534,411 - Off-balance sheet exposure 3,944,081 5,627 7,610,450 9,267 2,967,468 442 553,831 346 516 - 534,411 -



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43. Risk Management (Continued) 43.2 Credit Risk (Continued)

Loans and Receivables from Customers

(In RSD thousand)

Vojvodina region Belgrade region Sumadija and Western Serbia

region Southern and Eastern Serbia

region Kosovo and Metohia region Foreign country

31.12.2017 Performing receivables












Retail receivables 15,804,280 835,888 9,489,390 806,526 8,755,406 733,531 3,050,598 232,970 12,917 1,268 15,033 16,474 Housing loans 4,592,287 315,689 4,434,607 498,081 2,982,675 367,183 785,781 82,633 7,318 - 14,526 129 Consumer and cash loans 10,399,024 246,533 4,849,434 222,965 5,436,814 189,289 2,156,745 94,595 5,311 1,259 474 - Transaction loans and credit cards 812,969 273,343 205,349 85,359 335,917 176,077 108,072 55,742 288 9 33 16,345 Оther receivables - 323 - 121 - 982 - - - - - - Corporate receivables 12,136,014 2,456,578 15,285,507 437,388 5,142,515 1,105,218 1,509,341 137,080 - 1 316,841 - Sector А 2,703,313 190,495 59,286 130 210,111 93,388 43,339 4,189 - - - - Sector B, C, Е 6,131,183 823,162 1,895,531 90,299 3,261,790 454,310 664,451 45,148 - 1 - - Sector D 147,886 - 256,671 630 - - 3 - - - - - Sector F 736,641 308,104 881,922 93,137 266,706 27,279 63,135 9,402 - - 438 - Sector G 2,012,283 774,540 5,765,628 96,032 1,216,833 439,847 671,384 57,763 - - - - Sector H, I, J 313,416 334,718 4,869,525 29,691 173,491 53,703 53,219 9,246 - - - - Sector L, M, N 91,292 25,559 1,556,944 127,469 13,584 36,691 13,810 11,332 - - 316,403 - Receivables from banks and other financial institution - - 1,588,322 - - - - 386 - - 4,155,804 - Total exposure 27,940,294 3,292,466 26,363,219 1,243,914 13,897,921 1,838,749 4,559,939 370,436 12,917 1,269 4,487,678 16,474 Loan commitments 1,704,203 865 5,847,797 9,769 1,551,580 791 417,392 367 411 - - - Financial quaranties 752,186 95 1,363,360 9,280 746,549 - 80,217 - - - 510,825 - Off-balance sheet exposure 2,456,389 960 7,211,157 19,049 2,298,129 791 497,609 367 411 - 510,825 - Sector А Electricity, gas, steam and air conditioning supply Sector G Wholesale and retail trade, repair of motor vehicles and motorcycles Sector B, C, Е Construction Sector H, I, J Transporting and storage, Accommodation and food service activities, Information

and communication

Sector D Agriculture, forestry and fishing Sector L, M, N

Real estate activities, Professional, scientific and technical activities, Administrative and support service activities, Arts

Sector F Mining, Manufacturing, Water supply; sewerage; waste managment and remediation activities


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Collateral held as security and other credit enhancements The main way of mitigating credit risk is to take loan collateral. By its credit policies that Bank has specified types of acceptable collateral in the form of material and non-material credit hedging, while the conditions of obtaining collateral and coefficients for calculating the secured value in respect of the collateral type for the needs of the credit process are regulated in more detail by other Bank’s internal acts,

The basic collateral types used by the Bank for the purpose of mitigating credit risk are: mortgages over residential real-estate, mortgage over business real-estate, pledge over equipment, inventories and receivables, guarantees, financial assets (cash, securities) and sureties, as presented in the table below: Type of Collateral according to segments of credit portfolio

Derivative assets cash deposit Loans and advances to banks cash deposit

Mortgage lending cash deposit, mortgage on residential and commercial real estate

Personal lending cash deposit, mortgage on residential and commercial real estate

Corporate lending

cash deposit, guarantee issued by Republic of Serbia, bank guarantees, mortgage on residential and commercial real estate, pledge on movables, pledge on receivables, sureties and corporate guarantees

Values of taken collateral are monitored regularly and updated in accordance with the dynamics determined by Bank’s internal acts, which is no longer than 3 years. The Property Management Division coordinates the real-estate value appraisal, while external certified appraisers with whom the Bank has a regulated cooperation make the appraisal. The LTV ratio represents the ratio between the amounts of loans and appraised property value received as collateral. The structure of mortgage loans per scale of the LTV ratios is presented in the following overview:

LTV ratio receivables secured by mortgage

in RSD thousand

31.12.2018 31.12.2017

Value of LTV ratio Gross carrying

amount Impairments Gross carrying

amount Impairments Retail receivables secured by mortgage and real estate : < 50% 2,980,960 (124,427) 2,796,217 (83,232) 50%-70% 4,021,621 (200,441) 3,422,749 (103,001) 70%-90% 4,584,786 (204,878) 3,961,977 (148,238) 90%-100% 608,064 (58,334) 741,160 (57,825) 100%-120% 924,896 (128,041) 972,402 (115,224) 120%-150% 486,589 (95,305) 501,906 (69,888) >150% 2,239,081 (173,173) 1,745,221 (105,548) Total 15,845,997 (984,599) 14,141,632 (682,956) Average LTV ratio 71.69%

71.74%


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31.12.2018

Value of LTV ratio Gross carrying

amount Impairments Retail receivables secured by mortgage and arranged in stage 3: < 50% 136,993 (78,885) 50%-70% 201,146 (118,080) 70%-90% 201,846 (105,046) 90%-100% 86,963 (51,310) 100%-120% 190,503 (111,759) 120%-150% 142,447 (86,323) >150% 218,153 (131,483) Total 1,178,051 (682,886) Average LTV ratio 92.99%

Foreclosed Assets The largest portion of foreclosed assets pertains to real estate (buildings). The Bank is undertaking all necessary activities to sell the foreclosed assets within reasonable period of time. The foreclosed assets are presented within Other assets in the balance sheet (Note 30), with exception when it is determined that the property will be used in the Bank’s regular course of business activities, i.e., as investment property or own property of the Bank .

43.3 Market Risk

Market risk is the existing or future risk of the occurrence of adverse effects on the Bank’s financial result and capital due to changes of interest rates, price of equity securities, price of traded or tradable goods and exchange rates. The most important from the group of market risks in the Bank’s operation is foreign exchange risk and interest rate risk. Foreign exchange risk is the existing or future risk of the occurrence of adverse effects on the Bank’s financial result and capital due to unfavourable exchange rate fluctuations in the banking book and trading book. Interest rate risk is the existing or future risk of the occurrence of adverse effects on the Bank’s financial result and capital due to modifications in the direction or volatility of interest rates, shape of the yield curve and margin between different interest rates that affect positions in the trading book. The Bank has established and maintains corresponding market risk measuring, monitoring and controlling functions, including: • Market risk measurement processes which record all significant sources of market risk and assess the

impact of market risk factor changes in the manner in line with the Bank’s scope of activities. These measurement systems include VaR models for the most important currencies and models where appropriate;

• Operational limits and other practices which ensure that exposures remain within levels that are in accordance with internal policies in terms of exposure to individual market risk types, positions and loss limits; Measurement of sensitivity to loss under stressed market conditions and taking into account such results when establishing and reviewing policies and limits for market risks; and

• Adequate and efficient processes and information systems for measuring, monitoring, controlling and reporting on market risk exposure. Controls (limits) are included in those systems. Reports are regularly made and submitted to the Board of Directors, Executive Board, ALCO Committee and all other corresponding competent bodies.


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43.3 Market Risk

43.3.1. Interest Rate Risk

The Bank is exposed to interest risk based on items from banking book. The level of such risk is assessed as a whole and for each significant currency for definition of which there is established criteria. In accordance with these criteria, the Bank is of the opinion that RSD, EUR, USD and CHF are significant currencies. The basic instrument of interest rate risk management is to monitor mismatch of interest sensitive assets and liabilities and based on determining the impacts of changes to the interest rates on the changes of net interest income and economic value of capital. The acceptable interest rate risk level is defined by limits of mismatch of interest sensitive assets and liabilities. The Market Risk Management Department within the Risk Management Division monitors interest rate risk and reports thereof to the Assets and Liabilities Committee, which is responsible for maintaining exposure to the interest rate risk within adopted limits and it proposes to the Bank’s Executive Board the measures and activities necessary to adjust such exposure with limits. The following table presents the mismatch of interest sensitive assets and liabilities, i.e., the Bank’s exposure to the risk of changes in interest rates as of 31 December 2018. Table includes the Bank’s monetary assets and liabilities at their carrying value and initially agreed term of re-modification to the interest rate or due date.

In RSD thousand

Up to 1 month

From 1 to 3 months

From 3 to 12 months

Over 1 year

Non interest bearing Total

ASSETS Cash and balances with central banks 10,904,746 - - - 15,190,655 26,095,401

Receivables for derivatives 1,115 - - - - 1,115 Securities 746,871 2,171,928 4,329,559 4,309,772 57,945 11,616,075 Loans and receivables from banks and other financial organizations 2,506,165 500,037 90,355 346,891 2,004,649 5,448,097 Loans and receivables from customers 20,004,369 56,057,556 2,633,709 6,513,710 12,434 85,221,777 Other assets - - - - 263,877 263,877

TOTAL ASSETS 34,163,266

58,729,521 7,053,623 11,170,373 17,529,560 128,646,342 LIABILITIES

Liabilities for derivatives 7,667 - - - - 7,667 Deposits and other liabilities to banks, other financial organizations and central bank 2,001,338 3,300,839 10,158,960 - 836,412 16,297,549 Deposits and other liabilities to other customers 38,354,290 7,281,247 10,913,808 909,705 40,728,065 98,187,115 Other liabilities 4,896 - - - 596,746 601,642

TOTAL LIABILITIES 40,368,191

10,582,086 21,072,768 909,705 42,161,223 115,093,973

Net exposure to interest rate risk as of:

– 31 December 2018 (6,204,925) 48,147,435 (14,019,145) 10,260,668 (24,631,663) 13,552,369 – 31 December 2017 (9,490,451) 35,061,841 (13,579,289) 18,455,171 (16,698,344) 13,748,927

Interest rate risk is also monitored according to the scenario analysis, i.e. by observing the impact of interest rate changes to the Bank’s revenue and expenditures, as shown in the table as follows:

In RSD thousand 2018 2017

Change in percentage

point

Sensitivity of Income

statement

Change in percentage

point

Sensitivity of Income

statement Increase of percentage point + 1% 385,697 + 1% 307,548 Decrease of percentage point -1% (378,060) -1% (301,458)


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43.3 Market Risk (Continued)

43.3.2. Foreign Exchange Risk The Bank manages foreign exchange risk by limiting and daily monitoring of alignment of that position with the limit. In addition to this, the Bank measures on a daily basis the foreign exchange risk indicator pursuant to the regulations of the National Bank of Serbia and maintains it within the prescribed limits. Foreign exchange risk indicator is the ratio between the open FX position and Bank’s capital calculated pursuant to the regulations governing capital adequacy. The Bank has set and maintains corresponding foreign exchange risk measuring, monitoring and controlling functions, including an application enabling the monitoring of the open FX position both on a daily basis and during the day. The Bank’s exposure to foreign exchange risk, i.e. open FX position as of 31 December 2018 is presented in the following tables. In RSD thousand

EUR USD

Other currencies

Total foreign

currencies RSD Total

ASSETS Cash and balances with

central banks 10,563,772 427,809 1,028,738 12,020,319 14,075,082 26,095,401 Receivables for derivatives - - - - 1,115 1,115 Securities 7,535,389 - - 7,535,389 4,080,686 11,616,075

Loans and receivables from banks and other financial organizations 3,807,416 683,804 456,839 4,948,059 500,038 5,448,097

Loans and receivables from customers 47,455,380 253,754 3,220,571 50,929,705 34,292,072 85,221,777 Other assets 7,513 6,322 7 13,842 250,035 263,877

TOTAL ASSETS 69,369,470

1,371,689 4,706,155 75,447,314 53,199,028

128,646,342 LIABILITIES

Liabilities for derivatives - - - - 7,667 7,667 Deposits and other liabilities to banks, other financial organizations and central bank 12,782,651 190,152 1,786,654 14,759,457 1,538,092 16,297,549

Deposits and other liabilities to other customers 54,217,633

2,475,560 2,835,609 59,528,802 38,658,313 98,187,115

Other liabilities 167,448 389 3,716 171,553 430,089 601,642

TOTAL LIABILITIES 67,167,732

2,666,101 4,625,979 74,459,812 40,634,161

115,093,973 Forward and spot position (2,305,149)

1,302,862 (65,925) (1,068,213) 1,061,817 (6,395)

Net open position as of:

– 31 December 2018 (103,411) 8,450 14,251 (80,711) 13,626,684 13,545,974

– 31 December 2017 (192) (9) 39 (161)

13,939,838 13,778,339

Sensitivity analysis of financial assets and liabilities on 31 December 2018 provides two scenarios which are prepared based on assumed potential exchange rate differences, when all other variable components remain permanent and shows potential impacts on the Bank’s financial result.

