ABANKA VIPA D.D. Annual Report 2008b89c2754-160a-433f-bb17-70eebd564… · bank profile 19 about...

A B A N K A V I P A D . D . Annua l Repor t 2008

A B A N K A G R O U P Annua l Repor t 2008 A B A N K A G R O U P Annua l Repor t 2008


Every effort for enrichment,

development and growth starts with

people. We continuously expand our

horizons and persevere in the path

that leads to a bright future.

2008 ANNUAL REPORT OF THE ABANKA VIPA GROUP

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CONTENTS

BUSINESS REPORT 7FINANCIAL HIGHLIGHTS AND PERFORMANCE INDICATORS 8MANAGEMENT 11

PRESENTATION OF THE GROUP AND ITS ENVIRONMENT 17

ABOUT THE BANK 17SERVICES OF THE BANK 18BANK PROFILE 19ABOUT THE GROUP 19VISION AND MISSION OF ABANKA 24MAJOR BUSINESS EVENTS IN 2008 AND 2009 24ECONOMIC AND BANKING ENVIRONMENT IN 2008 AND OUTLOOK FOR 2009 26

FINANCIAL RESULTS OF THE GROUP 28

PERFORMANCE AS VIEWED THROUGH THE INCOME STATEMENT 28PERFORMANCE AS VIEWED THROUGH THE BALANCE SHEET 29PERFORMANCE OF THE GROUP IN 2008 32

THE BANK’S DEVELOPMENT AND ITS GOALS 44

DEVELOPMENT AND MARKETING COMMUNICATIONS IN 2008 44DEVELOPMENT AND MARKETING COMMUNICATIONS IN 2009 47

GOVERNANCE 49

CORPORATE GOVERNANCE STATEMENT 49

RISK MANAGEMENT 55

CREDIT RISK 55OPERATIONAL RISK 55MARKET RISK 55INTEREST AND LIQUIDITY RISK 55

HUMAN RESOURCES MANAGEMENT 56

PERSONNEL POLICY 56STAFF TRAINING AND DEVELOPMENT 56STAFF REMUNERATION 57ORGANISATIONAL CLIMATE AND EMPLOYEE SATISFACTION 57EMPLOYEE EDUCATIONAL STRUCTURE 57

A B A N K A G R O U P Annua l Repor t 2008

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CORPORATE RESPONSIBILITY 58

INFORMING STAKEHOLDERS IN THE BANK, RELATIONS WITH THE BUSINESS AND FINANCIAL PUBLICS AND MEDIA RELATIONS 58RELATIONS WITH EMPLOYEES 58SPONSORSHIPS AND DONATIONS 59

INTERNAL AUDITING 60

ORGANISATIONAL POSITION OF THE INTERNAL AUDIT DEPARTMENT 60OPERATIONS AND CONTROL OF THE GOVERNANCE SYSTEM 60REPORTING ON PERFORMED WORK 61INTERNAL AUDITING QUALITY 61

INFORMATION TECHNOLOGY 62

ORGANISATION 64

ORGANISATIONAL CHART AS AT 31 DECEMBER, 2008 64SENIOR MANAGEMENT 65BRANCH NETWORK 66

STATEMENT OF COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE 68

CONSOLIDATED FINANCIAL REPORT 77

GENERAL INFORMATION 78

STATEMENT OF MANAGEMENT’S RESPONSIBILITIES 79

CONSOLIDATED FINANCIAL STATEMENTS 80

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 90

INDEPENDENT AUDITOR’S REPORT 208


We take full responsibility for our

principles and pursue our goals:

standing with both feet on the

ground to be closer to nature and

holding our head above the clouds

to see farther than others.

BUSINESS REPORT

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FINANCIAL HIGHLIGHTS AND PERFORMANCE INDICATORS

Abanka Group

EUR thousands

BALANCE SHEET 31 Dec., 2008 31 Dec., 2007 31 Dec., 2006

Total assets 3,910,996 3,517,074 2,896,946

Total deposits from non-bank customers 1,918,527 1,724,689 1,701,244

Total loans to non-banking customers 2,773,794 2,384,788 1,829,052

Total equity 336,756 353,182 212,055

EUR thousands

INCOME STATEMENT 2008 2007 2006

Net interest income 78,786 67,182 55,264

Net non-interest income 21,319 49,193 54,291

Labour costs, general and administration costs (52,511) (50,584) (46,091)

Depreciation (6,857) (6,659) (8,296)

Impairments and provisions (14,695) (11,420) (17,589)

Profit or loss from ordinary and discontinued operations before tax

26,042 47,712 37,579

Corporate income tax on ordinary and discontinued operations

(5,644) (10,902) (9,963)

INDICATORS 2008 2007 2006

Capital adequacy 12.3% 10.7% 8.9%

Performance (in %)

– return on assets after tax 0.5 1.1 1.0

– return on equity after tax 5.9 11.1 13.6


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Abanka

EUR thousands

BALANCE SHEET 31 Dec., 2008 31 Dec., 2007 31 Dec., 2006

Total Assets 3,823,336 3,439,007 2,861,880

Total deposits from non-bank customers 1,929,650 1,735,777 1,704,711

– corporate 973,298 872,188 898,245

– retail 956,352 863,589 806,466

Total loans to non-bank customers 2,736,680 2,365,057 1,839,763

– corporate 2,313,641 1,990,589 1,533,726

– retail 423,039 374,468 306,037

Total equity 339,458 353,233 212,558

Impartment of financial assets at amortised cost and provisions

148,510 140,816 133,211

Off-balance sheet items 1,276,882 1,180,726 1,085,338

EUR thousands

INCOME STATEMENT 2008 2007 2006

Net interest 76,756 66,066 53,112

Net non-interest income 18,873 44,419 49,757

Labour costs, general and administration costs (48,572) (46,743) (43,162)

Depreciation (6,094) (5,931) (7,722)

Impairments and provisions (13,382) (11,139) (16,166)

Profit or loss before taxes from ordinary and discontinu-ed operations

27,581 46,671 35,819

Corporate income tax from ordinary and discontinued operations

(5,348) (10,108) (9,569)

NUMBER OF EMPLOYEES 31 Dec., 2008 31 Dec., 2007 31 Dec., 2006

Number of bank employees 878 871 867

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SHARES 31 Dec., 2008 31 Dec., 2007 31 Dec., 2006

Number of shareholders 1,142 1,053 1,132

Number of shares 7,200,000 5,500,000 5,500,000

Book value per share (in EUR) 47.21 64.36 38.74

INDICATORS 2008 2007 2006

Capital adequacy 12.6% 10.5% 8.8%

– own funds (in EUR thousand) 432,380 312,540 206,066

Asset quality (in %)

Impartment of financial assets at amortised cost and provisions

4.29 4.03 4.76

Performance (in %)

– interest margin 2.15 2.12 1.97

– financial intermediation margin 2.68 3.54 3.81

– return on assets before tax 0.77 1.50 1.33

– return on equity before tax 7.81 13.88 17.76

– return on equity after tax 6.30 10.88 13.01

Operational costs (in %)

– operational costs/average assets 1.53 1.69 1.88

Liquidity (in %)

– liquid assets/short-term deposits from non-bank customers

8.72 7.01 9.93

– liquid assets/average assets 3.97 3.23 5.09

Note: Data and performance indicators are based on the Indicator Calculation Method prescribed by the Bank of Slovenia with its

Decision on Accounting Records and Annual Reports of (Savings) Banks.


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Radovan JEREB, M.Sc. Econ.

Member of the Management Board

MANAGEMENT

Management Board of the Bank

Aleš ŽAJDELA, M.Sc.

President of the Management Board

Gregor HUDOBIVNIK


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Report of the Management Board

Abanka responded in a timely manner to unfavourable market conditions in 2008 and took mitigating measures to counteract the effects of the financial crisis, minimise its effects on the Group’s operations and was thus able to attain most of its business and financial objectives. The beginning of the year saw a successful recapitalisation by issuing 1,700,000 new shares worth EUR 102 million. The thereby achieved stability and other measures laid solid foundations for 2009, a year when banks will have to be very responsive to market crisis conditions and be attentive to making prudent business decisions.

The recapitalisation and the listing of Abanka shares on the stock exchange will help us implement our strategy to be the best banking partner in Slovenia. This also makes us more visible beyond Slovenia. We are producing good business results and achieving our strategic objectives thanks to the trust of our clients, shareholders, employees, a comprehensive range of financial-insurance products, an extensive branch network, information capital, modern sales channels and technological progress. In this regard it is important that Abanka is more than a bank; it is a banking group. In addition to the bank, the group includes an investment fund management company, an investment management company, two leasing companies, a factoring company, a project financing company, a mutual fund, an associated company and a joint venture company abroad. It gives us great satisfaction that the reputation of Abanka is spreading over the borders of Slovenia. Abanka successfully launched ASA Abanka leasing in Bosnia and Herzegovina and in early 2008 Afaktor - faktoring finansiranje, a company established by our subsidiary Afaktor, opened for business in Serbia.

The Abanka Group generated pre-tax profits of EUR 26,042 thousand in 2008 and Abanka alone posted EUR 27,581 thousand in pre-tax profits. Although profits were 40.9% lower than in 2007, we are still

satisfied with this achievement in view of the size of the financial crisis which had already spilled over to the real economy. These pre-tax profits of EUR 27,581 thousand resulted in a return on equity of 7.8%. After-tax profits of EUR 22,233 thousand meant a return on equity of 6.3%. The total assets of the Abanka Group and Abanka at the end of 2008 totalled EUR 3,910,996 thousand and EUR 3,823,336 thousand respectively. Compared to 2007 the Bank’s total assets grew by 11.2% and accounted for an 8.0% market share of the Slovene banking industry. At the end of December 2008 equity with reserves amounted to EUR 339,458 thousand, after having fallen by 3.9%, mainly as result of transferring the innovative instrument issued in 2007 from equity to liabilities. On the other hand successful recapitalisation raised shareholder equity by EUR 102 million, giving the Bank a strong capital base. It is with pride we can report that Abanka shares were listed on the Standard Market of the Ljubljana Stock Exchange in autumn which represented the achievement of one of our strategic goals.

In 2008 the shareholder structure remained in line with our medium-term strategy in 2008. At the end of the year 73.9% of Abanka was held by the following major shareholders: Zavarovalnica Triglav d.d., Sava d.d., Zvon Ena Holding d.d. and Delniški vzajemni sklad Triglav Steber I.

After the first presentation of Abanka on the Asian market, which happened in early 2008, we signed a syndicated loan agreement worth USD 55 million. In April Abanka signed a contract with the European Bank for Reconstruction and Development guaranteeing loans totalling EUR 10 million to finance small municipalities, municipal enterprises, and private companies providing public utility services. Another syndicated loan agreement was also signed in April with a consortium of foreign banks for EUR 165 million.


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As we started implementing adequate measures back in 2007, the financial crisis affected the operations of Abanka much less than would have otherwise been the case had we not had anticipated it in due time. The adequacy of our measures is evident from the ratings we received from rating agencies. Both Moody’s and Capital Intelligence reconfirmed our previous ratings of A3 and BBB respectively in August 2008 with stable outlook, and in March 2008 Fitch again assessed Abanka to have a stable outlook and assigned it the same rating BBB.

Abanka was reorganised in early 2008. A number of modern organisational solutions and best banking practices were introduced so that it can realise all of its strategic objectives and continue operating as a lean and development-oriented bank. During the year an IT System Administration Department was created to provide for quality functioning and upgrading of supplied IT systems. A Private Banking Department was established at the end of 2008 with the aim of getting closer to a specific segment of clients. Through the reorganisation and strengthening of

some of the Bank’s functions necessary for achieving strategic objectives we are able to consolidate our business in key areas, with practically no increases in the number of staff. On this basis Abanka will continue to put its strategies in place.

In 2008 we did everything to keep the promises given to you, our business partners, shareholders and employees. We assure you that we will endorse our promises and once again justify the trust and confidence of you all in 2009.

The Management Board hereby thanks the members of the Supervisory Board for monitoring its work and raising ideas and proposals on how to improve operations, as well as all employees who, through their dedicated work and positive attitude, contributed to the business results achieved in 2008.

To our respected business partners, these results are not ours alone. They are the fruits of good cooperation with companies and individuals who drive us to continue improving operations in the future.





Gregor HUDOBIVNIK


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Tomaž TOPLAKAGB INVEST d.o.o.

Miha DOLINARSava d.d., Kranj

Simon ZDOLŠEK Zvon Ena Holding, finančna družba d.d.

Irena VODOPIVEC JEANMinistry of Finance

Uroš ROŽIČ, M.Sc.D.S.U. d.o.o.

Janez BOHORIČSava d.d., Kranj

Niko TROŠT, M.Sc.HIT d.d.

Abanka’s Supervisory Board is comprised of seven members. The composition of the Supervisory Board changed in 2008. Two members were changed: Mr. Stojan Petrič resigned on 14 April, 2008 and Mr. Andrej Klanjšček on 28 May, 2008. The General Meeting of Shareholders appointed two new members to the Supervisory Board with four-year terms commencing 29 May, 2008: Mr. Janez Bohorič and Mr. Niko Trošt, M.Sc. They both took office on the day of their appointment. Tomaž Toplak serves as the Chairman of the Supervisory Board and Miha Dolinar as Vice Chairman. The following persons serve as members of the Supervisory Board: Simon Zdolšek, Irena Vodopivec Jean, Uroš Rožič, M.Sc., Janez Bohorič and Niko Trošt, M.Sc. The Supervisory Board members are independent and there were no conflicts of interest.

Individual members of the Supervisory Board were absent at the following sessions:– Stojan Petrič – 16th regular session (17 March, 2008); – Stojan Petrič, Simon Zdolšek – 17th regular session

(14 April, 2008);– Uroš Rožič, M.Sc. – 18th regular session (11 June,

2008); – Miha Dolinar – 20th regular session (20 October,

2008);– Uroš Rožič, M.Sc. – 21st regular session (8

December, 2008).

At the 13th regular session of the Supervisory Board on 15 October, 2007, an Audit Committee was formed. Tomaž Toplak was appointed its Chairman and the following persons were appointed as members: Vinko Perčič, Miha Dolinar and Simon Zdolšek. On 31 January, 2008, the constitutive session of the Audit Committee was held and it had four meetings in 2008.

The self-assessment of the Supervisory Board’s results in 2008 was positive and in accordance with expectations. The assessment of the Supervisory Board’s work is based on the findings that the composition of the Supervisory Board is appropriate in that it represents a competent group of experts. The organisation and functioning of the board’s members as a team is effective, as it facilitates the on-going monitoring and supervision of the Bank’s business and the communication of initiatives and

Supervisory Board Report of the Supervisory Board


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guidelines for its continuation. All individual members are deemed to function effectively. The Supervisory Board established cooperation with the Audit Committee. The Supervisory Board’s self-assessment positively affected and stimulated its work and reconfirmed the adequacy of the Supervisory Board’s activities.

Review of the Supervisory Board’s activities in 2008

In accordance with the competencies and obligations defined in the Banking Act, the Companies Act, the Decision on the Diligence of the Members of Management and Supervisory Boards of (Savings) Banks and the Bank’s Articles of Association, the Supervisory Board operated pursuant to the principles of modern corporate governance, and thus, through its supervisory function, contributed to the efficiency and transparency of the Bank’s operations. The Supervisory Board in its work considered the interests of shareholders, clients and employees.

The Supervisory Board held six regular and two correspondence sessions in 2008, in which it discussed Abanka’s operations, its achieved financial results, corporate policy, the annual report and other material issues regarding the operation of the Bank and its subsidiaries. At its sessions in 2008, the Supervisory Board: – considered the financial operations reports of

Abanka in 2008 and reports on the implementation of the Bank’s financial budget and strategy;

– redrafted the Articles of Association of Abanka due to the increase in share capital;

– took note of Abanka Vipa’s unaudited annual report and the Abanka Group’s unaudited consolidated annual report for 2007, and adopted a policy on the distribution of the unaudited net profit and distributable profit for the financial year 2007;

– was briefed on the schedule of activities starting with the approval of the annual report until the General Meeting of Shareholders and on the report on the subscription to the new share issue of Abanka Vipa d.d.;

– adopted the internal audit report for the last quarter of 2007 and the Internal Audit Department’s work plan for 2008;

– gave the required authorisations in accordance with Articles 67 and 167 of the Banking Act and regarding share trading;

– approved Abanka Vipa’s 2007 Annual Report and the Abanka Group’s 2007 Consolidated Annual Report;

– approved the proposed agenda and resolutions of the bank’s 20th General Meeting of Shareholders;

– gave its opinion on the 2007 Internal Audit Report; – adopted modifications to the Investment Strategy

and Trading Strategy of Abanka; – authorised the setting of exposure limits to individual

persons and a group of associated persons in accordance with Article 167, 1st paragraph, of the Banking Act and the setting of exposure limits to persons in a special relationship with the Bank pursuant to Article 167, 2nd paragraph of the Banking Act;

– took note and approved the Bank’s actions needed for listing Abanka shares on the official market as well as approved the Statement of Compliance with the Corporate Governance Code;

– was presented the reports in accordance with Article 247 of the Companies Act;

– was briefed on the situation on financial markets and its influence on the portfolio of debt securities on the banking book of Abanka; authorised a decrease of the volume of debt securities on the banking book;

– adopted the quarterly Internal Audit Report for the First Nine Months of 2008, adopted the follow-up report on implementation of the recommendations and requirements of the Internal Audit Department for 2008; adopted on offer for a review of the internal control function sent to Abanka;

– adopted the Financial Budget and Corporate Policy of Abanka d.d for 2009;

– authorised the Abanka Investment Strategy and Trading Strategy for 2009 as well as the Draft Work Plan of the Internal Audit Department concerning audits of trading; it approved the recast Risk Management Strategies, the accompanying Risk Management Policies and Public Information Disclosure;

– adopted the Internal Audit Department’s work plan for 2009;

– was informed about trading in Abanka shares on the Ljubljana Stock Exchange.

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Based on duly prepared material by the Management Board, reports by internal experts and its own findings, the Supervisory Board responsibly monitored the Bank’s operations and the work of the Internal Audit Department, as well as supervised the management of the Bank. The Supervisory Board has concluded that Abanka’s operations are regularly and comprehensively monitored and are geared to the best decisions. The appropriate supervision of the Bank’s management contributes to good results and the achievement of established strategic objectives.

2008 Annual Report

At its session of 6 April, 2009, the Supervisory Board discussed the 2008 Annual Report of Abanka Vipa d.d. together with PricewaterhouseCoopers’ audit report and the proposal of the bank’s Management Board for the distribution of profits. The Supervisory Board confirmed that the annual report truly and fairly reflects the Bank’s position while giving a comprehensive view of operations in 2008 thus adding to the information it received during the financial year. Comparing the annual report with the audited financial statements for the financial year 2008, the Supervisory Board established that the financial results presented in the annual report were in accordance with the audit report. The Supervisory Board is of the opinion that the Management Board and the Supervisory Board itself have fulfilled all legal requirements during the financial year 2008. Based on the regular monitoring of the Bank’s operations and the beforementioned reviews, the Supervisory Board approved the annual report on the operations of the Bank in 2008.

The Supervisory Board hereby establishes that the certified external auditor, in its report, issued a positive opinion on the financial statements which present a true and fair view of the Bank’s financial position in all material aspects. The Supervisory Board has no comments on PricewaterhouseCoopers’ audit report and believes that the Bank’s operations in 2008 were carried out in accordance with regulations thus confirming the appropriate management of the Bank’s business by the Management Board. Based on its knowledge of the bank’s operations during the year and following the diligent checking of the audited annual report and the positive opinion issued by the certified auditor in the audit report, the Supervisory Board hereby approves and adopts the Annual Report of Abanka Vipa d.d. for the financial year 2008. The Supervisory Board has also studied the proposal for the distribution of profits earned in the financial year 2008, to be finally approved by the General Meeting of Shareholders on 28 May 2009, and gives its full consent to the relevant Management Board’s proposal. The Supervisory Board confirms that Abanka’s performance in 2008 was good given the crisis situation, the impact of which Abanka mitigated by quickly responding to unfavourable market conditions and meeting a great number of set objectives.

The Supervisory Board hereby thanks the Management Board and all employees for the successful conclusion of the financial year 2008.

Tomaž TOPLAKChairman of the Supervisory Board


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ABOUT THE BANK

PRESENTATION OF THE GROUP AND ITS ENVIRONMENT

Abanka Vipa d.d. is a bank with a long tradition in the Slovene banking sector. The origins of Abanka d.d. date back to 1955 when the bank operated as a branch of the Yugoslavian Bank for Foreign Trade. In 1977, the branch was renamed Jugobanka – Temeljna banka Ljubljana. Abanka began using its current name on 1 January, 1990 when it was transformed into a public limited company. On 31 December, 2002, Banka Vipa merged with Abanka. Since that time, the bank has operated under the name Abanka Vipa d.d., abbreviated to Abanka d.d. (hereinafter: Abanka). Following the merger with Banka Vipa, Abanka's market share rose by 1.7 percentage points to 8.5%, making it the third largest bank in the Slovene banking sector. Abanka ended 2008 as the third largest bank in terms of total assets. The Bank's market share as at 31 December, 2008 was 8.0%.

Abanka is a universal bank with authorisation to provide all banking and other financial services. Through our extensive network of 41 branches throughout Slovenia, easily accessible e-banking,

our advisory services and personal approach, we offer comprehensive financial services, ranging from traditional banking and bancassurance services to investment banking. In the scope of its investment banking Abanka also manages the AIII VPS mutual retirement fund.

Abanka has established its reputation internationally as well. With regard to international operations, Abanka successfully satisfies its clients' needs for international payment transactions thanks to its network of correspondent banks across the globe.

Abanka's range of services is further supplemented by its subsidiaries in Slovenia: Abančna DZU d.o.o., Argolina d.o.o., Afaktor d.o.o., Aleasing d.o.o., Vogo leasing d.o.o., Analožbe d.o.o., an associated company in Slovenia Abančna DZU Delniški Evropa and an associated company, KDSPV1 B.V., in the Netherlands, as well as a joint venture company, ASA Abanka leasing d.o.o., in Bosnia and Herzegovina.

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SERVICES OF THE BANK

Abanka is authorised to provide the following mutually recognised financial services in accordance with Article 10 of the Banking Act (ZBan-1):

SERVICE

YES or NO – not provided or NO – not provided yet

1. Acceptance of deposits; YES

2. Granting of loans, including:– consumer loans,– mortgage loans,– factoring, with or without recourse,– financing of commercial transactions (including forfeiting)

YESYESYESNO – not provided

4. Payment transaction services in accordance with the Payment Transactions Act (ZPlaP), excluding payment system management services;

YES

5. Issuance and management of payment instruments (e.g. credit cards and travellers’ cheques); YES

6. Issuance of guarantees and other commitments; YES

7. Trading for own account or for the account of customers in:– money market instruments, – foreign exchange, including currency exchange transactions, – financial futures and options, – exchange and interest-rate instruments, – transferable securities;

YESYESYESYESYESYES

8. Participation in the issuance of securities and services related to such issues; YES

9. Advice and services related to mergers and the purchase of undertakings; YES

11. Portfolio management and advice; YES

12. Safekeeping of securities and other services related to safekeeping of securities; YES

13. Credit reference services: collection, analysis and provision of information on the credit-worthiness of legal entities;

YES

14. Renting of safe deposit boxes; YES

15. Investment and ancillary investment services and operations. YES

Abanka is also authorised to provide the following other financial services under Article 11 of the Banking Act (ZBan-1):

SERVICE

YES or NO – not provided or NO – not provided yet

1. Insurance brokerage in accordance with the law governing the insurance business; YES

3. Pension fund management in accordance with the law governing pension and disability insurance; YES

4. Custodian services, in accordance with the law governing investment funds and management companies;

YES

6. Administrative services for investment funds. YES


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BANK PROFILE

ABOUT THE GROUP

Abanka Vipa d.d. is entered in the Companies Register kept by the District Court in Ljubljana under registration no. 1/02828/00.

Registered office: Slovenska cesta 58, 1517 LjubljanaTransaction account: SI56 0100 0000 0500 021 BIC code: ABANSI2XVAT identification no.: SI68297530 Registration no.: 5026024Share capital: EUR 30,045,067.60 Telephone: (+386 1) 47 18 100 Fax: (+386 1) 43 25 165 Website: http://www.abanka.si E-mail: [email protected]

In addition to Abanka Vipa d.d. (hereinafter: Abanka), as parent company, the Abanka Vipa Group (hereinafter: the Abanka Group) includes the following:– subsidiaries: Abančna DZU d.o.o., Afaktor d.o.o.,

Argolina d.o.o., Aleasing d.o.o., Vogo leasing d.o.o., Analožbe d.o.o.;

– associated companies: Abančna DZU Delniški Evropa and KDSPV1 B.V and

– joint venture company: ASA Abanka leasing d.o.o.

Abanka Group

KDSPV1 33.33%

Abančna DZU Delniški Evropa

29.48%

ASA Abanka leasing 49.00%

Argolina 100.00%

Abančna DZU 99.00%

Afaktor 100.00%

Aleasing 100.00%

Vogo leasing 100.00%

Analožbe 100.00%

Subsidiaries Associated companies Joint venture company

Structure as at 31 December, 2008

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The following table indicates the year the subsidiaries, associated companies and joint venture company were included in the Abanka Group, their activities

and Abanka's equity shareholding as at 31 December, 2008.

Activities of subsidiaries, associated companies and joint venture company

Subsidiaries

Abančna DZU d.o.o.

Abančna DZU, družba za upravljanje investicijskih skladov d.o.o. (short company name: Abančna DZU d.o.o.) was established in May 1994. The company is based in Ljubljana.

At the end of 2008, it was owned by:– Abanka Vipa d.d. - 99% and– Mateja Gubanec - 1%.

Abančna DZU d.o.o. engages in financial activities and manages investment funds pursuant to the Investment Trusts and Management Companies Act. It was granted a licence to manage investment funds by the Securities Market Agency on 27 October, 1994. Investment fund management activities comprise:– managing the assets of investment funds,– marketing investment funds, selling investment

vouchers or shares of investment funds, and– administrative services.

At the end of 2008, Abančna DZU d.o.o. was managing the following mutual funds:

– Abančna DZU DELNIŠKI AKTIVNI,– Abančna DZU DELNIŠKI SVET,– Abančna DZU DELNIŠKI EVROPA,– Abančna DZU DELNIŠKI AZIJA,– Abančna DZU DELNIŠKI ZDA,– Abančna DZU DELNIŠKI BALKAN,– Abančna DZU DELNIŠKI PASIVNI BALTINORD,– Abančna DZU MEŠANI,– Abančna DZU URAVNOTEŽENI, – Abančna DZU OBVEZNIŠKI and– Abančna DZU DENARNI EURO.

Abančna DZU’s 2008 financial year was one of the most demanding, since the financial crisis hit the financial sector first. The net value of all mutual funds managed by Abančna DZU as at 31 December, 2008 was EUR 69,197 thousand (cf. EUR 136,903 thousand at the end of 2007) and the company reported a loss of EUR 740 thousand (as opposed to a profit of EUR 1,095 thousand in 2007).

Abančna DZU developed an IT platform in 2008 to support management and enable more efficient monitoring of the performance of several mutual funds. It also expanded the implementation of its risk management system project. A portfolio was formed for a new mutual fund Abančna DZU DELNIŠKI BALKAN. In the area of marketing, the company focused on the expansion and training of the sales network, primarily in defining procedures arising from

CompanyBecame

shareholder in ActivityEquity

shareholding

Abančna DZU d.o.o. 1994 investment fund management 99.00%

Afaktor d.o.o. 2002 factoring 100.00%

Argolina d.o.o. 2003 project financing 100.00%

Aleasing d.o.o. 2003 leasing 100.00%

Vogo leasing d.o.o. 2005 leasing 100.00%

Analožbe d.o.o. 2006 investment management 100.00%

Abančna DZU Delniški Evropa 2006 mutual fund 29.48%

KDSPV1 B.V. 2006 investing in the KD Private Equity Fund 33.33%

ASA Abanka leasing d.o.o. 2007 leasing 49.00%


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the Prevention of Money Laundering and Terrorist Financing Act, promoting the sales of the new Abančna DZU DELNIŠKI BALKAN mutual fund and the development of new products. Towards the end of 2008 Abančna DZU opened its first advice point in Ljubljana, which represents a new sales channel.

The objective pursued by Abančna DZU is to become a broadly visible company, offering products with highly competitive returns and a varied product range catering for different investor segments. It strives to provide an innovative and uniquely structured range of banking, insurance and other investment products. The company’s strategic goals: achieving a competitive market position, improving capital strength, maintaining high quality services and, foremostly, gaining and keeping investor confidence. Abančna DZU will continue building its visibility in 2009 through the advice point, in-house workshops for investors and by taking a creative approach to institutional investors. The company will introduce umbrella funds and include new investments in mutual funds, so as to develop into a superior fund manager – a quality particularly valuable in the future when the economy will start to recover.

Afaktor d.o.o.

Afaktor, finančna družba za faktoring d.o.o. is a 100%-owned subsidiary of Abanka Vipa d.d. which is based in Ljubljana. In the second half of 2007 Afaktor became a member of Factors Chain International, the largest global network of factors. Afaktor was able thereafter to provide its clients with new exports factoring and offer the use of the two factor system.

The main activities of Afaktor d.o.o. Ljubljana:– factoring – sale of accounts receivable with or

without recourse,– financing commercial transactions and lending,– agency services in credit transactions.

In 2008, factoring as the core business represented 92.6% of total turnover and loans just 7.4%. In factoring turnover domestic and international operations accounted for 93.3% and 6.7% respectively.

In the first half of 2008 operations proceeded in line with expectations. In the second half, however, the onset of the financial crisis diminished bank credit activity and triggered an increase in demand for Afaktor’s services. On the other hand it also raised risk and payment default. Payment discipline deteriorated considerably which impacted the sale of accounts receivable and Afaktor had to partly reprogram, involving resetting of payment terms. The greatest payment problems were encountered in the construction and car industries. The second half of 2008 witnessed not only a decrease in economic growth but also a fall in interest rates which in turn reduced the company’s interest income.

In accordance with the strategy of expanding business in the markets of South Eastern Europe, Afaktor established a factoring company in Serbia, AFAKTOR-faktoring finansiranje d.o.o. Belgrade. It opened for business in early 2008. Due to the crisis Afaktor decided to temporarily halt any further expansion to South Eastern Europe and adapted its business to the crisis situation. The future strategy of the company is concentrated on funding micro, small and medium-sized companies in Slovenia and Serbia.

Argolina d.o.o.

Aleasing financiranje, svetovanje, trženje d.o.o. (short company name: Argolina d.o.o.) was established in July 2003 as co-investor in the construction of the business and residential complex Argolina at the site of the former Argo factory in Izola. Once the construction has been completed the company is designed to continue working as a building manager until another one is selected by new owners. The company's registered office is in Ljubljana.

The company was founded by three partners:– Abanka Vipa d.d. (25.1%),– MPM Engineering d.o.o. (49.9%) and– Relax d.o.o. (25.0%).

In June 2006, MPM Engineering d.o.o. sold its stake in Argolina d.o.o. to Abanka Vipa d.d increasing its share to 75% of the company. With a resolution at the General Meeting of Shareholders in May 2007, Relax d.o.o. was excluded from the company due

22


to a breach of Articles of Association. Initially, the stake of Relax was transferred to Argolina and in accordance with the law three months later, it was acquired by Abanka Vipa d.d. Thus Argolina became its 100%-owned subsidiary.

The future business of Argolina depends to a great extent on the court's decision on a building permit and the development plans of the Municipality of Izola.

Aleasing d.o.o.

Aleasing financiranje, svetovanje, trženje d.o.o. opened for business on 11 February, 2000, based in Slovenj Gradec. At the time, it operated in the Slovene market under the name Eurofin Leasing. When Abanka Vipa became the majority owner, Eurofin Leasing was renamed Aleasing on 1 April, 2004. The registered office was moved in May 2007 from Slovenj Gradec to Celje. This 100%-owned subsidiary of Abanka Vipa is mainly a financial leasing company.

The following table shows its core business:

VEHICLES EQUIPMENTREAL

PROPERTY

FINANCIAL LEASING

yes yes yes

OPERATIONAL LEASING

yes no no

Aleasing actively markets financial leasing of real property and movables to corporate and retail clients. It also offers operating leasing of vehicles to corporate clients. In addition to that its range includes project financing and own property development for sale.

The milestones and major achievements of Aleasing in 2008 include: – completion of the construction and sale of office/

residential buildings in Maribor and Ljubljana; – beginning of the construction of a residential building

in Jesenice; – consolidation of the company’s position in the real

property market as an investor and provider of investment leasing;

– establishment of Aleasing on the second-hand vehicle market in North East Slovenia.

The corporate policy of Aleasing is based on its development strategy founded on growth,

development, streamlining and the search for synergies within the Abanka Group. The company has a well-defined corporate responsibility. It focuses on creating and constantly upgrading a comprehensive range of services to the satisfaction of its clients and business partners. Aleasing aims to: – increase the scale of investment and market share;– upgrade a risk management system in all operational

phases;– make the company more visible in the Slovene

leasing market;– control operating costs;– ensure returns on equity in line with the guidelines of

Abanka Vipa d.d.;– become a customer-centred leasing company;– train employees to enhance their competence and

professionalism;– actively consolidate the values of the Abanka Group;– maintain a creative and stimulating working

environment; – provide stabile funding for the company’s business

and optimise the placement of funds.

In 2008 Aleasing’s total assets decreased by 1%. Its market share was 0.9% and it posted EUR 29 thousand in profit after tax.

After the conclusion of the 2008 financial year the Management Board of Abanka passed a decision on the merger of Vogo leasing d.o.o. and Aleasing d.o.o.

Vogo leasing d.o.o.

Vogo leasing d.o.o. was founded in June 1990 and registered in Šempeter pri Gorici. The company covers the regions of Primorska, Notranjska, greater Ljubljana and Gorenjska. Its core business is the leasing of various equipment, vehicles and real property.

The company’s main lines of business are: – leasing services for all types of new and used

vehicles;– leasing services for new and used equipment

(machinery, mechanical equipment etc.);– sale-and-leaseback of movables for corporate

clients;– real-estate leasing services (office and shop

premises and residential premises) to corporate clients.


23


In 2008 Vogo leasing operated solely on the Slovene market. Its business and performance were marked by the following: illiquidity of clients and leasing companies; changed terms of financing, and repossession of vehicles and equipment due to default. In total leasing contracts, movables account for 40.2%, personal and business use vehicles 48.6%, manufacturing equipment with machinery 7.6% and others 3.6%. At the year’s end Vogo leasing controlled 1% of the market.

In 2008 the company posted a profit of EUR 139 thousand.

Družba Analožbe d.o.o.

Analožbe, upravljanje z naložbami d.o.o. (short company name: Analožbe d.o.o.) was founded in October 2006 by Abanka Vipa d.d. as its sole stakeholder. The company has its registered office in Nova Gorica.

The company offers investment management services, i.e. according to classification the main activity of other financial agency services. In 2008 Analožbe was active in domestic and foreign markets. It continued long-term crediting of foreign investment institutions and buying shares of Vipa Holding with the aim of reselling.

After the balance sheet date the Management Board of Abanka as the parent company passed a decision on appointing new management to Analožbe as of January 2009 together with an advisory committee and supervisory team. Mr. Tone Pekolj was appointed director and Mr. Jure Poljšak was given power of procuration.

Profits earned in 2008 amounted to EUR 22 thousand.

Associated companies

Abančna DZU Delniški Evropa mutual fund

In 2008 Delniški Evropa Vipa Invest mutual fund was renamed Abančna DZU Delniški Evropa. On 31 December, 2008 Abanka had 883,373 units in Abančna DZU Delniški Evropa accounting for 29.5%. The fund is managed by Abančna DZU, a company controlled by Abanka.

KDSPV1

Alavits B.V. is a company established in the Netherlands with the purpose of investing in KD Private Equity Fund B.V. In October, 2007 it was renamed KDSPV1 B.V.

Joint venture company

ASA Abanka leasing d.o.o.

On 18 May, 2007, Abanka signed a letter of intent in Sarajevo with ASA Holding d.o.o. Sarajevo on the establishment of ASA ABANKA LEASING d.o.o. Sarajevo. On this basis Abanka invested in ASA Abanka Leasing d.o.o. and became its 49% owner. The company’s registered office is in Sarajevo and it has branches in Mostar, Tuzla and Banja Luka. The bulk of the operations is leasing of personal vehicles and real property, and financial leasing in general.