• Proportionate exchange rate differences from +10% (currency depreciation); • Proportionate exchange rate differences from -10 % (dinar depreciation).


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43.3 Market Risk (Continued)

43.3.2. Foreign Exchange Risk (Continued) In RSD thousand

Change in exchange rate 31.12.2018 Total 10% -10% ASSETS

Cash and balances with central banks 12,020,319 1,335,591 (1,092,756) Securities 7,535,389 837,265 (685,035) Loans and receivables from banks and other financial organizations 4,948,059 549,784 (449,824) Loans and receivables from customers 50,929,705 5,658,856 (4,629,973) Other assets 13,842 1,538 (1,258) TOTAL ASSETS 75,447,314 8,383,035 (6,858,847) LIABILITIES

Deposits and other liabilities to banks, other financial organizations and central bank 14,759,457 1,639,940 (1,341,769) Deposits and other liabilities to other customers 59,528,802 6,614,311 (5,411,709) Other liabilities 171,553 19,061 (15,596) TOTAL LIABILITIES 74,459,812 8,273,312 (6,769,074) Net exposure to foreign exchange risk as of:

– 31 December 2018 109,722 (89,773) – 31 December 2017 109,001 (89,183)

43.4 Country Risk

Country risk is the possibility of the occurrence of adverse effects on the financial result and capital due to events in a certain country which are at least to some extent under the control of the central government, but beyond the control of natural persons or private corporate entities. Such events include: deterioration of economic conditions, political or social riots, nationalization and expropriation, as well as decline or devaluation of the national currency, deterioration of usual market conditions. The Bank is exposed to this type of risk based on all cross-border funding in a certain country, whether to the central government, bank, private company or natural person. Country risk in the Bank’s operation arises to the greatest extent in connection with interbank placements. The Bank manages country risk by the establishment of a system of exposure limits in connection with country risk and by the regular calculation of the provision for country risk.


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43.5 Liquidity Risk (Continued) Liquidity risk is the possibility of the occurrence of adverse effects on the Bank’s financial result and capital due to its inability to perform its due liabilities without making unacceptable losses. Liquidity risk stems from the maturity mismatch of income and outflow, including unexpected delays in collection (risk of payment mismatch), as well as unexpectedly high outflows (risk of unexpected outflows), and in connection with structure illiquidity, i.e., unexpected increase of costs for funding placements or the Bank’s inability to convert certain types of property into cash timely and at a reasonable price. The Bank has set the framework for liquidity risk management by the Policy for Liquidity Risk Management defining roles and responsibilities in the liquidity management process, with the aim of providing various sources of financing, corresponding management of the assets and liabilities structure and constant monitoring of future cash flows and liquidity on a daily basis. The Bank estimates on a daily basis the expected cash flows in dinars and in foreign currencies and the availability of assets which can be used as collateral for the purpose of ensuring additional financing if needed. The Bank manages its assets and liabilities in the manner that enables the Bank to always settle its due liabilities and timely meet its financial obligations. The Bank’s framework for liquidity risk management includes: • Operational standards with reference to liquidity risk, including corresponding policies, procedures and

resources for controlling, limiting liquidity risk and its management; • Maintaining the inventory of liquid assets pursuant to the cash flow profile which can if necessary be

converted into cash without unnecessary losses to capital; • Managing access to sources of financing and measuring, controlling and testing the funding request

scenarios. • MIS and other systems which identify, measure, monitor and control liquidity risk; • Business Contingency Plans to manage disturbances in liquidity in terms of the possibility that some or all

activities are financed timely and with reasonable costs; and • Liquidity risk limits (maturity mismatch indicator, liquid assets indicator), taking into account existing

regulatory frameworks. The Bank has established and maintains adequate functions for liquidity measurement, monitoring and controlling, as well as for reporting which relate to: • Cash flow maturity profile within different scenarios and testing, including scenario for assets and liabilities

without maturity; • Inventory of liquid assets available to the institution at their market value; • The Bank’s ability to sell assets at various markets (primarily in unfavourable conditions) and take loans on

markets; • Potential volatility sources of assets and liabilities (including receivables and obligations stemming from the

Bank’s off-balance sheet operations); • Impact of the unfavourable quality trends of assets on future cash flows and market reliability at the Bank’s

level; • Creditworthiness and capacity of persons ensuring stand-by placements to meet their obligations; • Impact of the deterioration of market conditions on cash flows and clients; • Types of new deposits being obtained, as well as their source, maturity and price; and • Requests for regulatory reporting.

The Market Risk Management Department within the Risk Management Division is responsible for monitoring liquidity risk. Daily liquidity management is performed in the Treasury Division. The Assets and Liabilities Management may recommend to the Executive Board measures and activities for improvement of the maturity structure and other measures necessary for better liquidity management The Bank calculates and maintains the liquidity indicators aligned on a daily basis as prescribed by the National Bank of Serbia, namely liquidity ratio and narrow liquidity ratio. Also, the Bank calculates and maintains on a monthly basis liquidity coverage ratio as prescribed by NBS.


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43.5 Liquidity Risk (Continued) Liquidity ratio represents the ratio of the sum of prescribed types of liquid assets and sum of certain types of liabilities, and measures the Bank’s liquidity within a time frame of one month.During 2018 and 2017 the indicator of the Bank’s daily liquidity was in average significantly above the level prescribed by the National Bank of Serbia. During 2018 and 2017 the liquidity indicators were as follows:

2018 2017

Average during the period 1.47 1.71 Highest 2.06 1.99 Lowest 1.22 1.28 As of 31 December 2.06 1.46 Liquidity coverage ratio was introduced in local regulatory framework starting from 30 June 2017 and represents extent to which liquid assets cover net outflows assessed under stressed circumstances for the period of 30 days from the measurement date. As the previously described indicator, in the second half of 2017 (i.e. since its introduction) this ratio of Bank’s liquidity was significantly above prescribed minimum of 100% and on 31 December 2018 it was calculated on the level of 144,56%. The Bank manages liquidity risk by continuous monitoring of maturity mismatch of assets and liabilities’ positions and by establishing a limit to the mismatch amount per maturity categories. The Bank’s management is of the opinion that diversification of deposits according to the type of placed deposits and the number of clients, as well as according to historical experience of the Bank, provides an adequate guarantee that its deposits are stable and reliable source of financing. The maturity structure of Bank’s assets and liabilities as of 31 December 2018 is presented in the following table. The table presents the remaining maturity of financial instruments stated at their book value at the balance sheet date, and maturity categories are presented according to the contracted, without including assumptions on expected maturity.

In RSD thousand

Up to 1 month From 1 to 3

months From 3 to 12

months From 1 to 5

years Over 5 years Total ASSETS

Cash and balances with central banks 26,095,401 - - - - 26,095,401 Receivables for derivatives 1,115 - - - - 1,115 Securities 804,814 2,171,928 4,329,559 4,309,773 - 11,616,075 Loans and receivables from banks and other financial organizations 2,969,949 500,000 610,358 1,027,666 340,125 5,448,097 Loans and receivables from customers 2,498,384 6,923,467 21,598,150 35,962,537 18,239,239 85,221,778 Other assets 237,614 15,020 7,510 - 3,733 263,877 TOTAL ASSETS 32,607,277 9,610,416 26,545,577 41,299,976 18,583,098 128,646,343 LIABILITIES

Liabilities for derivatives 7,667 - - - - 7,667 Deposits and other liabilities to banks, other financial organizations and central bank 2,837,737 3,300,839 10,158,973 - - 16,297,549 Deposits and other liabilities to other customers 77,538,153 7,458,065 11,303,535 1,791,668 95,694 98,187,115 Other liabilities 548,249 46,753 872 3,736 2,032 601,642 TOTAL LIABILITIES 80,931,806 10,805,657 21,463,380 1,795,404 97,726 115,093,973 Maturity gap as of:

– 31 December 2018 (48,324,529) (1,195,241) 5,082,197 39,504,572 18,485,372 13,552,370 – 31 December 2017 (43,708,423) 260 1,498,673 40,096,280 15,602,710 13,748,927


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43.6 Investment Risk The Bank’s investment risk includes the Bank’s equity share in legal entities, property, plant and equipment and investment property. Pursuant to the regulations of the National Bank of Serbia, the Risk Management Division monitors the Bank’s investment level and compliance with the limits prescribed by the National Bank of Serbia, according to which the Bank’s investment in a single non-financial sector entity may not exceed 10% of the Bank’s capital, while the total Bank’s investments into non-financial sector entities, property, plant, equipment and investment property may not exceed 60% of Bank’s regulatory capital. The Bank has regulated investment risk management by implementing adequate policies and accompanying internal acts, and limited the investment risk through adequate system of internal limits. During 2018, the Bank maintained the investment risk indicators within the range prescribed by the National Bank of Serbia.

43.7 Operational Risk

Operational risk is the risk of adverse effects to the financial result and capital of the Bank due to failures in performance of operating activities (unintentional and intentional) in the work of employees, inadequate internal procedures and processes, as well as due to unforeseen external events. The Bank cannot expect to eliminate all operational risks, but through a rigorous control framework and by monitoring and responding to potential risks, the Bank is able to manage these risks. The Bank’s operational risk management is regulated by the Framework for operational risk management at the level of the entire organisation with the objective to: • Promote awareness and management culture regarding operational risks at the Bank’s level aiming to

contribute to the process efficiency and success of controls; • Establish basic standards for operational risk management at the Bank’s level aiming to avoid unexpected

and disastrous losses, and to minimise expected losses; • Ensure that business goals are achieved in the manner which implies controlled risk; • Ensure cost-effectiveness of operation by reducing overlaps and by avoiding inadequate, excessive or

outdated controls; • Ensure consistency with best relevant practice and conformity with regulatory (quantitative and quality)

requirements; and • Improve the use of capital and improve the return on capital in connection with operational risk.

The Bank’s operational risk management framework is focused on operations and processes with the aim to have both a proactive and reactive role in operational risk management. The Bank’s framework for operational risk management includes: • Regular monitoring of exposure to operational risk; • Operational risk methodology including risk self assessment and control, key risk indicators and collecting

data on losses; and • Collection of material operational losses at the Bank’s level.

The Bank identifies operational risk retroactively (through an entry in a database of the events) and proactively through periodic self-assessment of operational risk. Information on operational risks is collected in all of the Bank’s organisational parts. Data are classified and analysed, and methods for risk mitigation and for reduction of its impact are recommended. The Bank has also developed the Business Continuity Plan in order to act timely to unexpected business disruptions of its important functions and to recover their operations is an organised and efficient manner.


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43.7 Operational Risk (Continued) The aim of the Business Continuity Plan is to: • Ensure achievement of desired level of recovery and business continuity; • Prevent that the business disruption of one function has a significant impact on the business continuity of

another function; • Achieve business recovery within the predetermined period for business recovery; • Maintain a high degree of readiness to activate and implement the plan and its effectiveness with the aim to

recover the Bank’s critical process; and • Mitigate (if possible) the impact of the potential business disruption and possibility of its occurrence.

The Disaster Recovery Plan is developed as a description of procedures that pertain to recovery and continuity of applications, data, hardware, communication and other IT infrastructure in the Bank and implies the existence of an alternative place (disaster recovery site).

43.8 Information System Risk The information system risk is the possibility of adverse effects on the financial performance and capital, achieving the business results, business in accordance with the regulations and reputation due to inadequate management of the information system or any other system weakness that adversely affects the functionality of the system or safety and/or jeopardizes business continuity. The Bank has adopted the Policy of information security, as well as the Methodology for evaluation and processing of information security risk and treatment of risk, analysis and IS risk monitoring, as well as the measures for their mitigation, prevention and control in accordance with the legal regulations and internal documentation within information technology, as well as the roles and responsibilities in this process. The methodology identified in this document for classification and assessment of the acceptable level of risk is based on ISO/IEC 27001 standard. The Bank has prescribed that an employee responsible for information security from the Security Sector prepares the following reports:

• The report on the level of the Bank’s compliance with the Information Security Policy; and • The report on security incidents.

In addition to above, on a monthly level, reports are submitted to the Director of the Security Sector and the member of the Executive Board, and if necessary, even more often in cases of extraordinary events. IS risk assessment is carried out at least once a year and involves a process in which the competent organizational units of the Bank observe IS risks and inform on the extent to which they are exposed to certain types of IS risks. IS risk assessment allows the owners to timely identify and assess the risks that affect the processes for which they are responsible.

43.9 Capital Management (a) Regulatory Capital

The Bank policy is to maintain strong capital base and fulfil minimal capital requirements prescribed by National Bank of Serbia in order to ensure confidence of investors, creditors and market, as well as to support further growth of Bank’s business. Recognizing the impact of capital level on shareholders’ return, Bank has identified the need to maintain the balance between higher returns, that are possible to be achieved with higher leverage, on one hand and advantages and security ensured by continuously high level of capital, on another hand.

Bank’s policy related to capital management requires maximization of return on equity adjusted for risks, while maintaining regulatory requirements at the same time.

National bank of Serbia is regulator/supervisor that prescribes and monitors fulfilment of minimal capital requirements. Capital adequacy is measured as ratio between capital and risk weighted assets of the Bank. According to currently applicable regulations, NBS requires Bank to maintain capital adequacy ratio (CAR) at the minimal level of:

• 4,5% for Common Equity Tier 1 capital ratio • 6% for Tier 1 capital ratio • 8% for capital adequacy ratio.


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43. Risk Management (Continued) 43.9 Capital Management (Continued)

(a) Regulatory Capital (Continued)

Capital represents the sum of Tier 1 and Tier 2 capital, where the Tier 1 capital represents the sum of Common Equity Tier 1 and Additional Tier 1 capital. These levels of regulatory capital are different according to their quality in the sense of their availability to cover risks and losses from Bank’s operations, so Tier 1 capital represents the capital available to cover losses on continuous basis during Bank’s operations (i.e. going concern capital), while Tier 2 consists of elements that are available to cover risks and losses on gone concern basis. Common Equity Tier 1 capital represents the part of Tier 1 capital of the highest quality and can be used unconditionally, fully and immediately to cover risks and losses form operations as soon as they occur.

As of 31 December 2018, the Bank has only elements of capital of highes quality (i.e. Common Equity Tier 1 capital), so all calculated capital adequacy ratios are the same (Common Equity Tier 1, Tier 1 and capital adequacy ratio) and amount to 19,31%. These ratios indicate compliance with the strategic goal of maintaining strong capital position.

The following table summarizes the structure of the Bank’s regulatory capital as of 31 December 2018 and 2017, as well as the risk/weighted assets and the capital adequacy ratio:

In RSD thousand

31.12.2018 31.12.2017

Regulatory capital Core capital 16,580,103 17,286,853 Core share capital 16,580,103 17,286,853

Total 16,580,103 17,286,853 Risk-weighted balance sheet and off-balance sheet assets

Balance sheet assets 70,092,944 65,385,067 Off-balance sheet assets 2,183,626 2,312,360

Derivatives that are not traded on the stock market 6,175 20,947 Exposure to operational risk 13,569,550 13,223,275

Exposure to foreign exchange risk - - Exposure to price risk - 49,475 Exposure to the risk of adjusting credit exposure 63 14,775 Total (2) 85,852,358 81,005,899 Indicator of the share capital adequacy ratio 19,31% 21,34% Indicator of capital adequacy ratio 19,31% 21,34% Capital adequacy (1/2 x 100) 19,31% 21,34%

The regulatory capital of the Bank as of 31 December 2018 amounts to RSD 16,580,103 thousand, or EUR 140,278,006 at the official middle rate of the National Bank of Serbia at the balance sheet date (31 December 2017: RSD 17,286,853 thousand and EUR 145,914,232). As of 31 December 2018 the capital adequacy ratio was at level of 19,31% and decreased by 2,03 percentage points as compared to the capital adequacy ratio as of 31 December 2017. Risk-weighted assets of the Bank in 2018 year has increased for RSD 4,846,459 thousand, based on credit risk was increased for RSD 4,564,371 thousand (the main reason for the increase of RWA is increase of exposures), on the basis of operational risk for RSD 346,275 thousand while, on the basis of credit valuation adjustment risk was reduced for RSD 14,712 thousands and on the basis of market risk it was reduced for RSD 49,475 thousands In the year 2018 the Bank’s regulatory capital was decreased by RSD 706,750 thousand, (Capital decreased as a consequence of loss driven by one offs costs for the effects of the beginning of the application of IFRS 9 standards). In line with NBS Decision on accounting write off of balance sheet assets of banks, the Bank has conducted write offs after which share of non-performing loans to clients from non-financial and non-government sectors in total loans to these sectors has decreased and as of 31 December 2018 is less than 10%, for which reason the required reserve was calculated in amount equal to zero. During whole 2018, the Bank’s capital adequacy ratio was stable and above the minimal level prescribed by the National Bank of Serbia.


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43. Risk Management (Continued) 43.9 Capital Management (Continued)

Internal Assessment of Capital Adequacy Internal assessment of capital adequacy is the process of assessment of all significant risks to which the Bank is or might be exposed in its operations. The process of internal assessment is conducted in accordance with applicable regulations of the National Bank of Serbia (Decision on Risk Management by Banks) and internal regulations adopted by the competent authorities of the Bank. The process of internal capital adequacy assessment includes the following phases:

- Assessment of the risk profile of the Bank for the purposes of ICAAP process; - Identification of risks; - Mapping of risk and materiality assessments; - Valuation and risk measurement, i.e., calculation of internal capital requirements for individual risk; - Determination of total internal capital requirements (prior to the diversification effects) - summing of

internal capital requirements for individual risks; - Calculation of the effects of diversification and correlation, as well as determination of total internal

capital requirements; - Calculation of the amount of capital in accordance with the Decision on Capital Adequacy of Banks

(regulatory capital), available internal capital and capital adequacy ratios; - Comparison of the amount of regulatory capital and the available internal capital, minimum capital

requirements and internal capital requirements and capital adequacy ratio; and - Preparation of the reports on ICAAP for the National Bank of Serbia.

Determination of the total internal capital available for risk coverage is performed by adding up the capital requirements for individual materially significant risks

(b) Performance Indicators - Compliance with Legal Requirements

The Bank is obliged to reconcile the scope and the structure of its operations and risky placements’ exposure with the performance indicators prescribed by the Law on Banks and the relevant decisions of the National Bank of Serbia brought on the basis of the aforementioned Law. The Bank's performance indicators as of 31 December 2018 were as follows: Performance Indicators Prescribed Realized

1. Regulatory capital

Minimum EUR 10 million

ЕUR 140,278,006

2. Capital adequacy ratio - Common Equity Tier 1 Capital adequacy ratio Minimum 4.5% 19,31% - Tier 1 Capital adequacy ratio Minimum 6% 19,31% - Capital adequacy ratio Minimum 8% 19,31% 3. Permanent investments indicator Maximum 60 % 26,18% 4. Exposure to a single entity or a group of related parties Maximum 25% 22,09% 5. The sum total of all large exposures in relation to the

capital Maximum 400% 115,25% 6. Average monthly liquidity ratios: – in the first month of the reporting period Minimum 1 1.51 – in the second month of the reporting period Minimum 1 1.43 – in the third month of the reporting period Minimum 1 1.47

7. Liquidity coverage ration Minimum 100% 144,56

% 8. Foreign currency risk ratio Maximum 20% 0,72% As of 31 December 2018, the Bank was in compliance with all prescribed performance indicators.


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43.10 Fair Value of Financial Assets and Liabilities

It is a policy of the Bank to disclose the information on fair value of those components of assets and liabilities for which published or quoted market prices are readily available, and of those for which the fair value may be materially different than their carrying amounts. The fair value mentioned in the financial statements is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an independent transaction. The fair value is calculated using the market information available at the reporting date, as well as Bank’s individual evaluation methods. A market price, where an active market exists, is the best evidence of the fair value of a financial instrument. However, market prices are not available for a significant number of financial assets and liabilities held by the Bank. Therefore, for financial instruments where no market price is available, the fair values of financial assets and liabilities are estimated using present value or other estimation and valuation techniques based on current prevailing market conditions. Since in the Republic of Serbia, sufficient market experience, stability and liquidity do not exist for the purchase and sale of receivables and other financial assets or liabilities, published market prices are presently not readily available. As a result, fair value cannot readily or reliably be determined in the absence of an active market. The Bank’s management assesses its overall risk exposure, and in instances in which it estimates that the value of assets stated in its books may not have been realized, it recognizes a provision. In the opinion of the Bank’s management, the reported carrying amounts are the most valid and useful reporting values under the present market conditions, as required under the Law on Accounting. The following methods and assumptions were used to estimate the fair values of the Bank’s financial instruments as of 31 December 2018 and 2017: Cash and cash equivalents: The carrying amount of cash and cash equivalents approximates their fair value. Loans and receivables from banks and other financial institutions and loans and receivables from clients: The fair value of loans to customers is estimated using discounted cash flow models. The discount rates are based on current market interest rates offered for instruments with similar terms to borrowers of similar credit quality. The fair value for impaired loans is estimated using discounted cash flow analysis or underlying collateral values, where applicable. Trading and available-for-sale securities: Fair value of trading and available-for-sale assets, which is also the amount recognized in the balance sheet, is based on quoted market prices of the same or comparable instruments. These instruments are included in level 1 of the fair value measurement hierarchy. For debt instruments (Government bonds and Treasury bills), for which such quoted market prices are not available the fair value is estimated using discounted cash flow analysis based on contractual cash flows discounted at the corresponding interest rates. These instruments are included in level 2 of the fair value measurement hierarchy. Derivative financial instruments: All derivatives are recognized on the balance sheet at fair value. For standard forward contracts and options traded on active markets, fair value is based on quoted market prices. For non-traded forward contracts, the fair value is based on dealer quotes and discounted cash flow analysis. Transaction deposits, other deposits and borrowings: Deposits from other banks and customers are mostly on demand or with short-term maturity, all deposits bear variable market interest rates; therefore management of the Bank is of the opinion that the fair value of deposits is equal to their carrying values. The fair value of other borrowed funds is estimated using discounted cash flow analysis based on the Bank’s current incremental borrowing rates for similar types of credit arrangements.