24


VISION AND MISSION OF ABANKA

MAJOR BUSINESS EVENTS IN 2008 AND 2009

Abanka is a provider of quality banking services in Slovenia. It is one of the three largest banks in Slovenia, and is a recognized banking partner in south-eastern Europe.

Abanka:– builds long-term partnership relations with its clients,– always maintains high-quality services,– provides investment security to its clients,– through high returns and a positive image ensures

long-term shareholder satisfaction,– ensures the long-term development, safety and

satisfaction of its employees.

Abanka pursues its vision in relations with clients, shareholders and employees. Above-average returns, quality services and positive image guarantee satisfaction and create confidence in the realisation of business objectives.

Abanka recognises the importance of responsible community involvement. Therefore, it transmits its high business values to the wider society in which it operates.

Major business events in 2008

The year 2008 witnessed the following major business events that had an impact on the operations of Abanka: – reorganisation

- in early 2008 the Bank was reorganised; – Basel II:

- in January, the new regulatory capital regime became effective;

– conclusion of a syndicated loan agreement: - in January, a syndicated loan agreement was

signed in Vienna, raising funds from Asian markets; - the loan amounts to USD 55 million;

– new share issue: - 1,700,000 shares with designation ABKN were

issued, worth EUR 102 million; – SEPA project:

- credit payments within SEPA started in January; – share capital increase:

- share capital was raised by over EUR 7 million;– rating by Fitch Ratings:

- in March, Fitch Ratings, an international ratings agency, published its new rating report on Abanka, reconfirming the existing long-term credit rating of BBB and short-term of F3;

- the assigned outlook was again stable; – mandating a syndicated loan:

- in March, Abanka mandated the arrangement of a syndicated loan of EUR 100 million;

– signing the Syndicated Loan Agreement:- in April, an agreement was signed with a

consortium of foreign banks on raising an international syndicated loan of EUR 165 million;

– signing an agreement with the European Bank for Reconstruction and Development:- in April, Abanka and the European Bank for

Reconstruction and Development signed a


25


contract guaranteeing loans in the amount of EUR 10 million to finance small municipalities, municipal enterprises, and private companies providing public utility services;

– rating by Moody’s Investors Service:- in August, Moody’s Investors Service, an

international ratings agency, published its new rating report on Abanka, reconfirming the existing long-term deposit rating of A3 and short-term of P-2;

- bank financial strength rating remained D+ and a stable outlook was maintained;

– rating by Capital Intelligence:- in August, Capital Intelligence, an international

ratings agency, published its new rating report on Abanka, reaffirming the existing ratings: long-term foreign currency rating at BBB; short-term foreign currency rating at A2, financial strength at BBB with a stable outlook;

– Statement of Compliance with the Corporate Governance Code:- in October, Abanka published a Statement of

Compliance with the Corporate Governance Code, by which the Management and Supervisory Boards of Abanka state that in their work they comply with the Code with certain derogations from the provisions (disclosed in the this Annual Report);

– listing of the shares with designation ABKN on the stock exchange: - on 27 October, 2008 Abanka shares were listed

on the regulated market – standard market subsegment;

– Financial Budget and Corporate Policy of Abanka for 2009: - in December 2008, Abanka’s Supervisory Board

approved the Financial Budget and Corporate Policy of Abanka for 2009.

Major business events in 2009

No events occurred after the balance sheet date which would materially affect the presented financial statements.

The Abanka Group’s achievements in 2008

The Abanka Group’s financial highlights of 2008: – total assets: EUR 3,910,996 thousand – total assets growth: 11.2%– total equity: EUR 336,756 thousand– profit after tax: EUR 20,398 thousand– ROE after tax: 5.9%.

Abanka’s achievements in 2008

Abanka’s financial highlights of 2008: – total assets: EUR 3,823,336 thousand – total assets growth: 11.2%– market share: 8.0%– total equity: EUR 339,458 thousand– profit after tax: EUR 22,233 thousand– ROE after tax: 6.3%– capital adequacy ratio: 12.6%– share book value: EUR 47.21– number of employees at the year’s end: 878– average number of employees during the year: 874.

26


ECONOMIC AND BANKING ENVIRONMENT IN 2008 AND OUTLOOK FOR 2009

3 Gross Domestic Product, 4th Quarter 2008. Ljubljana: Statistical Office of the Republic of Slovenia, March 2009.

4 Monthly Bulletin of Bank of Slovenia, February 2009. Ljubljana: Bank of Slovenia, March 2009.

1 Slovenian Economic Mirror, February 2009. Ljubljana: IMAD, March 2009.

2 Slovenian Economic Mirror, December 2008. Ljubljana: IMAD, January 2009.

Economic environment in 2008

Notably lower growth rates of merchandise exports, of the volume of industrial production in manufacturing, values of completed construction and real turnover in retail trade in Slovenia indicated a considerable deceleration of economic activity in the last quarter of 2008.1 Oil prices were on the increase by mid July 2008 when they reached record highs (the price per barrel of Brent crude went as high as USD 143.70), but then they started plummeting and by the end of December dropped below USD 40.0 per barrel.2

According to the Statistical Office of the Republic of Slovenia in 2008 gross domestic product (GDP) in Slovenia increased by 3.5% in real terms in 2008. Following a high growth rate of 5.6% in the first half of 2008, economic growth in the third quarter dropped

to 3.9% and was even negative in the last quarter of the year. On a year-on-year basis GDP in the last quarter of 2008 decreased in real terms by 0.8%. Exports of merchandise dropped in real terms by 9.4%, being the main driver of negative economic growth in the last quarter of the year. This negative trend, however, was not fully reflected in employment growth rate, which at the end of the year was still positive. In 2008 employment rate grew by 2.9%, almost the same as in 2007 when it increased by 3%.3

According to the first estimates, in the last quarter of 2008 leading economies experienced negative economic growth rates on a year-on-year basis: -1.2% in the euro area, -0.8% in the USA and -4.6% in Japan. In 2008 economic growth of major economies seriously decreased: by 0.7% in the euro area and by 1.1% respectively in the USA.4

MAJOR MACROECONOMIC INDICATORS2004 2005 2006 2007 2008

GDP growth, % 4.3 4.3 5.9 6.8 3.5*

GDP, EUR million (current prices, current exchange rates)

27,162 28,704 31,013 34,471 37.126*

GDP per capita, EUR (current prices, current exchange rates)

13,599 14,346 15,446 17,076 18.196*

Unemployment (ILO methodology), % 6.3 6.5 6.0 4.9 4.6**

Labour productivity, % 4.0 4.5 4.2 3.7 1.3**

Inflation (year-end), % 3.2 2.3 2.8 5.6 2.1

Inflation (average), % 3.6 2.5 2.5 3.6 5.7

Note: *estimationNote: ** forecastSource: Slovenian Economic Mirror, February 2009. Ljubljana: IMAD, March 2009, and Statistical Office of the Republic of Slovenia


27


0%

1%

2%

3%

4%

5%

6%

2004 2005 2006 2007 2008

3.2%

2.3%

2.8%

5.6%

2.1%

Source: Statistical Office of the Republic of Slovenia

CUMULATIVE INFLATION IN THE 2004-2008 PERIOD

Economic growth rates in the 2004-2008 period.

Note: *estimationSource: Statistical Office of the Republic of Slovenia

In 2008 inflation in Slovenia stood at 2.1% slowing faster than in the euro area. In the second half of the year, year-on-year growth of the harmonised index of consumer prices dropped from 6.9% in July to 1.8% in December, while at the level of total euro area it dropped from 4.0% to 1.6% in the same period.5 Lower inflation in the second half of 2008 resulted primarily from lower energy prices.6

Financial Markets and Banking Environment

The ongoing global financial and economic crisis that emerged out of the severe reduction in global liquidity which commenced in the middle of 2007 (often referred to as the “Credit Crunch”) has resulted in, among other things, a lower level of capital market funding, lower liquidity levels across the banking sector and wider economy, and, at times, higher interbank lending rates and very high volatility in stock and currency markets. The uncertainties in the global financial markets have also led to failures of banks and other corporates, and to bank rescues in the United States of America, Western Europe, Russia and elsewhere. The full extent of the impact of the ongoing global financial and economic crisis is proving to be difficult to anticipate or completely guard against. Management is unable to reliably determine the effects on the Group's future financial position of any further deterioration in the Group’s operating environment as a result of the ongoing crisis. Management believes it is taking all the necessary measures to support the sustainability and growth of the Group’s business in the current circumstances.

Outlook for 2009

It is forecast that in 2009 economic growth will slow considerably. Due to increasingly tough lending conditions, construction investments and investment in machinery and equipment are expected to fall in particular. Given the global downturn in economic growth, exports and personal consumption growth will continue to slow down. The expected increase in unemployment will weaken the effect of higher real income per household caused by moderate inflation, as a consequence of lower oil prices and other raw materials as well as by slowdown in economic activity.7

5 Slovenian Economic Mirror, January 2009. Ljubljana: IMAD, February 2009.

6 Monthly Bulletin, January 2009. Ljubljana: Bank of Slovenia, February 2009.

7 Updated Autumn Forecast of Economic Trends from 2008 to 2010. Ljubljana: IMAD, December 2008.

3%

4%

5%

6%

7%

8%

2004 2005 2006 2007 2008

4.3% 4.3%

5.9%

6.8%

3.5%*

Note: *estimationSource: Slovenian Economic Mirror, January 2009, IMAD, Ljubljana, February 2009

GROSS DOMESTIC PRODUCT REAL GROWTH RATES IN THE 2004-2008 PERIOD

28


The consolidated financial statements of the Abanka Group for 2008 consolidate Abanka and its subsidiaries Argolina, Abančna DZU, Afaktor, Aleasing, Vogo leasing and Analožbe. The participation in the associate KDSPV1 (former Alavits) and the joint venture ASA Abanka leasing are also consolidated under the equity method. The assets in the associated company Abančna DZU Delniški Evropa (former Delniški Evropa Vipa Invest) are recognised at fair value through profit or loss and not consolidated under the equity method. The fund does not prepare financial statements in accordance with IFRS, but according to Slovene Accounting Standards.

The consolidated financial statements for 2007 included the subsidiaries Argolina, Abančna DZU, Afaktor, Aleasing, Vogo leasing and Analožbe alongside Abanka as the parent bank. The holdings in the associate KDSPV1 (former Alavits) and the joint venture ASA Abanka leasing were consolidated under the equity method. The stake in the associated company Abančna DZU Delniški Evropa (former Delniški Evropa Vipa Invest) was measured at fair value through profit or loss and therefore not consolidated under the equity method. The fund does not prepare financial statements in accordance with IFRS, but applies Slovene Accounting Standards instead.

In 2008, the Abanka Group generated a profit before tax of EUR 26,042 thousand. Consolidated profit after tax in 2008 was EUR 20,398 thousand and 44.6% below the level reported for 2007. Abanka alone reported EUR 27,581 thousand in profit before tax and a return on equity of 7.8%. The Bank’s profit after tax in 2008 totalled EUR 22,233 thousand, which was 39.2% less than the year before. Abanka posted a return on equity after tax of 6.3%.

The Abanka Group in 2008 recorded interest income of EUR 213,801 thousand in 2008, up 33.9% on the previous year. The Group’s interest expenses amounted to EUR 135,015 thousand or 46.0% more than in 2007. The Abanka Group’s interest margin was thus EUR 78,786 thousand or 17.3% above the amount reported for 2007. Interest income of Abanka in 2008 was EUR 207,857 thousand, an increase of 32.2% over the previous year, whilst interest expenses totalled EUR 131,101 thousand and were 43.8% higher than those incurred in 2007. Abanka’s interest margin amounted to EUR 76,756 thousand, exceeding the 2007 level by 16.2%.

For 2008 the Abanka Group posted EUR 31,821 thousand in net fees and commissions or 4.8% lower than the year before. Abanka contributed EUR 29,993 thousand to this result which was 4.7% less than in 2007.

Other net non-interest income (excluding net fees and commissions) of the Abanka Group in 2008 were negative, EUR 10,502 thousand. Also out of this Abanka posted a negative figure of EUR 11,120 thousand due to financial market conditions (as opposed to 2007 when it earned EUR 12,962 thousand in other net non-interest income).

The Abanka Group’s operating costs totalled EUR 59,368 thousand in 2008 and were as much as 3.7% higher compared to 2007. Labour costs of EUR 31,092 thousand were 5.9% higher than the year before and general and administrative expenses went up by 0.9%, reaching EUR 21,419 thousand. Depreciation expenses amounted to EUR 6,857 thousand, having exceeded the 2007 level by 3.0%.

PERFORMANCE AS VIEWED THROUGH THE INCOME STATEMENT

FINANCIAL RESULTS OF THE GROUP


29


PERFORMANCE AS VIEWED THROUGH THE BALANCE SHEET

The operating costs of Abanka in 2008 were EUR 54,666 thousand in total and 3.8% higher than the year before. Compared to 2007 labour costs were 4.5% higher and totalled EUR 28,712 thousand, whereas general and administrative expenses equalled EUR 19,860 thousand and were 3.1% above the amount reported for 2007. The Bank’s depreciation expenses of EUR 6,094 thousand were 2.7% higher compared to 2007. Labour costs in 2008 accounted for the largest proportion of operating costs (52.5%), followed by general and administrative expenses (36.3%) and depreciation expenses (11.1%).

In 2008 the Abanka Group incurred EUR 14,695 thousand of net provision and impairment expenses – net provision income reached EUR 8,588 thousand and impairment expenses EUR 23,283 thousand. Abanka alone had net provisions of EUR 8,620 thousand in 2008 (as opposed to 2007 when it had net provision expenses of EUR 273 thousand), whereas its net impairment totalled EUR 22,002 thousand in 2008 (compared to EUR 10,866 thousand the year before).

-60,000

-40,000

-20,000

0

20,000

40,000

60,000

80,000

net interest

net fees andcommission

operatingcosts

netprovisions

net impairment expenses

66,066

29,993

-54,666-52,674

31,456

8,620

-10,866

-22,002

-273

NET INTEREST, NET FEES AND COMMISSION, OPERATING COSTS AND NET PROVISIONS AND NET IMPAIRMENT EXPENSES, 2008 AND 2007

76,756

EU

R th

ousa

nd

2008

2007

The consolidated balance sheet total as at 31 December, 2008 amounted to EUR 3,910,996 thousand, which was EUR 393,922 thousand or 11.2% above the level posted at the end of 2007. Combined balance sheet assets of consolidated companies, which equalled EUR 196,384 thousand, accounted for 5.0% of consolidated total assets (cf. 5.7% in 2007). After elimination of inter-company transactions, consolidated total assets exceeded Abanka’s total assets by 2.3% or EUR 87,660 thousand.

The Balance sheet total of Abanka at the end of 2008 stood at EUR 3,823,336 thousand, having increased over the previous year’s end by EUR 384,329 thousand or 11.2%. The market share of Abanka as at 31 December, 2008 was 8.0%, which again made it the third strongest player in the Slovene banking industry.

Loans to non-bank customers accounted for the largest proportion of consolidated balance sheet assets, amounting to EUR 2,773,794 thousand at the end of 2008, or 70.9% of the total. This lending was up 16.3% on the year earlier. As at 31 December, 2008 Abanka’s loans to non-bank customers totalled EUR 2,736,680 thousand and accounted for 71.6% of its total balance sheet assets. Compared to 2007 this represented a 15.7% growth or EUR 371,623 thousand in nominal terms. This nominal increase was the result of more loans to domestic and foreign corporate clients and sole proprietors, who with a share of 75.9% represented the largest portion of lending to non-bank customers, followed by the public sector with 8.6% and domestic and foreign retail clients with 15.5%.

Deposits and loans to banks by the Abanka Group totalled EUR 510,935 thousand and represented 13.1% of consolidated balance sheet assets. Compared to 2007 they increased by 72.2%. Deposits and loans to banks by Abanka amounted to EUR 503,863 thousand at the end of 2008 and accounted for 13.2% of total balance sheet assets, after having increased by 73.5% since the end of 2007. This growth came largely as a result of higher deposits held at the central bank as well as higher deposits and lending to banks. Cash and balances

30


at the central bank increased from EUR 60,456 thousand at the end of 2007 to EUR 229,417 thousand one year later (overnight deposits rose from EUR 7,001 thousand at the end of 2007 to EUR 170,009 thousand at the end of 2008). In the same period deposits and lending to banks grew from EUR 230,037 thousand to EUR 274,446 thousand.

Investments in securities by the Abanka Group as at 31 December, 2008 amounted to EUR 510,456 thousand, after having fallen by 27.8% or EUR 197,013 thousand compared to the year before. Their share in consolidated balance sheet assets decreased from 20.1% at the end of 2007 to 13.1% one year later. At the end of 2008, investments in securities by Abanka totalled EUR 508,975 thousand and accounted for 13.3% of balance sheet assets. Compared to the end of 2007 they dropped by EUR 195,493 thousand or 27.8%. Equity securities equalled EUR 46,280 thousand or 9.1% of total investments in securities, having decreased by 34.9% or EUR 24,817 thousand in nominal terms compared to one year before. Debt securities amounted to EUR 462,695 thousand and were 26.9% or EUR 170,676 thousand lower in comparison with the end of 2007.

Equity investments in subsidiaries, associated companies and the joint venture company at the end of 2008 totalled EUR 9,205 thousand and accounted for 0.2% of total assets. Over the reporting year equity investment in the associated company KDSPV1 B.V. was increased by EUR 14 thousand.

The graph below shows the structure of Abanka’s assets as at the end of 2008 and 2007.

As at 31 December, 2008 consolidated balance sheet liabilities were composed of 91.4% liabilities (EUR 3,574,240 thousand) and 8.6% of total equity (EUR 336,756 thousand). On the balance sheet date balance sheet liabilities of the Bank were made up of 91.1% of liabilities (EUR 3,483,878 thousand) and 8.9% of total equity (EUR 339,458 thousand).

Deposits from non-bank customers of the Abanka Group represented the bulk of total liabilities. In 2008 these increased by 11.2% or EUR 193,838 thousand to reach EUR 1,918,527 thousand. At the end of 2008 deposits from non-bank customers of Abanka

0%

10%

20%

30%

40%

50%

60%

70%

loans tonon-bankcustomers

deposits and loans to banks

investmentsin securities

other

13.2 13.3

ASSET STRUCTURE AS AT 31 DEC., 2008 AND 31 DEC., 2007

71.6

31 Dec., 2008

31 Dec., 2007

68.8

8.4

20.5

1.9 2.3


31


totalled EUR 1,929,650 thousand and also increased by 11.2% or EUR 193,873 thousand over the end of 2007 - deposits by the public sector grew by 16.4%, retail deposits by 10.6%, deposits by domestic and foreign corporate clients and sole proprietors by 7.9%. In total deposits from non-bank customers the largest part was accounted for by domestic and foreign retail clients (52.2%), followed by domestic and foreign corporate clients and sole proprietors (24.9%) in second place and deposits by the public sector in third place (22.9%).

Financial liabilities to banks of the Abanka Group amounted to EUR 1,298,218 thousand at the end of 2008, which was 12.3% more than the year before. Financial liabilities to banks of Abanka at the end of 2008 totalled EUR 1,227,600 thousand and were 11.1% higher on the previous year, however their proportion in total liabilities remained 32.1%, the same as in 2007.

Securities in issue of the Abanka Group equal those of Abanka. In 2008 they rose by 49.7% and by the end of the year reached EUR 282,321 thousand. Subordinated liabilities amounted to EUR 160,451 thousand after an increase of EUR 106,690 thousand during 2008, whilst debt securities decreased by EUR 12,902 thousand down to EUR 121,870 thousand. At the end of 2008 securities in issue represented 7.4% of total liabilities, having increased from 5.5% at the end of 2007.

Total equity of the Abanka Group at the end of the reporting year dropped by 4.7% compared to 2007 down to EUR 336,756 thousand. Total equity of Abanka at the end of 2008 amounted to EUR 339,458 thousand, which was 3.9% less than the year before. This decrease was primarily due to the transfer of the innovative instrument at the end of 2007, amounting to EUR 117,539 thousand, from the

equity component to liabilities. In 2008 EUR 102,000 thousand of additional capital was raised and as a result basic equity increased by EUR 7,094 thousand and capital reserves grew by EUR 94,906 thousand. Reserves from profit also rose because part of the profits earned in 2007 was, as decided by the General Meeting of Shareholders, allocated to other reserves from profit. In accordance with the Bank’s Management Board decision 25.8% of profit for the year of EUR 22,233 was allocated to other capital items and for servicing the innovative instrument.

The graph below shows the structure of Abanka’s liabilities as at the end of 2008 and 2007.

0%

10%

20%

30%

40%

50%

60%

70%

depositsfrom non-bank

customers

financialliabilitiesto banks

securitiesin issue

othertotal equity

32.1 32.1

5.5

STRUCTURE OF LIABILITIES AS AT 31 DEC., 2008 AND 31 DEC., 2007

50.5

31 Dec., 2008

31 Dec., 2007

50.5

7.4

1.2 1.6

8.910.3

32


PERFORMANCE OF THE GROUP IN 2008 Corporate banking

Corporate banking covers banking operations with domestic and foreign corporates, the public sector and sole proprietors.

The financial crisis which started in mid 2007 in the USA developed into a global financial crisis that was to a large extent felt in Slovenia only in 2008. The second half of 2008 saw the scarcity of funding available abroad and it became more expensive. After several years of declining interest rates the trend reversed back in 2007. At first the main reason was growing EURIBOR margins and others soon followed. Then, in autumn 2008, interest rates started growing even faster as the financial crisis deepened. Lending grew on a conservative basis in 2008 and was conditioned primarily by other banking business, with the focus on small and medium-sized companies. Abanka reduced funding of financial investments and large projects in real property mostly. Nevertheless, Abanka did increase the volume of operations by providing excellent quality-of-service and employing an active commercial approach, primarily based on cross-selling of all products on offer from the Bank and its subsidiaries. It upgraded technology with an emphasis on complex services for corporate clients and e-banking. Expansion to the markets of (South) East Europe was minimised by a selective approach and higher prices. In credit granting attention was paid to improving the quality of placements and obtaining adequate collateral in line with the Decision on Credit Protection. The currency structure at the end of 2008 was the same as that a year earlier, with foreign currency loans accounting for little more than 1%. The maturity structure of corporate lending in 2008 changed so that the share of short-term loans grew by 7.7 percentage points and reached 56.4% by the end of the year.

Loans to corporate clients of the Abanka Group at the end of 2008 amounted to EUR 2,322,421 thousand. Abanka’s loans to corporate clients at the end of 2008 amounted to EUR 2,312,771, after having increased by EUR 322,798 thousand or 16.2% at the end of the previous year. The market share of the loans to corporate clients decreased from 8.9% at the end of 2007 to 8.7% at the end of 2008. The share of loans to corporate clients in total assets

increased from 57.9% at the end of 2007 to 60.5% at the end of 2008.

As regards small and medium-sized companies Abanka was extremely active in 2008 and made a series of different offers for this segment. Together with SID, the Slovene Export and Development Bank, and EBRD, the European Bank for Reconstruction and Development, we greatly increased credit lines available to SMEs and municipalities. However, loans to SMEs grew slower than total corporate loans, as several small companies grew into large ones and the Abanka Group subsidiaries decreased their funding relatively. Abanka’s focus on the SME segment was additionally promoted in 2008 with media campaigns for individual offers and expert meetings were organised for clients.

Loans to corporate clients in 2008 increased by 14.6% or EUR 236,649 thousand, loans to the public sector grew by 36.6% or EUR 63,012 thousand, loans to foreign corporate clients went up by 11.1% or EUR 18,859 thousand and loans to sole proprietors was 14.6% higher or EUR 4,278 thousand.

The graph below shows the maturity structure of Abanka’s corporate loans at the end of 2008 and 2007.

0

400,000

800,000

1,200,000

1,600,000

2,000,000

2,400,000

CORPORATE LOANS

long-term loans

short-term loans

EU

R th

ousa

nd

31 Dec., 2008 31 Dec., 2007

1,009,290

1,303,481

1,021,194

968,779


33


Guarantees stood at EUR 422,942 thousand at the end of 2008, up 7.6% on a year earlier. Service guarantees increased by 18.4%, whilst financial guarantees declined by 23.3%, which meant that the proportion of service guarantees was 81.5% in total guarantees compared to 74.1% at the end of 2007.

In 2008 raising primary sources of funds was among our priority activities. Deposits by corporate clients in the Abanka Group stood at EUR 910,884 thousand at the end of 2008. Deposits by corporate clients stood at EUR 922,007 thousand at the end of 2008 in Abanka, which represents an annual growth of 11.8%. The market share of the deposits by corporate clients increased from 11.7% at the end of 2007 to 12.6% at the end of 2008. Deposits from the corporate sector increased by 9.0% or EUR 37,894 thousand in nominal terms while public sector deposits grew by 16.4% or EUR 62,137 thousand and sole proprietors’ deposits went up by 3.3% or EUR 620 thousand during 2008. Deposits by foreign corporate clients dropped by 53.0% or nominally by EUR 3,363

thousand. In total balance sheet liabilities the share of deposits by corporate clients by the end of 2008 increased to 24.1% from 24.0% one year earlier. Their currency structure changed slightly (1.6% of the total was in foreign currencies at the year’s end), but their maturity structure remained practically the same (92.6% was short-term deposits) in 2008.

0

100,000

200,000

300,000

400,000

500,000

GUARANTEES FOR CORPORATE CLIENTS

service guarantees

financial guarantees

EU

R th

ousa

nd

31 Dec., 2008 31 Dec., 2007

344,834

78,108

291,239

101,794

0

150,000

300,000

450,000

600,000

750,000

900,000

DEPOSITS BY CORPORATE CLIENTS

long-term deposits

short-term deposits

EU

R th

ousa

nd

31 Dec., 2008 31 Dec., 2007

68,347

853,66059,229

765,490

34


Retail banking comprises operations with domestic and foreign individuals.

In 2008 the development policy was derived from a corporate strategy and business orientation based on growth, development, streamlining of operations and modernisation. Following the reorganisation of the Bank in early 2008 a Retail Coordination Department was set up to coordinate the business of all regional offices and branches, rationalise work processes in the branch network and coordinate all the activities required for good performance and the implementation of Abanka’s mission and vision.

With a new and more corporate concept of advertising, Abanka gained greater visibility on the market and drew the public’s attention to its constant effort to improve the quality and security of its services, through which it forges long-term partnership relations with its clients. In order to take our operations closer to our clients we expanded our branch network by adding a new outlet designed on modern concepts towards the end of 2008 in the Mercator shopping mall along Šmartinska Street in Ljubljana.

Information of the offerings of Abanka aimed at facilitating business decisions are available to existing and potential clients from the www.abanka.si internet portal, the toll-free Abafon 080 1 360 number and the e-mail address [email protected], provided by various departments of the Bank. In order to better receive requirements of our clients a unified system of complaint management was introduced for all bank divisions. We concentrated on upgrading the functionalities of existing electronic sales channels (approval of regular or extraordinary draft facility through ABANET online bank) and providing greater security in the performance and viewing of transactions.

Loans to retail clients by the Abanka Group at the end of 2008 totalled EUR 451,373 thousand. At the end of 2008 loans to retail customers by Abanka totalled EUR 423,909 thousand, of which the majority was loans to domestic retail clients and loans to foreign retail clients amounted to no more that EUR 870 thousand. Loans to retail clients were up 13.0%, but its proportion in balance sheet total assets

remained practically unchanged and represented 11.1% at the end of 2008. The market share of loans to retail clients decreased from 6.6% at the end of 2007 to 6.4% at the end of 2008.

The graph below shows the maturity structure of Abanka’s loans to retail clients at the end of 2008 and 2007.

The maturity structure of loans to retail clients experienced minor changes in 2008 as short-term loans at the end of 2008 accounted for 11.4%. Only 3.4% of all total retail lending was in foreign currencies.

Due to the situation in financial markets Abanka geared its sales and marketing activities towards the collection of deposits. As at 31 December, 2008 deposits by retail clients in the Abanka Group and in Abanka were EUR 1,007,643 thousand in total, of which EUR 51,222 thousand were from foreign retail clients. In 2008 deposits by retail clients grew by 10.6%, with domestic and foreign clients contributions by 10.7% (EUR 92,820 thousand) and 7.9% (EUR 3,765 thousand) respectively. Deposits by

Retail banking

0

100,000

200,000

300,000

400,000

500,000

LOANS TO RETAIL CLIENTS

long-term loans

short-term loans

EU

R th

ousa

nd

31 Dec., 2008 31 Dec., 2007

375,400

48,509

329,976

45,108


35


Operations with other banks0

100,000

200,000

300,000

400,000

500,000

LOANS TO RETAIL CLIENTS

long-term loans

short-term loans

EU

R th

ousa

nd

31 Dec., 2008 31 Dec., 2007

375,400

48,509

329,976

45,108

retail clients in total balance sheet liabilities at the end of 2008 accounted for 26.4% (26.5% at 2007 year end). Their currency structure only changed slightly, as domestic client deposits in the domestic currency increased from 95.9% at the end of 2007 to 96.5% one year later. The maturity structure of deposits by retail clients was also somewhat different: short-term

deposits grew to 87.6% of the total by the end of the reporting year. The market share of deposits by retail clients increased from 7.4% at the end of 2007 to 7.6% at the end of 2008.

The graph below shows the account structure as at 31 December, 2008.

Amid fierce conditions on financial markets in the second half of 2008 Abanka adopted a series of measures for its money market operations and securities trading.

Loans and receivables to banks and cash and balances with central bank of the Abanka Group amounted to EUR 510,935 thousand at the end of 2008, whilst those of Abanka alone totalled EUR 503,863 thousand, up by 73.5% or EUR 213,370 thousand compared to the end of 2007. This was predominantly due to higher balances at the central bank, whereas loans to banks increased by 19.3%. The share of loans and receivables to banks in the total balance sheet account rose from 6.7% at the end of 2007 to 7.2% one year later.

18% savings accounts

1% foreign currency deposits

15% domestic currency deposits

66% personal accounts

ACCOUNT STRUCTURE

18% savings accounts

1% foreign currency deposits

15% domestic currency deposits

66% personal accounts

ACCOUNT STRUCTURE

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

550,000

LOANS AND RECEIVABLES TO BANKS AND ABANKA'S BALANCES AT THE CENTRAL BANK SLOVENIA

loans and receivables to banks

EU

R th

ousa

nd

31 Dec., 2008 31 Dec., 2007

274,446

229,417

230,037

60,456

cash and balances at the central bank

36


Despite extremely tough conditions on international financial markets in 2008, Abanka successfully completed some major transactions with different foreign bank consortia. In mid January Abanka, as the first bank from Slovenia, signed a syndicated loan agreement with a foreign-bank consortium raising USD 55 million on the Asian market. It signed another international syndicated loan agreement in April, obtaining EUR 165 million and in late September issued a note Schuldschein worth EUR 43 million.

At the end of 2008, financial liabilities to banks of the Abanka Group totalled EUR 1,298,218 thousand and those of Abanka EUR 1,227,600 thousand. The latter were 11.1% or EUR 122,432 thousand higher compared to the end of 2007. Despite nominal growth, the share of financial liabilities to other banks in total balance sheet liabilities remained 32.1% at the end of 2008. Short-term financial liabilities to other banks in the reporting year decreased by EUR 16,793 thousand or 7.4%, whilst long-term ones increased by EUR 139,225 thousand or 15.8%. As a result long-term financial liabilities to other banks in total liabilities grew from 79.6% at the end of 2007 to 83.0% one year later.

At the end of 2008, the value of Abanka Group investments in securities was EUR 510,456 thousand and exceeded that of Abanka by EUR 1,481 thousand (investments in securities of Abančna DZU and Analožba amounted to EUR 1,447 thousand and EUR 34 thousand respectively). At the end of 2008 investments in securities of Abanka stood at EUR 508,975 thousand and were 27.8% lower compared to the end of 2007. Taking into account the increase in total balance sheet assets they accounted for 13.3%, which is less than the 20.5% recorded at the end of 2007. The securities portfolio included both equity and debt securities.

In 2008 equity securities held by Abanka decreased by EUR 24,817 thousand or 34.9% down to EUR 46,280 thousand and accounted for 9.1% of the total securities portfolio at the end of 2008.

Debt securities held by Abanka totalled EUR 462,695 thousand and at the year end represented 90.9% of the total securities portfolio. They experienced a year-on-year decrease of 26.9% or EUR 170,676 thousand in nominal terms. The significant decrease in the share of debt securities in total balance sheet assets was due to the restructuring of the trading book portfolio of debt securities, which started in the first half of 2008. All the restructuring measures were taken to enable a timely response to unfavourable conditions on international markets at the time and with the primary aim of reducing possible negative effects on the Bank’s profit and loss account in view of the high volatility of debt securities and exposure limits to certain issuers.

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

FINANCIAL LIABILITIES TO BANKS

long-term

EU

R th

ousa

nd

31 Dec., 2008 31 Dec., 2007

1,018,497

209,103

879,272

225,896

short-term

Securities


37


Liabilities for securities issued of the Abanka Group equalled those of Abanka. They included debt securities in issue (i.e. bonds, bills and certificates, certificates of deposit) and subordinated deposits. Total securities in issue at the end of 2008 amounted to EUR 282,321 thousand, which was 49.7% or nominally EUR 93,788 thousand more compared to the year before. The bulk of this increase was accounted for by the transfer of the innovative instrument from equity component of compound financial instruments to liabilities. Their share in total balance sheet liabilities rose from 5.5% to 7.4%. At the end of 2008 certificates of deposit amounted to EUR 54,947 thousand, whereas

0

200,000

400,000

600,000

800,000

INVESTMENTS IN SECURITIES

debt securities

EU

R th

ousa

nd

31 Dec., 2008 31 Dec., 2007

462,695

46,280

633,371

71,097

equity securities

ordinary bonds in issue, subordinated deposits and bills and certificates in issue totalled EUR 227,374 thousand. In 2008 subordinated deposits grew by EUR 106,690 thousand, whilst bonds in issue, bills and certificates in issue and certificates of deposit declined by EUR 12,902 thousand. The main reason for this decline was the fact that two issues of the Bank’s own bonds matured: the 13th issue of Abanka d.d. (AB13) with a nominal value of EUR 5,097 thousand and the 5th issue of Banka Vipa (VIP5) with a nominal value of EUR 2,000 thousand.

0

50,000

100,000

150,000

200,000

250,000

300,000

SECURITIES IN ISSUE

subordinated liabilities

EU

R th

ousa

nd

31 Dec., 2008 31 Dec., 2007

160,451

121,870

53,761

134,772

debt securities

38


Equity investments

Payment transactions

Equity investments in subsidiaries, associated companies and joint venture company at the end of 2008 amounted to EUR 9,205 thousand. Over the year the largest increase was seen in the equity

investment in KDSPV1 B.V., which at the year’s end totalled EUR 74 thousand (with Abanka’s holding in the company unchanged at 33.3%).

Abanka’s competitive advantages in payment transactions arise from its sophisticated online bank as well as reliable and quality processing of payments. Abanka received the STP Excellence Award from Deutsche Bank, Frankfurt, as reward for its high-quality performance of international payment transactions. This involves highly automated processing of payment orders, lowering costs and providing better quality services for clients.

In 2008 Abanka recorded international payment transactions of EUR 7,279,189 and its market share of 11.2% place it third among banks in Slovenia.

(Payment transaction data include only international and cross-border payments of sums above EUR 12,500.) Incoming and outgoing payments respectively accounted for 48.0% and 52.0% of the total.

In domestic payment transactions Abanka processed 43,393 orders in the Target 2 system in 2008 worth EUR 24,992,856 thousand and 4,374,038 orders in the giro clearing system amounting to EUR 4,413,365 thousand. Abanka’s market share was 9.7% measured by the number of processed orders and 11.1% measured by their value.

EQUITY INVESTMENTSIn EUR thousand 31 Dec., 2008 Structure 31 Dec., 2007 Structure 08/07 Index

Subsidiaries 8,129 88.3% 8,129 88.4% 100

Associated companies 74 0.8% 60 0.7% 123

Joint venture company 1,002 10.9% 1,002 10.9% 100

TOTAL 9,205 100.0% 9,191 100.0% 100


39


Card operations

Abanka’s wide range of card products allows it to offer the most suitable cards to different client segments. In addition to domestic card products the Bank also issues the most popular foreign cards such as Visa and Mastercard. Abanka’s range includes the following cards: – BA Maestro – debit: standard, student and children’s

cards;– Visa: standard, gold, business cards;– Visa Electron: debit and credit cards;– Karanta;– MasterCard: standard and business cards.