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43.10 Fair Value of Financial Assets and Liabilities (Continued) (a) Financial Instruments not Measured at Fair Value

The following table presents the carrying amounts and fair values of the main categories of financial assets and liabilities at the reporting date not measured at fair value and their fair value is not materially different from the carrying amount:

In RSD thousand Carrying value Fair value 31.12.2018 31.12.2017 31.12.2018 31.12.2017 Financial assets Loans and receivables from banks and other financial organizations 5,448,097 5,729,058 5,448,097 5,729,058

Loans and receivables from customers 85,221,777 73,504,393 85,221,777 73,504,393 Financial assets held-to-maturity 16,725 59,186 16,725 59,186

Total 90,686,599 79,292,637 90,686,599 79,292,637

Financial liabilities Deposits and other liabilities to banks, other financial organizations and central bank 16,297,549 6,030,108 16,297,549 6,030,108 Deposits and other liabilities to other

customers 98,187,115 97,149,605 98,187,115 97,167,817 Total 114,484,664 103,179,713 114,484,664 103,197,925

(b) Financial Instruments Measured at Fair Value IFRS 7 “Financial Instruments: Disclosures” specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Group’s market assumptions. These two types of inputs have created the following fair value hierarchy, according to which the Bank measures the fair value that reflects the significance of the assumptions (inputs) used in making the measurements:

• Level 1: Quoted market prices (uncorrected) in active markets for identical instrument.

• Level 2: Assessment techniques based on the observable inputs that are not the quoted prices from the level 1, whether directly (as prices) or indirectly (derived from prices). This category includes instruments valued through their use: quoted prices in active markets for similar instruments; stated prices for same or similar instruments in the markets considered as less active; or other assessment techniques in which all important inputs are directly or indirectly observable from the market data.

• Level 3: Assessment techniques used for non-observable inputs. This category includes all instruments relative to which the valuation techniques include inputs not based on observable data and non-observable inputs that have a significant effect on the valuation of the instruments. This category includes instruments valued on the basis of quoted prices of similar instruments with significant non observable adjustments or assumptions necessary to maintain the difference between the instruments.


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43.10 Fair Value of Financial Assets and Liabilities (Continued) (b) Financial Instruments Measured at Fair Value (Continued)

The fair value hierarchy for the financial assets and liabilities of the Bank measured at fair value as of 31 December 2018 is summarized below:

In RSD thousand 31.12.2018 Level 1 Level 2 Level 3 Total Financial assets

Financial assets at fair value through profit and loss held-for-trading (Note 23)

1,115 - 1,115

Equity investments (Note 24) 57,945

- 57,945 Debt securities (Note 24)

11,541,405 - 11,541,405

Total assets 57,945 11,542,520 - 11,600,465 Financial liabilities

Liabilities under derivate (Note 31) - 7,667 - 7,667 Total liabilities - 7,667 - 7,667

The fair value hierarchy for the financial assets and liabilities of the Bank measured at fair value as of 31 December 2017 is summarized below:

In RSD thousand 31.12.2017 Level 1 Level 2 Level 3 Total Financial assets

Financial assets at fair value through profit and loss held-for-trading (Note 23) - 39,569 - 39,569 Equity investments (Note 24) 90,829

90,829

Debt securities (Note 24)

16,177,632

16,177,632 Total 90,829 16,217,201 - 16,308,030 Financial liabilities

Liabilities under derivatives (Note 31)

17,392

17,392 Total - 17,392 - 17,392



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44. Related Party Transactions Based on the existing regulatory framework, the Bank is obliged to disclose any transaction which took place during the current fiscal year between all its related parties as defined in IAS 24 “Related Party Disclosures”. Transactions with the related parties are carried out under the market conditions. Related parties of the Bank include members of the Group the Bank belongs to (OTP Group) and entities over which the Bank has control of or significant influence in. Parties related with the Bank include persons who have a significant influence on the Bank’s financial and business decisions. Parties related with the Bank include members of the management bodies, the Board of Directors and the Executive Board of the Bank, their close relatives and companies they own or control, as well as the companies on which financial and business policies they have influence. (a) The following table summarize the total balances of assets and liabilities as of 31 December 2018 and 2017, as well as revenues and expenses arising from transactions

with the related legal entities members of the banking group: In RSD thousand 2018 2017

Assets Liabilities Income* Expenses*

Off balance

sheet items Assets Liabilities Income Expenses

Off balance

sheet items

IMOS a.d. Sid

6 5,272 103 - - - - 125 30 - OTP Leasing d.o.o. Belgrade 1,241,296 40,793 24,107 1,857 32,630 1,307,994 413,639 26,134 1,849 27,636 OTP Services Belgrade 616,688 183,309 9,205 417 70,000 542,773 159,654 12,274 597 55,000 OTP Bank Srbija a.d Novi Sad 500,085 13 96,473 312,964 - 3 5 12,102 27,878 2,656,249

OTП Bank NYRT 1,115 14,023,394 15, 721 3,874 3,539,929 -

1,793,636 91 7 6,204,088 OTP Travel - - - 1,852 - - - - 31 -

Total 2,359,190 14,252,781 145,609 320,964 3,642,559

1,850,770

2,366,934 50,726 30,392 8,942,973


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44. Related Party Transactions (Continued) (b) The table bellow summarizes transactions with legal entities and individuals related to the Bank (excluding

banking group members):

In RSD thousand

2018 2017 Loans and receivables 348,819 84,179 Deposits 77,481 96,102 Letters of guarantee, contingent liabilities and other off balance sheet accounts 403,141 512 Interest, fee and commission and other income 5,235 3,646 Interest, fee and commission and other expenses (674) (331) Loans to the related parties were granted under the same terms and conditions, included interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than a normal risk of collectability. (c) Remunerations to the Key Management Personnel

Total benefits paid to members of the Board of Directors and the Executive Board in 2018 amounted to RSD 102,065 thousand (2017: RSD 140,735 thousand) and they completely related to short-term benefits (salaries, compensations and other personal income). In RSD thousand

2018 2017

Executive Board members 90,785 131,416 Board of Directors members 11,280 9,319 Total 102,065 140,735

45. Events after the Reporting Period Bank is in the process of merger with the shareholder OTP Bank Serbia. Bank’s Assembly reached on 28th January 2019 Decision on merger with OTP Bank Serbia with agreed merger calculation date 31st December 2018. Banks competent bodies have also reached all other relevant decisions related to the merger. All the required documentation for the merger has been sent to NBS in order to give consent for the merger. Planned date of the legal and operational merger to OTP Bank Serbia is 26th April 2019. Predrag Mihajlović Spyridon Ntallas Dragana Šarenac President of the Executive Board



Availability of the Financial Statements

89

Availability of the Financial Statements In accordance with the Law on banks, the Bank is publishing short financial statements in one daily newspaper which is distributed on the territory of Republic of Serbia. Short financial statements which are being published are the following:

• Independent auditor’s opinion

• Balance sheet

• Income statement

• Cash flow statement

• Statement on changes on equity

• Statement on other comprehensive result Besides that, the Bank publishes full set of financial statements on its website within the page “About us” as follows:

• Audit opinion and report on audit of financial statements

• Balance sheet

• Income statement

• Cash flow statement

• Statement on changes on equity

• Statement on other comprehensive result

• Notes to financial statements

• Annual report Financial statements are published on the website in the Serbian and English languages.

Annual Report 2018

Annual Report

2018

Annual Report 2018

CONTENT

1. OTP Group………………………..……………………………….......…1

2. Introduction by the President of the Executive Board.………….2

3. Vojvođanska banka a.d. Novi Sad…………………………...….…4

4. Macroeconomic Environment and the Banking Sector…….….5

5. Development and Financial Position of Vojvođanska banka in Serbia…………………………………………………………………….…11

6. Financial Risk Management…………………………...……...…....19

7. Plans for the Future………………………..…………….……...….....25

8. Social Responsibility and Environmental Protection……….......26

9. Significant Events after the Reporting Date….…………......…...30

10. Organisational structure…………………………………………....31

Appendices………………………………………………………..…..….32

Annual Report 2018

1

1. OTP Group

OTP group, as a dominant player on the banking market of Hungary and Central Europe, offers high quality financial services to nearly 18.5 million clients in nine countries.

The predecessor of OTP Bank, National Savings Bank (OTP Bank) was established in 1949 as a nation-wide, state-owned, banking entity providing retail deposits and loans. In the ensuing years, its activities and the scope of its authority gradually widened. First, it was authorised to enter into real estate transactions. Later, its role was extended to provide domestic foreign currency accounts and foreign exchange services; there was a subsequent diversification into providing banking services for Hungarian municipalities. Since 1989, the bank has operated as a multi-functional commercial bank.

In addition to continuing its retail and municipalities activities, the Bank has been authorized to solicit corporate loan accounts and deposits and to provide commercial loans and banking services for correspondent banking and import-export transactions.

In 1990, the National Savings Bank became a public company with a share capital of HUF 23 billion. Its name was changed to National Savings and Commercial Bank. Subsequently, non-banking activities were separated from the bank, along with their supporting organizational units.

OTP Bank privatization began in 1995. Currently the bank is characterized by dispersed ownership by mostly private and institutional (financial) investors.

In recent years, OTP Bank completed several acquisitions, making it a key player in the region. Along with Hungary, OTP Group currently operates in eight countries of the region: Bulgaria (DSK Bank), Romania (OTP Bank Romania), Serbia (OTP banka Srbija, Vojvođanska banka), Slovakia (OTP Banka Slovensko), Ukraine (OTP Bank JSC), Montenegro (Crnogorska komercijalna banka) and Russia (OAO OTP Bank).

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2

The OTP Group strives to evolve constantly to meet the needs of clients in order to achieve notable financial results across Europe.

2. Introduction by the President of the Executive Board

PREDRAG MIHAJLOVIĆ President of Executive Board

Dear Shareholder, With a 150-years long tradition, Vojvođanska banka is successfully operating in Serbia and represents one of the most recognised local brands in the country. The Bank is among the top ten largest banks by asset size with 1,395

employees, broad network of 103 branches and 135 ATMs at the main locations across Serbia, as well as four regional business centres. With a capital adequacy ratio significantly above the regulatory threshold, the Bank is highly capitalised and liquid and is among the best transaction banks in the market. On the 1st December 2017, Vojvođanska banka became a member of OTP Group, the largest financial service provider in Hungary and a dominant regional player in the Central and Eastern European market. This date marks the beginning of the creation of a strong integrated bank, which will have in its offer a full spectrum of advanced financial products and services. Throughout the year, the maximum resources of Vojvođanska banka and OTP banka Serbia were directed towards the integration process, which we expect to be successfully completed in the spring of 2019. Based on last estimations, the integrated Bank will be the sixth in the Serbian market by asset size, with more than 5% of the market share, over one million clients and the third largest network of branches in the country. By combining the strengths of the two banks and the synergy of our employees, as the key resource, we are aiming to become the most dynamic and most promising financial institution in the Serbian market. The quality of products and services remains an imperative in the next period, and with the integration of the banks our clients will have at their disposal a larger branch network, better service, and improved user experience, stronger support to the economy,

Annual Report 2018

3

development projects as well as easier access to finance for the micro and SME segments. In the year behind us, the overall best result was achieved for the past 10 years, with the highest recorded profitability from regular operations. As the biggest success, I would highlight the increase in market share in all segments of operations, keeping in mind the focus of all employees on the integration of two banks. We managed to increase the level of gross placements well above the market average. Household loans increased by 16%, while the market grew by 12.4%, out of which the Bank achieved the highest growth in the increase in cash loans of 23% and the increase in housing loans by 12%. Total gross corporate loans have increased almost twice as compared to market growth. The Bank increased its loans by 14%, while the market grew by 7.9% in 2018. This has given us the basis in the coming years that we can achieve even greater growths in all fields and contribute to the strength of our parent group. Throughout the year, the Bank actively implemented CSR activities, highlighting the new program to support the development of education in Serbia. As the official bank of the Olympic Committee of Serbia in 2018, activities on improving the national Olympic sport and conditions for our Olympic players, as well as promotion of this sponsorship and brand of the Bank continued. In 2019, the Bank plans to further enhance the cooperation and a new kind of activation, in order to be ready for 2020

and the upcoming Olympic Games in Tokyo. Ahead of us is a great responsibility to finalise the integration successfully while also ensuring continuity of successful business operations, maintaining the high-quality product portfolio, and being a valuable partner to the clients. We have long-term and strategic plans for the future, and along that way we need the support of our employees, partners and clients. As in the previous year, we base further success on team work, mutual trust and respect. On this way we rely on the support of OTP Group whose success and expansion into new markets give us additional wind at our back. Sincerely yours,

Predrag Mihajlović

President of the Executive Board

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4

3. Vojvođanska banka a.d. Novi Sad

About the Bank

Vojvođanska banka a.d. Novi Sad, started its business in 1868 as a credit union when the first branch in Sombor was opened. The name Privredna banka, which had years, was changed in 1973 to Vojvođanska banka. The Bank changed its legal form into a joint-stock company in 1995 and became Vojvođanska Banka a.d. Novi Sad.

At the end of 2006, the acquisition of Vojvođanska banka by a group of the National Bank of Greece was carried out, and in 2008 the National Bank of Greece, which operated under that name on the Serbian market, was joined to Vojvođanska banka.

On December 1, 2017, OTP Bank Serbia announced the completion of the acquisition of 100% ownership of Vojvođanska banka and in this way the Bank became a member of OTP Group whose presence on the market has been in existence for many years and whose

plans for the future are also long-term.

Vojvođanska banka will continue to operate independently until the spring of 2019. By that time, the Bank will be equally committed to its clients, providing quality services, realizing plans and good business results, and working on the process of merging two banks.

Vojvođanska banka is a proud member of various business organizations and associations, including the Association of Serbian Banks, the Serbian Chamber of Commerce, the Belgrade Chamber of Commerce, the Regional Chamber of Commerce of Novi Sad, the Chamber of Commerce of Vojvodina, the American Chamber of Commerce, the Forum for Responsible Business, Alliance of Economists of Serbia, Alliance of Economists of Vojvodina, NALED, as well as the United Nations Global Compact in Serbia. Vojvođanska banka is a proud

member of the UNICEF Friends' Club.

During 2018, Vojvođanska banka, by its investments, continued to promote its socially responsible business in Serbia, since its social responsibility arises from a firm and deep conviction and the need to thank to society for trust and good and long cooperation.

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4.Macroeconomic Environment and the Banking Sector

Economic indicators still point to stable global economic growth with the expectation that the same pace of growth as in 2017 (of 3.7%) will continue in this year and next year. Growth in the euro area, our most important foreign trade partner, continued in 2018, though at a slightly slower pace than in 2017, mainly due to somewhat weaker external demand which reflected also on the downward revision of the projection of its growth for this and the next year. Economic growth outlook of South Eastern Europe was also slightly downgraded, whereby the growth forecast for Serbia was revised upward by all relevant international institutions. Global inflation has trended higher under the influence of higher oil prices in the world, though staying moderate in the majority of countries. The leading central banks proceeded with monetary policy normalisation, while global financial conditions, though still favourable, have tightened, which is associated also with trade and geopolitical tensions.

Domestic macroeconomic conditions in which the monetary policy is pursued remained favourable, as evidenced by the main macroeconomic indicators. Inflationary pressures stayed low even against the background of strong economic growth. Inflation is stabilized and the average y-o-y inflation in 2018 was 2%. Thanks to past monetary policy

easing, low country risk premium, and persistently low interest rates in the international money market, the private sector and the government enjoy favourable financing conditions. Along with the effects of growing economic activity, accompanied by a workforce demand growth, contributed to the

further labour market recovery.

Higher than expected, GDP growth in 2018 (4.2%) was driven by double-digit growth in investment and consumption, with continued growth in exports despite the slowdown in the euro zone. On the production side, the growth is still diversified with a positive contribution of all sectors, but primarily service, agriculture and construction. High private and state investments, continued export growth and sustainable consumption growth will be the main drivers of GDP growth in the upcoming years. Factors that will contribute to a sustainable medium-term growth of 4% include macroeconomic stability, better business environment (structural reforms), investment in infrastructure and the effects of prior mitigation of monetary policy.

Improvement of the business and investment environment in Serbia has been significant, and this is confirmed also by the continuation of approaching the best world practice according to the conditions of Serbia's operations on the World Banks Doing Business list for 2018 - Serbia being on the 48th position (out of 190 countries in total). Pursuant to the World Economic Forum’s Global Competitiveness Report, Serbia advanced, as in the previous years, in

Annual Report 2018

6

terms of macroeconomic environment indicators (by 5 positions), taking the 65th position on the list of 140 countries. Progress has been made in the domain of macroeconomic stability as a result of low and stable inflation and the reduction of public debt, as well as within the financial system, owing to the macro-prudential policy of the National Bank of Serbia and the preserved financial stability in the country. In addition, competitiveness has increased in most other areas - commodity market, labour market, infrastructure, innovation capabilities.

Economic Activity

Economic activity in 2018 recorded growth, driven by intensified investment activity and increased personal consumption of the household. Such developments correspond with significant growth in construction and service sector, seen from the production side of GDP.

At the same time, there is a steady increase in the gross added value created in the industry, while the agricultural production is significantly higher than last year. Household spending continued to grow throughout the year, thanks to positive developments in the labour market, favourable financial conditions and increased consumer confidence, which was affected by the announced increase in pensions and salaries in the public sector, as well as minimum labour costs. The growth forecast for 2019 remained unchanged (3.5%), due to the high base in 2018, with the continued implementation of reforms

expected to provide the basis for a GDP growth rate of around 4%. This GDP growth rate should be sustainable in the medium term.

Inflation

Since the beginning of 2018, inflation has been moving within the target boundaries and in December amounted to 2.0%. Inflation decelerated due to the low rise in the prices of energy and food on account of the base effect from prices of petroleum products and meat.

The financial sector and the economy expect that the achieved price stability will be preserved, and the expectations

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7

are that the y-o-y inflation will be close to 3.0% during 2019, and in September of 2020 it will be 3.2%.

Monetary Policy

The NBS lowered the reference interest rate twice during 2018, in March and April for 0.25 pp. It is currently at the historically lowest level of 3.0%. The decision on

monetary easing was primarily influenced by the weakening of inflationary pressures based on the domestic and international environment factors. Thanks to the

previous mitigation of monetary policy, low country risk premium and low interest rates on the international money market, the conditions for financing the private sector and the state are favourable. This is evidenced by the interest rates on new local currency loans to corporate and retail clients. With the effects of growth in economic activity, accompanied by a recovery in the labour market and increased competition among banks, this contributes to the continued growth in credit activity.

Exchange Rate

From the beginning of 2018, the appreciation pressures prevailed, reflecting more favourable payment movements. The pressure was influenced by the export growth and the high inflow of FDI, as well as the high net purchase of effective foreign currency, the increased payment with cards by non-residents in Serbia, as well as the growth of currency indexed lending for corporate.

To mitigate excessive short-term oscillation of the exchange rate of the local currency against the euro, the National Bank of Serbia intervened on the IFEM both on the purchase side and on the sales side.

The Fiscal Result and the

Current Account Deficit

From the beginning of the year, ending in August 2018, a surplus was realized at RSD 41.1 billion at the general government level. The realized primary surplus when the interest expense is excluded is RSD 123 billion. Total revenues are higher by 3.4% in comparison to the same period of the previous year. This is the result of the growth in income from corporate income tax due to the higher profitability of enterprises in the previous year, the more social security contributions due to the

Annual Report 2018

8

recovery of the labour market, as well as the growth of revenues from value added tax due to more economic activity and better collection. Expenses related to the same period of the previous year, increased by 6.9% due to higher capital expenditures.

Foreign Trade

This year the trade is slowed down, after

the strong growth of world trade in 2017. Jump made in July was temporary, as export declined globally in September. The IMF reduced its global economic

growth estimate for 2018 and 2019 to 3.7% (by 0.2 pp) in the October. Rapid growth in exports of goods and services recorded in 2018, while imports of goods and

services were even faster in Q3, so that the contribution of net exports to GDP was negative. The increase in export of goods was driven by the export of the

processing industry. Growth in commodity imports has been higher due to increased demand in industry and construction for import raw materials and intermediate

goods.

External debt and public

debt

The public debt of the central government amounted to EUR 26.52 billion at the end of September 2018. This is over EUR 200 million less than at the end of 2017. The share of debt in the projected GDP was 55.9%, opposite to 57.9% at the end of 2017.

As a result of the state's determination to borrow more on the domestic market through the issuance of local currency long-term securities and to further reduce the currency risk and contribute to the sustainability of public debt - the share of debt in local currency increased from 23.0% at the end of 2017 to 25.9% in September 2018.

Banking Sector

At end of Q3 of 2018, the Serbian banking sector numbered 28 banks consisting of 1,610 organisational units and employed a total of 23,067 persons (approximately

Annual Report 2018

9

the same number of employees remained in comparison with 31.12.2017).

At end of September 2018, total net balance sheet assets of the Serbian banking sector amounted RSD 3,563.3 billion, and total capital RSD 681.6 billion.

Net result before taxes in the overall banking sector achieved in the first nine months of 2018 amounted to RSD 53.9 billion, representing an increase of 0.8% compared to the same period previous year. A positive result was reported by 24 banks with total profit of RSD 55.5 billion, while 4 banks operated with a loss of RSD 1.6 billion.

30.09.2017. 30.09.2018. Change

Net interest 91.713 95.420 4%

Net fees 28.193 29.294 4%

Credit losses -2.159 148

Exchange rate effect 5.750 5.905 3%

Result 53.458 53.893 1%

Changes in key elements of banking sector profitability

(in RSD mln)

At the end of September 2018, ROA was 2.07% (0.11 percentage point lower than in the same period previous year), while ROE was 10.66% (0.35 pp lower than in 2017).

Total net loans of the banking sector in Serbia at the end of the third quarter of 2018 increased by 3% comparing to previous quarter. FX and FX-indexed loans

participated with 68.8% in total loans.

The main sources of financing of the banking sector in Serbia are still received deposits, which share in total liabilities was 70.2%. Bank´s own sources of financing amounted to 19.1%, while borrowings constituted 5.8% of liabilities. Total deposits at the end of the third quarter amounted to RSD 2,502 billion (an increase of 2.1% as compared to the Q2 2018). FX and FX indexed deposits participated with 68.5% in total deposits. Sight deposits are still dominating in total deposits with 62.1%, while deposits with maturity up to 1 year participate with 25.5% and those with maturity over 1 year participates with minor 12.4%.

The total gross NPL loans in the amount of RSD 141.2 billion at the end of September 2018 accounted for 6.4% of total gross loans, which is their new historic minimum from defining a uniform definition and reporting obligation in 2008.

Annual Report 2018

10

At the end of the third quarter of 2018, the coverage of total NPL by reserve for estimated losses on balance sheet items was 153.3%, while 61.3% of the NPLs were covered with a provision for impairment of loans made in accordance with International Financial Reporting Standards.