At the end of 2008, there were 227,449 cards issued or 16.5% more than in 2007. The largest number of

cards are BA Maestro which also function as personal account cards (145,380 cards) and the biggest growth was recorded in the Visa Electron card the number of which increased by as much as 32% (30,541 cards). All cards produced by Abanka are EMV standard smart cards.

In 2008 there were 12.1 million POS terminal transactions with Abanka issued cards, which was 2.4% more than the year before. The total amount of these transactions was EUR 651,390 thousand which represents an annual growth of 9%. In addition to POS terminal transactions cardholders made 3.7 million ATM cash withdrawals worth EUR 292,579 thousand.

Abanka has an extensive network of points of sale. At the end of 2008, there were 15,925 of them accepting cards of all brands – namely Visa at 7,770, BA at 2,217, Karanta at 2,085, MasterCard at 1,945 and Maestro at 1,908. These points of sale have

POS terminals provided by Abanka, all of which were upgraded to EMV standard smart card technology in 2008. At the end of 2008 Abanka held 29% of the Slovene market, which was 13% more than one year before and equalled 2,886 POS terminals.

NUMBER AND VOLUME OF POS TRANSACTIONS WITH ABANKA CARDS IN 2008

Number of pos transactions StructureVolume of pos transactions

(EUR thousand) Structure

Ba Maestro 9,202,053 75.9% 500,824 76.9%

Visa - standard 1,746,708 14.4% 67,945 10.4%

Visa Electron - debit 465,556 3.8% 43,629 6.7%

Mastercard - standard 392,783 3.2% 14,518 2.2%

Visa - gold 186,176 1.5% 13,624 2.1%

Mastercard - business 49,836 0.4% 4,156 0.6%

Visa Electron - credit 42,298 0.3% 2,501 0.4%

Visa - business 32,484 0.3% 3,608 0.6%

Visa - AMZS co-branded 5,650 0.05% 219 0.03%

Karanta 4,793 0.04% 131 0.02%

TOTAL 12,128,337 100.0% 651,155 100.0%

40


The Abanka ATM network is also extensive. The number of bank-owned ATMs rose from 201 at the end of 2007 to 217 one year later. Among these there are 10 new multi-functional machines, which in addition to standard cash withdrawals also enable automated payment of special payment orders and automated cash deposits to personal

accounts processed in real time. In 2008, 4.9 million transactions were recorded at Abanka’s ATMs worth EUR 401,727 thousand. ATM transactions increased by 10.4% in number and 20.8% in volume. Thanks to the addition of new ATMs in 2008 the market share grew to 12.6%, compared to 12.2% in 2007.

Investment brokerage

The total volume of trading generated by the members of the Ljubljana Stock Exchange in 2008 was EUR 2,571,581 thousand. To this Abanka contributed EUR 252,407 thousand, the highest figure among stock exchange members. Despite a 42.3% slump in stock exchange turnover, Abanka’s share in the reporting year grew from 8.4% to 9.8%.

At the end of 2008 the financial instrument portfolio under management was worth EUR 30,543 thousand

or 30.6% less than one year earlier. Unfavourable conditions on capital markets considerably diminished demand for portfolio management. The decrease in assets under management was primarily due to lower securities prices. Also the number of portfolio management clients declined in 2008, again due to the generally known negative trends and instabilities on both domestic and international capital markets.

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

0

7,000

14,000

21,000

28,000

35,000

42,000

INVESTMENT BROKERAGE ON THE DOMESTIC MARKET

assets

number of clients

EU

R th

ousa

nd

num

ber

of c

lient

s

31 Dec., 2008 31 Dec., 2007

15,323

643,928

19,501

1,100,028

0

10,000

20,000

30,000

40,000

50,000

0

300

600

900

1,200

1,500

INVESTMENT BROKERAGE ON FOREIGN MARKETS

assets

number of clients

EU

R th

ousa

nd

num

ber

of c

lient

s

31 Dec., 2008 31 Dec., 2007

870

25,455

865

43,829


41


Custody and administrative services

In terms of the net asset value of investment funds, Abanka is still among the major providers of custody services. The Bank achieved a market share of 48.9% in terms of the number of investment funds for which it provides custody services.

The range of custody services for foreign securities was extended to meet the needs of institutional investors. In 2008, Abanka upgraded these services for foreign securities and offered them to institutional investors. In additional to that, the Bank also launched

custody services for long-term business funds of insurance companies.

Abanka is the only provider of administrative services in Slovenia who not only carries an integrated range of administrative services, but it is developing its own IT and software applications. The software is fully compliant with all legal requirements and every year receives a positive opinion from a certified information system auditor.

AIII VPS Mutual Pension Fund

For pension fund managers 2008 was more than challenging. Against the background of the many turbulences on global capital markets, for the first time great differences appeared in their performance. We are extremely pleased that AIII VPS Mutual Pension Fund had the second-highest annual return in Slovenia. Though, in 2008 this return was negative and as at 31 December reached -5.3%. Despite a period of negative trends on capital markets, the assets of the insureds are safe. Abanka, as the asset manager of AIII VPS Mutual Pension Fund, in accordance with the pension scheme guarantees a return equalling 50% of average annual interest rate on long-term securities issued by the Republic of Slovenia.

Both the volume of funds of AIII VPS and the number of the insureds increased in 2008, as shown by the graph. 0

2,000

4,000

6,000

8,000

10,000

12,000

0

500

1,000

1,500

2,000

2,500

3,000

NUMBER OF INSUREDS AND NET ASSET VALUE OF AIII VPS MUTUAL PENSION FUND

net asset value

number of insureds

net a

sset

val

ue -

EU

R th

ousa

nd

num

ber

of in

sure

ds

31 Dec., 2008 31 Dec., 2007

11,437 2,658

9,786

2,871

42


Bancassurance

Abanka pursues a policy of strategic partnership with Zavarovalnica Triglav, whose synergies allow it to develop its profile on the financial intermediation market as a provider of bancassurance products.

Abanka has acted as an agent in the insurance market since November 2003. In conjunction with Zavarovalnica Triglav it offers the following banking/insurance products:– accident insurance as a supplementary facility for

holders of regular personal accounts and Akeš personal accounts;

– traditional life insurance: a combination of insurance with three types of savings products;

– unit-linked life insurance, combines life insurance and investment, linked to the unit prices of selected mutual funds and the Zavarovalnica Triglav investment fund;

– single premium unit-linked life insurance combines life insurance and investment elements, linked to the unit prices of selected mutual funds, the insurance premium being paid in a lump sum when the policy is taken out;

– Fleks investment insurance is a combination of life insurance and investment, linked to investment funds; the policyholders assume investment risk but at the same time has a choice among different investment strategies;

– mortgage life insurance is taken out in combination with a housing or consumer mortgage loan (with a term above 5 years) and provides a diminishing payout in the event of death, the payout reaching zero when the policy expires;

– top-up health insurance in conjunction with Triglav Zdravstvena Zavarovalnica is voluntary health insurance available to holders of personal and savings accounts with Abanka who are covered by compulsory health insurance and are obliged to make top-up payments.

Under favourable terms, Abanka offered TRIGLAV GARANT 150 in 2008, a capital guaranteed unit-linked insurance product and TRIGLAV V.E.P., a single premium unit-linked insurance product with guaranteed unit value, a form of insurance contract with a guaranteed endowment sum. It is a combination of an investment linked to the performance of three neutral investment strategies and a life insurance policy. The premium paid is linked to the value of Zavarovalnica Triglav’s investment fund units as an underlying investment vehicle.

In general, insurance products can be divided into two categories: personal insurance (life insurance proper, unit-linked life insurance, single premium unit-linked life insurance, mortgage life insurance, accident insurance and health insurance) on the one hand and property insurance on the other.

The breakdown of life insurance in terms of the number of policies at the end of 2008 is illustrated in the graph below (figures for single premium unit-linked insurance include unit-linked insurance products with capital guarantee under favourable terms).

8% life insurance proper

41% mortgage life insurance

23% unit-linked insurance

21% single premium unit-linked insurance

7% Fleks investment insurance

BREAKDOWN OF LIFE INSURANCE BY NUMBER OF POLICIES

8% life insurance proper

41% mortgage life insurance

23% unit-linked insurance

21% single premium unit-linked insurance

7% Fleks investment insurance

BREAKDOWN OF LIFE INSURANCE BY NUMBER OF POLICIES


43


Total equity and ownership structure

As at 31 December, 2008 the total equity of the Abanka Group and Abanka amounted to EUR 336,756 thousand and EUR 339,458 thousand respectively. The Bank’s capital in 2008 dropped by 3.9% or EUR 13,775 thousand on the previous year and accounted for 8.9% of total liabilities on the balance sheet.

This decrease was primarily due to the transfer of the innovative instrument, amounting to EUR 117,539 thousand, at the end of 2007 from equity component of compound financial instruments to liabilities. As a result basic capital rose by EUR 7,094 thousand and the share premium account by EUR 94,906 thousand.

Reserves from profit were higher predominantly as a result of the resolution by the General Meeting of Shareholders on the basis of which part of balance sheet profit from 2007 was distributed to other reserves from profit. 25.8% of the profit for the year 2008, which amounted EUR 22,233 thousand was in accordance with the Management Board’s decision allocated to other capital items and for servicing the innovative instrument. Book value per share was EUR 47.21 as at 31 December, 2008, calculated on the basis of 7,200,000 shares excluding own shares. The ten major shareholders in Abanka at the end of 2008 are shown below, along with their equity holdings at the end of 2007.

At the end of 2008 the ten largest shareholders held 6,582,048 shares or 91.4% of Abanka’s share capital, whilst one year earlier this proportion was 89.7%. By issuing 1,700,000 shares the Bank raised additional capital worth EUR 102,000 thousand in 2008. At the end of 2008 Zavarovalnica Triglav held a 25.6% stake (due to the technical transfer within KDD of 4.3% of shares from the account of Zavarovalnica Triglav d.d. – life insurance long-term business fund to another account of Zavarovalnica Triglav). Sava d.d. retained its 23.8% participation in Abanka. Vipa Holding d.d. with 148,396 shares was the eighth biggest

shareholder, Vipa d.d. with 146,115 shares was the ninth biggest shareholder, followed by Raiffeisen Zentralbank with 105,809 shares in tenth place.

The total number of shareholders in Abanka had risen to 1,142 by the end of 2008, from 1,053 a year earlier. At the end of 2008 the Bank held 9,213 redeemed own shares (compared with 11,870 at the end of 2007), equivalent to 0.1% of its share capital. A fund of own shares was established for redeemed own shares.

TEN LARGEST SHAREHOLDERS OF THE BANK31 Dec., 2008 31 Dec., 2007

Number of shares

Holding in %

Rank Number of shares

Holding in %

Rank

ZAVAROVALNICA TRIGLAV D.D. 1,843,377 25.6 1 1,170,028 21.3 2

SAVA D.D. 1,715,841 23.8 2 1,309,966 23.8 1

ZVON ENA HOLDING D.D. 1,235,520 17.2 3 943,748 17.2 3

DELNIŠKI VZAJEMNI SKLAD TRIGLAV STEBER I 527,258 7.3 4 402,537 7.3 4

HIT D.D., NOVA GORICA 442,705 6.1 5 335,275 6.1 5

DAIMOND D.D. 255,907 3.6 6 195,373 3.6 7

SLOVENSKA ODŠKODNINSKA DRUŽBA D.D. 161,120 2.2 7 120,298 2.2 9

VIPA HOLDING D.D. 148,396 2.1 8 79,798 1.5 10

VIPA D.D., NOVA GORICA 146,115 2.0 9 134,875 2.5 8

RAIFFEISEN ZENTRALBANK OESTERREICH 105,809 1.5 10 79,119 1.4 11

Ten largest 6,582,048 91.4 4,933,473 89.7

Other shareholders 617,952 8.6 566,527 10.3

All shareholders 7,200,000 100.0 5,500,000 100.0

44


THE BANK’S DEVELOPMENT AND ITS GOALS

DEVELOPMENT AND MARKETING COMMUNICATIONS IN 2008

The financial crisis in 2008 further tightened market conditions, influencing Abanka’s business policies and development cycle. The Bank quickly reacted to market developments by duly adapting the development of new products. It paid greater attention to raising primary sources of funds and increasing non-interest income. A new Capacity Building Methodology was developed and implemented to enable the management to promptly adapt the Bank’s business policies for maximum results.

With an aim to lay new modern business foundations great progress was achieved in electronic banking by increasing the number of products. By fully automating the management of documents with electronic signature, the Bank created a basis for remote business operations and determined a direction towards new payment methods in the future by developing additional web and mobile technology based payment instruments.

In spite of unfavourable market trends, we kept focused on the modernisation and streamlining of operations. In this framework the Bank started redesigning some key processes including retail loans, bad debt management as well as reengineering deposit operations, which requires not only complex technological design but also participation of all divisions and entails changes in the organisation of work. The migration of Visa card processing to the Bankart processing centre continued in 2008.

As in previous years, the Bank’s development was again subject to legislative changes. A lot of attention was dedicated in 2008 to compliance with the Financial Instruments Market Act, Prevention of Money Laundering and Terrorist Financing Act, payment system modernisation (Single Euro

Payments Area - SEPA, Small Value Payment System – SIMP) and setting up SISBON, the Slovene credit bureau system for banks. Further improvements and automation of required disclosers according to IFRS was one of the major projects in 2008.

In the first quarter of 2008 marketing communications focused on developing a new creative position for the Abanka brand name. The personality of Abanka was also defined as friendly and dynamic, with an image that conveys stability. Abanka is very fond of nature, which it believes to express the ideas of life and existence. Abanka understands the meaning of development and progress, as it keeps adding new innovative products needed by its existing and potential clients. Therefore, the stability of Abanka is represented in promotion campaigns by plant life and upgraded by people, as it focuses its efforts on the stability of its client deposits. Towards the end of 2008, under the slogan »Financial flexibility flow«, Abanka redesigned its advertisements for investment banking and visual image. The focal point was quality, integrated, innovative and effective communication between target groups and Abanka, with an aim to achieve value for money in optimising communication effects.

The entire range of banking and bancassurance products was communicated to raise demand and directly increase the sales of the existing products. The greatest emphasis was on retail products, products for SMEs and investment banking. A lot of attention was paid to maintaining and upgrading the Abanka website, which is becoming an increasingly important and visible source of information about the range of Abanka’s products and services. Many activities revolved around the study and research of the financial sector and financial products.


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Corporate banking

Retail banking

In early 2008 Abanka joined the SEPA credit scheme, whilst during the year work continued on the migration of domestic credit payments into the SEPA low value payment system. Our ABACOM electronic bank and the applications supporting our domestic and cross-border payments were adapted to meet the new SEPA payment processing standards. Work also continued on the E-invoice project, where the system was upgraded by automating log-on procedures for receiving electronic documents and by automating feedback information. It also involved participation in the creation of a business model for inter-bank exchange of data. Some major issuers were already included in the upgraded system. The introduction of new and modern working methods continued in 2008. This also meant developing a new system for secure acceptance of internet card payments based on the 3D Secure Protocol, in which our first merchants were already included.

Abanka consolidated its presence as a bank for sole proprietors and SMEs by preparing special offers for them. For notaries public a notarial account was launched as a new product, which enables simple administration of funds they are given to keep in custody.

The centralised collateral registry was upgraded by supporting new forms of collateral and further computerisation of internal procedures by upgrading Work Flow for deposit files and reports.

Abanka mainly focused its marketing communications on SMEs. It informed them about its range through media, by direct mail, leaflets, e-bulletin and by sponsoring entrepreneurial events. The Bank organised consultations or seminars for this segment, which were attended in great numbers, to discuss topical issues of interest to small and medium-sized companies.

In view of the development of new products, the greatest attention was devoted to the marketing of corporate transaction accounts, our ABACOM online bank, new payment instruments, on-line payment service and other electronic channels. Abanka brought its products and services closer to the needs of its clients and with a free five-service package wanted to appeal to those companies which it wants to win over and interest them in cooperation. Marketing communications were also aimed at promoting our AIII VPS pension fund, investments, insurance products, deposits and loans.

Banking products for retail clients continued to be developed in 2008 in line with our strategic goals. The range was broadened in the segments of savings, lending and bancassurance products, based on the expansion of electronic sales channels as well as the ATM and branch networks.

Abanka started reengineering its retail lending operations in an integrated manner, which will bring greater flexibility, adaptability and speed in the future in developing and launching new credit products.

The software support for deposit operations was upgraded and development started on a new type of savings account, enabling remote opening of accounts, i.e. in physical absence of a client. By developing a system of orders in the ABANET online bank the Bank fully complied with the requirements for remote signing and secure storage of documents with electronic signatures, which involved complete computerisation of all working procedures. The conclusion of an extraordinary limit agreement and a deposit agreement was included in the system. In

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cooperation with Abančna DZU a hybrid savings-investment product was developed and named “Dvojček” (Twin).

Great attention was dedicated to improving safety and security for clients. Additional safety elements, such as virtual keyboard and daily limits, were introduced in ABANET online bank to provide for greater security and applicability of the system. Our SMS mobile service alerts clients to all debits made to their personal accounts through ABANET online bank and as a result of credit card payments. Abanka started developing a new mobile payment service, which will be the first of its kind in Slovenia providing safe mobile payments based on electronic signature and qualified digital certificate.

Considerable effort was invested in the development of the new E-invoice service, which enables issuers to send invoices in electronic format directly to ABANET online bank, where they can be paid by ABANET users without any data entry. This new service consolidated Abanka’s leading position as a provider of modern banking facilities.

In the project of adapting procedures to the required prevention of money laundering and terrorist financing Abanka focused on redesigning and optimising procedures to provide legal compliance. Activities for the inclusion in SISBON were completed.

ATM operations were improved by adding new multifunctional ATM models that enable both Abanka clients and those of other banks automated

processing of special payment orders, debited to their transaction accounts in real time. Another new facility is the deposit of coins on special machines and direct deposits of banknotes at ATMs that are credited to transaction accounts in real time. Moreover, higher-denomination cash withdrawals were enabled, so that ATMs now pay not only banknotes of 10 and 20 euros but also banknotes of 50 euros.

Late 2008 saw the opening of a new outlet based on a new sales concept. Its opening hours are the same as the operating hours of the shopping mall in which it is located, making banking products and services more available.

The retail communications of Abanka were integrated. Heavy advertising was organised through traditional media, such as press, television and radio, and part of our advertising activities went through the branch network. Abanka employed new marketing communications that included various forms of communication through digital media, prize games, sponsoring financial advice, co-branding and the like.

Core banking products were at the centre of the Bank’s attention – promotion of deposits, opening of new transaction accounts and granting new consumer and housing loans. The elderly, as one of Abanka’s target groups, were offered lower payment order processing costs and towards the end of the year our AIII VPS mutual pension fund was presented to another target segment, the employed. In 2008, the creative concept and design of the leaflets used in the branch network was modernised and unified.


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The leverage needed for the good performance of a bank is its development orientation, which serves as a platform for constantly improving the quality of existing products and developing new ones, for strengthening market communications and boosting sales. The combination of all these elements enables a bank to achieve any growth targets in the volume of operations, provides for higher returns and consolidates its competitive position. Abanka will strive towards building and maintaining long-term relationships with its clients, based on the provision of products tailored to individual client segments and applying sales methods best suited to them.

In order to maximise the effectiveness of development initiatives, the focus in 2009 will be on standardisation and gradual computerisation of project work as well as the upgrading of product and service development processes. The first step was the creation of a project bureau and its first task will be to define the Bank process architecture aimed at introducing business process modelling and organisation. The main goal is to define key business processes and their owners. Lower-level processes will also receive due attention, as they can be relatively quickly simplified, resulting in lower costs and higher productivity.

Financial markets

DEVELOPMENT AND MARKETING COMMUNICATIONS IN 2009 Introduction

In 2008 Abanka launched several new trading instruments (e.g. cross currency swaps) and finalised the introduction of some additional products (e.g. futures), which the Bank uses both for balance sheet management and for its clients’ active trading and marketing. Abanka co-underwrote the second bond issue by the Ministry of Finance placed on international markets. It was also involved in trading on the EuroMTS-MTS electronic trading platform Slovenia, where Abanka acts as an official market maker for Slovene government securities.

The Bank started developing private banking, which will encompass many of its products and services (including commercial and investment banking as well as asset management) and tailor them to the needs of clients. Private banking facilities will round out Abanka’s range to cover to all client segments.

Following internal reorganisation of investment banking, the competences of asset managers and investment analysts were clearly delimitated. Since September 2008 brokerage services on global stock exchanges have been available to Abanka’s clients on a daily basis until 17.30 and in December new portfolios were offered among other portfolio management products.

For the purpose of asset and liability management, Abanka developed a data framework for acquiring data relevant for adequate and effective business decisions in this field and developed a model of opportunity interest rates in the Bank.

In 2008, the Treasury Division actively marketed its products for currency risk and interest risk hedging as well as strived to attract new clients.

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Abanka’s budged for 2009 sets the following financial targets: – total assets growth: 5.0%; – equity: EUR 378,254 thousand; – profit after tax: EUR 36,268 thousand;

– ROE after tax: 10.0%; – cost to income ratio: 48.1%; – capital adequacy ratio: 11.9%; – number of employees at the year’s end: 911.

Bank’s financial targets in 2009

Abanka’s main development activities in 2009

Abanka’s main development activities planned for 2009 are presented below.

Commercial Banking Division: The two main projects are to finish the second phase of upgrading the retail credit application and begin the process of upgrading the support of quick service zone operations, where the objective is to simplify tasks, optimise work processes, cut the time needed to adapt to different requirements and, at the same time, create an open and flexible basis for prompt and effective introduction of new products.

In corporate banking the centralised collateral registry will be expanded with new forms of collateral, new documents will be added to the computerised system of work tasks, new offers will be custom-tailored to different client segments and new card products will be introduced. The upgrading of ABACOM electronic bank will be intensified through the introduction of new e-documents and the support of SEPA direct debits will commence development. Direct debiting of corporate accounts for Abanka charges will be further automated.

In retail banking the credit application for retail clients will be redesigned and new savings products

launched. The personal and savings account will be made compliant with new legal requirements and the interest calculation recommendations will be followed. Special product packages will be prepared, tailored to the needs of individual client segments, so as to reflect client demand for daily banking operations to the maximum extent. The online bank will be further automated regarding working procedures and support of different banking products (long-term deposits, e-invoice).

Financial Markets Division: Liquidity management support will start being automated and IT support of funds in the area of custody will be further developed. Special attention will be paid to the development of new products for financial markets and private banking will be introduced.

Finance and Process Support DivisionEmphasis will be laid on matrix reporting in line with the Bank of Slovenia’s requirements, conclusion of the discloser project, final migration of Visa card processing to the Bankart processing centre, creation of a common code list of securities and compliance with the new Payment Services Act.


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CORPORATE GOVERNANCE STATEMENT

GOVERNANCE

Corporate Governance Code

The Bank signed a statement of support for the Corporate Governance Code (hereinafter: the Code) adopted by the Ljubljana Stock Exchange d.d., Ljubljana, the Association of Supervisory Board Members of Slovenia and the Managers’ Association of Slovenia on 18 March, 2004, and amended on 14 December, 2005 and 5 February, 2007. The Code is also available on the website of the Ljubljana Stock Exchange http://www.ljse.si/ in Slovene and English.

Abanka abides by the Code in its operations, with the exceptions and differences disclosed in the Statement of Compliance with the Corporate Governance Code of 15 September, 2008, contained in this Annual Report. This statement shows all the information on governance, going beyond the requirements of the Companies Act. The governance practice of Abanka is publicly available at its website: http://www.abanka.si/.

Description of the main features of internal controls and risk management in the Bank in connection with the accounting reporting procedure

The Bank manages all types of risks in accordance with the Risk Management Strategy of Abanka Vipa d.d. Risks are controlled according to risk management policies by risk type. In line with the operational risk management policy the Bank

establishes procedures for reducing risk and limiting the occurrence of any losses from operating risks of the Bank’s individual organisational units and the Bank as a whole. It actively plans and implements measures to reduce the frequency and severity of losses arising from operational risks.

The main objectives of internal controls in risk management in terms of accounting reporting are effective administration of tasks, efficient use of funds and their protection against loss due to negligence, abuse, misadministration, default, fraud and other errors, compliance with primary and secondary legislation and instructions by the Management Board and senior management of the Bank, provision and maintenance of timely, integrated and reliable data and information and their fair disclosure in internal and external reports.

Monitoring the effectiveness of risk hedging methods arising from accounting reporting and risk reduction is a process based on an internal control system composed of internal controls, activities by the Internal Audit Department and compliance activities.

Information required under Article 70, §6, items 3, 4, 6, 8 and 9 of the Companies Act

– Holdings of the Bank’s shares in terms of achieving the qualified holding according to the Takeover Act As at 31 December, 2008 the following shareholders achieved a qualified holding:

Zavarovalnica Triglav d.d. is the majority shareholder in Triglav družba za upravljanje d.o.o., which manages Delniški vzajemni sklad Triglav Steber I (mutual share fund). Zavarovalnica Triglav d.d. and Delniški vzajemni

sklad Triglav Steber I together hold 2,370,635 shares of Abanka which represents 32.9% of the Bank’s share capital.

Company Number of shares %

Zavarovalnica Triglav d.d. 1,843,377 25.6

Sava d.d. 1,715,841 23.8

Zvon Ena Holding d.d. 1,235,520 17.2

Delniški vzajemni sklad Triglav Steber I 527,258 7.3

HIT d.d., Nova Gorica 442,705 6.1

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– Special controlling rights None of the Bank’s shareholders have special controlling rights.

– Voting rights restrictions According to the Articles of Association voting rights are not restricted to a certain holding or to a minimum number of shares. Detailed information on the exercising of voting rights is contained in the chapter “Functioning of the General Meeting of Shareholders, its Key Competences and Description of Shareholders’ Voting Rights with the Way They are Exercised”. The Bank is unaware of any agreements in which, on the basis of its co-operation, the financial rights arising from securities are separated from the rights arising from the holding of such securities.

– The Bank’s rules on the appointment or replacement of members of the management or supervisory bodies and amendments to the Articles of Association The rules on the appointment or replacement of members of the management or supervisory bodies are shown in the chapter “Composition and Functioning of Management or Supervisory Bodies and their Committees”. The rules regarding amendments to the Articles of Association are disclosed in the chapter “Functioning of the General Meeting of Shareholders, its Key Competences and Description of Shareholders’ Voting Rights with the Way They are Exercised”.

– Authorisations of the management, especially share purchase and share issuing options The share purchase option given by the General Meeting of Shareholders on 6 June 2007 expired on 6 December, 2008. Subject to the prior approval by the Supervisory Board, the Management Board is authorised in the period of five years following the entry of relevant amendment to Articles of Association in the Companies Register, to raise the share capital of the Bank by issuing new ordinary shares payable in cash up to EUR 15,022,533.80 (authorised capital).

The amendment to the Articles of Association was entered in the Companies Register on 13 June, 2008.

Functioning of the General Meeting of Shareholders, its Key Competences and Description of Shareholders’ Voting Rights with the Way They Are Exercised

The General Meeting of Shareholders is made up of the Bank’s shareholders. The General Meeting of Shareholders passes resolutions on the distribution of the balance-sheet profit on the proposals of the Management and Supervisory Boards. Should the Supervisory Board fail to approve the annual report or should the Management and Supervisory Boards leave it up to the General Meeting of Shareholders to decide on the approval of the annual report, on the annual report on internal audits (with the opinion by the Supervisory Board), on the adoption of and amendment to the Articles of Association, on measures for raising or decreasing capital, excluding those which are according to the Articles of Association in the competence of the Management Board, the winding-up of the Bank and status-related changes, the appointment and dismissal of Supervisory Board members, a vote of no confidence in the Management and Supervisory Board members or their discharge, the appointment of the auditor, the Rules of Procedure of the General Meeting of Shareholders, and other matters determined by the Articles of Association.

The General Meeting of Shareholders is convened at least once a year by the Management Board. Shareholders holding a total of one twentieth of share capital may request in writing that a General Meeting of Shareholders be convened. The Management Board publishes the announcement of the General Meeting of Shareholders in the daily newspaper Delo, in the SEO-net information system of the Ljubljana Stock Exchange and on the website of the Bank.

Only those shareholders holding ordinary shares who were entered in the Shareholders Register 10 days prior to the holding of the General Meeting of


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Shareholders and who announced their attendance to the Management Board at least 3 days in advance are entitled to participate in and vote at the General Meeting of Shareholders. Shareholders may exercise their rights at the General Meeting of Shareholders in person or through a proxy. A quorum of the General Meeting of Shareholders is constituted if shareholders with the right to vote present at the meeting account for at least 1/3 of the share capital. Should the General Meeting of Shareholders fail to constitute a quorum, a new General Meeting of Shareholders is convened within 15 days which is able to adopt valid decisions regardless of the provisions on the quorum.

Each ordinary share carries one vote at the General Meeting of Shareholders. The Bank has not issued any shares with restricted rights. The General Meeting of Shareholders shall adopt decisions by the majority of votes cast unless otherwise stipulated by the Articles of Association or by the law. A three-quarter majority of the represented share capital is required for the General Meeting of Shareholders to adopt decisions on raising or reducing capital, amendments to the Articles of Association, denial of pre-emption rights to purchase shares in raised share capital, winding-up of the Bank, status-related changes of the Bank, discharge of a member of the Supervisory Board and vote of no confidence in the members of the Management Board.

The General Meeting of Shareholders on 29 May, 2008 passed a resolution on the distribution of balance-sheet profits, granted discharge to the Management and Supervisory Board members, adopted the 2007 Internal Audit Report including the opinion of the Supervisory Board, appointed Janez Bohorič and Niko Trošt to the Supervisory Board, appointed PricewaterhouseCoopers d.o.o., Ljubljana, as auditors of Abanka for 2008, took note of the Management Board’s report on the acquisition of own shares, passed the amendments to the Articles of Association and decided on the amount of attendance fees and reimbursement of costs for the President and members of the Audit Committee also serving on the Supervisory Board.

Composition and functioning of management or supervisory bodies and their committees

Abanka uses a two-tier management system. The Bank is run by the Management Board whose work is overviewed by the Supervisory Board. The governance of the Bank is based on the law, Articles of Association, internal documents and generally accepted business practice and in compliance with the Code (with the exceptions and differences disclosed in the Statement of Compliance with the Corporate Governance Code).

Management Board

The Management Board independently runs the Bank’s operations for which it is fully responsible. In legal transactions the Bank is always jointly represented by two members of the Management Board who are entitled to sign on its behalf.

The Management Board may be composed from three to five members, among whom one acts as its President. The number of the Management Board members is determined by the Supervisory Board. Presently the Management Board is composed of: – Aleš Žajdela, M.Sc., President, term of office starting

on 1 September, 2005 and expiring on 1 September, 2010;

– Radovan Jereb, M.Sc. Econ., Member, term of office starting on 28 September, 2005 and expiring on 28 September, 2010;

– Gregor Hudobivnik, Member, term of office starting on 28 September, 2005 and expiring on 28 September, 2010.

The Supervisory Board appoints and discharges the Management Board members at the proposal of the President of the Management Board. The President and Members of the Management Board are appointed for a five-year term with the possibility of reappointment. Any individual member or President of the Management Board may be dismissed by the Supervisory Board, if legal grounds for their dismissal have been established.

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The Management Board reports at least four times a year to the Supervisory Board on the planned business policy of the Bank and other material issues regarding the Bank’s operations; the performance of the Bank, particularly return on equity; business, particularly transactions and financial position of the Bank, operations which may materially affect the performance or solvency of the Bank.

The Rules of Procedure of the Management Board stipulate the methods of its work and distributes the areas of work and tasks among its members. The Management Board assigns individual organisational units of the Bank to its members and makes them responsible for their management and coordination.

The Management Board may transfer certain decision-making rights to collective decision making bodies. The following bodies assist the Management Board in its work:

– Assets and Liabilities Management Committee The committee manages the Bank’s liquidity, currency, interest and market risks, manages capital and capital adequacy, manages other operating risks, manages property rights of the Bank, follows financial results and business volumes, sets transfer interest rates and charges, decides on write-offs and on special terms for certain clients and considers other matters. The committee meets once a month. It has seven to nine members, subject to the decision by the Management Board. There were nine members at the end of 2008. The Management Board appoints the Chairman and Deputy Chairman of the committee from amongst its members. Other members appointed to the committee are employees with special authorisations.

– Credit Committee The committee decides on credit to clients, who are corporates, sole proprietors and individuals engaged in gainful activity, decides on syndicate loans, approves limits on credit and forward transactions involving equity securities, discusses the restructuring and financial reorganisation

programmes of clients, discusses proposals regarding bad debt, decides on accepting syndicated loan agent services, project financing and other financial services, manages credit risks, monitors how authorisations for individual decision making is exercised by employees with special authorisations and other employees set out in the Management Board’s decisions on individual authorisations, approves credit rating classification of clients, decides the credit rating classification of receivables and approves exposure limits to foreign banks. The Credit Committee has a regular meeting once a week. It may have between five and seven members, the exact number being decided by the Management Board. At the end of 2008 there were seven members on the Credit Committee.

– Liquidity Commission The commission maps out the current liquidity, exchange and interest policies of the Bank. It has seven members and has regular meetings twice a week.

– Credit Commission Decides on loan facilities of up to EUR 300,000 to clients who are individuals, sole proprietors, individuals having the status of farmer and other individuals engaged in gainful activity; monitors how authorisations for individual decision making is exercised by employees with special authorisations and other employees set out in Management Board decisions on individual authorisations; monitors the credit rating of receivables from the above clients. The commission has regular meetings once a week. It may have between three and five members, the exact number being decided by the Management Board. At the end of 2008 there were five members on the Credit Commission.

– Operational Risk Committee The committee is a collective decision making body, responsible for directing and supervising operational risk management in the Bank. Regular meetings of the committee are convened quarterly. It may have between ten and twelve members, the exact number being decided by the Management


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Board. The committee had twelve members at the end of 2008.

– Development Committee The committee is a collective decision making body in charge of directing and supervising the development and capacity building of the Bank. Regular meetings of the committee are convened quarterly. It may have up to fifteen members and forty in extended composition, the exact number being decided by the Management Board. The committee had twelve members at the end of 2008.

– Bad Debt Management Committee The committee is an advisory board which deals with bad debt collection. It holds regular monthly meetings. It may have between five and six members, the exact number being decided by the Management Board. The committee had five members at the end of 2008.

– Group for the supervision of subsidiary and associated companies of Abanka Supervision groups are coordination and consultation bodies in charge of the monitoring, coordination and supervision of operations and risk exposures in individual subsidiary and associated companies of the Bank, which makes them responsible for a more integrated and effective risk management system at the level of the Abanka Group. Groups have regular meetings on a monthly or quarterly basis, depending on the nature of the work of an individual subsidiary or associated company. Among these groups there are the Group for the Supervision of Aleasing d.o.o. and Vogo leasing d.o.o., the Group for the Supervision of Afaktor d.o.o. and the Group for the Supervision of ASA Abanka leasing d.o.o. Each group has three to seven members, the exact number being decided by the Management Board. At least one group member is from the Commercial Banking Division, one from the Risk Management Department and one from the Finance and Process Support Division. At the end of 2008 each group had five members.

Supervisory Board

The Supervisory Board overviews the management of the Bank’s business operations. It may have seven to nine members, appointed and discharged by the General Meeting of Shareholders. The members of the Supervisory Board are appointed for a four-year term with the possibility of reappointment.

The Supervisory Board decides on the appointment and dismissal of Management Board members and their remuneration; decides on granting loans to Management Board members and other persons stipulated by law; approves agreements between Supervisory Board members and the Bank; decides on granting loans to Supervisory Board members; reviews and gives opinions on financial and other reports by the Management Board, supervises the adequacy of procedures by the internal audit department and control of the Bank; proposes nominees to the General Meeting of Shareholders for the Supervisory Board; submits proposals to the General Meeting of Shareholders for the appointment of the auditor; together with the Management Board proposes profit distribution to the General Meeting of Shareholders; gives an opinion on the annual internal audit report to the General Meeting of Shareholders; reports on the annual audit and auditing costs of the Bank to the General Meeting of Shareholders; approves the operations of the Bank if such approval is required in the Articles of Association; passes its own Rules of Procedure and has other competences determined by the law or Articles of Association.