The Serbian banking sector is still

characterized by very high liquidity. At the end of the third quarter of 2018, the average monthly liquidity ratio stood at 2.12% (regulatory minimum is 1%), while

the narrower liquidity ratio stood at 1.76% (regulatory minimum is 0.7%).

The Serbian banking sector is well capitalised. At the end of September 2018, capital adequacy ratio of the Serbian banking sector averaged 22.84%, well above the National Bank of Serbia regulatory minimum (8%). Regulatory capital consists of: 95.9% of Tier I or core capital and 4.1% of Tier 2 or supplementary capital.

Annual Report 2018

11

5.Development and Financial Position of Vojvođanska banka in Serbia

In 000 RSD

Income Statement 2017 2018Net interest income 4,803,190 4,783,646

Net fees and commissions income 1,759,852 1,928,192

Operating expenses* (6,977,526) (6,320,240)

Profit before tax (2,058,137) 644,749

Profit after tax (2,107,478) 595,504

Adjusted profit after tax ** 660,794 899,470

Balance SheetCash and balances with central bank 21,416,477 26,095,401

Loans and receivables 79,233,451 90,669,874

Securities 16,327,647 11,617,190

Other assets 5,750,218 5,249,779

Total Assets 122,727,793 133,632,244Deposits and other liabilities to other banks, financial organizations, central bank and other customers

103,179,713 114,484,664

Reserves 757,207 577,461

Other liabilities 821,144 1,038,403

Total liabilities 104,758,064 116,100,528

Total equity 79,969,729 17,531,716

Total liabilities and equity 122,727,793 133,632,244

Key performance indicatorsCapital adequacy ratio (CAD) 21.34% 19.31%

Net interest margin (total assets %) 3.86% 3.73%

ROA*** 0.53% 0.76%

ROE*** 3.20% 5.41%

Number of employees 1473 1395

Number of branches and sub branches 105 103

Market share 3.6% 3.5%***

Note: Balance Sheet and Income Statement are given in more details in Appendix 1 and Appendix 2

*** as of 30.09.2018

** The result and indicators for 2017 and 2018 are adjusted for expenses related to integrat ion and harmonizat ion within new Group

* Operat ing expenses include wages, salaries and other personnel expenses, depreciat ion costs and other expenses

Annual Report 2018

12

Stable business resulted in the increase in the Bank's Balance Sheet assets as of 31 December 2018 by 9% compared to the end of 2017, amounting RSD 133,632 million. The increase in the balance sheet assets was significantly influenced by the increase in the position of loans and receivables from customers in the amount of RSD 11,717 million. This increase positively influenced the increase in the market share of loans by 0.22% compared to the end of 2017.

During 2018, the process of the acquisition of Vojvođanska banka by the OTP Group which started in 2017 resulted in increased of costs for the implementation of integration. Profit after tax was achieved in the amount of ~ RSD 595.5 million in 2018. The Bank’s business result would be ~ RSD 899.5 million if these one off expenses were excluded.

Net interest income in 2018 remained at

approximately the same level in comparison to 2017, while at the same time net fee and commission income

increased by 9% as compared to the

previous year.

The Bank managed to maintain the capital adequacy ratio significantly above the prescribed minimum during 2018. Capital adequacy ratio with the balance on December 31, 2018 was

19.31%.

Income Statement

The Bank realized positive operating result (before impairments and taxes) in the amount of RSD 1,068 million during 2018.

Income

The decrease in the key policy rate on the market had an impact on the downturn in the average repo rate, as well as on the downturn in interest rates on the banking market. In accordance with this trend, the Bank lowered interest rates on RSD loans by ~ 1 pp. and on foreign currency loans by 0.5 pp. which affected the reduction of interest income. The Bank overcame this decline of income through more intensive lending activity, there for total interest income in the year 2018 recorded a decrease of only 3% compared to the previous year.

In the total interest income structure, interest income on loans and securities took the most significant part.

During 2018, decrease in the average securities portfolio compared to 2017 and lower interest rates lead to decrease in interest income of securities. The Bank recorded a decrease of interest income on securities by ~ 33%.

Annual Report 2018

13

Loan interest income remained on the same level in 2018 compared to 2017. Lower Interest rates did not affect interest income on loans, given that the average state of non-performing was higher in 2018. Interest income on cash loans and loans for working capital and liquidity participate with 70% in total loans interest

income.

In 2018, fees and commissions income reached RSD 2,103 million, which presents a growth of 9% as opposed to year 2017. Vojvođanska banka has a long tradition of transaction banking that is reflected in stable income from fees and commissions.

Expenses

The decrease in interest rates on the

market had an impact on the level of the interest rates of Vojvođanska banka. Interest rates on local currency deposits decreased by 0.3 pp. and interest rates

on foreign currency deposits by 0.1 pp. In accordance to this decrease, the total interest expense was reduced in 2018 by 18% compared to 2017.

In the structure of interest expenses, the majority are deposits interest expenses.

Annual Report 2018

14

Term retail deposits and other deposits took the largest part in deposits expenses

(78% in total).

In the structure of operating expenses, the majority are other expenses ~56%. Wages, salaries and other personnel expenses contribute to 39% of total operating expenses, while depreciation costs account for 5% of total operating

expenses.

Balance Sheet

Vojvođanska banka increased its balance sheet assets for RSD 10,904 million in 2018 compared to the end of 2017, and

managed to maintain its position in the banking market, and this year it remained among the ten largest banks in Serbia. Detailed positions of Balance Sheet are in

Appendix 1.

Financial Assets Available

for Sale

Financial assets available for sale, as of 31st of December recorded a decrease of 29% compared to 31.12.2017. The Bank has reduced the level of investment in

government bonds in order to increase the volume of credit activity.

Annual Report 2018

15

Loans and Receivables

from Banks and Other

Financial Institutions

Loans and receivables to banks and other financial institutions were in line with the achieved level of deposit and credit

activities of the Bank, in order to achieve greater profitability of total business.

Loans and Receivables to

Customers

Vojvođanska banka increased the level of gross loans and receivables to customers for ~15.5% in 2018. The increase in gross loans was recorded primarily in loans given to corporate (14.7%) and cash loans to retail (20.5%).

In the structure of gross loans, corporate loans contribute with a share of 48.86%. The largest part of corporate loans is loans with a foreign currency clause and foreign currency loans.

Mortgage loans took part of 34% out of gross retail loans, while cash loans took

part of 61%.

The ratio of gross loans to deposits from customers amounted to 92% as of 31.12.2018.

Annual Report 2018

16

Deposits

The conditions for maintaining a high level of liquidity and growth of placements both for commercial entities and for physical persons were secured by

increasing the level of deposits in 2018.

Total deposits of Vojvođanska banka amounts RSD 114.5 billion as of December 31, 2018.

Transactional deposits participate with 41% in total deposits while term retail

deposits have largest contribution of 47%.

FX deposits participate with 61% in total customer deposits, with the largest part referring to retail term FX deposits. On the other hand, deposits in local currency

mostly come from legal entities.

Retail Banking

Vojvođanska banka has succeeded in increasing gross loans to households by 16%, and to increase the market share from 4.62% to 4.78% in 2018.

Favourable trends are the result of finding the optimal level of price and product combinations. Special campaigns were organised for cash loans, which was reflected in cash loan increase of ~20.5% compared to the previous year, achieving 7% of the market share in the part of cash loans. The focus was on the new client segmentation and the harmonization of the product offer in line with the needs of clients. During 2018, promotions included campaigns through the media (television and radio commercials, via the Internet and newspapers). The Bank's offer was

Annual Report 2018

17

attractive during the current year in the market, since the application processing, maintenance of accounts and early repayment of loans were carried out at no cost, with a favourable effective interest rate.

During 2018, the banking sector was characterized by an increase of total household credit activity.

Housing loans recorded market growth

compared to 2017 of 8% due to lower interest rates. Vojvođanska banka managed to increase the level of housing loans by as much as 12%, and increase

the market share from 3.96% to 4.11% in 2018 compared to 2017. A special offer of housing loans in Vojvođanska banka is characterized by a competitive interest

rate as well as the release from the processing cost of applications for housing loans.

During 2018, in the spirit of its tradition, Vojvođanska banka organized a series of special benefits for credit and debit card users. Performance and customer satisfaction are reflected in the growth of volume and number of transactions by 16% compared to the previous year.

In 2018, Vojvođanska banka continued to enrich its offer with a package of products and services for Small Business customers inspired by the challenges and needs that Small Business clients face in everyday business. Changes in tariffs and payment services, their improvement, stepped into force in 2018, as well as the issuance of Dina Business Cards. The card is available to all Small Business clients with local currency current account for

payments and cash withdrawals.

Vojvođanska banka Retail deposits remained on the same level during 2018 as in the previous year, achieving market share of ~4.7%.

Corporate Banking

The basic goal in corporate business during 2018 was maintaining long-term relationships with clients and providing quality services and diverse products.

Total gross corporate loans increased by ~14.7% in 2018 by improving business

cooperation with new and existing clients.

Annual Report 2018

18

The largest part of approved loans was related to loans for working capital, which

continued the trend from previous years.

FX indexed loans accounted for the largest portion of approved and disbursed loans.

Annual Report 2018

19

6. Financial Risk Management

General Framework

Activities related t risk management at all organizational levels are guided by the mission of realizing shareholder value by optimizing the risk to return ratio, taking into account the interests of customers

and employees in a manner that is consistent with best practice and compliance with regulatory requirements.

The risk management structure is organized in accordance with the Law on Banks, the relevant decisions of the National Bank of Serbia, which define the area of risk management and capital adequacy, as well as the Bank's Risk Management Strategy.

The general objectives of the Bank’s risk management are:

• Establishment of basic principles and standards for risk management in the Bank;

• Support to the Bank's business strategy by ensuring that business goals are achieved with controlled risk;

• Improvement of the use and allocation of capital and increase of revenue from capital adjusted to risks by including risk in the measurement of business

performance;

• Support to the decision-making process by providing the necessary

information relating to the risks;

• Ensuring consistency with best practices and compliance with local regulatory, quantitative and

qualitative requirements;

• Providing cost-effective risk management by reducing overlapping and avoiding

inadequate, excessive or outdated policies, processes, methodologies, models, controls and systems.

Credit Risk

Credit risk is the most significant material risk the Bank is exposed to.

The process of continuous measurement,

monitoring and control of credit risk is based on:

• consistent tools for scoring and ranking credit placements in order to standardize and improve credit assessment, as well as to establish a system of limits in line with the level of estimated risk;

• the process of regular monitoring of credit exposures harmonized with regulatory requirements, as well as with best practice standards, and

• information system and analytical techniques that allow measurement of credit risk in all relevant activities and provide adequate information on the content of the loan portfolio,

Annual Report 2018

20

including the identification of possible concentration of risk.

The basic method of mitigating credit risk is ensuring the collateral for a loan. The Bank's credit policies determine the types of eligible collateral in the form of funded and unfunded credit protection, whereas the conditions to obtain these collaterals, as well as the ratios for calculating the secured values in relation to the type of collateral for the purposes of loan processing, are in more detail regulated by other internal documents of the Bank.

The main types of collateral used by the

Bank for the purposes of mitigating credit risk are: residential property mortgage, business property mortgage, pledge on equipment, inventory and receivables,

letters of guarantee, financial assets (cash, securities) and sureties.

Exposure to credit risk with balance sheet items (positions) is presented in Appendix

3 table.

The Bank realized a significant decrease of the NPL indicator in 2018, resulting in the value of the indicator of 6.55% as of 31.12.2018, as per the methodology of the National Bank of Serbia. The realised indicator was lower than the last year's by 1.88 percentage points, and also significantly higher than the NPL indicators of the banking sector, which amounted to 6.4% in the third quarter. The decrease in NPL indicators is caused by the accounting write-off of fully impaired bad assets, by the improvement of the loan portfolio quality, as well as by an increase in the performing loan portfolio.