The Supervisory Board gives its approval to the Management Board regarding strategic equity investment in other legal entities, exceeding 1% of the Bank’s Tier 1 capital, strategic business alliances, the Bank’s corporate policy, the Bank’s budget, organisation of an internal control system, draft annual work programme of the Internal Audit Department, rules of the Internal Audit Department, conclusion of a legal transaction that in consideration of the overall exposure of the Bank would result in the Bank’s large exposure to an individual person, conclusion of a legal transaction because of which the large exposure of

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the Bank to an individual person would rise to equal or exceed 15% or 20% of the bank’s own funds, conclusion of a legal transaction which would result in the Bank’s exposure to the Management Board, members of the Supervisory Board, procurators of the Bank and parties related to these persons as well as other matters stipulated by law or the Articles of Association.

The Supervisory Board discharges its duties and responsibilities at regular and correspondence sessions. The quorum of the Supervisory Board is constituted if the majority of members are present at a session. Decisions are adopted with the majority of votes cast. Where the vote is equal, the Chairperson holds the deciding vote.

At the end of 2008 the Supervisory Board is composed of: – Tomaž Toplak, Chairman, term of office starting on

30 June, 2005 and expiring on 30 June, 2009; – Miha Dolinar, Deputy Chairman, term of office

starting on 20 June, 2007 and expiring on 20 June, 2011;

– Simon Zdolšek, Member, term of office starting on 30 June, 2005 and expiring on 30 June, 2009;

– Irena Vodopivec Jean, Member, term of office starting on 8 June, 2006 and expiring on 8 June, 2010;

– Niko Trošt, M.Sc., Member, term of office starting on 29 May, 2008 and expiring on 29 May, 2012;

– Uroš Rožič, M.Sc., Member, term of office starting on 6 June, 2007 and expiring on 6 June, 2011;

– Janez Bohorič, Member, term of office starting on 29 May, 2008 and expiring on 29 May, 2012.

Supervisory Board Committee

– Audit Committee The Audit Committee was formed at the beginning of 2008. It is composed of three Supervisory Board members (Tomaž Toplak, Miha Dolinar and Simon Zdolšek) and an expert (Vinko Perčič). Its main purpose is to assist the Supervisory Board in discharging its supervision duties regarding the reliability of financial statements, financial reports and other financial information which the Bank send to its shareholders and other public concerning the qualifications, effectiveness and independence of the external auditor, functioning of the internal audit system and compliance of the Bank with legal requirements.


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RISK MANAGEMENT

In 2008 Abanka paid special attention to the modernisation of its risk management system in compliance with the requirements of the new capital regime (Basel II). In the framework of the Basel II Project an adequate system and procedures were developed for the calculation of capital requirements and a more integrated system of risk monitoring and management was set up.

Credit risk

In the area of credit risk even more attention was paid to weaker economic conditions in 2008 owing to client credit ratings, follow up of client operations and volumes of business as well as the quality of provided collateral. Credit standards were made more stringent. Our system of limits on exposures to clients, industries and countries was also adapted accordingly. In addition to that the Bank regularly performed stress tests for credit risk, which included identification of potential events or future changes in the economy that might have a negative impact on the Bank’s exposure.

Operational risk

Our integrated and proactive system of operational risk management continued to be upgraded in 2008. The Bank established an Operational Risk Management Committee as a collective decision making body, in charge of the direction and supervision of operational risk management. A data base of loss events in 2008 was created and operational risk profiles were assessed for organisational units of the Bank. Additional disaster recovery plans were prepared for the major stress events. In 2008 Abanka started calculating the capital requirement for operational risk in which it opted for basic indicator approach.

Market risk

In view of the situation on financial markets, with regard to market risks the Bank applied a stricter system of limits for trading in financial instruments on the trading book and upgraded the existing limit system for trading in financial instruments on the banking book. Abanka continued implementing the Avantgard® project, which allows for the integrated management of market risks arising from financial instrument transactions in treasury and upgraded the application for the calculation of the market risk capital requirements for market risk. The Bank developed internal valuation models for measuring non-tradable equity and debt securities.

Interest and liquidity risk

As a consequence of the difficult situation on financial markets particular attention was dedicated to interest and liquidity risk management. Current business decisions in the Bank were always taken in consideration of maintaining adequate liquidity levels and reducing interest risks due to extreme interest risk fluctuations. In accordance with the Basel II regime Abanka further assessed capital needs for different types of banking risks (including strategic risk, reputational risk and profitability risk) in the framework of the Internal Capital Adequacy Assessment Process (ICAAP).

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HUMAN RESOURCES MANAGEMENT

Personnel policy in 2008 was primarily focused on work with the staff employed in Abanka, their development and training according to the Bank’s needs through in-house programmes adjusted to the special requirements of the Bank and within the given cost limits.

At the beginning of the year Abanka went through a reorganisation which was also supported by suitable human resources activities.

Based on an overall assessment of the human resources situation in the Bank areas were identified with shortages of staff with adequate know-how and skills. These areas were strengthened by staff reassignments and external recruitment. Human resources restructuring continued so that retiring employees were replaced with highly educated new recruits. The development of the banking industry requires a greater percentage of staff with a university degree. Periodic extra staffing needs were met through forms of recruitment (e.g. by recruiting students and hiring part-time staff through an authorised agency).

Despite restructuring and the fact that individual areas were strengthened, the number of staff in Abanka compared to 2007 increased by only 7 employees to 878 or 0.8% in the reporting year.

Abanka focused its training activities on providing the know-how and skills needed to achieve and exceed its business objectives. In-house training was prepared and provided by the Bank’s own and external instructors in 2008, specifically designed for Abanka. In-house coaching programmes accounted for more than 78% of all training in Abanka. The bulk of training was on skills needed in communication with retail and corporate clients, marketing and leadership and management skills. The Bank also organised training upon the introduction of new products and on the use of software programmes used in the work process, aimed at improving the quality and efficiency of work.

Great effort was invested in the development of staff, with a focus on selection, potential assessment and career planning. In the past these activities considerably helped reduce operational risk in which Abanka could be faced with a case of significant shortages of adequately trained staff.

Personnel policy Staff training and development


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In staff remuneration a direct link was established between individual performance and remuneration, basing performance assessments on pre-set, measurable and verifiable criteria. The amount allocated for our performance-related remuneration component increased in 2008. In addition to a regular variable component, paid on the basis of performance, special bonuses were introduced for top achievements. Thus in 2008 the eight top achievers received such special bonuses: the four employees with the best sales results and outstanding relations with clients and the four most cooperative employees from the business support organisational units, whose know-how and attitude contributed the most to improve the work of the front office. During the year executive directors also awarded their subordinates for top achievement, so that 12% of all the employees received such bonuses.

Organisational climate and employee satisfaction

As organisational climate and employee satisfaction are two important factors with a long-term effect on the achievement of the Bank’s objectives, Abanka again participated in SiOK project (Slovene Organisational Climate) in 2008. The first results show that activities carried out on the basis of 2007 findings of the same project bore fruit. The purpose of these activities was to eliminate identified deficiencies. Both organisational climate and employee satisfaction improved despite the difficult situation which is even more important amid increasingly tight operating conditions.

The chart below shows the educational structure of employees in 2008, which improved compared to 2007 (when 47% of total staff was on VI – VIII education level).

Staff remuneration Employee educational structure

49.9% VI.-VIII.

44.5% V.

5.6% I.-IV.

EDUCATIONAL STRUCTURE OF ABANKA EMPLOYEES

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Informing stakeholders in the bank, relations with the business and financial publics and media relations

Relations with employees

On 27 October, 2008 Abanka’s shares were listed on the stock exchange. Share trading in an organised capital market entails a commitment to meet high reporting standards, which makes operations more transparent and open to direct assessment by domestic and foreign capital market participants. Abanka created a special web page for investors on which the public can follow the price of Abanka shares on a daily basis and access all notifications regarding the financial and business environment.

Abanka informs the general public about all major relevant business events, regularly answers

all journalists’ questions and actively prepares statements and comments. The Bank regularly analyses media publications and verifies response rates. In 2008 there were 1,802 media publications concerning Abanka.

The public image, built on media publications, is one of the parameters Abanka measures and manages, based on the information gathered in the scope of the risk management Basel II project.

Abanka also implements corporate responsibility in relation to its employees through their remuneration and training, aimed at developing know-how and skills. These enable them to achieve business targets as well as their personal development.

Organisational climate and employee satisfaction are measured and the resulting parameters are used to create internal communication. In this

framework several meetings were organised in 2008 between employees at various levels of the Bank and its top management. An internal newsletter was made available in electronic format to inform staff of business and in-house events, important staff achievements, present new products and individual organisational units; all with the purpose of improving mutual knowledge and building good relations with employees.

CORPORATE RESPONSIBILITY

Through various activities which reflect its values, objectives and guidelines the Abanka Group acts out its corporate responsibility. In 2008 it was most active in: – informing the Bank’s stakeholders, in relations

with the business and financial publics and media relations;

– building positive relations with employees; – selecting sponsorships and donations.


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Sponsorships and donations

Through sponsorships and donations Abanka stimulates good mutual relations, supports the development of various sporting, cultural and educational associations and organisations and provides opportunities for the organisation of different events. Donations are the expression of the Bank’s responsibility towards health and charity organisations. In this way Abanka carries out its mission, realises its values and implements the vision of long-term partnership relationships.

In 2008 the Bank continued to sponsor various sports. Abanka made financial investments in Krka women’s handball club, Trimo Trebnje men’s handball club, Radeče handball club, Naklo sports association and Perutnina Ptuj cycling club. The Bank helped the 41st Šalamun Memorial - Artistic Gymnastics World-Cup for men and women organised by the Gymnastics Federation of Slovenia, the 13th Ljubljana Marathon and supported the Slovene team at the Central European chess tournament Mitropa 2008.

Through the financing of educational, cultural and finance events the visibility of Abanka was raised in Slovenia and abroad. Among such sponsored events

included the 15th “Days of Slovenian Informatics” conference, the 4th International Festival of Old-Timers, the 10th conference of the European Association of Social Anthropologists (entitled “Experiencing Diversity and Mutuality”, the 27th Idrija Lace Festival, the Veronika Festival in Celje, SNG Nova Gorica, the Gala Concert organised by Radio Ognjišče, international conference of the Bled Strategic Forum “Energy and Climate Change: Si.energy for the Future”. Abanka also co-financed the publishing of a book by Dr. France Štiblar »World Crisis and the Slovenes«.

Another humanitarian contribution by Abanka was the donation for the event “Just a Single Flower” organised by the Franc Rozman Stane Foundation. This organisation is actively engaged in social and humanitarian activities, providing health care to war veterans, victims of war violence, the war disabled, as well as preserving the values of resistance and homeland defence. Abanka also joined a donors fund for the construction of the Slovenian Mountaineering Museum, and, traditionally, sent a donation to the Institute of Oncology of Ljubljana for the renewal of Ward C.

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Organisational position of the internal audit department

Operations and control of the governance system

The Internal Audit Department (IAD) is organised as an independent department directly accountable to the Management Board. Its competences, responsibilities, tasks and methods of work are defined in the Rules of the Internal Audit Department, which was approved by the Management Board in coordination with the Supervisory Board. The Management Board included guidelines for the work of the IAD in the long-term strategy of Abanka. On an annual basis in coordination with the Supervisory Board the Management Board approves the IAD’s audit plan, based on a global assessment of the risk profile of the audit environment in the Abanka Group. To provide for better efficiency and effectiveness of its work the IAD designed additional internal documents (Internal Auditing Manual, Methodology of Risk Assessment Based Work Planning, Quality Assurance and Enhancement Programme).

The IAD continually oversees the operations of the Bank and its subsidiaries in an integrated manner. This includes monitoring and evaluating the efficiency of risk management systems and internal control systems, auditing of the internal capital adequacy assessment process in consideration of the group risk assessment, IT system reliability audit, reliability and veracity of accounting records and financial reports by verifying reporting and the Group’s compliance with regulations and established procedures.

According to the Rules of the Internal Audit Department one of the key areas of work of the IAD is the control of contractual exchange offices of Abanka. As of 1 January, 2008 the duties of the Anti Money Laundering Officer have been undertaken by the Legal and Compliance Department.

The Internal Audit Department (IAD) followed the approved Work Programme for 2008, which was amended in line with strategic plans, regulatory requirements based on the Group’s compliance with the new capital adequacy rules under the Basel II banking accord and additional requirements by the Management Board. The IAD carried out a self-assessment period audit to check compliance with the Code of Ethics, International Standards for the Professional Practice of Internal Auditing, the efficiency and effectiveness of internal auditing and its compliance with the internal Rules of the Internal Audit Department.

In 2008 the IAD:– provided opinions regarding the fulfilment of

conditions for launching new products and services and the adequacy of risk management procedures;

– audited the Investment Banking Department, focusing on equity investments and financial instrument transactions;

– audited some material business functions, including payment transactions, retail and corporate lending process, cash and ATM transactions in the branch network and administration services;

– assessed the effectiveness of the risk management system and internal control system regarding foreign

INTERNAL AUDITING


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Reporting on performed work

Internal auditing quality

The findings of the audits carried out by the IAD in 2008 were reported in writing to all management levels up to the Management Board. A summary of major audit findings and recommendations together with the realisation of the audit plan for 2008 were reported to the Management Board, Audit

Committee and Supervisory Board of Abanka on a quarterly basis. The IAD uses response reports from those in charge and follow up audits to monitor the implementation of corrective measures and report thereon to the Management Board, Audit Committee and Supervisory Board.

In January 2009 an external audit of the quality of Abanka internal auditing was carried out by an independent external auditor. The audit covered the internal auditing activities in 2008 and examined compliance with directly transposed International Standards for the Professional Practice of Internal Auditing, Code of Ethics of Internal Auditors and Code of Internal Auditing Principles.

Based on the audit a combined evaluation of internal auditing in Abanka was produced stating that in all material aspects standards are generally complied with.

exchange, interest rate and operational risks, made an internal capital adequacy assessment and verified the Group's compliance with the Basel II banking accord;

– audited business with credit brokers;– audited some key business support software

applications used and outsourcing practices;– assessed the adequacy of the risk management

system and internal control system regarding equity investments and corporate lending process; gave recommendations on how to upgrade individual elements of the governance system;

– undertook controls of exchange offices;– monitored the adherence to the requirements by

external auditors and supervisory institutions;– audited the management of key projects in Abanka

(Basel II, SEPA, retail credit operations redesign);– participated in work groups for launching new

products and services and compliance with new regulatory requirements as well as provided advice and assistance in upgrading work processes, procedures and internal instructions.

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The Information Technology Division covers three areas: IT application support, information technology with all general services and IT system security. The role of the Information Technology Division in Abanka is to continually provide available, integrated, safe and user-friendly information and technological support for all banking operations and other Bank activities at minimum cost and with maximum reliability. It is also in charge of maintaining the property of the Bank, facilitating investments and general services and provide for the safety of the IT system.

Abanka’s mainframe IT system is developed and maintained in-house, whereas mainframe sub-systems are provided, primarily by Slovene suppliers.

In 2008 the development of IT application solutions was focused on regulatory, business and internal projects. Major regulatory projects included: SEPA Project in the framework of which in early 2008 cross border credit transfers were successfully migrated to the SEPA system to which later in the year additional functionalities were added; the BASEL II Project where software was designed and to a great extent developed to support limit management, ratios and reporting; the SISBON Project; the Anti Money Laundering System which was made compliant with the Prevention of Money Laundering and Terrorist Financing Act, which involved the upgrading of the client base register in credit rating and monitoring procedures.

Major business projects include: the E Sales Channels Project where a feature that enables orders in retail our Abanet online bank was added and procedures for obtaining transaction account overdrafts and deposits were fully automated; the corporate Abacom online bank was upgraded to meet SEPA and ZBSXML requirements, a mobile phone alert system was introduced called AbaSMS which represents a security package providing information on transactions performed with payment cards and through the Abanet online bank. Another important business project which is expected to take ground over the next years is the introduction of e-invoices for retail and corporate clients and their inter-bank exchange. In addition to that 2008 saw the development and pilot production of 123-plačam (“I Pay 123” mobile phone payment facility). New products were added to the New Retail Deposits Project and additional features were introduced – mainly special purpose savings accounts and short-term deposits made through Abanet online bank. At the beginning of the year the Cash Management (pooling) application was put in production and, in autumn, development of the new application support for retail loans started which is planned to go live in 2009. Work on other projects continued as well. A great part of our effort was invested in transferring Visa processing to Bankart. For this purpose integrated support for the new operational method was developed in 2008. Moreover, software application support for fund administration was also greatly expanded in 2008.

INFORMATION TECHNOLOGY


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Development of a software application for bad debt management is one of our internal projects. In this group there are also electronic acceptance of received invoices, development of support for court ordered recoveries from corporate clients, support of agency deals, support of ScanCoin – deposit of coins on special machines, new support for temporary account management, upgrades of liabilities and reporting systems.

The main responsibility in information technology is to guarantee an available, integrated and secure information system. Some important steps towards these objectives were taken in 2008: the Hercules system was installed, which will finally replace the IBM Mainframe System; features and functionalities were continually upgraded and added to our data base and Oracle system; the same applied to our Linux and AIX servers on which the key parts of the information system run; the S.W.I.F.T. architecture was reconfigured; the communication infrastructure was enhanced with emphasis on connections with external institutions as well as the internal network of the Bank.

The Disaster Recovery Centre (DR), which was originally located in Nova Gorica, accounts for a great part of the tasks in this area. In 2008 its capacities were built and new parts of the information system were transferred there. Moreover, regular operation tests and connectivity to DR Centre were carried out.

In 2008 information infrastructure was controlled and administered not only in the Bank but also those of its subsidiaries, Abančna DZU and Aleasing. Discussions regarding taking over these tasks in Afaktor and Vogo leasing also started.

The area of technical support and general services in 2008 focused on internal user assistance requests as well as newly installed hardware and software including new ATMs, maintained and activated other equipment, maintained office buildings and provided physical protection of premises; leased, acquired, sold business premises and provided construction and renovation projects for existing ones as well as managed the post room and print shop of the Bank.

Information system protection and safety in Abanka included the launching of an electronic training system for personnel, the performance of information technology risk analyses, involvement in audits and inspections, more extensive control over the functioning of security mechanisms and the participation in planning and implementation of modifications in the Bank’s information system security architecture. Other tasks in this field were incident management in conjunction with external institutions (Bank Association of Slovenia), associations (Slovenian Institute of Auditors) and other banks on the promotion and advancement of information security.

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The new organisation structure of Abanka became effective in January 2008, as a response to increasing competition in the Slovene banking sector. The goal of the reorganisation was to introduce modern organisational solutions and best banking practices, which will enable the Bank to fully attain its strategic objectives, improve its performance, streamline its operations and remain a development oriented bank.

An important new element is the matrix organisation of subsidiaries and regional offices.

In the framework of the Information Technology Division an IT System Administration Department was set up in 2008 and put in charge of the functioning and upgrading of supplied IT systems. Towards the end of the year a Private Banking Section was established in the Investment Banking Department which is part of the Financial Markets Division.

ORGANISATION

ORGANISATIONAL CHART AS AT 31 DECEMBER, 2008

MANAGEMENT BOARD

INTERNAL AUDIT

MARKETING AND PUBLIC RELATIONS

RISK MANAGEMENT

CUSTODY AND ADMINISTRATIVE SERVICES

DEVELOPMENT DIVISIONCOMMERCIAL BANKING

DIVISIONFINANCIAL MARKETS

DIVISIONFINANCE AND PROCESS

SUPPORT DIVISIONINFORMATION

TECHNOLOGY DIVISION

LEGAL AND COMPLIANCE PERSONNEL

DEVELOPMENT AND BANKING TECHNOLOGY

LARGE CORPORATE CLIENT

TREASURY ACCOUNTINGINFORMATION TECHNOLOGY DEVELOPMENT

ORGANISATION AND PROCESS MANAGEMENT

SME CLIENT INVESTMENT BANKINGFINANCIAL CONTROLLING

AND REPORTING

INFORMATION TECHNOLOGY AND GENERAL SERVICES

INFORMATION TECHNOLOGY SYSTEM

ADMINISTRATIONRETAIL COORDINATION

CORPORATE OPERATIONS

INTER-BANK RELATIONS CENTRAL BACK OFFICE

BANKING OPERATIONS

TREASURY AND INVESTMENT BANKING

MIDDLE OFFICE

LJUBLJANA REGIONAL OFFICE

MARIBOR REGIONAL OFFICE

NOVA GORICA REGIONAL OFFICE

KRANJ REGIONAL OFFICE

KOPER REGIONAL OFFICE

CELJE REGIONAL OFFICE

NOVO MESTO REGIONAL OFFICE


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SENIOR MANAGEMENT

MANAGEMENT BOARD Aleš Žajdela, M.Sc. President of the Management Board

Gregor Hudobivnik Member of the Management Board

Radovan Jereb, M.Sc. Econ. Member of the Management Board

Marketing and Public Relations Department

Nina Intihar Director of Marketing and Public Relations Department

Internal Audit Department Klavdija Markič Director of Internal Audit Department

Risk Management Department

Kristijan Hvala, M.Sc. Director of Risk Management Department

Custody and Administrative Services Department

Jasmin Furlan, M.Sc. Director of Custody and Administrative Services Department

Legal and Compliance Department

Tomaž Marinček Director of Legal and Compliance Department

Personnel Department Alenka Sabadin, M.Sc. Director of Personnel Department

DEVELOPMENT DIVISION Franc Bračun, Ph.D. Division Executive Director

Matjaž Mušič Director of Development and Banking Technology Department

Andrej Grobler, M.Sc. Director of Organisation and Process Management Department

COMMERCIAL BANKING DIVISION

Vanja Jeraj Markoja Division Executive Director

Barbara Jagodič Director of Large Corporate Client Department

Zvonka Črmelj Director of SME Client Department

Julija Šušmelj Stevanovič Director of Retail Coordination Department

Eva Janžek Director of Ljubljana Regional Office and Assistant to the Executive Director

Janja Podvršnik Vrabič Director of Maribor Regional Office

Davorina Mrevlje Director of Nova Gorica Regional Office

Tatjana Ahačič Director of Kranj Regional Office

Branko Hočevar Director of Koper Regional Office

Nada Jurko Director of Celje Regional Office

Janja Horvat Jaklič, M.Sc. Director of Novo mesto Regional Office

FINANCIAL MARKETS DIVISION

Boštjan Herič, M.Sc. Division Executive Director

Sabina Župec - Kranjc, M.Sc. Director of Treasury Department

Uroš Vejnović Director of Investment Banking Department

Štefan Volk, M.Sc. Director of Interbank Relations Department

FINANCE AND PROCESS SUPPORT DIVISION

Nada Mertik Division Executive Director

Alenka Plut, M.Sc. Assistant to Executive Director, Head of Financial Controlling and Reporting Department

Marko Zabukovec Director of Central Back Office

Marija Kordiš Director of Banking Operations Department

Irena Drčič Rojc Director of Accounting Department

Boštjan Rupar Director of Treasury and Investment Banking Middle Office

INFORMATION TECHNOLOGY DIVISION

Simona Kogovšek Division Executive Director

Matej Jereb Director of Information Technology and General Services Department

Liljana Torkar Kogovšek Director of Information Technology Development Department

Martin Žumer Director of Information Technology System Administration Department

Senior management organisational chart as at 1 January, 2009.

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Ljubljana Regional Office

Slovenska 50 Branch Office Slovenska 50 Ljubljana

Šiška Branch Office Celovška 106 Ljubljana

Pražakova Branch Office Kolodvorska 9 Ljubljana

Bežigrad Branch Office Dunajska 48 Ljubljana

Trubarjeva Branch Office Trubarjeva 65 Ljubljana

Loterija Slovenije Offsite Counter Gerbičeva 99 Ljubljana

Smelt Branch Office Dunajska 160 Ljubljana

Vič Branch Office Tržaška 87 Ljubljana

Logatec Outlet Notranjska 4 Logatec

Šmartinska Outlet Šmartinska 102 - 104 Ljubljana

Novo mesto Regional Office

Novo mesto Branch Office Rozmanova 40 Novo mesto

Krško Branch Office Cesta krških žrtev 135 B Krško

Kranj Regional Office

Kranj Branch Office Nazorjeva 1 Kranj

Jesenice Branch Office Maršala Tita 39 A Jesenice

Tržič Branch Office Cankarjeva 1 A Tržič

Maribor Regional Office

Maribor I Branch Office Glavni trg 18 Maribor

Maribor II Branch Office Cankarjeva 6 B Maribor

Maribor III Branch Office Kardeljeva 61 Maribor

Murska Sobota Branch Office Kocljeva 16 Murska Sobota

Ptuj Branch Office Osojnikova 9 Ptuj

Slovenj Gradec Branch Office Ronkova 4 A Slovenj Gradec

Prevalje Offsite Counter Trg 12 Prevalje

Tezno Outlet Prvomajska 26 Maribor

BRANCH NETWORK


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Celje Regional Office

Celje I Branch Office Aškerčeva 10 Celje

Celje II Branch Office Miklošičeva 1 Celje

Žalec Branch Office Šlandrov trg 28 Žalec

Velenje Branch Office Kersnikova 1 Velenje

Koper Regional Office

Koper Branch Office Ferrarska 12 Koper

Lucija Outlet Obala 112 Lucija

Casino Portorož Offsite Counter Obala 75 A Portorož

Izola Outlet Sončno nabrežje 6 Izola

Sežana Branch Office Partizanska 41 Sežana

Casino Lipica Offsite Counter Lipica 5 Lipica

Nova Gorica Regional Office

Nova Gorica Erjavčeva Branch Office Erjavčeva 2 Nova Gorica

Šempeter pri Gorici Branch Office C. Prekomorskih brigad 2 C Šempeter

Nova Gorica Kidričeva Branch Office Kidričeva 18 Nova Gorica

Ajdovščina Branch Office Goriška 25 A Ajdovščina

Idrija Branch Office Lapajnetova 47 Idrija

Tolmin Branch Office Mestni trg 5 Tolmin

Kobarid Offsite Counter Markova 16 Kobarid

Postojna Outlet Gregorčičev drevored 2 B Postojna

Branch network overview as at 31 December, 2008.

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STATEMENT OF COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE

Abanka Vipa d.d. (hereinafter: Abanka) accepts and abides by the Corporate Governance Code (hereinafter: the Code) adopted by the Ljubljana Stock Exchange d.d., Ljubljana, the Association of Supervisory Board Members of Slovenia and the Managers’ Association of Slovenia on 18 March, 2004, and amended on 14 December, 2005 and 5 February, 2007.

The Code is also available on the website of the Ljubljana Stock Exchange http://www.ljse.si/ in Slovene and English.

This statement refers to the fiscal year 2008.

The Management and Supervisory Boards of Abanka hereby declare that in their work they comply with the Code with certain derogations from the provisions, disclosed hereinafter.

Code provision 1.1.1.:The key goal of a public limited company engaged in a gainful activity is to maximise the company’s value. This and other goals, pursued by the company in performing its activity, should be stated in the company’s Articles of Association.

The Articles of Association of Abanka state that it is a public limited company which operates independently according to the principles of liquidity, prudence and profitability with the purpose of making profit. The defined goals include achieving adequate return on equity, competitive position on the market and ensuring the capital strength of the Bank. On top of that Abanka continually pursues the goal set out in the Code: maximisation of its value.

Code provision 1.2.6.: Companies should encourage all shareholders to actively and responsibly exercise their rights and warn them of the manner of exercising their right which could damage the company or other company’s

shareholders. Companies should encourage a greater representation of shareholders at the general meeting of shareholders also indirectly, through financial and other organisations and by proxy (organised collection of proxies, publication of information on proxies).

Abanka does not encourage its shareholders through financial and other organisations, since it wishes them to directly participate in general meetings of shareholders or to choose their own proxies. To this end the Bank distributes notices of general meetings with registration and proxy forms enclosed.

Code provision 1.2.7.: Companies should encourage major shareholders, institutional investors and the state, to inform the public of their investment policy regarding the company, e.g. its voting policy, the strength and method of corporate governance, the mechanisms and frequency of communicating with the management or supervisory bodies.

Abanka is of the view that providing information to the public by its shareholders about their investment policy is primarily at their discretion and it depends on their public communications policy. No encouragement by Abanka can specifically influence its shareholders decision to inform the public. Abanka’s main concern is to treat all of its shareholders equally.

Code provision 1.3.7.:The company’s management should ensure the company, upon convening the general meeting of shareholders, uses such information technology as to allow for information to be disseminated uniformly to all shareholders and for their rights to be exercised effectively. When releasing data and material from paragraphs 2 to 4 of this subsection and publishing them on the company’s official website, the company’s management should abide by the rules of uniform information dissemination.


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When publishing the notice of the general meeting of shareholders, the company’s management should also state the company’s official website address.The company’s management should publish the reports and material stipulated by law on the company’s official website, together with the notice of the general meeting of shareholders, the agenda, proposed resolutions and the grounds for them. If the general meeting of shareholders is to decide on amendments to the articles of association, the company’s management shall publish the text of the proposed amendments and substantiate them on the company’s official website.The company’s management should also publish the total number of shares and voting rights, along with the number of shares and voting rights for a particular class of shares as at the time the general meeting is convened on the company’s official website.

So far Abanka has not stated its official website address in notices of General Meetings of Shareholders. It has published these notices on its official website with the agenda, proposed resolutions and full amendments to the Articles of Association, however without adding grounds for other proposed resolutions and other legally required reports and material. Abanka hasn’t published the total number of shares or voting rights, along with their number per share class as at the time the general meeting is convened. Abanka shall fully comply with Code provision 1.3.7. in the future.

Code provision 1.3.10.: If the general meeting of shareholders is to elect members of the supervisory or management board at the proposal of these bodies, the grounds for such resolution proposals should include – along with the data required by law (name and surname, education, relevant work experience and current employment) – at least the information on the proposed nominee’s membership in other management or supervisory bodies and any potential conflicts of interest. The management should also express their view on

whether the proposed nominee is independent in relation to the company (whether he is economically, personally or in any other way closely linked to the company or its management board). It is recommended that this information be made public and available to the proposed nominee for a member of a management or supervisory body from the time when the general meeting of shareholders has been convened in the manner described in subsections 1.3.7. and 1.3.9. of this Code.

In the grounds for the proposed resolutions on nominations of Supervisory Board members, on top of the legally required information, Abanka will state in the future the information on the nominee’s membership in other management or supervisory bodies and any potential conflicts of interest, provided that proposals for nominations are lodged in due time. Likewise, Abanka will in the future make public its opinion on the nominees independence in relation to the Bank. A presentation of such a nominee shall be made public subject to his or her explicit prior approval.

Code provision 1.3.19.:The general meeting of shareholders should adopt resolutions on adopting management or supervisory bodies discharges separately for each body. A member of a management or supervisory body may not vote on adopting the discharge of the body he or she is a member of.

Abanka so far has not abided by this provision, since the General Meeting of Shareholders resolved on the discharge of the Management and Supervisory Board together. Abanka will comply with this provision in the future.

The members of Abanka’s management or supervisory bodies who are at the same time shareholders of Abanka have the right to vote on their discharge. As shareholders’ corporate rights may not be restricted, Abanka does

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not intend to restrict their voting rights in this way and will leave to individual members of management or supervisory bodies to act in this matter at their own discretion.

Code provision 1.3.21.: Along with the contents of the announcement from the previous subsection, the company’s management should also publish questions asked by shareholders at the general meeting of shareholders and related answers on the company’s website.

Questions put by shareholders and answers given at a General Meetings of Shareholders usually cannot influence the operations of Abanka as a public limited company, but the shareholders present at the meeting are acquainted with them. As a rule Abanka does not publish these questions and answers, unless there is a legal requirement for the publication of the information disclosed at the general meetings of shareholders.

Code provision 2.3.7.: Share options and other management board members’ earnings that arise from the company’s shares, and other individual or collective remuneration schemes based on profit sharing or the company’s shares, should be proposed by the supervisory board to the general meeting of shareholders. Management board members may participate in profit sharing schemes only if this is regulated by the company’s articles of association and based on a resolution by the general meeting of shareholders.

Abanka has no remuneration scheme involving a share options scheme or a share scheme. In spite of that, part of the Management Board’s remuneration, defined on the basis of criteria set by the Supervisory Board, may be paid in shares.

Code provision 2.3.8.:The total remuneration, compensation and other benefits of management board members should be disclosed annually in the Notes to the Financial Statements and should be given in net and gross amounts for each management board member. Remuneration should be broken down as follows:– fixed component of earnings,– variable component of earnings (long-term

and short-term incentives for achieving higher productivity and performance-related earnings, excluding profit sharing),

– profit sharing, – share options,– other earnings of management board members

(severance pay, additional insurance premiums, bonuses).

If a management board member’s remuneration also includes the company’s shares, the earnings should be broken down into cash receipts and shares.

The earnings of the Abanka Management Board members are disclosed in an aggregate amount in line with the legislation in force.

Code provision 3.1.10.:The chairman of the supervisory board should encourage its members to perform their duties effectively and actively. If a member fails to attend the board’s meetings or is not active in performing their duties, this should be evident from a written report to the general meeting of shareholders. Once a year the supervisory board shall evaluate its members’ performance. This evaluation should include evaluations of the board’s composition, organisation and functioning as a team, along with the assessment of the competence and efficiency of each individual member as well as individual committees and commissions of the supervisory board. Based on this procedure the board shall decide on measures required to improve its effectiveness (composition, education, session dynamics and attendance, acquisition of information and preparation for sessions, etc).


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The Supervisory Board evaluates its own work as a whole and of its individual members. As a rule the Supervisory Board holds its sessions in full attendance with regular participation by all of its members, which with their work and experience contribute to quality performance of the body.

Code provision 3.2.3.:The supervisory board shall provide for adequate service contracts with management board members. The contract should determine the duties and competencies of a management board member, the remuneration system and the criteria for the variable component of remuneration, his or her loyalty to the company and the methods for his or her dismissal and severance pay. A member’s dismissal for other economic and business reasons should not automatically be a dismissal due to culpable liability. The grounds of culpable liability resulting in a board member’s dismissal should be specified in the service contract. In the event of dismissal due to culpable liability a management board member shall not be entitled to severance pay.

The service contracts of the Management Board members do not explicitly specify the grounds of culpable liability; as such explicit specification is inappropriate and could never cover all possible situations.

Code provision 3.3.6:In collecting the nominations, the supervisory board or its special committee shall consider certain pre-set criteria. It is recommended that in selecting the nominees, the following is considered:– comprehensive business knowledge and adequate

expertise for effective service performance (taking into consideration the company’s specific features, such as the industry in which it operates, international activities, etc.);

– potential conflicts of interest as specified in chapter 3.5 of this Code,

– business ethics and personal integrity; – appropriate documents and evidence of relevant

skills, evidencing that a nominee is qualified for serving on supervisory boards;

– sufficient time available. It is recommended that knowledge, experience and qualifications of individual members are well balanced.It is recommended that the above criteria be taken into account when specifying the special conditions supervisory board members are to meet, as stipulated by the company’s articles of association.

The criteria for the membership of the Supervisory Board are specified in detail in the Banking Act, which is why there is no need for defining internal ones.

Code provision 3.3.8.:Prior to the general meeting at which shareholders are to elect supervisory board members, the supervisory board should, pursuant to subsection 1.3.10. of this Code, properly introduce the nominees to the shareholders and disclose any potential conflicts of interest.

See note to the Code provision 1.3.10.

Code provision 3.3.10.:The number of employee-elected representatives on the supervisory board should be set in the articles of association. The procedure for their election or dismissal should be regulated by a general internal document. In nominee selection the required professional qualifications should also be considered. It is recommended that employee-elected representatives on the supervisory board not be appointed from among senior management, or else this should be publicly disclosed. If there are no adequate nominees from among the company’s employees, the workers’ council should propose independent nominees from outside the company.

There are no employee-elected representatives on the Supervisory Board, as the legal provision

72


regarding workers’ participation in the Management and Supervisory Boards is not applicable for Banks.

Code provision 3.4.2.:The amount and method of determining individual remuneration, compensation and other benefits of supervisory board members are based on a resolution by the general meeting of shareholders or the articles of association. Amount of a remuneration shall be determined according to the following criteria:– scope of duties and responsibilities of supervisory

board members;– expertise and activity of supervisory board

members;– size of the company and the complexity of its

business operations;– the company’s general economic environment.

The members of the Supervisory Board of Abanka are remunerated for their service on the board itself as well as on its committees and commissions, they receive attendance fees and expense reimbursement. The attendance fee paid to the Chairman is higher than that paid to all the members.

Code provision 3.4.3.:The total remunerations, compensation and other benefits of supervisory board members should be disclosed in the Notes to the Financial Statements. It is recommended that remuneration amounts be disclosed for each supervisory board member separately. They should be broken down as specified in the section 3.4.1. of this Code and include profit sharing, any existing share option schemes and all other earnings and benefits that the supervisory board members received from the company.

All earnings received by the Supervisory Board members of Abanka are disclosed separately by type and in an aggregate amount. The recommendation on disclosing amounts per member has not been followed yet. In the opinion of Abanka the information on the

aggregate amount of paid earnings is the most relevant to the shareholders.

Code provision 3.4.6.:Supervisory board members’ liability insurance should protect the interests of the company, not the supervisory board members.

Abanka has not taken any liability insurance for the members of the Supervisory Board.

Code provision 3.5.4.:A supervisory board member should take all the necessary precautionary measures to avoid conflicts of interest which could influence his or her judgement. A conflict of interest exists when a board member’s impartial and objective performance of duties or decision-making is jeopardised due to personal economic interests their families’ interests, emotions, political or national (favourable or unfavourable) disposition or any other related interests with other individuals or legal entities.A supervisory board member has a conflict of interest if he or she:– has, or has had, within the past three years, an

important business relationship with the company or its associated company;

– is a member of the senior management team of an associated company;

– helped draft a proposal of the company’s annual report;

– is a major shareholder of the company;– is economically, personally or in some other way

closely associated with a major shareholder or its management board;

– is a major supplier of goods or services (including advisory or auditing services);

– has received, within the last three years, or currently receives considerable extra remuneration from the company or an associated company, excluding the remuneration received as a supervisory board member;

– has been, within the last three years, a partner or employee of a current or former external auditor of the company or associated company;


73


– has been on the supervisory board for over 12 years;– is an immediate family member of another member

of the supervisory or of the management board.

Several members of the Supervisory Board of Abanka can be deemed to have economic, personal or other close relationship with the Bank’s major shareholders or their Management Board. In these cases there is no conflict of interest in the opinion of Abanka. Even less so, because these members are not prohibited from serving as supervisory board members pursuant to the Banking Act, which very specifically and in detail stipulated the conditions and requirements for bank supervisory board members.

Code provision 3.5.5.:The company should state its detailed criteria for assessing the existence of conflicts of interest and the measures to be taken to avoid them in the rules of procedure of the supervisory board, its articles of association or in a company’s special corporate governance code. It is recommended that at least the following measures are provided for: – a supervisory board member explains his or her

conflict of interest and abstains from voting;– in well-grounded cases the chairman of the

supervisory board may, prior to voting, demand from the board members to declare whether they have any conflicts of interest related to the subject-matter of voting;

– if a supervisory board member abstained from voting due to a conflict of interest, this should be recorded in the minutes of the supervisory board session, along with any respective explanations or statements provided by supervisory board members.

Any material or evident conflict of interest in relation to a supervisory board member that is not of a temporary nature, represents the grounds for the termination of his or her term of office.

No precise criteria for establishing conflicts of interest and required consequent action are stipulated either in the Rules of Procedure

of the Supervisory Board or in the Articles of Association. The occurrence of a conflict of interest is prevented by the Banking Act stipulations which, in view of the nature of banking operations, specify persons who are not allowed to serve on the supervisory board of a bank and the conditions for supervisory board members.

Code provision 3.6.4.:The chairman of the committee or a commission shall not be the chairman of the supervisory board. The committee or commission shall report regularly to the supervisory board on its work.

The Chairman of the Audit Committee is also the Chairman of the Supervisory Board. He was appointed Chairman of the Audit Committee before the Bank accepted the Code. For the purpose of the continuity of the work of the Audit Committee it is deemed inappropriate to appoint another chairman for the time being.

Code provision 7.1.3.: Before appointing an auditor at the general meeting of shareholders (on the proposal of the supervisory or management board), shareholders shall be informed of any other services that the auditor provides or has provided to the company in professional areas related to auditing. Shareholders shall also be made aware of any other fact that could cause a conflict of interest in the proposed auditor.

At the General Meeting of Shareholders in 2008 shareholders were not informed about any other services that the auditor has provided to the Bank in professional areas related to auditing. In the future Abanka shall fully comply with this provision of the Code.

74


Code provision 8.2.:Companies should provide their public announcements and publish their annual reports also in the English language.

Abanka publishes its annual report and those individual announcements which it deems necessary in English. Further, the official website of Abanka provides key information on the Bank and the Abanka Group in English as well.

Code provision 8.6.:Companies should prepare a financial calendar of the company’s expected significant announcements (general meetings of shareholders, announcement of the record date for dividend payments, annual and interim reports, etc.) in the forthcoming financial year. The financial calendar should be published and publicly available on the company’s website.

Abanka has not prepared a financial calendar. It will prepare one for the financial year 2009.

Made on this 15th day of September, 2008 Management Board

Supervisory Board





Tomaž TOPLAK

Chairman of the Supervisory Board

Gregor HUDOBIVNIK



75



77


We believe the future is built on

trust. We believe that growth is a

natural process. That’s why we

continue to grow each and every

moment: high, wise, and green.

CONSOLIDATED FINANCIAL REPORT

78


Abanka Vipa d.d. is a bank with tradition in the Slovene banking sector. It started back in 1955 as a branch of the Yugoslav Bank for International Trade. In 1977, the branch was renamed Jugobanka – Ljubljana Basic Bank and it started operating independently as Abanka d.d., Ljubljana in January 1990, after its conversion into a public limited company. On 31 December, 2002 it acquired Banka Vipa d.d. and has since then worked under the name Abanka Vipa d.d. or Abanka d.d. for short. As a result of this acquisition Abanka’s market share increased by 1.7 percentage points to 8.5%, which made it the third largest bank in Slovenia. In terms of total assets, Abanka was the third strongest Slovene bank as at 31 December, 2008, when it held 8.0% of the market.

Abanka is a universal bank, authorised for all banking and other financial services. Through a branch network of 41 outlets across Slovenia, easily accessible electronic banking as well as its consulting and personalised client approach it provides integrated financial services, ranging from classic banking to bankassurance and investment banking products. As a part of its investment banking business Abanka manages the AIII Mutual Pension Fund.

Moreover, Abanka is an internationally renowned bank. Through its interbank operations based on a worldwide network of correspondent banks it enables international client payment transactions.

The range of Abanka’s products and services is complemented by its subsidiaries, associates and joint ventures: Abančna DZU, Argolina, Afaktor, Aleasing, Vogo leasing, Analožbe, KDSPV1, Abančna DZU Delniški Evropa and ASA Abanka leasing.

At the end of 2008 Abanka was employing 878 staff or seven more than at the end of 2007.

The Bank is run by the Management Board: Mr. Aleš Žajdela, President, Mr. Gregor Hudobivnik, Member, and Mr. Radovan Jereb, Member.

ABANKA’S REGISTERED OFFICE:

ABANKA VIPA d.d.Slovenska 581517 LjubljanaSlovenia

GENERAL INFORMATION


79


The Management of the Bank confirms the financial statements of ABANKA VIPA GROUP for the year ended 31 December, 2008 (pages 81 through 89 of Consolidated financial statements), the applied accounting policies, and the notes to the financial statements (pages 90 through 207 of the Consolidated financial statements).

The Management of the Bank is responsible for the preparation of the Consolidated financial statements which give a true and fair view of the financial position of the Group as at 31 December, 2008 and the results of its operations for the year then ended.

The Management of the Bank confirms that the accepted accounting policies have been used on a consistent basis and that the accounting estimates have been made in compliance with the principle of prudence. The management of the Bank also confirms that the consolidated financial statements have been prepared under the assumption of a going concern and in compliance with the relevant legislation and International Financial Reporting Standards as adopted by the EU.

The management is also responsible for proper management of accounting, for taking appropriate measures to protect the Group's assets and to prevent and discover fraud, other irregularities or illegal acts.

The tax authorities may inspect the books and records at any time within 5 years subsequent to the reported tax year, and may impose additional tax assessments and penalties. The Bank's management is not aware of any circumstances which may give rise to a potential material liability in this respect.

Ljubljana, 20 March 2009

Gregor HUDOBIVNIK

Member of the Management BoardAleš ŽAJDELA, M.Sc.




STATEMENT OF MANAGEMENT’S RESPONSIBILITIES

80


Index to the consolidated financial statements

Note Page

Consolidated income statement 81

Consolidated balance sheet 82

Consolidated statement of changes in equity 84

Consolidated cash flow statement 88

Notes to the consolidated financial statements 90

1 Summary of significant accounting policies: 90

1.1 Basis of presentation 90

1.2 Consolidation 91

1.3 Segment reporting 93

1.4 Foreign currency translation 93

1.5 Financial assets 93

1.6 Offsetting financial instruments 95

1.7 Derivative financial instruments 95

1.8 Interest income and expense 95

1.9 Fee and commission income 96

1.10 Dividend income 96

1.11 Impairment of financial assets 96

1.12 Property and equipment, intangible assets and investment property 98

1.13 Impairment of non-financial assets 99

1.14 Leases 99

1.15 Cash and cash equivalents 100

1.16 Provisions 100

1.17 Financial guarantee contracts 100

1.18 Employee benefits 101

1.19 Taxation 101

1.20 Borrowings 102

1.21 Share capital 102

1.22 Managed funds 102

1.23 Fiduciary activities 102

1.24 Sale and repurchase agreements 102

1.25 Equity component of compound financial instrument 103

1.26 Comparatives 103

1.27 Amendments of the financial statements after issue 103

2 Risk Management 104

3 Critical accounting estimates, and judgements in applying accounting policies 166

4 Segment analyses 167

5 Net interest income 171

6 Dividend income 171

7 Net fee and commission income and expenses 172

8 Realised gains and losses on financial assets and liabilities not measured at fair value through profit or loss 172

9 Net gains/losses on financial assets and liabilities held for trading 173

Note Page

10 Net gains/losses on financial assets and liabilities designated at fair value through profit or loss 173

11 Net other operating income 174

12 Administration cost 174

13 Depreciation 175

14 Provisions 175

15 Impairment 175

16 Income tax expense 176

17 Earnings per share 176

18 Cash and cash balances with central bank 177

19 Financial assets and liabilities held for trading 177

20 Financial assets designated at fair value through profit or loss 179

21 Available for-sale financial assets 180

22 Loans and receivables to banks 181

23 Loans and receivables to non-bank customers 183

24 Held-to maturity investments 184

25 Property and equipment, intangible assets, investment property and non-current assets and disposal groups classified as held for sale 185

26 Investments in associates and joint ventures 187

27 Other assets 188

28 Deposits from central bank 189

29 Financial liabilities designated at fair value through profit or loss 189

30 Deposits from banks and non-bank customers 190

31 Debt instruments 191

32 Subordinated liabilities 191

33 Repurchase agreements 193

34 Provisions 193

35 Deferred income tax 194

36 Other liabilities 195

37 Basic equity, share premium and treasury shares 196

38 Reserves from profit (including retained earnings) and revaluation reserves 198

39 Dividends per share 199

40 Cash and cash equivalents 200

41 Contingent liabilities and commitments 200

42 Investment services and transactions for customers 202

43 Managed funds 202

44 Other items in the Cash flow statement 203

45 Related party transactions 203

46 Subsidiaries 205

47 Acquisitions and disposals 205

48 Post balance sheet events 207

CONSOLIDATED FINANCIAL STATEMENTS


81


Consolidated income statement

(All amounts in EUR thousand unless otherwise stated)

Ser.No.

AMOUNT

Year ended 31 December

ITEM DESCRIPTION NOTE 2008 2007

1 2 3 4

1 Interest income and similar income 5 213,801 159,638

2 Interest expenses and similar expenses 5 (135,015) (92,456)

3 Net interest income (1 - 2) 78,786 67,182

4 Dividend income 6 3,594 1,644

5 Fee and commission income 7 38,051 39,695

6 Fee and commission expenses 7 (6,230) (6,257)

7 Net fee and commission income (5 - 6) 31,821 33,438

8 Realised gains and losses on financial assets and liabilities not measured at fair value through profit and loss 8 2,986 6,884

9 Net gains and losses on financial assets and liabilities held for trading 9 (12,934) 83

10 Net gains and losses on financial assets and liabilities designatedat fair value through profit or loss 10 (3,287) (260)

11 Exchange differences (4,334) 2,834

12 Gains and losses on derecognition of assets other than held for sale 160 (122)

13 Net other operating income 11 3,451 4,747

14 Administration costs 12 (52,511) (50,584)

15 Depreciation 13 (6,857) (6,659)

16 Provisions 14 8,588 (293)

17 Impairment 15 (23,283) (11,127)

18 Share of the profit or loss of associates and joint ventures accounted for using the equity method (60) (61)

19 Total profit or loss from non-current assets and disposal groupsclassified as held for sale (78) 6

20 TOTAL PROFIT OR LOSS BEFORE TAX FROM CONTINUING OPERATIONS(3 + 4 + 7 + 8 + 9 + 10 + 11 + 12 + 13 - 14 - 15 - 16 - 17 + 18 + 19) 26,042 47,712

21 Tax expense related to profit or loss from continuing operations 16 (5,644) (10,902)

22 TOTAL PROFIT OR LOSS AFTER TAX FROM CONTINUING OPERATIONS (20 - 21) 20,398 36,810

23 NET PROFIT OR LOSS for the financial year (22) 20,398 36,810

a) Profit or loss attributable to equity holders of the parent 20,406 36,799

b) Profit or loss attributable to minority interest (8) 11

24 Basic earnings per share in EUR 17 2.44 5.68

25 Diluted earnings per share in EUR 17 2.44 5.68

These financial statements have been approved for issue by the Management Board on 20 March, 2009 and signed on its behalf by:

Management Board

The notes on pages 90 to 207 are an integral part of these consolidated financial statements.

Gregor HUDOBIVNIK

MemberAleš ŽAJDELA, M.Sc.

President


Member

82



Consolidated balance sheet

AMOUNT

ItemNo.

As at 31 December


1 2 3 4

1 Cash and cash balances with central bank 18 229,417 60,456

2 Financial assets held for trading 19 48,310 183,543

3 Financial assets designated at fair value through profit or loss 20 24,313 25,063

4 Available-for-sale financial assets 21 438,718 486,117

5 Loans and receivables 3,055,312 2,620,990

– loans and receivables to banks 22 281,518 236,202

– loans and receivables to non-bank customers 23 2,773,794 2,384,788

6 Held-to-maturity investments 24 13,378 13,308

7 Non-current assets and disposal groups classified as held for sale 25 2,464 1,427

8 Property and equipment 25 48,079 51,845

9 Investment property 25 123 144

10 Intangible assets 25 3,698 4,535

11 Investments in associates and joint ventures 26 955 1,001

12 Tax assets 9,077 3,304

– current tax assets 3,835 53

– deferred tax assets 35 5,242 3,251

13 Other assets 27 37,152 65,341

14 TOTAL ASSETS (from 1 to 13) 3,910,996 3,517,074


83



AMOUNT

ItemNo.

As at 31 December


1 2 3 4

15 Deposits from central bank 28 130,384 26

16 Financial liabilities held for trading 19 9,834 8,077

17 Financial liabilities designated at fair value through profit or loss 29 7,699 8,386

18 Financial liabilities measured at amortised cost 3,358,001 2,945,161

– deposits from banks 30 66,027 76,692

– deposits from non– bank customers 30 1,918,311 1,724,359

– loans and advances from banks 1,091,126 955,247

– loans and advances from non– bank customers 216 330

– debt instruments 31 121,870 134,772

– subordinated liabilities 32 160,451 53,761

19 Financial liabilities associated to transferred assets 33 10,681 123,887

20 Provisions 34 14,299 23,752

21 Tax liabilities 3,140 5,507

– current tax liabilities 963 1,238

– deferred tax liabilities 35 2,177 4,269

22 Other liabilities 36 40,202 49,096

23 TOTAL LIABILITIES (from 15 to 22) 3,574,240 3,163,892

24 Basic equity 37 30,045 22,951

25 Share premium 37 153,117 58,062

26 Equity component of compound financial instruments 32 – 117,539

27 Revaluation reserves 38 (2,941) 7,260

28 Reserves from profit (including retained earnings) 38 141,351 121,001

29 Treasury shares 37 (240) (254)

30 Income from current year 38 15,402 26,586

31 EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF PARENT (from 24 to 30) 336,734 353,145

32 Minority interest 47 22 37

33 TOTAL EQUITY (31 + 32) 336,756 353,182

34 TOTAL LIABILITIES AND EQUITY (23 + 33) 3,910,996 3,517,074


Management Board


Gregor HUDOBIVNIK


President


Member

84



Consolidated statement of changes in equity for the reporting period ended 31 December 2008

Item Code ITEM DESCRIPTION NOTE

Basicequity

Sharepremium

Equitycomponent

of compound

financialinstruments

Revaluationreserves

Reservesfrom

profit

Retained earnings

or loss

Treasuryshares

(capital deduction

item)

Incomefrom

currentyear

Minorityinterest

Totalequity

1 2 3 4 5 6 7 8 9 10 11 12

1 OPENING BALANCE FOR THE REPORTING PERIOD 22,951 58,062 117,539 7,260 112,644 8,357 (254) 26,586 37 353,182

2 Net gains/losses in revaluation reserves from financial assets available for sale 38, 47 (10,184) (7) (10,191)

3 Net gains/losses from consolidated capital revaluation adjustment 38 (17) (17)

4 Total gains/losses after tax recognised directly in equity - revaluation reserves (2 + 3) – – – (10,201) – – – – (7) (10,208)

5 Net profit or loss for the financial year (from income statement) 38 20,406 (8) 20,398

6 Net profit or loss for the financial year recognised in equity (4 + 5) – – – (10,201) – – – 20,406 (15) 10,190

7 New share capital subscribed (paid) 37 7,094 94,906 102,000

8 Appropriation of (accounting for) dividends/rewards in form of shares 37, 45 149 14 163

9 Appropriation of (accounting for) dividends, of interests from innovative instrument 38, 39 (7,260) (3,895) (11,155)

10 Transfer of net profit to reserves from profit 38 32,199 (4,579) (27,695) (75)

11 Conversion of the innovative instrument from equity to a liability 32 (117,539) (117,539)

12 Other 38 11 (21) (10)

13 CLOSING BALANCE FOR THE REPORTING PERIOD 30,045 153,117 – (2,941) 144,854 (3,503) (240) 15,402 22 336,756


85




Basicequity

Sharepremium

Equitycomponent

of compound


Revaluationreserves

Reservesfrom

profit

Retained earnings

or loss

Treasuryshares

(capital deduction

item)

Incomefrom

currentyear

Minorityinterest

Totalequity

1 2 3 4 5 6 7 8 9 10 11 12

1 OPENING BALANCE FOR THE REPORTING PERIOD 22,951 58,062 117,539 7,260 112,644 8,357 (254) 26,586 37 353,182

2 Net gains/losses in revaluation reserves from financial assets available for sale 38, 47 (10,184) (7) (10,191)

3 Net gains/losses from consolidated capital revaluation adjustment 38 (17) (17)

4 Total gains/losses after tax recognised directly in equity - revaluation reserves (2 + 3) – – – (10,201) – – – – (7) (10,208)

5 Net profit or loss for the financial year (from income statement) 38 20,406 (8) 20,398

6 Net profit or loss for the financial year recognised in equity (4 + 5) – – – (10,201) – – – 20,406 (15) 10,190

7 New share capital subscribed (paid) 37 7,094 94,906 102,000



10 Transfer of net profit to reserves from profit 38 32,199 (4,579) (27,695) (75)

11 Conversion of the innovative instrument from equity to a liability 32 (117,539) (117,539)

12 Other 38 11 (21) (10)

13 CLOSING BALANCE FOR THE REPORTING PERIOD 30,045 153,117 – (2,941) 144,854 (3,503) (240) 15,402 22 336,756

86



Consolidated statement of changes in equity for the reporting period ended 31 December 2007


Basicequity

Sharepremium

Equitycomponent

of compound


Revaluationreserves

Reservesfrom

profit

Retained earnings

or loss

Treasuryshares

(capital deduction

item)

Incomefrom

currentyear

Minorityinterest

Totalequity

1 2 3 4 5 6 7 8 9 10 11 12

1 OPENING BALANCE FOR THE REPORTING PERIOD 22,951 57,994 – 7,747 90,675 8,357 (267) 24,548 50 212,055

Prior period errors 38 (1,617) (1,617)

1 RESTATED OPENING BALANCE FOR THE REPORTING PERIOD 22,951 57,994 – 7,747 90,675 6,740 (267) 24,548 50 210,438

2 Net gains/losses in revaluation reserves from financial assets available for sale 38 (487) (487)

3 Total gains/losses after tax recognised directly in equity – revaluation reserves (2) – – – (487) – – – (487)

4 Net profit or loss for the financial year (from income statement) 38 36,799 11 36,810

5 Net profit or loss for the financial year recognised in equity (3 + 4) – – – (487) – – – 36,799 11 36,323



8 Transfer of net profit to reserves from profit 38 21,949 5,541 (27,514) (24)

9 Covering of the loss brought forward 38 1,617 (1,617) –

10 Issue of innovative instrument 32 117,539 117,539

11 Other 38, 47 20 (24) (4)

12 CLOSING BALANCE FOR THE REPORTING PERIOD 22,951 58,062 117,539 7,260 112,644 8,357 (254) 26,586 37 353,182


Management Board


Gregor HUDOBIVNIK


President


Member


87




Basicequity

Sharepremium

Equitycomponent

of compound


Revaluationreserves

Reservesfrom

profit

Retained earnings

or loss

Treasuryshares

(capital deduction

item)

Incomefrom

currentyear

Minorityinterest

Totalequity

1 2 3 4 5 6 7 8 9 10 11 12

1 OPENING BALANCE FOR THE REPORTING PERIOD 22,951 57,994 – 7,747 90,675 8,357 (267) 24,548 50 212,055

Prior period errors 38 (1,617) (1,617)

1 RESTATED OPENING BALANCE FOR THE REPORTING PERIOD 22,951 57,994 – 7,747 90,675 6,740 (267) 24,548 50 210,438

2 Net gains/losses in revaluation reserves from financial assets available for sale 38 (487) (487)

3 Total gains/losses after tax recognised directly in equity – revaluation reserves (2) – – – (487) – – – (487)

4 Net profit or loss for the financial year (from income statement) 38 36,799 11 36,810

5 Net profit or loss for the financial year recognised in equity (3 + 4) – – – (487) – – – 36,799 11 36,323



8 Transfer of net profit to reserves from profit 38 21,949 5,541 (27,514) (24)

9 Covering of the loss brought forward 38 1,617 (1,617) –

10 Issue of innovative instrument 32 117,539 117,539

11 Other 38, 47 20 (24) (4)

12 CLOSING BALANCE FOR THE REPORTING PERIOD 22,951 58,062 117,539 7,260 112,644 8,357 (254) 26,586 37 353,182


Management Board

88



Consolidated cash flow statement

Desig-nation ITEM DESCRIPTION NOTE

AMOUNT


2008 2007

1 2 3 4

A. CASH FLOWS FROM OPERATING ACTIVITIES

a) Total profit or loss before tax 26,042 47,712

Depreciation 13 6,857 6,659

Share of the profit or loss of associates and joint ventures accounted for using the equity method 26 60 61

Net losses/(gains) from exchange differences 4,334 (2,834)

Net (gains)/losses from financial assets held to maturity – 42

Net (gains)/losses from sale of tangible assets and investment properties (82) 15

Net (gains)/losses from sale of intangible fixed assets – 107

Other (gains) from investing activities 44 (1,057) (2,233)

Other losses from financing activities 44 6,682 3,113

Net unrealised gains in revaluation reserves from financial assets available for sale (excluding effect of deferred tax) (12,120) 845

Other adjustments to total profit or loss before tax 44 (8,620) 273

Cash flow from operating activities before changes in operating assets and liabilities 22,096 53,760

b) (Increases)/decreases in operating assets (excl. cash & cash equivalents) (211,228) (689,517)

Net (increase) in balances with central bank (7,399) (5,165)

Net decrease/(increase) in financial assets held for trading 149,415 (14,646)

Net decrease/(increase) in financial assets designated at fair value through profit or loss 902 (25,063)

Net decrease/(increase) in financial assets available for sale 57,275 (67,955)

Net (increase) in loans and receivables (438,699) (545,281)

Net (increase)/decrease in non-current assets held for sale (1,036) 39

Net decrease/(increase) in other assets 28,314 (31,446)

c) (Increases)/decreases in operating liabilities 318,467 501,897

Net increase in financial liabilities to central bank 130,358 29

Net increase in financial liabilities held for trading – 7,808

Net (decrease)/increase in financial liabilities designated at fair value through profit or loss (687) 8,386

Net increase in deposits, loans and receivables measured at amortised cost 210,635 491,483

Net (decrease) in debt instruments in issue measured at amortised cost (12,902) (18,058)

Net (decrease)/increase in other liabilities (8,937) 12,249

d) Cash flow from operating activities (a + b + c) 129,335 (133,860)

e) Income taxes (paid) refunded (10,803) (11,738)

f) Net cash flow from operating activities (d + e) 118,532 (145,598)


89



Desig-nation ITEM DESCRIPTION NOTE

AMOUNT


2008 2007

1 2 3 4

B. CASH FLOWS FROM INVESTING ACTIVITIES

a) Receipts from investing activities 2,180 68,401

Receipts from the sale of tangible assets and investment properties 2,180 2,861

Receipts from non-current assets or liabilities held for sale – 6

Receipts from the redemption of financial assets held to maturity – 64,699

Other receipts from investing activities – 835

b) Cash payments on investing activities (6,799) (75,933)

(Cash payments to acquire tangible assets and investment properties) (5,347) (8,314)

(Cash payments to acquire intangible fixed assets) (1,271) (1,738)

(Cash payments for the investment in subsidiaries, associates and joint ventures)

(85) (993)

(Cash outflow to non-current assets or liabilities held for sale) (96) –

(Cash payments to acquire held to maturity investments) – (64,888)

c) Net cash flow from investing activities (a - b) (4,619) (7,532)

C. CASH FLOWS FROM FINANCING ACTIVITIES

a) Cash proceeds from financing activities 102,195 120,068

Cash proceeds from issuing shares and other equity instruments 37 102,000 120,000

Cash proceeds from the sale of treasury shares 195 68

b) Cash payments on financing activities (29,969) (27,752)

(Dividends paid) 39 (7,254) (5,541)

(Cash repayments of subordinated liabilities) (14,678) (14,119)

(Cash payments to acquire treasury shares) (32) –

(Other cash payments related to financial activities - innovative instrument) 32 (8,005) (8,092)

c) Net cash flow from financing activities (a - b) 72,226 92,316

D. Effects of change in exchange rates on cash and cash equivalents 2,082 1,055

E. Net increase in cash and cash equivalents (Ae + Bc + Cc) 186,139 (60,814)

F. Opening balance of cash and cash equivalents 263,739 323,498

G. Closing balance of cash and cash equivalents (D + E + F) 40 451,960 263,739


Management Board


Gregor HUDOBIVNIK


President


Member

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1 Summary of significant accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below:

1.1 Basis of presentation

The consolidated financial statements of the Abanka Group have been prepared in accordance with EU International Financial Reporting Standards (IFRS). The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, held for trading financial assets and all derivative contracts.

The scope of information and notes included in the Annual Report of the Group at least equals the scope required by the Companies Act (ZGD-1), EU IFRS and the Decision on the Books of Account and Annual Reports of (Savings) Banks.

The preparation of financial statements in conformity with EU IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Bank’s accounting policies. Areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in Note 3.

a) Amendments to published standards and interpretations effective 1 January, 2008The application of the amendments and interpretations listed below did not result in substantial changes to the Group’s accounting policies:– IFRIC 11 ‘IFRS 2 – Group Treasury Share Transactions (effective 1 March 2007);– IAS 39 (Amendment), ‘Financial instruments: Recognition and measurement‘ and IFRS 7 ‘Financial instruments:

Disclosures’ (Amendment) (effective 1 July 2008).

Amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures (effective from 1 July 2008) were issued in October 2008. An amendment to IAS 39 permits an entity to reclassify non-derivative financial assets (other than those designated at fair value through profit or loss by the entity upon initial recognition) out of the fair value through profit or loss category in particular circumstances. The amendment also permits an entity to transfer from the available-for-sale category to the loans and receivables category a financial asset that would have met the definition of loans and receivables (if the financial asset had not been designated as available for sale), if the entity has the intention and ability to hold that financial asset for the foreseeable future. An amendment to IFRS 7 requires disclosures about reclassification of financial assets permitted by the amendment to IAS 39 from October 2008.

b) Standards, interpretations and amendments issued but not yet effectiveThe Group has chosen not to early adopt the following standards and interpretations that have been issued but which do not yet take effect for accounting periods beginning on 1 January 2008:

– IAS 1 (Amendment), ‘Presentation of financial statements’ (effective 1 January 2009);– IAS 16 (Amendment), ‘Property, plant and equipment’ (effective 1 January 2009);– IAS 19 (Amendment), ‘Employee benefits’ (effective 1 January 2009);– IAS 20 (Amendment), ‘Accounting for government grants and disclosure of government assistance’ (effective 1

January 2009);– IAS 23 (Amendment), ‘Borrowing costs’ (effective 1 January 2009);– IAS 27 (Revised), ‘Consolidated and separate financial statements’ (effective 1 July 2009);

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


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Notes to the consolidated financial statements (continued)

– IAS 28 (Amendment), ‘Investments in associates’ and consequential amendments to IAS 32, ‘Financial instruments: Presentation’ and IFRS 7, ‘Financial instruments: Disclosures’ (effective 1 January 2009);

– IAS 29 (Amendment), ‘Financial reporting in hyperinflationary economies’ (effective 1 January 2009);– IAS 31 (Amendment), ‘Interests in joint ventures’ and consequential amendments to IAS 32, ‘Financial instruments:

Presentation’ and IFRS 7, ‘Financial instruments: Disclosures’ (effective 1 January 2009);– IAS 32 (Amendment), ‘Financial instruments: Presentation’ and consequential amendments to IAS 1, ‘Presentation

of financial statements’ (effective 1 January 2009);– IAS 36 (Amendment), ‘Impairment of assets’ (effective 1 January 2009);– IAS 38 (Amendment), ‘Intangible assets’ (effective 1 January 2009);– IAS 39 (Amendment), ‘Financial instruments: Recognition and measurement’ (effective 1 January 2009);– IAS 40 (Amendment), ‘Investment property’ (effective 1 January 2009);– IAS 41 (Amendment), ‘Agriculture’ (effective 1 January 2009);– IFRS 1 (Amendment), ‘First time adoption of IFRS’ and consequential amendments to IAS 27, ‘Consolidated and

separate financial statements’ (effective 1 January 2009);– IFRS 2 (Amendment), ‘Share-based payment’ (effective 1 January 2009);– IFRS 3 (Revised), ‘Business Combinations’ (effective 1 July 2009);– IFRS 5 (Amendment), ‘Non-current assets held-for-sale and discontinued operations’ (effective 1 January 2009);– IFRS 7 (Amendment), ‘Financial instruments: Disclosures’ (effective 1 January 2009);– IFRS 8 ‘Operating Segments’ (effective 1 January 2009);– IFRIC 13 ‘Customer Loyalty Programmes’ (effective 1 January 2009);– IFRIC 14 ‘IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction’ (effective

1 January 2009);– IFRIC 15 ‘Agreements for the construction of real estate’ (effective 1 January 2009);– IFRIC 16 ‘Hedges of a net investment in a foreign operations’ (effective 1 October 2008);– IFRIC 17 ‘Distributions of non-cash assets to owners’ (effective 1 July 2009);– IFRIC 18 ‘Transfers of assets from customers’ (effective 1 July 2009).

There are a number of minor amendments to IFRS 7, ‘Financial instruments: Disclosures’, IAS 8, ‘Accounting policies, changes in accounting estimates and errors’, IAS 10, ‘Events after the reporting period’, IAS 18, ‘Revenue’ and IAS 34, ‘Interim financial reporting’. The application of the new interpretations mentioned above will not affect the valuation of items in the Group’s financial statements, but the application of some of them will affect their presentation and disclosure.

1.2 Consolidation a) SubsidiariesSubsidiaries are all entities over which the Group has the power to govern the financial and operating policies accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date on which control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued or liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is

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less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.

Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of impairment of the asset transferred. Where necessary, the accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group.

b) Transactions and minority interestsThe Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests result in gains and losses for the Group that are recorded in the income statement. Purchases from minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the fair value of net assets of the subsidiary.

c) AssociatesAssociates are all entities in which the Group has between 20% and 50% of the voting rights, and over which the Group has significant influence, but which it does not control. Investments in associates not quoted on an active market are accounted for by the equity method of accounting and are initially recognised at cost. Investments in associates quoted on an active market, are measured at fair value through profit or loss. The Group’s investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition.

The Group’s share of the post-acquisition profits or losses of associates is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment.

Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealised losses are also eliminated, unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies have been changed where necessary to ensure consistency with the policies adopted by the Group. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognise further losses unless the Group has incurred obligations or made payments on behalf of the associates. A listing of the Group’s principal associated undertakings is shown in Note 26.

d) Joint venturesA joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control, whereby the standard identifies three broad types—jointly controlled operations, jointly controlled assets and jointly controlled entities.

Each venture partner usually contributes cash or other resources to the jointly controlled entity. These contributions are included in the accounting records of the venture partner and recognised in its financial statements as an investment in the jointly controlled entity.

An investor recognises its interest in a jointly controlled entity using the equity method, whereby an interest in a jointly controlled entity is initially recorded at cost. The Group’s share of the post-acquisition profits or losses of joint ventures is recognised in the income statement, and increases or decreases the carrying amount of the investment.

A listing of the Group’s principal joint venture undertakings is shown in Note 26.



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1.3 Segment reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns different from those of segments operating in other economic environments.

1.4 Foreign currency translation

a) Functional and presentation currencyThe functional currency of each of the Group’s consolidated entities is the currency of the primary economic environment in which the entity operates. The functional and presentation currency of the Bank and its subsidiaries in Slovenia is the euro whereas the functional currency of one of the Group’s subsidiary is the national currency of Serbia, the Serbian Dinar (“RSD”).

b) Transactions and balancesForeign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

Changes in the fair value of monetary securities denominated in foreign currency classified as available-for-sale are analysed between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortised cost are recognised in profit or loss, and other changes in the carrying amount are recognised in equity.

Translation differences on non-monetary items, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation differences on non-monetary items, such as equities classified as available-for-sale financial assets, are included in the fair value reserve in equity.

1.5 Financial assets

The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss; loans and receivables; held-to-maturity investments; and available-for-sale financial assets. Management determines the classification of its investments at initial recognition. Reclassifications after initial recognition are possible under certain circumstances as well.

a) Financial assets at fair value through profit or lossThis category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Derivatives are also categorised as held for trading unless they are designated as hedging instruments.

In rare circumstances of the financial turmoil and the fact that certain financial instruments are no longer traded or related markets have become inactive or distressed, financial assets may be reclassified out of the fair value through

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profit or loss category. However, derivatives and financial assets designated as fair value through profit or loss cannot be reclassified.

Financial assets and financial liabilities are designated at fair value through profit or loss when:– Doing so significantly reduces measurement inconsistencies that would arise if the related instruments were

classified in different groups of financial instruments and therefore valued differently; – Financial instruments, containing one or more embedded derivatives which significantly modify the cash flows, are

designated at fair value through profit and loss;– Certain instruments, such as equity investments, that are managed and evaluated on a fair value basis in accordance

with a documented risk management or investment strategy and reported to key management personnel on that basis are designated at fair value through profit and loss.

b) Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: (a) those that the entity intends to sell immediately or in the short term which are classified as held for trading and those that the entity designates at fair value through profit or loss upon initial recognition; (b) those that the entity designates as available for sale upon initial recognition; or (c) those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration.

c) Held-to-maturity financial assetsHeld-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. If the Group were to sell other than an insignificant amount of held-to-maturity assets, the entire category would be reclassified as available-for-sale.

d) Available-for-sale financial assetsAvailable-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to liquidity needs or changes in interest rates, exchange rates or equity prices.

Regular way purchases and sales of financial assets at fair value through profit or loss, held-to-maturity and available-for-sale are recognised on trade-date – the date on which the Group commits to purchase or sell the asset.

Financial assets are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit and loss are initially recognised at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognised when they are extinguished – that is, when the obligation is discharged, cancelled or expires.

Available-for-sale financial assets can be reclassified if they can be classified as a loan and receivable at the moment of reclassification and the Group has the ability and intent to hold the financial asset for the foreseeable future or until maturity.

Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Gains and losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are included in the income statement in the period in which they arise. Interest earned whilst holding trading securities is reported as interest income. Dividends received are included separately in dividend



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income. Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised directly in equity, until the financial asset is derecognised or impaired. At this time, the cumulative gain or loss previously recognised in equity is recognised in profit or loss. However, interest calculated using the effective interest method and foreign currency gains and losses on monetary assets classified as available-for-sale are recognised in the income statement. Dividends on available-for-sale equity instruments are recognised in the income statement when the entity’s right to receive payment is established.