Market Risk

The Bank has established and further

maintains the proper function of measuring, monitoring and controlling market risk, including:

• The processes of measuring the market risks that record all significant sources of market risk and assess the impact of changes in market risk factors in a manner that is consonant with the volume of the Bank’s activity. These measurement systems include VaR models for the most important currencies and models where appropriate;

• Operational limits and other practices which ensure that exposures remain within levels that are in accordance with internal policies in terms of exposure to individual market risk types, positions and loss limits;

• Measurement of sensitivity to loss under stressful market conditions and taking into account those results when establishing and reviewing policies and limits for market risks;

• Adequate and efficient processes and information systems for measuring, monitoring, controlling and reporting on market risk exposure. Controls (limits) are incorporated in those systems. Reports are regularly made and submitted to the Board of Directors, the Executive Board, the senior

Annual Report 2018

21

management and all other relevant competent bodies.

Interest Rate Risk

The basic instrument of interest rate risk management is monitoring the mismatch between interest sensitive assets and liabilities. The Bank regularly monitors and determines the impact of changes in interest rates on net income and the

economic value of equity.

The acceptable interest risk level is defined by limits of mismatch between interest sensitive assets and liabilities.

The exposure to interest risk in balance sheet items is presented in Appendix 4 table.

111.116 72.933

17.531

42.161

Assets Liabilities

Non-Interest

BearingInterest Bearing

RSD mil

Interest Rate Risk - 31.12.2018.

Foreign Exchange Risk

The Bank manages the foreign exchange risk by limiting and daily monitoring the compliance of this position with a limit. In addition to this, the Bank measures the

indicator of foreign currency risk in accordance with the regulations of the National Bank of Serbia on a daily basis and maintains it within the prescribed

limits.

The Bank has established and maintains the appropriate functions of measuring, monitoring and controlling foreign exchange risk, including an application that allows the monitoring of the open foreign exchange position both on a daily

basis and during the day.

An Assets and Liabilities currency

breakdown is presented in Appendix 5.

Annual Report 2018

22

Aiming at the protection against foreign exchange risk, the Bank monitors daily changes in the market, implementing a policy of low exposure to foreign currency risk and monitoring the results obtained during simulations of stress scenarios.

Liquidity Risk

The Bank has set the framework for liquidity risk management in the Policy for Liquidity Risk Management defining roles and responsibilities in the liquidity management process, with the aim of providing various sources of financing, the corresponding management of the assets and liabilities structure, and the constant monitoring of future cash flows and liquidity on a daily basis. The Bank daily estimates the expected cash flows in dinars and in foreign currencies, as well as the availability of assets that can be used as a security instrument in order to provide

additional financing, if necessary.

The Bank manages its assets and liabilities in a way that allows it to settle its due obligations at all times, taking into account the consistency between seasonal fluctuations in the sources of funds and loan applications. In order to

better manage its sources of funds, the Bank devotes special attention to the monitoring and, measuring the concentration of deposits per different

levels and types of deposits.

A table of assets and liabilities per maturity

is shown in Appendix 6.

Error! Not a valid

link.

0,00

0,50

1,00

1,50

2,00

2,50

Liquidity ratio Regulatory limit

Liquidity ratio

0,00

0,50

1,00

1,50

2,00

2,50

3,00

Narrow liquidity ratio Regulatory limit

Narrow liquidity ratio

Annual Report 2018

23

Country Risk

The Bank is exposed to this type of risk on the basis of all types of cross-border financing in a particular country, either to a central government, a bank, a private company or a physical person. The Bank manages the risk of the country by establishing a system of exposure risk based on country risk and regular

calculation of country risk provisions.

15,1

5,4 5,3

Germany Greece USA

mil EUR

The greatest exposure to country risk as at 31.12.2018

Operational Risk

The Bank's operational risk management is regulated by the Framework for operational risk management at the level

of the entire organisation with the objective to have both a proactive and reactive role in operational risk management.

The Bank's operational risk management framework includes:

• Regular monitoring of operational risk exposure;

• Methodology of operational risk including self-assessment of risk and

control, key risk indicators and data collection on losses and

• Collection of material operating

losses at the Bank's level.

The Bank has also developed the Business Continuity Plan in order to act timely in

response to unexpected business disruptions of its crucial functions. The Disaster Recovery Plan is developed as a description of procedures that pertain to

recovery and continuity of applications, data, hardware, communication and other IT infrastructure in the Bank and implies the existence of an alternative

place (place for recovery from disaster).

Capital Management

The Bank continuously monitors its capital, in order to:

• Act in accordance with the requirements of the National Bank of Serbia regarding the maintenance of the minimum

prescribed capital;

• Ensure the adequate capital level that provides operations on a

continuous basis;

• Maintain a strong capital base that corresponds to the level of anticipated risks in the existing and planned operations.

The Bank's management regularly monitors the level and conformity of the Bank's capital adequacy ratio, as well as other indicators set by the National Bank

of Serbia. The Bank has established a framework for capital management by

Annual Report 2018

24

adopting the Capital Management Strategy, consistent with the Bank’s

business strategy.

Assessment and measurement of the taken risks, as well as the adequacy of the capital base as opposed to those risks, is performed not only for the types of risk defined by the regulator, but also for all other types of risks in the Bank. This measurement is performed within the Internal Capital Adequacy Assessment

Process (ICAAP) and involves the measuring according to the type of risk in the normal course of business, as well as in stressful conditions, for all types of risks that

are considered material.

An overview of performance indicators as per the limits prescribed by the National

Bank of Serbia on 31.12.2018 are presented in Appendix 7.

Annual Report 2018

25

7.Plans for the Future

Vojvođanska banka has defined the following strategic objectives for the period

2019:

- commitment to create, through the integration process, a bank which will be a long-term choice of our clients,

- defines innovative and high quality products and serv ices which will be offered to the clients after integration;

- further digitalization process development for improvement of business efficiency;

- performing activ ities and overall business that our clients are accustomed to; corporate soscial responsibility and

support to community, clients, children and young people

- strong risk management as a pillar of support in our Bank;

- the tendency to preserve the high capitalization of the Bank, while monitoring

the internal indicators and indicators established by the NBS;

- maintaining optimal liquidity combining self-funding and group financing;

- establishment of all necessary processes for functioning of the integrated Bank and investment in the IT infrastructure in order to improve business and automation of all processes within the Bank;

- increase efficiency and economy while increasing the quality of business and prov iding services;- training and improvement of employees for the best professional career development

Annual Report 2018

26

8.Social Responsibility and Environmental Protection

The activities of social responsibility department as part of the business strategy of Vojvođanska banka and during 2018 were very intensive, and they represent a continuation of the Bank's commitment to be an active participant in improving the living conditions and work of the community in which it performs its basic, banking and business activities. "Responsible" is a brand of socially responsible business of Vojvođanska banka to support initiatives that change the society for the better. The brand was founded in 2014 with a mission to support initiatives that innovatively contribute to the society, whether in the field of human rights promotion, environmental protection, art, culture or education.

Olympic Committee of

Serbia

For the fifth time in a row, Vojvođanska banka has been contributing to the preparation of top athletes to take part in the Olympic Games to be held in Tokyo in 2020. These preparations also include participations in competitions throughout the four-year cycle, while Vojvođanska banka, as the official bank of the Serbian Olympic Committee, is beside the top athletes with a common desire for achieving top results. As an additional

incentive to the athletes, the Bank continued with the donation of funds made on each VISA Olympic Card

transaction.

Responsibly in the

community

“Responsibly in the Community” is a program to support the development of education in Serbia. It is dedicated to two target groups: educational initiatives (educational hubs, movements, associations and groups of citizens) that strategically address the promotion of education or informal forms of education, as well as agricultural schools in Serbia.

The support includes:

• Inspiration and motivation in the form of events in which candidates will be able to get detailed information about the program, get comments and advice on how to best present their work in the

application process.

• Providing knowledge and network

of contacts, through mentoring and volunteering work of experts and students with candidates

Annual Report 2018

27

• Donation of resources, through donation of computers and other equipment

The top five winners of the first round of the project “Responsibly in the Community” are the following projects:

1. “Digital Marketing in the Function of Student Entrepreneurship”, Youth Educational center from Niš 2. “Modern Corner”, Naš svet, naša

pravila (Our World, Our Rules) from Vranje 3. “Dok Tok”, Center for prevention of crime and aftercare NEOSTART from Belgrade 4. “Digital Teacher”, Association SEE ICT from Belgrade 5. “Youth Innovation”, Nauči me (Teach Me) from Niš

Gallery of Matica Srpska

Successful cooperation with the Matica Srpska Gallery continued in 2018. The work of the Gallery's experts on the evaluation of artworks owned by the Bank has been completed and a catalogue of all evaluated works has been submitted to the Bank. In September, with a presence of the Minister of Culture of Serbia, an exhibition of 100 selected works from our

collection was held in the premises of the Gallery.

Also, Vojvođanska banka supported the implementation of the Baby Friendly Museum action with a donation. The Bank's resources equipped a corner for mothers in which mothers with children can rest, bind babies and not interrupt the visit to the museum. As part of this activity, every first Saturday, concerts are held for babies and their parents on the Gallery premises.

The cooperation between the Bank and Gallery of Matica Srpska was accomplished in a large project that the Gallery implemented in previous years, restoring the iconostasis of the Serbian Orthodox Church in Budapest, which was destroyed during the bombing in World War II. After the successful restoration and presentation in Novi Sad, the iconostasis

Annual Report 2018

28

was returned to Hungary, and the opening of the exhibition was supported by Vojvođanska banka in cooperation with OTP Group.

United Nations Children’s

Fund – UNICEF

In 2018, Vojvođanska banka was part of the large UNICEF project "Sport for All". The project seeks to contribute to the social inclusion of children with disabilities through creating opportunities for joint play, recreation and sports. A donation of 3 million dinars enabled the implementation of this project in three cities: Velika Plana, Subotica, and Novi Sad.

In addition, Vojvođanska banka as a member of UNICEF Friends Club contributed to the implementation of UNICEF activities dedicated to children and their growing up with monthly donations.

Corporate Volunteering

In 2016 Vojvođanska banka for the first time joined the great volunteering

Annual Report 2018

29

campaign “Our Belgrade“. A joint team of volunteers of Vojvođanska banka and OTP Bank Serbia was part of this campaign in 2018. The joint forces of volunteers arranged the space at the Nikola Pašić Square in Belgrade. All the benches were cleaned and painted, and the spaces around them were decorated.

Non-Financial Reporting

After the first published Sustainable Business Report of Vojvođanska banka for the year 2016, the Sustainable Business Report of the Bank for 2017 was prepared and published: https://www.voban.co.rs/izvestavanje.

This Report has established a continuity in transparent notification to the public through application of the highest recognized standards in this field.

Donations

Recognizing the need to respond in some situations, providing the need for those who need it in 2018 with donations, both in commodity and money, institutions and organizations such as the Faculty of Political Science, the Pensioners' Associations of Novi Sad and Vrbas were supported.

Responsibility for the

Environment

Vojvođanska banka is strategically defined in supporting and promoting a responsible approach to environmental protection. Energy and raw material savings, adequate recycling of raw materials, application of environmental risk assessment models in investment and credit processes, as well as participation in local and global iniciatives are the most visible forms of this commitment. Likewise, active participation in global initiatives such as "Just Not by Car" and "An Hour for Our Planet" represents a responsible relationship between the management and employees of the Bank in solving identified environmental problems.