The fair values of quoted investments in active markets are based on current bid prices. If there is no active market for a financial asset, the Group establishes fair value using valuation techniques. These include the use of recent arm’s length transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants.

1.6 Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

1.7 Derivative financial instruments

Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and valuation techniques, including discounted cash flow models and options pricing models, as appropriate. All effects of derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.

The best evidence of the fair value of a derivative at initial recognition is the transaction price (i.e., the fair value of the consideration given or received).

All derivatives of the Group are classified as held for trading and do not qualify for hedge accounting. Changes in the fair value of derivative instruments which do not qualify for hedge accounting are recognised immediately in the income statement.

1.8 Interest income and expense

Interest income and expense for all interest-bearing financial instruments are recognised within ‘interest income’ and ‘interest expense’ in the income statement using the effective interest method.

The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.


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Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

1.9 Fee and commission income

Fees and commissions are generally recognised on an accrual basis when the service has been provided. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct cost) and recognised as an adjustment to the effective interest rate on the loan. Loan syndication fees are recognised as revenue when the syndication has been completed and the Group has retained no part of the loan package for itself or has retained a part at the same effective interest rate as the other participants. Commission and fees arising from negotiating, or participating in the negotiation of a transaction for a third party - such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses - are recognised on completion of the underlying transaction. Portfolio and other management advisory and service fees are recognised based on the applicable service contracts, usually on a time-apportionate basis. Asset management fees related to investment funds are recognised rateably over the period in which the service is provided. The same principle is applied for wealth management, financial planning and custody services that are continuously provided over an extended period of time. Performance linked fees or fee components are recognised when the performance criteria are fulfilled.

1.10 Dividend income

Dividends are recognised in the income statement when the entity’s right to receive payment is established.

1.11 Impairment of financial assets

a) Assets carried at amortised costAt each balance sheet date the Group assesses whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The Group estimates whether there is impartial evidence of the impairment or possibility of loss by considering the following: significant financial difficulties for the debtor; actual breach of contract such as a failure to repay interest, principal, provisions; restructuring of financial assets; bankruptcy or undergoing financial reorganisation; the possibility of bankruptcy or financial reorganisation; the existence of a measurable decline in the projected cash flows of a group of financial assets from the initial recognition of those assets even though the decline cannot yet be allocated to individual assets in the group, including: negative changes when settling debts in the group of financial assets or national or local economic conditions associated with the failure to settle financial assets in the group.

The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.



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The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.

The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

Homogenous groups and sub-groups are created for collective assessments of debtors. These are classified by credit risk categories, which reflect their ability to settle obligations in accordance with contractual provisions. Classification into groups and subgroups takes place according to the following criteria:a) type of debtor,b) debtor’s credit rating, and c) credit rating of the financial asset or contingency and commitment including off-balance sheet items for private

individuals.

The companies group is classified into subgroups according to the credit rating of individual debtors. Credit risk loss is calculated for individual subgroups of companies on the basis of an aggregate (annual) credit rating migration matrix and calculation of the average recovery rate for individual subgroups. The annual migration matrix sets out the probability of debtor transfers from one credit group to another credit group over one year. Past experiences with losses and factors indicating the current state are taken into account when evaluating losses.

The Group divides the financial assets of individuals into subcategories according to the credit rating of the financial assets. Classification of financial assets of individuals is based on objective criteria (i.e. the regularity of settling liabilities to the Group). On the basis of the credit rating of the financial assets, any necessary impairments are formed.

Exposures to general government and exposures secured with best-quality collateral are not impaired, meaning provisions are not formed against them.

The percentage of losses from credit risk for collective assessment of companies is calculated once per year, or during the year when significant changes in circumstances within the Group and/or on the market.

The Group regularly checks the methodology and assumptions used when assessing losses. Assessment of loss must be brought into line with changes in circumstances in the Group, on the market or to legislation.

When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. No claims are written off until all legal remedies and other means of recovery are exhausted.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the income statement in impairment losses.


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b) Assets classified as available-for-saleAt each balance sheet date, the Group assesses whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the income statement.

c) Restructuring of loansRestructuring of financial assets include activities pursued by the Group in relation to borrowers on whom it has outstanding claims due to default. The restructuring of these claims may include one or several activities which would not have been pursued had the defaulter been in a normal economic and financial position. Restructuring activities include: – grace period and/or principal repayment rescheduling; – partial write off;– interest rate reduction; – other activities.

Any loss or impairment measured as a difference between book value and replacement value that occurs in financial assets restructuring is recognised in the income statement of the Group.

1.12 Property and equipment, intangible assets and investment property Land and buildings comprise mainly investments in branches and offices. All property and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to administration cost during the financial period in which they are incurred.

The Group includes licences and software among its intangible assets. Intangible assets are valued at historical cost upon initial recognition. Subsequent valuation is made using the historical cost model. In line with this valuation model, intangible assets are recorded at the historical cost less amortisation and the accumulated impairment loss.

Investment property includes land and buildings leased out under an operating lease. Investment property is valued at historical cost upon initial recognition. Subsequent valuation is made using the historical cost model, as for tangible assets. The same accounting treatment which applies to tangible assets is applied to investment property.



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Land is not depreciated. Depreciation of other assets is calculated using the straight line method to allocate their cost to their residual values over their estimated useful lives, as follows:

2008 and 2007

Buildings 2% - 3%

Equipment 20%

Vehicles 20%

Computers 10% - 50%

Intangible assets 25% - 33.3%

The residual values and useful lives of assets are reviewed and adjusted if appropriate at each balance sheet date. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Property and equipment are periodically reviewed for impairment. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposal of property and equipment are determined by comparing proceeds with carrying amount and are included in gains and losses on derecognition of assets other than those held for sale in the income statement.

1.13 Impairment of non-financial assets Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less disposal costs and its value in use. Non-financial assets that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

1.14 Leases A group company is the lessorA lease is classified as a finance lease if it transfers all the substantial risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer all the substantial risks and rewards incidental to ownership.

When assets are held subject to a finance lease, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method (before tax), which reflects a constant periodic rate of return.

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Lease income from operating leases is recognised in income on a straight-line basis over the lease term. Costs, including depreciation, incurred in earning the lease income are recognised as an expense. Initial direct costs incurred by lessors in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as the lease income.

A group company is the lesseeThe leases entered into by the Group are primarily operating leases. The Group rents business premises, equipment, cars and locations for cash machines. The total payments made under operating leases are charged to administration costs. When an operating lease is terminated before the lease period has expired any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place.

1.15 Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including cash and non-restricted balances with the central bank, treasury bills and other eligible bills, amounts due from other banks, and securities.

1.16 Provisions

Provisions are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is probable than an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate of the amount of the obligation can be made.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognised as interest expense.

1.17 Financial guarantee contracts

Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities.

Financial guarantees are initially recognised in the financial statements at fair value on the date the guarantee was given. Subsequent to initial recognition, the Group’s liabilities under such guarantees are measured at the higher of the initial measurement, less amortisation calculated to recognise the fee income earned on a straight line basis over the life of the guarantee and contingent liability or provision in accordance with IAS 37 in the income statement, which presents the best estimate of the expenditure required to settle any financial obligation arising at the balance sheet date. These estimates are determined based on the experience of similar transactions and history of past losses, supplemented by the judgment of Management.

Any increase in the liability relating to guarantees is taken to the income statement under other operating expenses.



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1.18 Employee benefits

The Group provides benefits for employees as a legal obligation including jubilee rewards and retirement bonuses. These obligations are valued by independent qualified actuaries. Employee benefits are included in provisions for employee benefits. The Group sets aside such provisions based on actuarial calculations made by independent actuaries every three years. In the meantime, the Group either establishes or cancels these provisions on the basis of its own calculations – using data averages for employees under collective agreements, under management agreements with special authorities and on the Management Board. Major assumptions for these calculations are the following: – a discount rate of 7.65%;– the number of employees eligible for benefits; – the rate of labour turnover in the period from 2003 to 2008; – the average wage growth in the Republic of Slovenia: 4.5% per annum.

In accordance with the Slovene legislation employees may retire after 35-40 years of service, at which time (if they meet certain conditions) they become eligible for an outright retirement severance payment. Furthermore, pursuant to the collective agreement, employees are also entitled to jubilee payments.

Defined contributions to state social security are deducted each month from the payroll, expensed as incurred and included in administration costs.

1.19 Taxation

Taxation is provided for in the consolidated financial statements in accordance with the Slovene legislation currently in force. The charge for taxation in the income statement for the year comprises current tax and changes in deferred tax. Current tax is calculated on the basis of the expected taxable profit for the year using the tax rates in effect at the balance sheet date.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax basis of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

The Group has created deferred taxes on the temporary differences arising from the impairment of tangible and intangible assets, from different depreciation rates for accounting and tax purposes, from the revaluation and impairment of available-for-sale securities, from the provisions created for employee benefits and for the repayment of premiums under the national housing savings scheme, and from impairment of loans and receivables of subsidiaries.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Income tax payable on profits, based on the applicable tax law in each jurisdiction is recognised as an expense in the period in which profits arise. The tax effects of income tax losses available for carrying forward are recognised as an asset when it is probable that future taxable profits will be available against which these losses can be utilised.

Deferred tax related to fair value re-measurement of available-for-sale investments, which is charged or credited directly to equity, is also credited or charged directly to equity and subsequently recognised in the income statement together with the deferred gain or loss.


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1.20 Borrowings

Borrowings are recognised initially at fair value net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between proceeds net of transaction costs and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

If the Group purchases its own debt it is removed from the balance sheet and the difference between the carrying amount of the liability and the consideration paid is included in realised gains and losses on financial assets and liabilities not measured at fair value through profit or loss.

1.21 Share capital

a) Share issue costsIncremental costs directly attributable to the issue of new shares or options or to the acquisition of a business are shown in equity as a deduction, net of tax, from the proceeds.

b) Dividends on ordinary sharesDividends on ordinary shares are recognised in equity in the period in which they are approved by the Bank’s shareholders.

Dividends for the year that are declared after the balance sheet date are dealt with in the subsequent events note.

c) Treasury sharesWhere the Bank or other members of the Group purchase the Bank’s equity share capital, the consideration paid is deducted from total shareholders’ equity as treasury shares until they are cancelled. Where such shares are subsequently sold or reissued, any consideration received is included in shareholders’ equity.

1.22 Managed funds

The Group manages a significant amount of assets on behalf of legal entities and natural persons and a fee is charged for this service. These assets are not shown in the consolidated financial statements of the Group.

The Group does not have significant investments in managed funds and, as a result, assets are not consolidated.

1.23 Fiduciary activities

The Group acts as trustee and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and income arising thereon are excluded from these financial statements as they are not assets of the Group.

1.24 Sale and repurchase agreements

Securities sold subject to repurchase agreements (‘repos’) are classified in the financial statements as financial assets held for trading, available-for-sale financial assets or financial assets held to maturity, even though the transferee has the right by contract or custom to sell or repledge them as collateral. The counterparty liability is included in financial



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liabilities linked to transferred assets. Securities purchased under agreements to resell (‘reverse repos’) are recorded as loans and receivables to banks or customers, as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method. Securities lent to counterparties are also retained in the financial statements.

1.25 Equity component of compound financial instruments

An issued financial instrument is classified at initial recognition as a financial asset, financial liability, equity instrument or a compound financial instrument, where different elements are defined depending on the assessed attributes of a given financial instrument. If such an instrument does not include any contractual obligation (a) to deliver cash or other financial assets to another entity or (b) to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity and it will or may be settled in the issuer’s own equity instruments, it is treated as a component of equity. If the Group has no unconditional right to avoid delivery of cash or any other financial asset to settle a contractual obligation, that obligation is defined as a financial liability.

When the initial book value of a compound financial instrument is divided among its equity component and debt component, the equity component is assigned an amount that remains after the fair value of the instrument as a whole is reduced by an amount specifically set for the debt component. The sum of book values assigned to the debt components and equity components at initial recognition always equals the fair value which would be assigned to the instrument as a whole. No profit or loss occurs as a result of the initial divided recognition of the components of such an instrument.

Interest, dividends, losses and profits related to a financial instrument or its component, which is a financial liability, are shown in the income statement as income or expenses. Distributions to equity instrument holders are directly debited to own funds, net of any related corporate income tax benefit. Equity transaction expenses, other than equity instrument issuing costs directly attributable to transaction costs, are netted and accounted for as a deduction from equity, excluding any related corporate income tax amounts.

1.26 Comparatives

There was no need to adjust any comparative figures.

1.27 Amendments of the financial statements after issue

The Bank’s shareholders and management have the power to amend the financial statements after issue.

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2. Risk management

The Group is exposed to various risks in its operations which must be managed appropriately. The ability to manage risks − which the Group broadly divides into credit risk, market risk, operational risk, interest rate risk, liquidity risk, business risk and reputational risk − has a direct impact on long-term security and performance of the Group. The risk management function is, therefore, given due attention.

In 2008 the Group was faced with the negative impact of the global financial crisis, which peaked in September after the fall of the American investment bank Lehman Brothers, and the first signs of slower economic growth and deterioration of the macroeconomic conditions already reflected in the real sector of the economy. After it had noticed greater turbulence on the financial markets, the Group carried out a project to increase the Bank capital in early 2008 which was supported by all the major shareholders. The capital adequacy ratio achieved as a result was much higher than the regulatory minimum. With this operation the Group increased its risk bearing capacity and absorption of unforeseen losses brought about by this uncertain economic environment.

The volume of wholesale financing has significantly reduced since August 2007. Despite continued efforts of the Group, such circumstances may affect its ability to obtain new borrowings and re-finance its existing borrowings at terms and conditions similar to those applied to earlier transactions. During 2008 the Group therefore paid due attention to preserving its strong liquidity position. As a consequence, its liquidity ratio was not only in accordance with the legal requirement but reached record levels. The Group maintained a liquidity reserve sufficient for due payments of all contractual obligations as well as any unexpected increase in deposit withdrawals.

The Group is aware that its debtors may be adversely affected by the harsh financial and economic environment which could in turn impact their ability to repay the amounts owed. Deteriorating economic conditions for customers may also have an impact on management’s cash flow forecasts and assessment of the impairment of financial and non-financial assets. As a result of global volatility in financial and commodity markets, among other factors, there has been a significant decline in the word stock markets. Due to these reasons, the Group proactively managed credit and market risk as well. Tightening of existing internal limits and introduction of new limits, as well as more frequent monitoring of the issuers of the securities in the Group’s portfolio were among the measures taken to limit Group exposure to market risks. The Group reacted to the expectedly lower creditworthiness of customers by setting up a Bad Debt Management Committee. It also upgraded its customer credit rating system and monitored this segment more frequently and thoroughly. In the implementation of credit policy the Group limited its exposure to South Eastern European markets, reduced the maturity of extended credit facilities, paid more attention to obtaining adequate collateral, required that (more stringent) financial covenants are included in loan agreements (together with reporting requirements) and additionally centralised its credit function.

Regarding operational risk management a special committee was set up at the level of the Group, composed of the members of the Management Board and senior management. This body regularly follows the effectiveness of operational risk management, analyses the occurrence of loss events and defines guidelines for reducing operational risk to an acceptable level. Special measures were prepared for possible cases of abuse and fraud, a common phenomenon amid fierce economic downturn.

In the framework of the Internal Capital Adequacy Assessment Process (ICAAP) the Group regularly monitors its risk profile, carries out stress testing and uses its early warning system for detecting risk increases and reporting them to the Management Board. The organisation provides for the independency of the risk management function, to which necessary human and technological resources are made available. By nurturing a culture which pays due attention to risk management the staff is becoming increasingly aware of its importance for stability and performance. The basic tenets of risk management in the Group are formally set out in the risk management strategy and policies, all of which were upgraded and redrafted in 2008. These documents, which were approved by the Management and Supervisory Boards, define in detail procedures of prudent risk taking and management for individual risk types, compliance and transparent public disclosure of information about the Group. As the macroeconomic outlook continues to be


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extremely uncertain, the Group remains committed to proactive measures in risk management aimed at maintaining a stable financial position in the future.

2.1 Financial risk management

2.1.1 Credit risk

Credit risk is the risk that a counterparty will cause a financial loss for the Group by failing to discharge an obligation. It includes: country risk, concentration risk, dilution risk, residual risk and securitisation credit risk. Credit risk is the most important risk of the Group’s operations and the management therefore places high priority on risk management.

The main objectives of credit risk management process are: profit maximization, stability and safety of operations and achievement and/or maintenance of high credit portfolio quality. The Group assumes and manages credit risk in accordance with its Business Strategy and Risk Management Strategy. The latter specifies the objectives and defines general principles as well as guidelines for assuming and managing credit risk. In accordance with the Risk Management Strategy the main objectives of Credit Risk Policy are:– target investments in customers with good credit ratings,– greater emphasis on appropriate collateral,– achieving credit portfolio diversification,– increasing investment in less risky industries and countries,– intensive solving of problem loans.

Credit risk management process includes the identification, measurement, monitoring and control of credit risk and reporting thereon.

Credit risk is managed at the level of individual transactions and debtors as well as the overall credit portfolio.

Structure and definition of functions for adequate credit risk management are very important, the Group’s Management Board and senior management are responsible for efficient management of credit risk. The Management Board transferred part of its competences in this area to collective decision making bodies: the Credit Committee, Credit Commission and Assets and Liabilities Committee. In the case of problem loans the Loan Watch Committee is involved.

The Group has clearly delimitated competences and tasks among commercial units and the Risk Management Department, which is organisationally independent from units that assume credit risk, on the one hand and, on the other, among commercial units and the backoffice, including management.

In relation to the extent and features of internal reporting there is an established practice to produce periodic, and when appropriate, extraordinary reports on credit risk. Adequate flow of information up- and downstream as well as among organisational units facilitates decision-taking at all managerial levels of the Group in a timely manner with regard to measures for mitigating credit risk and for monitoring the results of these measures.

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2.1.1.1 Credit risk measurement

a) LoansThe Group has set up its own internal methodologies for measuring credit risk which serve as the basis for a process of categorising borrowers and exposures into credit rating groups (A, B, C, D and E). Corporate customers are classified into nine credit rating classes (credit rating groups from A to D are subdivided into two credit rating classes). The methodology of assigning the credit rating takes into account quantitative and qualitative criteria such as an assessment of the borrowers’ financial position, ability to provide sufficient cash flow for future debt servicing, borrower’s loan servicing track record, value and type of collateral.

In assessing the credit risk of banks and countries the credit ratings of external credit assessment institutions have mainly been taken into account. To the extent that a bank has no external rating, the Group assesses the bank itself in accordance with internal methodology.

Prior to credit approval all debtors have to be classified in the appropriate rating group. Throughout the duration of the legal relationship underlying credit exposure the Group monitors the operations of the borrower and quality of collateral. The Group also regularly evaluates the level of expected credit losses and creates the necessary amount of adjustments and provisions in accordance with International Financial Reporting Standards.

b) Debt securitiesCredit risk arising from investments in debt securities is managed by a limit system which is based on internal and external ratings (Fitch Ratings, Standard & Poor’s and Moody’s Investors Service) of securities and their issuers.

c) Contingent liabilities and credit-related commitmentsThe primary purpose of these instruments is to ensure that funds are available to a customer when required. Guarantees and standby letters of credit, which are written undertakings by the Group to pay in the case of the customer’s default on their obligations to a third party, potentially carry the same credit risk for the Group as loans. The same methodology as for loans is used for measuring credit risk arising from contingent liabilities and credit-related commitments to extend credit.

Credit-related commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, since most commitments to extend credit are contingent upon customers maintaining specific credit standards.

d) DerivativesIn the case of over-the-counter (OTC) derivative instruments, the Group is exposed to counterparty credit risk, this is the risk that a counterparty will default before the final settlement of the transaction’s cash flows. Counterparty credit risk from positions in derivatives equals the credit exposure value of these transactions which the Group calculates using the Mark-to-Market Method. Credit risk exposure from derivatives is managed within credit limits for counterparties. The internal methodology for monitoring these credit limits considers potential exposure due to market fluctuations. The amount of credit risk exposure from derivatives is calculated on a daily basis in accordance with the internal methodology and represents only a minor part of the nominal value of the underlying contract.




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2.1.1.2 Credit risk mitigation

a) Credit limitsThe Group mitigates credit risk by setting and monitoring credit limits at the level of individual borrowers or counterparties and groups of related counterparties. There are also structural limits established for industries, geographic regions and for specific products within the exposure limits to banks. Limits ensure that the Group’s credit granting activities are adequately diversified.

With regard to maximum allowable exposure and sum of large exposures the Group complies with the requirements of banking regulation. Every large exposure to an individual customer or a group of related parties is previously approved by the Supervisory Board, which, at its sessions, discusses reports on large exposures and on exposures to individuals with a special relationship to the Bank.

Credit limits for corporate customers are approved by the Credit Committee, other credit limits are approved by the Assets and Liabilities Committee. Credit limits are set and controlled according to internal methodologies. The Group regularly monitors the limits and provides for adequate diversification of the credit portfolio.

b) Credit collateralIn addition to the risk limit system, the Group also requires loan collateral in order to reduce credit risk. A loan collateral policy was developed for this purpose, defining the individual types of collateral that the Group accepts, as well as minimum requirements that must be fulfilled for each type of loan collateral. The most common collateral types are real-estate collateral and financial assets (securities) collateral.

c) Master netting agreementsThe Group further restricts its exposure to credit losses by entering into master netting agreements which cover securities sale and repurchase agreements, transactions in derivatives and other capital market instruments. Master netting agreements are made with counterparties generating a high volume of business. These arrangements do not generally result in an offset of balance sheet assets and liabilities, as transactions are usually settled on a gross basis. However, in the case of a default all amounts with the counterparty are terminated and settled on a net basis.



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2.1.1.3 Impairment and provisioning policies

The following table shows the structure of loans and the average percentage of impairment by the internal credit ratings.

Structure of loans and the average percentages of impairment by internal credit rating

Internalcreditrating

2008 2007

Loans (%)

Average % of impairment

Loans (%)

Average % of impairment

A 66.20 0.76 68.61 0.84

B 23.71 4.91 20.90 5.50

C 6.96 12.40 7.61 12.03

D 1.33 36.23 1.72 40.43

E 1.80 68.81 1.16 83.06

100.00 4.25 100.00 4.30

The Group pays great attention to the quality of its credit portfolio. The majority of loan exposures are classified into the highest internal rating groups (A and B).

Financial assets are impaired and provisions for commitments and contingencies to extend credit are created in accordance with the International Financial Reporting Standards. The Group estimates if there is impartial evidence of an impairment or possibility of loss as follows:– significant financial difficulties of the debtor; – actual breach of contract conditions; – restructuring of financial assets; – probability of bankruptcy or financial reorganisation;– existence of a measurable decrease in the estimated future cash flows from a group of financial assets since the

initial recognition of those assets, although the decrease cannot yet be identified with individual financial assets in the group, including:

- adverse changes in the payment status of debtors in the group, - national or local economic conditions that correlate with defaults on the financial assets in the group.

When there is impartial evidence on impairment or possible losses, the Group creates impairments of financial assets or provisions for commitments and contingencies on the basis of individual or collective assessment.

Individually impairments of financial assets are calculated as the difference between the carrying and recoverable amount. The latter is calculated by discounting the estimated future cash flows, which include cash flows from foreclosure of collateral.

For the purpose of calculating collectively impairments homogenous groups of debtors are formed according to similar credit risk characteristics that reflect the debtor’s ability to meet their contractual obligations. The Group estimates the impairments and provisions for particular homogenous groups of exposures on the basis of historical default data and credit losses.

The Group regularly monitors credit risk losses.




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2.1.1.4 Maximum exposure to credit risk

The following table shows the maximum exposure to credit risk from the balance sheet items and commitments and contingencies without taking into account collateral held or other credit enhancements.

Maximum exposure to credit risk before collateral held or other credit enhancements

Maximum exposure

As at 31 December 2008 2007

Credit risk exposures relating to on-balance sheet assets are as follows: 3,567,397 3,319,432

1. Financial assets held for trading 38,184 165,381

– derivatives 14,263 562

– debt securities 23,921 164,819

2. Financial assets designated at fair value through profit or loss 17,528 8,386


3. Available– for– sale financial assets 408,137 447,167


4. Loans and receivables 3,055,312 2,620,990

– loans and receivables to banks 281,518 236,202

– loans and receivables to non– bank customers 2,773,794 2,384,788

- loans and receivables to retail customers 451,373 400,939

- loans and receivables to corporate entities 2,322,421 1,983,849

5. Held-to-maturity investments 13,378 13,308


6. Other assets 34,858 64,200

Credit risk exposures relating to commitments and contingencies are as follows (reference to note 2.1.3.5): 693,181 778,264

– financial guarantees 75,457 98,439

– other commitments and contingencies 617,724 679,825

Total credit exposure 4,260,578 4,097,696

Exposure for balance sheet assets and commitments and contingencies, shown above, are based on carrying values as shown in the balance sheet and in commitments and contingencies (reference to note 2.1.3.5 Commitments and contingencies).

The largest part of total exposure is represented by loans to corporate entities (2008: 54.5%, 2007: 48.4%) and the exposure of commitments and contingencies (2008: 16.3%, 2007: 19.0%).



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2.1.1.5 Loans

The following tables show credit exposure regarding their maturity and impairments.

Loans

31 December 2008

Loans and receivables to non-

bank customersLoans and

receivables to banks

Total loans

Neither past due nor impaired loans 2,257,727 277,319 2,535,046

Past due but not impaired loans 135,769 – 135,769

Individually impaired loans 507,528 12,705 520,233

– of which non-performing loans (D, E) 64,188 12,705 76,893

Gross loans 2,901,024 290,024 3,191,048

Less: total impairments (127,230) (8,506) (135,736)

– individual impairments (73,924) (8,506) (82,430)

- of which NPL impairments (D, E) (33,797) (8,506) (42,303)

– collective impairments (53,306) – (53,306)

Net loans 2,773,794 281,518 3,055,312

Fair value of collateral 1,798,194 – 1,798,194

– of which fair value of collateral for individually impaired NPL (D, E) 56,607 – 56,607

31 December 2007

Loans and receivables to non-

bank customersLoans and

receivables to banks

Total loans

Neither past due nor impaired loans 1,882,965 236,202 2,119,167

Past due but not impaired loans 107,857 – 107,857

Individually impaired loans 511,756 65 511,821

– of which non-performing loans (D, E) 54,690 65 54,755

Gross loans 2,502,578 236,267 2,738,845

Less: total impairments (117,790) (65) (117,855)

– individual impairments (70,748) (65) (70,813)

- of which NPL impairments (D, E) (31,618) (65) (31,683)

– collective impairments (47,042) – (47,042)

Net loans 2,384,788 236,202 2,620,990

Fair value of collateral 1,598,876 – 1,598,876

– of which fair value of collateral for individually impaired NPL (D, E) 28,890 – 28,890

The largest item represents neither past due nor impaired loans, in which the Group classifies collectively estimated and impaired loans, non impaired loans to banks and the risk-free assets. Individually impaired loans are loans to customers other than banks, which are estimated and impaired individually and individually impaired loans to banks. Collectively impaired past due loans are classified among past due but not impaired loans.




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The disclosed fair value of collateral includes deposits, housing and commercial mortgages and securities. The value of housing and commercial mortgages is assessed by external appraisers. The value of marketable securities is determined with regard to their market value. The book value of deposits pledged as collateral is taken into account as the value of deposits.

a) Loans neither past due nor impaired

31 December 2008

Loans and receivables to non-bank customers

Loans and receivables to retail customers Loans and receivables to

corporate entities Loans and receiva-

bles to banks

Internal rating

Over-drafts

Credit cards

Housing loans

Consumer loans

Large corporates SMEs Others

A 23,012 7,062 193,461 208,207 1,017,853 318,440 20,589 1,788,624 264,137

B – – – – 174,932 252,455 11,668 439,055 7,636

C – – – – 2,328 19,434 4,014 25,776 5,546

D – – – – 1,247 2,657 160 4,064 –

E – – – 39 – 20 149 208 –

Total 23,012 7,062 193,461 208,246 1,196,360 593,006 36,580 2,257,727 277,319

Fair value of collateral – 5 260,996 29,926 462,586 566,183 39,431 1,359,127 –

31 December 2007

Loans and receivables to non-bank customers

Loans and receiva-

bles to banks

Loans and receivables to retail customers Loans and receivables to

corporate entities

Internal rating Overdrafts

Credit cards

Housing loans

Consumer loans

Large corporates SMEs Others

A 20,368 6,605 160,910 193,940 881,513 325,274 28,980 1,617,590 227,828

B – – – – 57,927 166,483 10,723 235,133 5,118

C – – – 1 1,864 20,344 4,684 26,893 3,256

D – – – – 3 2,850 142 2,995 –

E – – – 68 – 99 187 354 –

Total 20,368 6,605 160,910 194,009 941,307 515,050 44,716 1,882,965 236,202

Fair value of collateral – 10 195,180 34,114 467,410 395,619 35,760 1,128,093 –

Note: The methodology of assigning credit ratings to corporate customers takes into account quantitative and qualitative criteria

whereas for retail customers the payment regularity criterion is applied to a greater extent.



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b) Loans past due but not impaired

Loans and receivables to retail customersLoans and receivables to

corporate entitiesTotal loans

and receiva-

bles31 December 2008Over-drafts

Credit cards

Housing loans

Consum-er loans

Large corpo-

rates SMEs Others

Past due up to 30 days 4,859 48 321 5,127 10,355 37,799 21,068 5,047 63,914 74,269

Past due 31 to 60 days 858 3 266 3,876 5,003 862 7,038 1,552 9,452 14,455

Past due 61 to 90 days – 3 148 2,598 2,749 1,940 5,503 1,025 8,468 11,217

Past due over 90 days 1,332 6 1,466 10,358 13,162 430 15,649 6,587 22,666 35,828

Total 7,049 60 2,201 21,959 31,269 41,031 49,258 14,211 104,500 135,769

Fair value of collateral – – 1,987 878 2,865 27,512 31,450 8,108 67,070 69,935

Loans and receivables to retail customersLoans and receivables to

corporate entitiesTotal loans

and receiva-

bles31 December 2007Over-drafts

Credit cards

Housing loans

Consum-er loans

Large corpo-

rates SMEs Others

Past due up to 30 days 3,794 38 119 6,831 10,782 4,857 33,733 3,342 41,932 52,714

Past due 31 to 60 days 883 5 141 3,668 4,697 1,781 9,200 2,398 13,379 18,076

Past due 61 to 90 days – 3 274 1,992 2,269 – 4,409 910 5,319 7,588

Past due over 90 days 1,134 8 1,363 9,499 12,004 827 10,689 5,959 17,475 29,479

Total 5,811 54 1,897 21,990 29,752 7,465 58,031 12,609 78,105 107,857

Fair value of collateral – – 1,618 1,450 3,068 4,273 32,393 8,205 44,871 47,939

c) Individually impaired loans

Loans and receivables to corporate entities

Total loans31 December 2008Large

corporates SMEs Others

Loans and receivables

to banks

Individually impaired loans 199,769 300,226 7,533 507,528 12,705 520,233

Fair value of collateral 172,662 190,301 6,169 369,132 – 369,132

Loans and receivables to corporate entities

Total loans31 December 2007Large

corporates SMEs Others


to banks

Individually impaired loans 199,670 305,236 6,850 511,756 65 511,821

Fair value of collateral 193,940 223,969 4,935 422,844 – 422,844

Note: Impaired loans to retail customers aren’t included because they’re impaired collectively.




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d) Renegotiated loans

Renegotiation of financial assets can also be explained as activities performed by the Group in relation to customers who had not met their financial obligations as stated in the contract. The Group estimates whether renegotiation of a debtor’s exposure is reasonable. If it is reasonable, the Group forms an adequate restructuring plan and follows its implementation as well as effects.

The Group classifies outstanding claims (financial assets) to be renegotiated toward a debtor by doing one or more activities which the Group would not undertake if the debtor’s economic and financial situation were normal. Possible activities for restructuring claims are as follows:– Extending the term for repayment of principal,– Moratorium on principal payment,– Decreasing the amount of claims,– Changing interest rates.

Renegotiated loans (gross)

Loans to retail customers Loans to corporates

Total31 December 2008

Loans without

mortgage collateral

Collat-eralized

mortgage loans

Loans without

mortgage collateral

Collat-eralized

mortgage loans

Neither past due nor impaired loans 36 154 190 7,296 1,394 8,690 8,880

Past due but not impaired loans 141 – 141 10,430 – 10,430 10,571

Individually impaired loans – – – 15,729 41,721 57,450 57,450

– of which non-performing loans (D, E) – – – 7,451 12,884 20,335 20,335

Total renegotiated gross loans 177 154 331 33,455 43,115 76,570 76,901

Share of renegotiated gross loans and receivables in total gross loans and receivables to non-bank cutomers 2.65%

Loans to retail customers Loans to corporates

Total31 December 2007

Loans without

mortgage collateral

Collat-eralized

mortgage loans

Loans without

mortgage collateral

Collat-eralized

mortgage loans

Neither past due nor impaired loans 12 – 12 7,026 9,230 16,256 16,268

Past due but not impaired loans 11 101 112 36 453 489 601

Individually impaired loans – – – 12,363 57,263 69,626 69,626

– of which non-performing loans (D, E) – – – 8,719 10,902 19,621 19,621

Total renegotiated gross loans 23 101 124 19,425 66,946 86,371 86,495

Share of renegotiated gross loans and receivables in total gross loans and receivables to non-bank cutomers 3.46%

Renegotiated gross loans amounted to EUR 76,901 as at 31 December 2008 (as at 31 December 2007 amounted to EUR 86,495). The share of renegotiated gross loans compared to the Group’s total gross loans to corporate and retail customers decreased from 3.46% at the end of year 2007 to 2.65% at the end of year 2008.



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An important share of the renegotiated loans in 2008 is represented by loans to corporates in the process of financial-business restructuring of the debtor. Corporates whose loans have been the subject of restructuring come from different industries.

2.1.1.6 Debt securities

The following table presents the credit quality of debt securities. Classification according to the credit ratings reflects the credit assessments of external rating agencies: Fitch Ratings, Standard & Poor’s and Moody’s Investors Service.

Debt securities by credit ratings

31 December 2008

Debt securities

held for trading

(reference to note 19)

Debt securities

designated at fair value

through profit or loss (reference to

note 20)

Available-for-sale debt

securities(reference to

note 21)

Held-to-maturity

debt securities

(reference to note 24)

Debt securities

reclassified to loan

category(reference to

note 22) Total

Neither past due debt securities at fair value/at amortised cost

AAA 11 1,857 54,894 – – 56,762

AA- to AA+ 3,993 – 174,258 – – 178,251

A- to A+ 10,495 3,774 49,605 – 10,433 74,307

Lower than A- 6,594 1,169 8,349 – 15,419 31,531

Unrated 2,828 10,728 121,031 13,378 2,700 150,665

Total neither past due debt securities 23,921 17,528 408,137 13,378 28,552 491,516

31 December 2007

Neither past due debt securities at fair value/at amortised cost

AAA 4,812 – 82,996 – – 87,808

AA- to AA+ 54,790 8,386 216,450 13,308 – 292,934

A- to A+ 70,951 – 123,149 – – 194,100

Lower than A- 29,789 – 1,222 – – 31,011

Unrated 4,477 – 23,350 – – 27,827

Total neither past due debt securities 164,819 8,386 447,167 13,308 – 633,680

As in 2007, there were no debt securities which would be past due in 2008.

Impairments totalling EUR 8,439 thousand have been created for debt securities. Impairments have been created for non-performing exposures of senior debt securities of bank issuers. Other debt securities are performing and there is no impartial evidence of impairment for these securities.




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2.1.1.7 Other assets

Other financial assets

31 Dec., 2008 31 Dec., 2007

Neither past due nor impaired other assets 26,765 58,362

Past due but not impaired other assets 7,501 4,124

Individually impaired other assets 4,644 5,557

– of which non-performing other assets (D, E) 2,223 2,241

Gross other assets 38,910 68,043

Less: total impairments (4,052) (3,843)

– individual impairments (2,144) (2,175)

- of which non-performing other assets impairments (D, E) (2,143) (2,143)

– collective impairments (1,908) (1,668)

Net other assets 34,858 64,200

Other financial assets neither past due nor impaired

Internal rating 31 Dec., 2008 31 Dec., 2007

A 20,624 45,892

B 2,494 2,855

C 3,590 9,490

D 57 89

E – 36

Total 26,765 58,362

Other financial assets past due but not impaired

31 Dec., 2008 31 Dec., 2007

Past due up to 30 days 3,919 1,051

Past due 31 to 60 days 528 936

Past due 61 to 90 days 402 80

Past due over 90 days 2,652 2,057

Total 7,501 4,124



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2.1.1.8 Repossessed collateral

The Group acquired the following assets through realisation of repossessed collaterals:

Real estate owned by the Group

Carrying amount

Nature of assets 2008 2007

Business premises 565 117

Residential real-estate 145 145

Total 710 262

The value of the real-estate (sales value or certified assessor’s valuation in the case of execution topped up by any costs arising from the property in hand: valuation costs, real-estate turnover tax charge if applicable, etc.) acquired by the Group for the purpose of debt settlement is deducted from outstanding claims on the borrower. The repossessed real-estate is sold as soon as practicable. Until the asset is disposed it is disclosed on the balance sheet as non-current assets held for sale.

As at the end of 2008 the value of repossessed real-estate, acquired as settlement of debt, was EUR 448 higher compared to the end of 2007. The increased amount represents business premises acquired in bankruptcy proceedings (in June 2008) for the purpose of settling outstanding liabilities of a debtor in bankruptcy to the Group, reduced by the acquisition expenses incurred in the bankruptcy proceedings.




117


2.1.1.9 Risk exposure by industry sectors

The table below shows the credit risk exposure of financial assets by industry sector.

Credit risk exposure of financial assets according to industry sectors

Assets

Manufac-turing

(C)Construc-

tion (F)Trade

(G)

Financial and as-surance

activities (K)

Profes-sional, sci-entific and

technical activities

(M)

Public adminis-

tration and defence

activities (O) Other

Retail customers

Foreign entities* Total

1. Financial assets held for trading 1,777 368 1,132 2,306 3,235 5,659 31 – 23,676 38,184

– derivatives 1,777 368 1,132 1,144 3,235 – 31 – 6,576 14,263

– debt securities – – – 1,162 – 5,659 – – 17,100 23,921

2. Financial assets designated at fair value through profit or loss – – – 878 – – – – 16,650 17,528

– debt securities – – – 878 – – – – 16,650 17,528

3. Available-for- sale financial assets – – – 67,943 1,138 82,636 2,744 – 253,676 408,137

– debt securities – – – 67,943 1,138 82,636 2,744 – 253,676 408,137

4. Loans and receivables 597,327 203,787 451,201 422,557 103,970 10,679 345,668 448,942 471,181

3,055,312

– loans and receivables to banks – – – 10,605 – – – – 270,913 281,518

– loans and receivables to non-bank customers 597,327 203,787 451,201 411,952 103,970 10,679 345,668 448,942 200,268

2,773,794

- loans and receivables to retail customers – – – – – – – 448,942 2,431 451,373

- loans and receivables to corporate entities 597,327 203,787 451,201 411,952 103,970 10,679 345,668 – 197,837

2,322,421

5. Held-to-maturi-ty investments – – – – – 13,378 – – – 13,378

– debt securities – – – – – 13,378 – – – 13,378

6. Other assets 8,925 5,603 5,225 3,336 290 218 6,130 217 4,914 34,858

Total financial assets – 31 December 2008** 608,029 209,758 457,558 497,020 108,633 112,570 354,573 449,159 770,097 3,567,397

Total financial assets – 31 December 2007 490,649 169,148 427,619 365,458 110,238 136,310 338,182 400,750 881,078

3,319,432

Note: * data categorised by industry sectors are not available ** sector segmentation is made in accordance with Standard Classification of Activities 2008 (valid since 1 January 2008).



118


The highest exposure is shown towards borrowers in the manufacturing sector. The second largest exposure is to borrowers registered for performing activities within the financial and insurance activities.

The Group’s credit risk exposure of financial assets by geographical area is shown in chapter 2.1.4 Geographical risk concentration.

2.1.2 Market risk

Market risk is the uncertainty that adverse movement of risk factors including interest rates, exchange rates and prices of financial instruments may unfavourably affect the value of a financial instrument and consequently lead to a loss. The Group monitors its market risk exposure in its trading and banking books.

Market risks comprise the following risk segments:– position risk,– foreign exchange risk,– commodities risk and– risk of exceeding large trading exposure limits.

Position risk denotes the risk of loss due to price changes of a financial instrument and it is either specific or general. Specific position risk arises from an adverse movement in the price of a financial instrument due to factors related to its issuer, or with the issuer of the underlying financial instrument in the case of a derivative. General position risk arises from an adverse movement of the price of a debt financial instrument caused by interest rate fluctuations or, in the case of an equity financial instrument, by changes in capital market prices that are not related to individual features of the financial instrument in question.

Foreign exchange risk is the risk of incurring losses as a result of foreign exchange rate fluctuations.

Commodities risk is the risk of loss caused by the fluctuation in prices of the commodities which underlie a financial instrument.

Risk of exceeding large exposure limits denotes the risk arising from trading with individual customers.

Capital requirements for market risks are calculated in accordance with the Basel II standardized approach requirements that are adopted in the Bank of Slovenia’s Decision on the Calculation of Capital Requirements for Market Risks for Banks and Savings Banks. Capital requirements are calculated for position and foreign exchange risks, while the Group does not exceed the legally prescribed maximum large exposure limit in the trading book and does not trade in commodities, so no calculations are made for these two market risk segments.




119


The purpose of the market risk management process is to minimise losses from trading with financial instruments. Simultaneously, it takes into account opportunities and potential risks on capital markets and target capital adequacy. The Group aspires to achieve the most favourable ratio between generated return and assumed risk and it manages market risk pursuant to the Market Risk Policy of the Group.

The market risk management process comprises:– procedures of market risk identification, measurement/assessment, monitoring and control;– internal reporting on market risks.

Identification procedures are used to define existing and potential risks that arise from trading with financial instruments. When the Group plans to launch a new service or enter a new market, it first has to define risks and a risk management process. The Trading Strategy, which presents potential risks and the way they will be managed, is formulated on a yearly basis and approved by the Risk Management Department.

The consideration of capital market opportunities enables efficient diversification of risk by applying a risk management system of limits for trading with financial instruments. The Risk Management Department sets these limits and, based on the current level of regulatory capital, monitors stop loss limits, credit, industry and VaR limits as well as limits per financial instrument and their maturity, trader, trading department, listing type, origin and credit rating of the issuer on a daily basis.

The Group has also established a system of limits for banking book debt and equity financial instruments, through which it implements its policy of investing in debt instruments of high credit quality, while following the goal of industry diversification and maximum loss limitation.

Structure and organization of functions for adequate market risk management are the responsibility of the Management Board and senior management. The Management Board authorised the Assets and Liabilities Committee to approve market risk exposure limits.

The competences and responsibilities are clearly delimitated between trading units (treasury, investment banking), the backoffice, the middle office and the Risk Management Department, which is organisationally independent from units that assume market risk.

Extent and features of internal reporting – the middle office is responsible for daily monitoring of exposures from financial instruments in trading and in the banking book and reporting to the Management Board, senior management, trading units and the Risk Management Department. Monthly reports on market risk exposure, utilisation of limits, the size of Value-at-Risk and stress testing results for trading and the banking book are presented to The Assets and Liabilities Committee.



120


2.1.2.1 Market risk measurement techniques

Market risk measurement techniques comprises risk analyses and validation. This includes determining the possible frequency of a potential event and the size of its consequence. Market risks are regularly measured by:– Value-at-Risk method (i.e. VaR),– stress testing,– calculation of market risk capital requirements using the standardised approach.

Market risk measurement is based on the Value-at-Risk method (VaR). The calculations are based on a historical simulation approach in accordance with quantitative standards laid down by the Bank of Slovenia (99% level of confidence, one year observation period and 10-day holding period). The average trading book VaR in 2008 was EUR 6,011 thousand and the average VaR of the positions in debt financial instruments in the banking book was EUR 5,361 thousand. In 2007 the average trading book VaR was EUR 1,750 thousand and the average VaR of the positions in debt financial instruments in the banking book was EUR 2,113 thousand. The increase in the value of VaR results from the increased volatility that was observed in financial markets in 2008 and also from the improved VaR methodology. Apart from that, VaR in the banking book is also increased due to the increase in the value of the portfolio. For internal purposes VaR is also calculated at a 95% level of confidence.

As the Group is aware of limitations of the VaR method in cases of extreme market conditions, it uses stress testing as a supplement to VaR. Stress testing assesses potential impacts on the value of financial instruments of extraordinary, yet plausible, events on the financial markets.

Market risks are also measured by sensitivity analyses to determine the impact of changes in different risk factors (such as interest rates, value of stock indices, foreign currency rates and credit spreads) and their influence on the Group’s profit before tax and equity level.

For the purpose of market risk limitation and its reduction a system of trading limits is established as well as a system of limits on banking book operations with debt and equity financial instruments. The market risk regime is implemented through the systems of limits and clear guidelines on responsibilities and competences in assuming risk.

When trading in derivatives, exposures to position, interest rate and foreign exchange risks are managed by implementing a closed positions policy. Market risks are covered with adequate countertransactions, while counterparty risk and the risk of exceeding maximum large exposures are limited by a strictly monitored system of limits.




121


2.1.2.1.1 Sensitivity analysis for financial instruments

Sensitivity analysis for financial instruments in the banking and trading book measures effects of changes in market risk factors (interest rates, currency rates and stock market indices). It is prepared on the basis of the Group’s balance sheet on the last day of the year, while the impact of the sensitivity on financial instruments is demonstrated in comparison to the net profit or equity. When measuring foreign exchange risk and the risk of changes in equity prices with sensitivity analysis, the impact of changes in risk factors on the value of the position is shown. In the case of interest rate risk the impact of changes in interest rates on interest income and expenditure and on the market value of debt financial instruments carried at fair value is shown.

The methodology of determining potential changes in the value of risk factors is based on expectations about their movement in the next calendar year. Determination of expected changes in exchange rates is based on the implied volatility of currency options traded on organized markets. Currency options that refer to the relevant currency pair with maturities of one year are applied in the analysis. In defining the expected changes in the value of equity indices, estimates of the Group’s investment banking analytical team are used.

The following is the sensitivity analysis by risk segments for financial instruments in the banking and trading books.



122


Sensitivity analysis by risk segment for financial instruments in the banking and trading books for the year 2008

Foreign exchange risk Interest rate risk Equity security price risk

Change in exchange rate (in %)* Change in interest rate (in basis points)** Change in market indices (in %)***

As at 31 December 2008 Appreciation of foreign currency

against EUR

Depreciation of foreign currency

against EURIncrease

of interest ratesDecrease

of interest ratesIncrease of

market indicesDecrease

of market indices

Financial assets Carrying amount Book

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

1. Cash and cash balances with central banks 229,417 B 111 – (111) – 1,135 – (1,135) – – – – –

2. Financial assets held for trading 48,310 T 328 – (328) – 688 – (688) – 2,018 – (2,018) –

3. Financial assets designated at fair value through profit or loss 24,313 B 212 – (212) – 254 – (254) – 1,332 – (1,332) –

4. Available-for-sale financial assets 438,718 B, T 79 166 (79) (166) 499 5,468 (499) (5,468) – 5,689 – (5,689)

– in banking book 411,731 B 79 152 (79) (152) 496 5,232 (496) (5,232) – 2,350 – (2,350)

– in trading book 26,987 T – 14 – (14) 3 236 (3) (236) – 3,339 – (3,339)

5. Loans and receivables 3,055,312 B 9,697 – (9,697) – 12,141 (12,141) – – – – –

– loans and receivables to banks 281,518 4,744 – (4,744) – 1,259 – (1,259) – – – – –

– loans and receivables to non-bank customers 2,773,794 4,953 – (4,953) – 10,882 – (10,882) – – – – –

6. Held-to-maturity investments 13,378 B – – – – – – – – – – – –

7. Other assets 36,644 B 35 – (35) – – – – – – – – –

Effect on financial assets before tax 10,462 166 (10,462) (166) 14,717 5,468 (14,717) (5,468) 3,350 5,689 (3,350) (5,689)

– effect arising from banking book 10,134 152 (10,134) (152) 14,026 5,232 (14,026) (5,232) 1,332 2,350 (1,332) (2,350)

– effect arising from trading book 328 14 (328) (14) 691 236 (691) (236) 2,018 3,339 (2,018) (3,339)

Tax (22%) (2,270) – 2,270 – (3,194) – 3,194 – (727) – 727 –

– from banking book (2,199) – 2,199 – (3,044) – 3,044 – (289) – 289 –

– from trading book (71) – 71 – (150) – 150 – (438) – 438 –

Effect on financial assets after tax 8,192 166 (8,192) (166) 11,523 5,468 (11,523) (5,468) 2,623 5,689 (2,623) (5,689)



* Scenario of exchange rate change

USD 15%

CHF 10%

GBP 10%

Other 20%




123






against EUR


against EURIncrease




of market indices

Financial assets Carrying amount Book

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

1. Cash and cash balances with central banks 229,417 B 111 – (111) – 1,135 – (1,135) – – – – –

2. Financial assets held for trading 48,310 T 328 – (328) – 688 – (688) – 2,018 – (2,018) –

3. Financial assets designated at fair value through profit or loss 24,313 B 212 – (212) – 254 – (254) – 1,332 – (1,332) –

4. Available-for-sale financial assets 438,718 B, T 79 166 (79) (166) 499 5,468 (499) (5,468) – 5,689 – (5,689)

– in banking book 411,731 B 79 152 (79) (152) 496 5,232 (496) (5,232) – 2,350 – (2,350)

– in trading book 26,987 T – 14 – (14) 3 236 (3) (236) – 3,339 – (3,339)





7. Other assets 36,644 B 35 – (35) – – – – – – – – –




Tax (22%) (2,270) – 2,270 – (3,194) – 3,194 – (727) – 727 –






** Scenario of interest rate change

EUR 50 bp

USD 100 bp

CHF 50 bp

Other 100 bp

*** Scenario of market indices change

SBI20 20%

ATX 20%

CAC40 20%

Other 20%



124


Sensitivity analysis by risk segment for financial instruments in the banking and trading books for the year 2008 (continued)




against EUR


against EURIncrease




of market indices

Financial liabilities Carrying amount Book

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

1. Deposits from central banks 130,384 B (17) – 17 – (458) – 458 – – – – –

2. Financial liabilities held for trading 9,834 T (247) – 247 – (245) – 245 – – – – –

3. Financial liabilities designated at fair value through profit or loss 7,699 B – – – – – – – – (1,332) – 1,332 –

4. Financial liabilities measured at amortised cost 3,358,001 B (9,704) – 9,704 – (11,718) – 11,718 – – – – –

– deposits from banks 66,027 (145) – 145 – (131) – 131 – – – – –

– deposits from non-bank customers 1,918,311 (7,213) – 7,213 – (6,552) – 6,552 – – – – –

– loans and advances from banks 1,091,126 (2,338) – 2,338 – (4,463) – 4,463 – – – – –

– loans and advances from non-bank customers 216 – – – – – – – – – – – –

– debt instruments 121,870 (8) – 8 – (29) – 29 – – – – –

– subordinated liabilities 160,451 – – – – (543) – 543 – – – – –

5. Financial liabilities associated to transferred assets 10,681 B – – – – (54) – 54 – – – – –

6. Other liabilities 39,499 B (67) – 67 – – – – – – – – –

Effect on financial liabilities before tax (10,035) – 10,035 – (12,475) – 12,475 – (1,332) – 1,332 –

– effect arising from banking book (9,788) – 9,788 – (12,230) – 12,230 – (1,332) – 1,332 –

– effect arising from trading book (247) – 247 – (245) – 245 – – – – –

Tax (22%) 2,178 – (2,178) – 2,707 – (2,707) – 289 – (289) –

– from banking book 2,124 – (2,124) – 2,654 – (2,654) – 289 – (289) –

– from trading book 54 – (54) – 53 – (53) – – – – –

Effect on financial liabilities after tax (7,857) – 7,857 – (9,768) – 9,768 – (1,043) – 1,043 –



Total increase/decrease after tax 334 166 (334) (166) 1,755 5,468 (1,755) (5,468) 1,580 5,689 (1,580) (5,689)

– from banking book 271 152 (271) (152) 1,406 5,232 (1,406) (5,232) – 2,350 – (2,350)

– from trading book 63 14 (63) (14) 349 236 (349) (236) 1,580 3,339 (1,580) (3,339)


USD 15%

CHF 10%

GBP 10%

Other 20%




125






against EUR


against EURIncrease




of market indices

Financial liabilities Carrying amount Book

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

1. Deposits from central banks 130,384 B (17) – 17 – (458) – 458 – – – – –

2. Financial liabilities held for trading 9,834 T (247) – 247 – (245) – 245 – – – – –

3. Financial liabilities designated at fair value through profit or loss 7,699 B – – – – – – – – (1,332) – 1,332 –




– loans and advances from banks 1,091,126 (2,338) – 2,338 – (4,463) – 4,463 – – – – –




5. Financial liabilities associated to transferred assets 10,681 B – – – – (54) – 54 – – – – –





Tax (22%) 2,178 – (2,178) – 2,707 – (2,707) – 289 – (289) –


– from trading book 54 – (54) – 53 – (53) – – – – –





– from banking book 271 152 (271) (152) 1,406 5,232 (1,406) (5,232) – 2,350 – (2,350)

– from trading book 63 14 (63) (14) 349 236 (349) (236) 1,580 3,339 (1,580) (3,339)


EUR 50 bp

USD 100 bp

CHF 50 bp

Other 100 bp


SBI20 20%

ATX 20%

CAC40 20%

Other 20%



126




Change in currency rate (in %)* Change in interest rate (in basis points)** Change in market indices (in %)***


against EUR


against EUR

Increase of interest rates

Decrease of interest rates

Increase of market indices

Decrease of market indices

Financial assets Carrying amount

Book Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

1. Cash and cash balances with central banks 60,456 B 83 – (83) – 286 – (286) – – – – –

2. Financial assets held for trading 183,543 T 2,769 – (2,769) – 3,306 – (3,306) – 2,779 – (2,779) –

3. Financial assets designated at fair value through profit or loss 25,063 B – – – – 58 (58) – 2,177 – (2,177) –

4. Available-for-sale financial assets 486,117 B, T 205 154 (205) (154) 1,495 11,599 (1,495) (11,599) – 4,453 – (4,453)

– in banking book 418,244 B 8 – (8) – 1,460 10,230 (1,460) (10,230) – – – –

– in trading book 67,873 T 197 154 (197) (154) 35 1,369 (35) (1,369) – 4,453 – (4,453)





7. Other assets 64,996 B 104 – (104) – – – – – – – – –


– effect arising from banking book 7,361 – (7,361) – 21,683 10,230 (21,683) (10,230) 2,177 – (2,177) –

– effect arising from trading book 2,966 154 (2,966) (154) 3,341 1,369 (3,341) (1,369) 2,779 4,453 (2,779) (4,453)

Tax (23%) (2,354) – 2,354 – (5,706) – 5,706 – (1,130) – 1,130 –







USD 15%

CHF 5%

GBP 10%

Other 10%




127






against EUR


against EUR





Financial assets Carrying amount


Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

1. Cash and cash balances with central banks 60,456 B 83 – (83) – 286 – (286) – – – – –

2. Financial assets held for trading 183,543 T 2,769 – (2,769) – 3,306 – (3,306) – 2,779 – (2,779) –

3. Financial assets designated at fair value through profit or loss 25,063 B – – – – 58 (58) – 2,177 – (2,177) –

4. Available-for-sale financial assets 486,117 B, T 205 154 (205) (154) 1,495 11,599 (1,495) (11,599) – 4,453 – (4,453)

– in banking book 418,244 B 8 – (8) – 1,460 10,230 (1,460) (10,230) – – – –

– in trading book 67,873 T 197 154 (197) (154) 35 1,369 (35) (1,369) – 4,453 – (4,453)





7. Other assets 64,996 B 104 – (104) – – – – – – – – –




Tax (23%) (2,354) – 2,354 – (5,706) – 5,706 – (1,130) – 1,130 –







EUR 100 bp

USD 50 bp

CHF 50 bp

Other 50 bp


SBI20 15%

ATX 20%

DAX 20%

Dow Jones 20%

Other 20%



128






against EUR


against EUR





Financial liabilities Carrying amount


Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

1. Deposits from central banks 26 B (4) – 4 – – – – – – – – –

2. Financial liabilities held for trading 8,077 T (2) – 2 – – – – – – – – –

3. Financial liabilities designated at fair value through profit or loss 8,386 B – – – – (77) – 77 – (2,177) – 2,177 –




– loans and advances from banks 955,247 (1,528) – 1,528 – (6,615) – 6,615 – – – – –




5. Financial liabilities associated to transferred assets 123,887 B – – – – (1,238) – 1,238 – – – – –




– effect arising from trading book (2) – 2 – – – – – – – – –

Tax (23%) 2,184 – (2,184) – 4,587 – (4,587) – 496 – (496) –


– from trading book – – – – – – – – – – – –





– from banking book (1,712) – 1,712 – 1,205 10,230 (1,205) (10,230) – – – –

– from trading book 2,288 154 (2,288) (154) 2,580 1,369 (2,580) (1,369) 2,145 4,453 (2,145) (4,453)


USD 15%

CHF 5%

GBP 10%

Other 10%




129






against EUR


against EUR





Financial liabilities Carrying amount


Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

Effect on profit

Effect on equity

1. Deposits from central banks 26 B (4) – 4 – – – – – – – – –

2. Financial liabilities held for trading 8,077 T (2) – 2 – – – – – – – – –

3. Financial liabilities designated at fair value through profit or loss 8,386 B – – – – (77) – 77 – (2,177) – 2,177 –




– loans and advances from banks 955,247 (1,528) – 1,528 – (6,615) – 6,615 – – – – –




5. Financial liabilities associated to transferred assets 123,887 B – – – – (1,238) – 1,238 – – – – –





Tax (23%) 2,184 – (2,184) – 4,587 – (4,587) – 496 – (496) –


– from trading book – – – – – – – – – – – –





– from banking book (1,712) – 1,712 – 1,205 10,230 (1,205) (10,230) – – – –

– from trading book 2,288 154 (2,288) (154) 2,580 1,369 (2,580) (1,369) 2,145 4,453 (2,145) (4,453)


EUR 100 bp

USD 50 bp

CHF 50 bp

Other 50 bp


SBI20 15%

ATX 20%

DAX 20%

Dow Jones 20%

Other 20%



130




2.1.2.1.2 VaR of trading book

VaR is calculated at a 99% confidence level, 10-day holding period, 1-year observation period.

VaR of trading book

2008 2007

Average High Low Average High Low

VaR 6,011 7,326 3,903 VaR 1,750 3,705 976

When trading in derivatives, exposures to position, interest rate and foreign exchange risk are managed by closing positions. Market risks are covered with adequate countertransactions while the risk of exceeding large exposures is managed by a strictly controlled limit system. 2.1.2.3 Foreign exchange risk

Foreign exchange risk arises from the exposure to changes in foreign exchange rates which may adversely affect the Group’s income.

The foreign exchange risk strategy focuses on risk exposure against set limits and the Group’s risk capacity in view of its income and capital adequacy. Foreign exchange risk is identified, measured, controlled and monitored in line with the established foreign exchange risk management policy of the Group. The foreign exchange risk management process is based on procedures of identification, measurement, monitoring and management of foreign exchange risk and includes internal reporting.

The structure and the organisation of foreign exchange risk management functions are set out in the relevant policy. Its implementation is controlled by the Assets and Liabilities Committee, whereas the Treasury Department operationally manages foreign exchange risk and manages the level of exposure for overnight and intra-day positions.

Extent and features of internal reporting – it is an established practice to produce daily reports on foreign exchange exposures, including daily calculations of maximum potential losses arising from net foreign exchange positions. Regular monthly reports on foreign exchange exposures are produced for the Assets and Liability Committee as well.

The foreign exchange measurement system covers daily monitoring of net foreign exchange positions and daily calculation of maximum loss limits associated with foreign exchange risk by using the Value-at-Risk method. Foreign exchange risk is measured and assessed in accordance with the internal methodology. This defines stress testing to be used by the Group to evaluate potential losses resulting from foreign exchange rate fluctuations.

The Group manages and minimises foreign exchange rate risk, as fluctuations in the prevailing foreign currency exchange rates have an impact on its financial position and cash flows. In 2008, gaps between foreign currency inflows and outflows that mostly arose from payment transactions were managed by arbitrage. These exposures associated with financial instruments in foreign currencies were low and well within the set limits.

In 2008 the Group limited its maximum exposure in foreign currencies to less than 5% of its capital in accordance with its strategy and the turmoil on financial markets. In 2007 limits were higher, but the exposure was also low.


131




The following table presents foreign exchange risk exposures of the Group and includes the Group’s financial instruments at their carrying amounts by currency.

Concentration of currency risk: on- and off-balance sheet financial instruments

As at 31 December 2008 EUR USD CHF GBP Other Total

Assets

1. Cash and cash balances with central banks 228,693 314 126 54 230 229,417

2. Financial assets held for trading 45,356 608 2,329 – 17 48,310

3. Financial assets designated at fair value through profit or loss 22,901 1,412 – – – 24,313

4. Available-for-sale financial assets 437,181 1,249 – – 288 438,718

5. Loans and receivables

– loans and receivables to banks 250,869 20,973 808 2,565 6,303 281,518

– loans and receivables to non-bank customers 2,730,696 12,590 30,363 – 145 2,773,794

6. Held-to-maturity investments 13,378 – – – – 13,378

7. Investments in associates and joint ventures 955 – – – – 955

8. Other assets 34,681 2 – 1 173 34,858

Total assets 3,764,710 37,148 33,626 2,620 7,156 3,845,261

Liabilities

1. Deposits from central banks 130,269 112 – 3 – 130,384

2. Financial liabilities held for trading 7,410 95 2,329 – – 9,834

3. Financial liabilities designated at fair value through profit or loss 7,699 – – – – 7,699

4. Financial liabilities measured at amortised cost

– deposits from banks 64,993 403 322 92 217 66,027

– deposits from non-bank customers 1,868,728 34,052 7,597 2,411 5,523 1,918,311

– loans and advances from banks 1,028,249 39,499 23,378 – – 1,091,126

– loans and advances from non-bank customers 216 – – – – 216

– debt instruments 121,820 50 – – – 121,870

– subordinated liabilities 160,451 – – – – 160,451

5. Financial liabilities associated to transferred assets 10,681 – – – – 10,681

6. Other liabilities 39,309 18 – – 172 39,499

Total liabilities 3,439,825 74,229 33,626 2,506 5,912 3,556,098

Net on-balance sheet position 324,885 (37,081) – 114 1,244 289,163

Commitments and contingencies 653,738 15,772 3,941 – 19,730 693,181

132


Concentration of currency risk: on- and off-balance sheet financial instruments

As at 31 December 2007 EUR USD CHF GBP Other Total

Assets

1. Cash and cash balances with central banks 59,686 268 150 95 257 60,456

2. Financial assets held for trading 164,689 18,120 447 211 76 183,543

3. Financial assets designated at fair value through profit or loss 25,063 – – – – 25,063

4. Available-for-sale financial assets 483,289 1,788 135 – 905 486,117


– loans and receivables to banks 186,864 11,343 15,865 6,354 15,776 236,202

– loans and receivables to non-bank customers 2,356,037 10,209 18,542 – – 2,384,788

6. Held-to-maturity investments 13,308 – – – – 13,308

7. Investments in associates and joint ventures 1,001 – – – – 1,001

8. Other assets 64,172 3 2 16 7 64,200

Total assets 3,354,109 41,731 35,141 6,676 17,021 3,454,678

Liabilities

1. Deposits from central banks – 20 – 6 – 26

2. Financial liabilities held for trading 8,063 14 – – – 8,077

3. Financial liabilities designated at fair value through profit or loss 8,386 – – – – 8,386

4. Financial liabilities measured at amor-tised cost

– deposits from banks 76,007 183 101 25 376 76,692


– loans and advances from banks 926,994 1,157 27,096 – – 955,247


– debt instruments 133,767 1,005 – – – 134,772

– subordinated liabilities 53,761 – – – – 53,761


6. Other liabilities 47,337 539 1 149 117 48,143

Total liabilities 3,044,390 45,718 34,395 3,706 5,471 3,133,680

Net on-balance sheet position 309,719 (3,987) 746 2,970 11,550 320,998

Commitments and contingencies 734,870 20,886 329 211 21,968 778,264




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2.1.2.3.1 Foreign exchange sensitivity analysis

The following is the foreign exchange sensitivity analysis and impact of changes on profit and equity due to depreciation.

The impact of foreign currency exchange rates on profit and equity

31 December 2008 31 December 2007

Currency


against EUR

Effect on profit after tax

Effect on equity Currency


against EUR

Effect on profit after tax

Effect on equity

USD 15% (179) (109) USD 15% 487 (63)

GBP 10% (9) – CHF 5% (23) (7)

CHF 10% – – GBP 10% (229) –

Other 20% (146) (56) Other 10% (811) (84)

Total (334) (166) Total (576) (154)

In case of appreciation of foreign currency against the euro (the same scenario as above), the impact on profit and equity would be just the opposite. 2.1.2.4 Interest rate risk

Interest rate risk is the risk arising from the exposure of the Group’s financial position to unfavourable changes in interest rate levels on the market. The Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its fair value and cash flows. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. As a consequence of these changes, interest margins and the Group’s income change as well.

For the security and soundness of the Group it is vital to set up an efficient interest rate risk management process which keeps risks at an acceptable level. Interest rate risk is identified, measured, managed, controlled and monitored in line with the established interest rate risk management policy. The interest rate risk management process is based on the procedures of identification, measurement, assessment and management of interest rate risk. The process is supported by efficient internal reporting.

The structure and the organisation of interest rate risk management functions are set out in the relevant policy. Its implementation is controlled by the Assets and Liabilities Committee, whereas the Treasury Department is in charge of interest rate risk management within the set limits.

As required by its international reporting the Group monitors interest rate risk arising from trading in the framework of global market risks control and uses the Value-at-Risk method, stress testing and sensitivity analysis to measure them. The interest rate risk arising from mismatches on the banking book is measured by means of gap analyses. Gap analysis comprises aggregating cash flows into different maturity buckets, categorised by the earlier of contractual repricing or maturity dates. For classifying items of open-end maturity the Group uses an internal methodology, approved by the Assets and Liabilities Committee. Open positions were monitored and reported on a monthly basis.



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The Group takes on exposure to the effects of fluctuations in interest rates. It is therefore important for the Group to measure its interest rate sensitivity and manage its assets and liabilities in accordance. The Group regularly calculates the effect of interest rate fluctuations on its profit before tax and equity.

For the purpose of monitoring the effectiveness of interest rate risk hedging and minimisation the Group regularly assesses its risk capacity in accordance with the set methodology. The Group uses derivatives to hedge against interest rate risk. The following table summarises the Group’s exposure to interest rate risk. It includes the Group’s financial instruments at carrying amounts categorised by the earlier of contractual repricing or maturity dates.

Interest rate sensitivity of assets and liabilities

As at 31 December 2008 Up to 1 month 1-3 months3-12

months1-5

yearsOver

5 yearsNon-interest

bearing Total

Assets

1. Cash and cash balances with central banks 205,719 – – – – 23,698 229,417

2. Financial assets held for trading 18,098 1,142 13 3,212 7,343 18,502 48,310

3. Financial assets designated at fair value through profit or loss 15,671 – – – 1,857 6,785 24,313

4. Available-for-sale financial assets 58,428 29,424 26,706 211,482 82,096 30,582 438,718


– loans and receivables to banks 149,531 125,120 2,630 600 1,500 2,137 281,518

– loans and receivables to non-bank customers 406,271 770,144 1,442,075 75,728 74,723 4,853 2,773,794

6. Held-to-maturity investments – – – 13,378 – – 13,378

Total assets 853,718 925,830 1,471,424 304,400 167,519 86,557 3,809,448

Liabilities

1. Deposits from central banks 384 – 130,000 – – – 130,384

2. Financial liabilities designated at fair value through profit or loss – 7,699 – – – – 7,699


– deposits from banks 53,713 7,537 3,410 1,367 – – 66,027

– deposits from non-bank customers 975,139 452,317 456,776 30,367 3,709 3 1,918,311

– loans and advances from banks 205,296 184,782 686,153 – – 14,895 1,091,126

– loans and advances from non-bank customers 111 – – 105 – – 216

– debt instruments 3,015 – 6,200 96,984 15,671 – 121,870

– subordinated liabilities 1,304 117,675 14,195 27,277 – – 160,451

4. Financial liabilities associated to transferred assets 10,681 – – – – – 10,681

Total liabilities 1,249,643 770,010 1,296,734 156,100 19,380 14,898 3,506,765

Interest rate sensitivity gap (395,925) 155,820 174,690 148,300 148,139

Loan commitments 2,356 104,957 87,362 28,447 6,734 3,600 233,456




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The Group takes on exposure to the effects of fluctuations in interest rates. It is therefore important for the Group to measure its interest rate sensitivity and manage its assets and liabilities in accordance. The Group regularly calculates the effect of interest rate fluctuations on its profit before tax and equity.

For the purpose of monitoring the effectiveness of interest rate risk hedging and minimisation the Group regularly assesses its risk capacity in accordance with the set methodology. The Group uses derivatives to hedge against interest rate risk. The following table summarises the Group’s exposure to interest rate risk. It includes the Group’s financial instruments at carrying amounts categorised by the earlier of contractual repricing or maturity dates.



months1-5

yearsOver

5 yearsNon-interest

bearing Total

Assets


2. Financial assets held for trading 18,098 1,142 13 3,212 7,343 18,502 48,310

3. Financial assets designated at fair value through profit or loss 15,671 – – – 1,857 6,785 24,313



– loans and receivables to banks 149,531 125,120 2,630 600 1,500 2,137 281,518

– loans and receivables to non-bank customers 406,271 770,144 1,442,075 75,728 74,723 4,853 2,773,794


Total assets 853,718 925,830 1,471,424 304,400 167,519 86,557 3,809,448

Liabilities

1. Deposits from central banks 384 – 130,000 – – – 130,384



– deposits from banks 53,713 7,537 3,410 1,367 – – 66,027

– deposits from non-bank customers 975,139 452,317 456,776 30,367 3,709 3 1,918,311

– loans and advances from banks 205,296 184,782 686,153 – – 14,895 1,091,126


– debt instruments 3,015 – 6,200 96,984 15,671 – 121,870

– subordinated liabilities 1,304 117,675 14,195 27,277 – – 160,451


Total liabilities 1,249,643 770,010 1,296,734 156,100 19,380 14,898 3,506,765





136




months1-5

yearsOver

5 yearsNon-interest

bearing Total

Assets


2. Financial assets held for trading 120,340 – 13,934 3,710 27,005 18,554 183,543

3. Financial assets designated at fair value through profit or loss 8,386 – – – – 16,677 25,063



– loans and receivables to banks 227,966 1,386 6,850 – – – 236,202

– loans and receivables to non-bank customers 318,582 695,935 1,221,978 101,650 46,643 – 2,384,788


Total assets 850,371 707,996 1,285,275 274,930 169,042 101,863 3,389,477

Liabilities

1. Deposits from central banks 26 – – – – – 26



– deposits from banks 37,696 31,239 5,861 413 1,483 – 76,692

– deposits from non-bank customers 1,041,443 434,343 207,928 35,815 4,830 – 1,724,359

– loans and advances from banks 28,539 22,900 902,919 889 – – 955,247


– debt instruments 4,734 47 28,376 67,405 34,210 – 134,772

– subordinated liabilities 28 125 12,595 41,013 – – 53,761


Total liabilities 1,236,555 497,040 1,157,679 145,663 40,523 – 3,077,460






137




months1-5

yearsOver

5 yearsNon-interest

bearing Total

Assets


2. Financial assets held for trading 120,340 – 13,934 3,710 27,005 18,554 183,543

3. Financial assets designated at fair value through profit or loss 8,386 – – – – 16,677 25,063



– loans and receivables to banks 227,966 1,386 6,850 – – – 236,202

– loans and receivables to non-bank customers 318,582 695,935 1,221,978 101,650 46,643 – 2,384,788


Total assets 850,371 707,996 1,285,275 274,930 169,042 101,863 3,389,477

Liabilities

1. Deposits from central banks 26 – – – – – 26



– deposits from banks 37,696 31,239 5,861 413 1,483 – 76,692

– deposits from non-bank customers 1,041,443 434,343 207,928 35,815 4,830 – 1,724,359

– loans and advances from banks 28,539 22,900 902,919 889 – – 955,247


– debt instruments 4,734 47 28,376 67,405 34,210 – 134,772

– subordinated liabilities 28 125 12,595 41,013 – – 53,761


Total liabilities 1,236,555 497,040 1,157,679 145,663 40,523 – 3,077,460





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2.1.2.4.1 Interest rates by currency

The Group monitors the interest rates by currency for financial instruments as shown in the following table.