Annual Report 2018

30

9. Significant Events after the Reporting Date

The Bank is in the process of merger with the shareholder OTP Bank Serbia. The Bank’s Assembly reached on 28th January 2019 the Decision on merger with OTP Bank Serbia with the agreed merger calculation date 31st December 2018. The Banks’ competent bodies have also reached all other relevant decisions related to the merger. All the required documentation for the merger has been sent to the NBS in order to give consent for the merger. Planned date of the legal and operational merger to OTP Bank Serbia is 26th April 2019.

The Bank did not have any purchase of own shares in 2018.

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31

10. Organisational structure

EMPLOYEE STRUCTURE IN VOJVOĐANSKA:

number of employees: 1.395

average age: 46

number of female/ male employees: 1.014 / 381

university level education: 738

average number of year employeed within the Bank:15,6

Digital

Channels

and Call

CentarProcurement

Property

Management

Information

Technology

Operations

Treasury Brokerage

&

Advisory

Corporate

banking

Retail products

&

segments

Network

Board of Directors

InternalAudit

Compliance andSecurity of the

Bank

Executive Board

Executive

Board's

officeMarketing

Communication & PR

Human

resources

Legal affairs

Credit risk

Management

Risk

Management

Finance

Troubled

Assets

Management

SBB Product

development

Predrag Mihajlović Spyridon Ntallas Živko Popov

President of the Executive Board Member of the Executive Board/CFO Assistance CFO

Annual Report 2018

32

Appendix 1. Balance sheet as of (in 000 RSD)

POSITION

31.12.2018.

31.12.2017.

ASSETS

Cash and balances with Central Bank 26,095,401 21,416,477 Receivables under derivatives 1,115 39,569

Securities 11,616,075 16,327,647 Loans and receivables from banks and other financial organizations 5,448,097 5,729,058

Loans and receivables from customers 85,221,777 73,504,393 Intangible investments 151,681 172,693

Property, plant and equipment 4,192,552 4,248,264 Investment property 122,515 134,835

Deferred tax assets 273,849 301,874 Other assets 509,182 852,983

TOTAL ASSETs 133,632,244 122,727,793

Annual Report 2018

33

Appendix 1. Balance sheet as of (in 000 RSD)

POSITION

31.12.2018.

31.12.2017.

LIABILITIES

LIABILITIES

Liabilities under derivatives 7,667 17,392 Deposits and other liabilities due to banks, other financial organisations and Central Bank 16,297,549 6,030,108

Deposits and other liabilities due to customers 98,187,115 97,149,605

Reserves 577,461 757,207 Current tax liabilities 3,351 1,447

Deferred tax assets 98,230 83,559 Other liabilities 928,975 718,746

TOTAL LIABILITIES 116,100,528 104,758,064

CAPITAL

Chare capital 16,337,550 16,337,550 Profit / Loss 595,504 (2,107,478)

Reserves 598,662 3,739,657

TOTAL CAPITAL 17,531,716 17,969,729

TOTAL LIABILITIES

133,632,244

122,727,793

Annual Report 2018

34

Appendix 2. Income statement for the period (in 000 RSD)

POSITION

Current

year

Previous

year

Interest income

5,456,487

5,620,328

Interest expense (672,841) (817,138) Net interest income 4,783,646 4,803,190

Fee and commission income 2,102,989 1,928,842

Fee and commission expense (174,797) (168,990) Net fee and commission income 1,928,192 1,759,852

Net gains/losses from change in fair value of financial instruments Net gain / loss from the de-recognition of financial instruments recognized at FVTOCI

(19,016) -

7,279 45,768

Net exchange rate gains and effects of agreed currency clause

Net (Losses) / Gains from hedging

231,700 243

455,132 (818)

Net gain / loss on impairment of financial assets and credit risk off-balance sheet items (423,889) (2,263,153) Net gains from de-recognition of the financial instruments recognized at amortised cost 31,119 -

Other operating income 56,471 48,776

TOTAL NET OPERATING INCOME 6,588,466 4,856,026

Annual Report 2018

35

Appendix 2. Income statement for the period (in 000 RSD) (Continued)

Current Previous

POSITION year year

Wages, salaries and other personnel expenses (2,481,860)

(2,399,855) Amortisation and Depreciation (293,521)

(336,972)

Other income 376,523

63,363 Other expenses (3,544,859)

(4,240,699)

PROFIT BEFORE TAX 644,749

-

LOSSES BEFORE TAX -

(2,058,137)

Income tax (3,351)

(1,447) Profit on deferred taxes 1,795

90,234

Loss on deferred taxes (47,509)

(138,137) PROFIT AFTER TAX 595,504

-

LOSS AFTER TAX -

(2,107,478)

Annual Report 2018

36

Appendix 3. Overview of credit risk exposure in balance sheet items (in 000 RSD)

POSITION

31.12.2018. 31.12.2017.

Cash and balances with Central Bank 26,095,401 21,416,477 Securities 11,617,190

16,367,216

Loans and receivables from banks and other financial organizations 5,448,096

5,729,058 Loans and receivables from customers 85,221,778

73,504,393

Other assets 509,182

852,983 Commitments* 6,462,784

6,600,390

Total 135,354,431 124,470,517

* excluded revocable unused limits

Annual Report 2018

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Appendix 4. Overview of interest rate risk on balance sheet items as at 31.12.2018 (in 000 RSD)

Up to 1

month

From 1 to 3

months

From 3 to 12

months Over 1 year

Non-Interest

Bearing Total

31.december 2018

ASSETS

Cash and balances with Central Bank 10,904,746 - - - 15,190,655 26,095,401 Financial assets at fair value through profit and loss held for trading - - - - - - Receivables for derivatives 1,115 - - - - 1,115 Securities 746,871 2,171,928 4,329,559 4,309,772 57,945 11,616,075 Loans and receivables from banks and other financial organizations 2,506,165 500,037 90,355 346,891 2,004,649 5,448,097 Loans and receivables from customers 20,057,148 55,978,150 2,633,896 6,538,936 13,647 85,221,777 Other assets - - - - 263,877 263,877 TOTAL ASSETS 34,216,045 58,650,115 7,053,810 11,195,599 17,530,773 128,646,342

LIABILITIES

Liabilities based on derivatives 7,667 - - - - 7,667 Deposits and other liabilities due to banks, other financial organisations and Central Bank

2,001,338 3,300,839 10,158,960 - 836,412 16,297,549

Deposits and other liabilities due to customers 38,354,290 7,281,247 10,913,808 909,705 40,728,065 98,187,115 Liabilities based on securities - - - - - - Other liabilities 4,896 - - - 596,746 601,642 TOTAL LIABILITIES 40,368,191 10,582,086 21,072,768 909,705 42,161,223 115,093,973

Net exposure to interest rate risk as at:

– 31.december 2018. (6,152,146) 48,068,029 (14,018,958) 10,285,894 (24,630,450) 13,552,369

– 31.december 2017. (9,490,451) 35,061,841 (13,579,289) 18,455,171 (16,698,344) 13,748,927

Annual Report 2018

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Appendix 5. Overview of balance sheet assets and liabilities by currency as at 31.12.2018 (in 000 RSD)

EUR USD Other

currencies Total FX RSD Total

31.december 2018

ASSETS

Cash and balances with Central Bank 10,563,772 427,809 1,028,738

- 12,020,319 26,095,401

Financial assets at fair value through profit and loss held for trading - - -

-

- -

Receivables for derivatives - - - - 1,115 1,115 Securities 7,535,389 - - 7,535,389 4,080,686 11,616,075 Loans and receivables from banks and other financial organizations 3,807,416 683,804 456,839 4,948,059 500,038 5,448,097 Loans and receivables from customers 20,057,148 55,978,150 2,633,896 6,538,936 13,647 85,221,777 Other assets 7,513 6,322 7 13,842 250,035 263,877 TOTAL ASSETS 69,369,470 1,371,689 4,706,155 75,447,314 53,199,028 128,646,342

LIABILITIES Liabilities based on derivatives - - - - 7,667 7,667 Deposits and other liabilities due to banks, other financial organisations and Central Bank 12,782,651 190,152 1,786,654 14,759,457 1,538,092 16,297,549 Deposits and other liabilities due to customers 54,217,633 2,475,560 2,835,609 59,528,802 38,658,313 98,187,115 Liabilities based on securities - - - - - - Other liabilities 167,448 389 3,716 171,553 430,089 601,642 TOTAL LIABILITIES 67,167,732 2,666,101 4,625,979 74,459,812 40,634,161 115,093,973

Forward and spot position (2,305,149) 1,302,862 (65,925) (1,068,213) 1,061,817 (6,395) The net open foreign currency position as of

– 31.december 2018. (103,411) 8,450 14,251 (80,711) 13,626,684 13,545,974

– 31.december 2017. (192) (9) 39 (161) 13,939,838 13,778,339

Loans with a foreign currency clause are shown under foreign currency

Annual Report 2018

39

Appendix 6. Overview of the maturity structure of assets and liabilities of the Bank as at 31.12.2018 (in 000 RSD)

Up to 1 month From 1 to 3 months From 3 to 12 months From 1 to 5 years Over 5 years Total 31.december 2018

ASSETS

Cash and balances with Central Bank 26,095,401 - - - - 26,095,401 Financial assets at fair value through profit and loss held for trading

- - - - - -

Receivables for derivatives 1,115 - - - - 1,115 Securities 804,815 2,171,928 4,329,559 4,309,773 - 11,616,075 Loans and receivables from banks and other financial organisations

2,969,948 500,000 610,358 1,027,666 340,125 5,448,097

Loans and receivables from customers 2,498,384 6,923,467 21,598,150 35,962,537 18,239,239 85,221,777 Other assets 237,614 15,020 7,510 - 3,733 263,877 TOTAL ASSETS 32,607,277 9,610,415 26,545,577 41,299,976 18,583,097 128,646,342

LIABILITIES

Liabilities based on derivatives 7,667 - - - - 7,667 Deposits and other liabilities due to banks, other financial organisations and Central Bank

2,837,737 3,300,839 10,158,973 - - 16,297,549

Deposits and other liabilities due to customers 77,538,153 7,458,065 11,303,535 1,791,668 95,694 98,187,115 Liabilities based on securities - - - - - - Other liabilities 548,249 46,753 872 3,736 2,032 601,642 TOTAL LIABILITIES 80,931,806 10,805,657 21,463,380 1,795,404 97,726 115,093,973

Maturity gap as at:

– 31. December 2018. (48,324,529) (1,195,242) 5,082,197 39,504,572 18,485,371 13,552,369

– 31. December 2017. (43,708,423) 259,687 1,498,673 40,096,280 15,602,710 13,748,927

Annual Report 2018

40

Appendix 7. Overview of actual indicators in accordance with the prescribed limits by the National Bank of Serbia

Indicator Limit 31.12.2018.

Capital

Minimum

140,278,006 EUR 10,000,000

Capital adequacy ratios:

- Capital adequacy Common equity Tier I Minimum 4.5% 19.31%

- Capital adequacy Tier I Minimum 6% 19.31%

- Capital adequacy ratio Minimum 8% 19.31%

Monthly liquidity ratios:

In the first month of the reporting period Minimum 1 1.51

In the second month of the reporting period Minimum 1 1.43

In the third month of the reporting period

Liquidity coverage ratio

Minimum 1

Minimum 100%

1.47

144.56%

Foreign exchange risk ratio Maximum 20% 0.72%

Exposure to a group of related parties Maximum 25% of Capital 22.09%

Banks investments in legal entities which are not in the financial sector

The sum total of all large exposures in relation to the capital

Maximum 60% of Capital

Maximum 400%

26.18%

115.25%

The Bank in 2018 has not violated any of the prescribed indicators.

vojvoĐanska banka a.d., novi sad · assembly adopted the decision to merge its business operations...

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