Interest rates by currency and type of financial instrument

As at 31 December 2008 As at 31 December 2007

EUR USD CHF EUR USD CHF

Assets

1. Cash balances with banks and central banks 2.10% 0.00% 0.00% 4.20% 0.00% 0.00%

2. Financial assets held for trading 4.67% 3.39% – 4.75% 5.90% –

3. Financial assets designated at fair value through profit or loss 2.75% 3.05% – – – –

4. Available-for-sale financial assets 4.04% – – 4.05% 5.26% –


– loans and receivables to banks 2.53% 0.90% – 4.39% 3.89% 2.30%

– loans and receivables to non-bank customers 6.36% 4.69% 4.39% 6.01% 5.94% 4.14%

6. Held-to-maturity investments 3.33% – – 3.33% – –

Liabilities

1. Deposits from central banks 2.79% – – – – –

2. Financial liabilities held for trading 5.27% – – 3.19% – –

3. Financial liabilities measured at amortised cost 4.23% 2.24% 2.64% 3.80% 2.52% 2.67%

– deposits from banks 1.99% 0.00% 0.00% 4.03% 0.00% 0.00%

– deposits from non-bank customers 3.81% 1.01% 0.69% 3.19% 2.46% 0.91%

– loans and advances from banks 4.77% 3.32% 3.28% 4.88% 6.04% 3.14%

– debt instruments 4.43% – – 4.09% – –

– subordinated liabilities 6.36% – – 5.23% – –

4. Financial liabilities associated to transferred assets 2.60% – – 4.20% – –




139




2.1.3 Liquidity risk

Liquidity risk is the risk that the Group might not be able to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn. The consequence may be the failure to meet obligations to repay depositors and fulfil lending commitments. 2.1.3.1 Liquidity risk management process

The liquidity risk management process follows the established liquidity risk management policy. This process includes implementation procedures and rules on measures for identifying, assessing, monitoring, reporting on and minimising risk exposure.

Liquidity risk management process consists of:– day-to-day funding, managed by monitoring future cash flows to ensure that requirements can be met. This includes

replenishment of funds as they mature;– maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against any unforeseen

cash flow trends;– monitoring balance sheet liquidity ratios against internal and regulatory requirements; and– managing the concentration and profile of debt maturities.

The structure and the organisation of liquidity risk management functions are defined in the relevant policy. Its implementation is jointly controlled by the Assets and Liabilities Committee and the Liquidity Committee, whereas liquidity management is the competence of the Treasury Department.

Internal reporting takes the form of cash flow measurement and projections for the next day, week and month respectively, as these are key periods for liquidity management. If material cash flow changes are expected, measurements are carried out over longer periods (several months ahead). The starting point for those projections is the contractual maturity of financial liabilities and the expected collection date of financial assets.

The system for measuring liquidity risk is based on compliance with the Bank of Slovenia’s regulation regarding minimum requirements for ensuring an adequate liquidity position. This regulation prescribes the ratio of financial assets to financial liabilities according to residual maturity. For that purpose, the following prescribed ratios are calculated and monitored:– the liquidity ratio with a residual maturity of assets and liabilities of up to 30 days. The value of this ratio may not be

less than 1;– the liquidity ratio with a residual maturity of assets and liabilities of up to 180 days. The calculation of this ratio is for

information purposes.

Despite the turmoil on financial markets, operations continued in 2008 in the context of favourable liquidity indicators, as seen in the table below:

Prescribed liquidity ratio (assets/liabilities)

Average2008

As at31 Dec., 2008

Average2007

As at31 Dec., 2007

Maturity of up to 30 days 1.31 1.28 1.12 1.16

Maturity of up to 180 days 1.21 1.20 1.08 1.10

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The monitoring of long-term liquidity, or solvency, has also been established. To that end, the Bank has developed a quantitative system of measures based on the continuous calculation of ratios that indicate the structure of assets and liabilities.

Structural liquidity ratios (in %)

Average 2008

As at 31 Dec., 2008

Average 2007

As at 31 Dec., 2007

Core liquidity/total assets 22.1 22.2 22.3 22.5

Core liquidity/short-term deposits of non-banking sectors 66.1 63.1 70.3 64.8

Borrowing/loans granted 38.7 42.3 36.3 36.3

With the aim of liquidity risk hedging and minimisation of liquidity risk the Group defined procedures for minimising the occurrence of crises which would prevent the Group from duly and promptly discharging its obligations.

Prudent assets and liabilities management is the foundation of secure banking operations, which is why the Group pursues the following objectives:– ability to meet all short-term financial obligations arising from on- and off-balance-sheet cash flows;– minimising costs of liquidity maintenance;– anticipation of potential extraordinary circumstances or crisis situations and the implementation of contingency

plans in the event of the latter.

For the purpose of liquidity risk hedging a method of liquidity risk identification and measurement is applied and a contingency plan is in place in the event of a liquidity crisis. The Group is hedged against liquidity risk through careful management of the liquidity reserve portfolio and ensuring an appropriate level of funding sources which are adequately diversified.

For the purpose of monitoring the effectiveness of liquidity risk hedging and minimisation the Group regularly assesses its risk capacity in accordance with the set methodology.

2.1.3.1.1 Liquidity management scenarios in extreme situations

The Group prepares various liquidity stress tests. Among the most important scenarios are a significant unexpected outflow of sight deposits and a significant unexpected outflow of short-term deposits. In both scenarios, the Group determines the impact on liquidity, as well as the impact on operating results arising from the search for new, more expensive sources of financing.

A shift in the volume of borrowing from banks also has a significant impact on the Group’s liquidity position. Therefore, the Group draws up scenarios for obtaining substitute sources of financing. On the basis of previously adopted and anticipated measures, the Bank has assessed that the Group’s liquidity will be sufficiently high in 2009, even if foreign banks stop refinancing loans.




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2.1.3.2 Funding approach

The Group appropriately diversifies its sources of financing by currency, lenders/creditors, products and maturities. Among the Group’s additional long-term resources in 2008 there was also a new long-term syndicated loan.

2.1.3.3 Non-derivative cash flows

2.1.3.3.1 Non-derivative cash flows based on contractual maturity

The table below shows non-derivatives cash flows by their remaining, contractual maturity at the balance sheet date. The amounts disclosed in the maturity table represent undiscounted cash flows including future interest payments. Foreign currency cash flows are converted into euros using the spot exchange rate at the balance sheet date.

Non-derivative cash flows based on contractual maturity

As at 31 December 2008Up to 1 month

1-3 months

3-12 months

1-5 years

Over 5 years Total

Liabilities

1. Deposits from central banks 115 50,158 80,111 – – 130,384

2. Financial liabilities designated at fair value through profit or loss – – – – 9,254 9,254


– deposits from banks 56,171 6,062 717 3,895 – 66,845

– deposits from non-bank customers 955,245 416,662 525,519 42,848 6,460 1,946,734

– loans and advances from banks 40,079 68,209 269,157 783,166 30,217 1,190,828


– debt instruments 4,209 795 9,599 109,602 21,033 145,238

– subordinated liabilities 10 2,527 19,071 47,832 134,514 203,954


5. Other liabilities 19,327 12,292 7,880 – – 39,499

Total potential future payments (contractual maturity dates) for financial obligations 1,086,053 556,705 912,054 987,343 201,478 3,743,633

Loan commitments and financial guarantees 2,612 81,024 118,444 73,658 33,175 308,913



142


Non-derivative cash flows based on contractual maturity


1-3 months

3-12 months

1-5 years

Over 5 years Total

Liabilities

1. Deposits from central banks 26 – – – – 26



– deposits from banks 37,730 31,597 1,540 5,315 1,931 78,113



– loans and advances from non-bank customers 202 – – 128 – 330


– subordinated liabilities 179 629 13,806 44,273 – 58,887

4. Financial liabilities associated to transferred assets 123,887 – –

–

– 123,887


Total potential future payments (contractual maturity dates) for financial obligations 1,259,097 507,379 403,097 910,481 155,324 3,235,378

Loan commitments and financial guarantees 5,879 128,902 182,099 71,876 51,532 440,288

The Group possesses an adequate volume of core liquidity available for settling all on-balance sheet obligations and covering loan commitments. The largest part of the core liquidity is composed of prime securities, interbank deposits, cash and cash balances with the central bank.




143


2.1.3.3.2 Non-derivative cash flows based on expected maturity

The Group does not use the undiscounted maturity analysis (in previous table) to manage liquidity, but the Group takes into account cash flows based on expected maturity, which are summarised as follows.

Non-derivative cash flows based on expected maturity


1-3 months

3-12 months

1-5 years

Over 5 years Total

Assets

1. Cash and cash balances with central banks 229,417 – – – – 229,417

2. Financial assets held for trading 10,624 370 1,316 14,890 8,923 36,123

3. Financial assets designated at fair value through profit or loss 134 180 7,066 583 18,121 26,084

4. Available-for-sale financial assets 24,498 44,529 40,258 263,517 125,246 498,048

5. Loans and receivables 736,855 593,584 859,041 895,755 247,858 3,333,093

– loans and receivables to banks 121,923 123,669 6,501 22,576 7,113 281,782

– loans and receivables to non-bank customers 614,932 469,915 852,540 873,179 240,745 3,051,311

6. Held-to-maturity investments 292 146 – 13,874 – 14,312

7. Other assets 19,054 9,656 6,137 11 – 34,858

Total financial assets based on expected maturity 1,020,874 648,465 913,818 1,188,630 400,148 4,171,935

Liabilities

1. Deposits from central banks 115 50,158 80,111 – – 130,384








– subordinated liabilities 10 2,527 19,071 47,832 134,514 203,954



Total financial liabilities based on expected maturity 757,780 562,844 939,665 1,134,588 348,756 3,743,633

Net liquidity gap 263,094 85,621 (25,847) 54,042 51,392 428,302



144


Non-derivative cash flows based on expected maturity


1-3 months

3-12 months

1-5 years

Over 5 years Total

Assets

1. Cash and cash balances with central banks 64,853 – – – – 64,853

2. Financial assets held for trading 19,173 2,538 25,824 57,671 89,195 194,401

3. Financial assets designated at fair value through profit or loss – 15,395 – – 11,197 26,592

4. Available-for-sale financial assets 53,532 14,923 97,003 215,904 150,250 531,612

5. Loans and receivables 538,698 248,784 668,682 787,951 615,568 2,859,683

– loans and receivables to banks 228,360 – 3,050 5,005 – 236,415

– loans and receivables to non-bank customers 310,338 248,784 665,632 782,946 615,568 2,623,268

6. Held-to-maturity investments 293 134 – 14,453 – 14,880

7. Other assets 35,402 25,195 3,333 8 262 64,200

Total financial assets based on expected maturity 711,951 306,969 794,842 1,075,987 866,472 3,756,221

Liabilities

1. Deposits from central banks 26 – – – – 26






– loans and advances from non-bank customers 202 – – 128 – 330


– subordinated liabilities 179 629 13,806 44,273 – 58,887



Total financial liabilities based on expected maturity 925,984 513,609 431,115 1,059,897 304,773 3,235,378

Net liquidity gap (214,033) (206,640) 363,727 16,090 561,699 520,843

The above analysis represents cash flows based on expected maturities. Cash flows include estimated loan prepayments based on historical data. Demand deposits are classified into different time buckets, according to an internal methodology. Demand deposits are divided into stable and unstable sources using a statistical method based on a multi-annual time series. Stable sources are subsequently dispersed into different long term time buckets.




145


2.1.3.4 Derivative cash flows

2.1.3.4.1 Derivatives settled on a net basis

The Group’s derivatives that are settled on a net basis include:– foreign exchange derivatives: over-the-counter (OTC) currency options,– interest rate derivatives: interest rate swaps.

The table below shows the analysis of the Group’s derivative financial instruments with positive and negative fair value that are settled on a net basis, arranged into groups according to maturity on the basis of the outstanding contractual maturity on the balance sheet date. The amounts disclosed in the table are the contractual undiscounted cash flows.

Derivative financial instruments with positive and negative fair value


1-3 months

3-12 months

1-5 years

Over 5 years Total

Derivatives held for trading:

– interest rate derivatives (344) (249) 434 797 1,623 2,261


1-3 months

3-12 months

1-5 years

Over 5 years Total


– interest rate derivatives 14 (280) 452 48 9 243

The table below shows the analysis for the year 2008 of the Group’s derivative financial instruments with negative fair value that are settled on a net basis, arranged into groups according to maturity on the basis of the outstanding contractual maturity on the balance sheet date. The amounts disclosed in the table are the contractual undiscounted cash flows. It was not possible to provide analysis split for positive and negative fair values for the year 2007 because of technical problems.

Derivative financial instruments with negative fair value


1-3 months

3-12 months

1-5 years

Over 5 years Total


– foreign exchange derivatives – 103 (167) (10) – (74)

– interest rate derivatives 16 (175) 245 931 (8) 1,009

Total 16 (72) 78 921 (8) 935



146


2.1.3.4.2 Derivatives settled on a gross basis

Among derivatives which are netted on a gross basis there are foreign exchange derivatives: currency forwards, currency swaps, cross currency swaps and equity forwards.

The table below shows analysis of the Group’s derivative financial instruments with positive and negative fair value, settled on a gross basis, arranged in logical groups according to maturity on the basis of outstanding contractually set maturity on the balance sheet date. Items shown in the table represent the contractually set undiscounted cash flows.

Derivatives settled on a gross basis


1-3 months

3-12 months

1-5 years

Over 5 years Total


– foreign exchange derivatives:

- inflow 8,925 67,271 115,934 10,824 – 202,954

- outflow 8,921 66,669 115,706 10,775 – 202,071

– equity forward:

- inflow – 7,291 – – – 7,291

Total inflow 8,925 74,562 115,934 10,824 – 210,245

Total outflow 8,921 66,669 115,706 10,775 – 202,071


1-3 months

3-12 months

1-5 years

Over 5 years Total


– foreign exchange derivatives:

- inflow 20,682 1,116 4,589 – – 26,387

- outflow 20,675 1,115 4,584 – – 26,374

– equity forward:

- inflow – 7,291 – – – 7,291

Total inflow 20,682 8,407 4,589 – – 33,678

Total outflow 20,675 1,115 4,584 – – 26,374




147


2.1.3.5 Commitments and contingencies

Items which refer to potential obligations are presented off balance. The trigger events for those obligations haven’t occurred and these facilities are not yet due. Those obligations for which the trigger events have already occurred are presented in the balance sheet.

a) Loan commitmentsThe following table shows a summary of contractually set values of off-balance-sheet financial instruments that oblige the Group to provide credits to customers (loan commitments) and for other arrangements.

b) Guarantees and other financial facilitiesThe following table also includes financial guarantees and other financial facilities arranged according to contractually set maturity dates.

Commitments and contingencies (reference to note 2.1.1.4)

As at 31 December 2008Up to

1 year1-5

yearsOver

5 years Total

Loan commitments 169,096 55,950 8,410 233,456

Guarantees and other financial facilities 81,859 290,068 87,798 459,725

– financial guarantees 4,696 45,996 24,765 75,457

– performance bonds 42,719 238,206 62,232 343,157

– letters of credit 14,983 1,377 – 16,360

– avals 40 – – 40

– derivatives and other 19,421 4,489 801 24,711

Total 250,955 346,018 96,208 693,181

As at 31 December 2007Up to

1 year1-5

yearsOver

5 years Total

Loan commitments 260,232 43,975 37,642 341,849

Guarantees and other financial facilities 222,398 173,989 40,028 436,415

– financial guarantees 56,648 27,901 13,890 98,439

– performance bonds 121,611 137,579 25,081 284,271

– letters of credit 31,253 8,509 – 39,762

– avals 19 – – 19

– derivatives and other 12,867 – 1,057 13,924

Total 482,630 217,964 77,670 778,264



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2.1.4 Geographical risk concentration

The following table shows the risk of geographical concentration of financial and non-financial assets and liabilities by geographical sectors.

Geographical risk concentration

31 December 2008

Slovenia

Other EU member

states

SE and Eastern Europe

(without EU member

states)

Other

countries

Total

Assets

1. Cash and cash balances with central banks 229,417 – – – 229,417

2. Financial assets held for trading 19,128 24,043 17 5,122 48,310

3. Financial assets designated at fair value through profit or loss 7,663 8,951 – 7,699 24,313

4. Available-for-sale financial assets 181,941 200,850 1,807 54,120 438,718

5. Loans and receivables 2,585,901 244,470 162,087 62,854 3,055,312

– loans and receivables to banks 10,605 222,125 9,903 38,885 281,518

– loans and receivables to non-bank customers 2,575,296 22,345 152,184 23,969 2,773,794

6. Held-to-maturity investments 13,378 – – – 13,378

7. Other assets 29,944 1,769 3,144 1 34,858

Total financial assets 3,067,372 480,083 167,055 129,796 3,844,306

Non-financial assets 65,388 345 957 – 66,690

Total assets 3,132,760 480,428 168,012 129,796 3,910,996

Liabilities

1. Deposits from central banks 130,384 – – – 130,384

2. Financial liabilities held for trading 4,673 5,145 – 16 9,834

3. Financial liabilities designated at fair value through profit or loss 7,639 4 54 2 7,699

4. Financial liabilities measured at amortised cost 2,356,891 932,048 56,483 12,579 3,358,001

– deposits from banks 43,955 476 21,596 – 66,027

– deposits from non-bank customers 1,864,033 13,570 34,887 5,821 1,918,311

– loans and advances from banks 285,802 798,566 – 6,758 1,091,126

– loans and advances from non-bank customers 216 – – – 216

– debt instruments 121,853 17 – – 121,870

– subordinated liabilities 41,032 119,419 – – 160,451

5. Financial liabilities associated to transferred assets – 10,681 – – 10,681

6. Other liabilities 38,937 375 187 – 39,499

Total financial liabilities 2,538,524 948,253 56,724 12,597 3,556,098

Non-financial liabilities 18,132 5 5 – 18,142

Total liabilities 2,556,656 948,258 56,729 12,597 3,574,240

Net on-balance sheet position 576,104 (467,830) 111,283 117,199 336,756

Commitments and contingencies 670,823 15,619 5,026 1,713 693,181




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The geographical exposure of the Group is based on the domicile or head office of the counterparties. The major exposures outside the Republic of Slovenia represent counterparties from EU member states.

Geographical risk concentration

31 December 2007

Slovenia

Other EU member

states

SE and Eastern Europe

(without EU member

states)

Other

countries

Total

Assets

1. Cash and cash balances with central banks 60,456 – – – 60,456

2. Financial assets held for trading 42,129 79,174 7,669 54,571 183,543

3. Financial assets designated at fair value through profit or loss 16,677 8,386 – – 25,063

4. Available-for-sale financial assets 164,465 274,821 2,430 44,401 486,117

5. Loans and receivables 2,223,737 217,800 141,222 38,231 2,620,990

– loans and receivables to banks 19,082 193,327 8,746 15,047 236,202

– loans and receivables to non-bank customers 2,204,655 24,473 132,476 23,184 2,384,788

6. Held-to-maturity investments 13,308 – – – 13,308

7. Other assets 42,577 21,620 – 3 64,200

Total financial assets 2,563,349 601,801 151,321 137,206 3,453,677

Non-financial assets 62,000 387 952 58 63,397

Total assets 2,625,349 602,188 152,273 137,264 3,517,074

Liabilities

1. Deposits from central banks 26 – – – 26

2. Financial liabilities held for trading 7,609 444 – 24 8,077

3. Financial liabilities designated at fair value through profit or loss 8,320 5 59 2 8,386

4. Financial liabilities measured at amortised cost 2,125,397 747,138 44,900 27,726 2,945,161

– deposits from banks 28,537 30,910 17,245 – 76,692

– deposits from non-bank customers 1,670,505 20,760 27,655 5,439 1,724,359

– loans and advances from banks 237,942 695,018 – 22,287 955,247

– loans and advances from non-bank customers 330 – – – 330

– debt instruments 134,772 – – – 134,772

– subordinated liabilities 53,311 450 – – 53,761

5. Financial liabilities associated to transferred assets – 123,887 – – 123,887

6. Other liabilities 47,799 344 – – 48,143

Total financial liabilities 2,189,151 871,818 44,959 27,752 3,133,680

Non-financial liabilities 29,659 59 494 – 30,212

Total liabilities 2,218,810 871,877 45,453 27,752 3,163,892

Net on-balance sheet position 406,539 (269,689) 106,820 109,512 353,182

Commitments and contingencies 760,119 8,455 9,069 621 778,264



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2.1.5 Capital management

Capital management is an on-going process of decision making and maintaining the required level and quality of the Group’s capital. The aim of capital management on the one hand is to provide an adequate level of Group capital which generates confidence in and stability of the Group and, on the other, to guarantee a return on capital which will meet shareholder expectations. At all times the Group requires sufficient capital and capital adequacy as prescribed by legislation, dependant on the volume and type of services it provides and the risks it assumes.

The management and supervisory bodies regularly monitor and assess the effectiveness of the capital management system. The Group calculates its regulatory capital and capital adequacy at least quarterly.

At all times the Group’s capital has to be above paid-up capital (in accordance with 42nd article of the Banking Act - Zban-1) or at least equal the total sum of minimum capital requirements calculated on a consolidated basis.

2.1.5.1 Regulatory capital and capital adequacy

Capital or own funds consist of:

a) Original own funds (Tier 1 capital) made up of – paid-up capital and share premium, – reserves and retained profits, – minority interest, – innovative instrument and – deduction items from Tier 1 capital (own shares, intangible assets and statutory impairments and provisions);

The innovative instrument is in compliance with Article 11 of the Decision of the Calculation of Own Funds of (Savings) Banks. Abanka’s innovative instrument is a subordinated loan taken on 18 January, 2007 from VTB Bank Europe, based in London. The loan fulfils the Bank of Slovenia’s requirements for inclusion in Tier 1 and Tier 2.

b) Additional own funds I (Tier 2 capital) which includes – any surpluses of the Group’s own funds that may be taken into consideration in the calculation of Tier 2 capital

(arising from an innovative instrument) and – subordinated debt I (subordinated bonds maturing at a point in time greater than 5 years and one day);

c) Additional own funds II (Tier 3 capital) which includes subordinated debt II (subordinated bonds and deposits maturing at a point in time greater than 2 years and one day).

The credit risk capital requirement of the Group is calculated by applying the Standardised Method. Consequently, the Group discloses no deduction items from Tier 1 capital and Tier 2 capital arising from the IRB approach.

Tier 1 capital and Tier 2 capital are decreased by investments in other associated and jointly controlled credit and financial institutions to establish the actual amount of capital to be further used for capital adequacy calculation, taking into account capital requirements for credit, market and operational risks.

The table below shows capital components and capital adequacy ratios as at 31 December. In the two years presented in the table the Group’s capital adequacy was above the regulatory required minimum.




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Capital and capital adequacy

2008 2007

Paid up capital 30,045 22,951

– own shares (244) (258)

Share premium 153,117 58,062

Reserves 139,007 118,540

Minority interest 33 22

Interim profits (audited) 8,252 13,192

Valuation differences eligible as original own funds (5,025) –

Innovative instruments subject to limit 120,000 120,000

– other deductions from Original Own Funds (82,488) (116,403)

- intangible assets (3,697) (4,535)

- excess on limits for innovative instruments (65,595) (87,584)

- difference between the reported impairments and provisions according to IFRS and the regulation on loss assessment* (13,196) (24,284)

Original own funds (Tier 1) 362,697 216,106

Additional own funds I (Tier 2) 73,019 102,667

– deductions from original and additional own funds I (equity investments in banks and financial institutions) (956) (1,001)

Additional own funds II (Tier 3) – 11,356

Total own funds 434,760 329,128

Total capital requirements for credit, counterparty credit and dilution risks and free deliveries 259,878 229,947

Total capital requirements for position, foreign exchange and commodity risks 6,794 15,328

Total capital requirements for operational risks 15,965 –

Capital requirements 282,637 245,275

Tier 1 capital adequacy ratio 10.25% 7.03%

Capital adequacy ratio 12.31% 10.73%

Capital adequacy ratio (excluding impact of national discretion) 12.68% 11.53%

The deduction item »Difference between the reported impairments and provisions according to IFRS and the regulation on loss assessment” * is not directly based on the European capital legislation and was introduced by the Bank of Slovenia as a national discretion. For comparison purposes the capital adequacy ratio is also calculated without national discretion. At the end of 2008 it was 12.68% (cf. 11.53% at the end of 2007).



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2.1.5.2 Minimum capital requirements

2.1.5.2.1 Credit risk capital requirement

The credit risk capital requirement of the Group is calculated by applying the Standardised Method. The following table shows capital requirement amounts per exposure category.

Total capital requirements for credit, counterparty credit and dilution risks and free deliveries

2008

Standardised approach (SA) (1 + 2) 259,878

1. SA exposure classes excluding securitization positions 259,878

Central governments or central banks 6

Regional governments or local authorities 339

Administrative bodies and non-commercial undertakings 175

Institutions 6,936

Corporates 182,948

Retail 40,983

Secured by real estate property 318

Past due items 4,800

Items belonging to regulatory high-risk categories 10,134

Short-term claims on institutions and corporates 4,022

Collective investments undertakings (CIU) 1,053

Other items 8,164

2. Securitization positions SA –

As at 31 December, 2008 the credit risk capital requirement amounted to EUR 259,878 thousand.

In January 2008 the Group started to calculate the credit risk capital requirement pursuant to the new Capital Directive (Basel II) in the new reporting format. As at 31 December, 2007 the credit risk capital requirement amounted to EUR 229,947 thousand.

2.1.5.2.2 Market risk capital requirement

The market risk capital requirement of the Group is calculated by applying the Standardised Method. This involves the calculation of capital requirements for position and foreign exchange risks. Position risk arises from price fluctuations of a financial instrument and is calculated separately for debt and equity financial instruments.

Total capital requirements for position, foreign exchange and commodity risks

2008 2007

Standardised approach 6,794 15,328

Traded debt instruments 2,481 7,648

Equity 3,423 6,064

Foreign exchange 890 1,616




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As at 31 December, 2008 the capital requirement for debt financial instruments amounted to EUR 2,481 thousand (37% of total market risk capital requirement), EUR 3,423 thousand for equity financial instruments (50% of total market risk capital requirement) and EUR 890 thousand for foreign exchange (13% of total market risk capital requirement). 2.1.5.2.3 Operational risk capital requirement

The operational risk capital requirement of the Group is calculated by applying the Standardised Method.

Total capital requirements for operational risks

2008

Basic indicator approach 15,965

The operational risk capital requirement totalled EUR 15,965 thousand in 2008. In 2007 the Group didn't calculate the operational risk capital requirement. 2.1.5.3 Internal capital adequacy assessment process

In early 2008 an Internal Capital Adequacy Assessment Process (ICAAP) was set up as one of the key elements in the introduction and implementation of the new capital adequacy rules under the Basel II banking accord.

The Group already started preparing its Internal Capital Adequacy Assessment Process in 2007 by defining the Group’s risk profile and making a risk profile matrix. This is a mechanism which identifies the material risks that arise from the Group’s core business and enables setting up controls with the purpose of risk mitigation. Risk profile monitoring over time facilitates timely identification of key movements in the Group’s risk profile and represents the basis for taking necessary measures. The Group evaluated the adequacy of capital levels and quality in relation to its risk profile for the first time in 2007 by assessing internal capital needs. This calculation took into account not only the capital requirements for credit, market and operational risks (calculated according to the applicable rules set out in Pillar 1 of the Basel II banking accord), but also identified capital needs to support all other risks (e.g. concentration risk, interest rate risk, liquidity risk etc.).

An integrated internal capital adequacy assessment process has to ensure that the assumed risks stay within the Group’s risk bearing capacity.

In the framework of the Internal Capital Adequacy Assessment Process the Group internally assesses its capital needs and existing capital at least twice a year.

2.1.5.3.1 Parameters for assessing internal capital needs

The Group selects risks to subject to its ICAAP based on risk definitions set out in the Decision on Risk Management and Implementation of the Internal Capital Adequacy Assessment Process for (Savings) Banks (Official Gazette of the RS, nos. 135/06, 28/07 and 104/07) and applies the classification set out in Annex 2 to the Guidelines on the Application of the Supervisory Review process under Pillar 2 (CP03 revised) of January 2006, as it includes all the material risks to which the Group’s business is, will or might be exposed.

The Group relies on the opinions by different experts from several of its divisions and applies some 90 quality and quantity indicators (parameters) for 9 risks, of which 35 are used as the basis for assessing internal capital needs. The Group regularly identifies all material risks by means of a questionnaire and takes the necessary measures accordingly.



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2.1.5.3.2 Internal capital assessment

The internal capital needs assessment is founded on the Decision of the Calculation of Own Funds of (Savings) Banks. All the items which the Group considers to be of primary importance for providing the necessary level of (internal) capital according to this decision are included in regulatory capital. In addition, the Group also posts unaudited interim profit: 50% in the calculations from January to November and 75% in the calculation for December as regulatory capital. 2.1.6 Fair value of financial assets and liabilities

Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing par ties, other than in a forced sale or liquidation, and is best evidenced by an active quoted market price.

The estimated fair values of financial instruments have been determined by the Group using available market information where it exists, and appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to determine the estimated fair value. Market quotations may be outdated or reflect distressed sale transactions and therefore not represent fair values of financial instruments. Management has used all available market information in estimating the fair value of financial instruments.

2.1.6.1 Financial instruments carried at fair value

Trading securities, other securities at fair value through profit or loss, investment securities available for sale and financial derivatives, including those classified as repurchase receivables are carried in the consolidated balance sheet at their fair value.

Fair values were determined based on quoted market prices except for certain investment securities available for sale (Note 21) for which there were no available external independent market price quotations and certain trading securities (Note 19).

The Group valued financial instruments and financial assets at cost where their fair value could not be determined. The reasons for the inability to determine fair values were that some financial instruments were not traded in an active market which would clearly define their fair value and that there was no active market participant or seller to give an offer price for those financial instruments or assets. In accordance with the Group’s rules on financial instrument valuation, the Group does not use its certified internal asset valuation model for assets valued less than EUR 10 thousand nor does it apply the model to all cases where quality valuation input data cannot be provided.




155


Valuation methodology for financial instruments measured at fair value

2008

Quoted price on a stock exchange

Price quoted by an active

broker or market maker

Valuation method Cost

Financial assets measured at fair value

Financial assets held for trading 21,024 12,318 14,263 705

Debt securities 10,951 12,272 – 698

Equities 10,073 46 – 7

Derivatives – – 14,263 –

Financial assets designated at fair value through profit or loss 4,780 19,533 – –

Debt securities – 17,528 – –

Equities 4,780 – – –

Unit linked investments – 2,005 – –

Financial assets available for sale 348,959 48,502 – 41,257

Debt securities 332,940 36,154 – 39,043

Equities 16,019 3,396 – 89

Equity holdings – – – 2,125


Financial liabilities measured at fair value

Financial liabilities held for trading – – 9,834 –

Derivatives – – 9,834 –

Financial liabilities designated at fair value through profit or loss – 7,699 – –

Structured deposit – 7,699 – –



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Valuation methodology for financial instruments measured at fair value

2007

Quoted price on a stock exchange

Price quoted by an active

broker or market maker

Valuation method Cost

Financial assets measured at fair value

Financial assets held for trading 181,597 344 562 1,040

Debt securities 163,786 – – 1,033

Equities 17,811 344 – 7

Derivatives – – 562 –

Financial assets designated at fair value through profit or loss 14,510 10,553 – –

Debt securities – 8,386 – –

Equities 14,510 – – –


Financial assets available for sale 457,655 21,252 – 7,210

Debt securities 446,318 – – 849

Equities 11,337 5,120 – 107

Equity holdings – – – 6,254


Financial liabilities measured at fair value

Financial liabilities held for trading – – – –

Derivatives 8,077 – – –

Financial liabilities designated at fair value through profit or loss 8,386 – – –

Structured deposit 8,386 – – –




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2.1.6.2 Financial instruments not measured at fair value

The table below summarises the carrying amounts and fair values of those financial assets and liabilities not presented on the Group’s balance sheet at their fair value.

Financial instruments not measured at fair value

Carrying value Fair value

2008 2007 2008 2007

Financial assets

Loans and receivables 3,055,312 2,620,990 3,079,912 2,546,121

– loans and receivables to banks 281,518 236,202 281,681 234,511

– loans and receivables to non-bank customers 2,773,794 2,384,788 2,798,231 2,311,610

- retail customers 451,373 400,939 461,699 415,933

- corporate entities 2,322,421 1,983,849 2,336,532 1,895,678

Held-to-maturity investments 13,378 13,308 13,439 12,998

Financial liabilities

Deposits from central bank 130,384 26 130,384 26

Financial liabilities measured at amortised cost 3,358,001 2,945,161 3,402,260 3,098,189

– deposits from banks 66,027 76,692 66,493 82,027

– deposits from non-bank customers 1,918,311 1,724,359 1,958,821 1,871,852

- retail customers 1,007,643 911,058 1,038,199 1,084,969

- corporate entities 910,668 813,301 920,622 786,883

– loans and advances from banks 1,091,126 955,247 1,094,599 955,247

– loans and advances from non-bank customers – corporate entities 216 330 216 319

– debt instruments 121,870 134,772 119,377 134,597

– subordinated liabilities 160,451 53,761 162,754 54,146

Financial liabilities associated to transferred assets 10,681 123,887 10,750 123,887

Loan commitments 233,456 341,849 443 684

The following summarises the major methods and assumptions used in estimating the fair values of financial instruments carried at other than fair value in the financial statements.

i) Loans and receivables to banksLoans and receivables to banks include inter-bank placements and items in the course of collection. The fair value of floating rate placements and overnight deposits is their carrying amount. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and remaining maturity.



158


ii) Loans and receivables to non-bank customersLoans and receivables are net of provisions for impairment. The estimated fair value of loans and receivables represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value.

Discount rates used depending on the currency, maturity of the instrument and credit risk of the counterparty were as follows:

Interest rates

2008 2007


– loans and receivables to banks (Note 22) 3.9% 4.2%

– loans and receivables to non-bank customers (Note 23)

- retail customers 5.5% 5.4%

- corporate entities 5.0% 4.8%

iii) Held-to-maturity investmentsHeld-to-maturity investments relate to interest-bearing securities held to maturity. Fair value of held-to-maturity assets is based on the market prices of the Ljubljana Stock Exchange.

iv) Deposits and loans from banks and non-bank customers and subordinated deposits The estimated fair value of deposits with no stated maturity, including non-interest-bearing deposits, is the amount repayable on demand. The estimated fair value of fixed interest-bearing deposits and other borrowings not quoted on an active market is based on discounted cash flows using interest rates on new debts with similar remaining maturity. Discount rates used were consistent with the Group’s credit risk and also depend on the currency and maturity of the instrument and ranged from 3% p.a. to 5.2% p.a. (2007: from 3.2% p.a. to 5% p.a.).

v) Debt securities in issue and subordinated debt securitiesTotal fair value is calculated on the basis of the prices quoted in an active securities market.

2.2 Operational risk management

The Group’s operational risk management strategy and processes are set out in the Strategy of Developing and Implementing of the Operational Risk Management Framework and the Operational Risk Management Policy. In 2008, the Group continued implementing the activities planned in these documents. It prepared internal instructions in line with the policy that define all steps involved in operational risk management as well as the Group’s tolerance and appetite in this respect. Based on the overall Policy, specific operational risk management policies were formulated for individual organisational units.

The structure and the organisation of operational risk management functions involve employees at all levels with different responsibilities and tasks. Coordination of operational risk management and operational risk mitigation measures are centralised in the Risk Management Department, whilst their implementation is decentralised through organisational units.

An Operational Risk Management Committee was set up in the second half of 2008 to direct and control operational risk management. The Committee which includes all senior managers is chaired by the President of the Management Board.




159


The operational risk measurement system includes identification, assessment and/or measurement of operational risk on the basis of forms filled in for the purpose of listing potential loss events. These forms are designed by the Risk Management Department. For each identified potential loss event the probability of occurrence and the seriousness of the consequences in the case of occurrence is assessed. A qualitative approach is taken to make assessments. Measurement of operational risk also involves interviews with senior management carried out by the Risk Management Department, which also analyses internal operating instructions for organisational units to verify whether embedded internal control mechanisms prevent the occurrence of (expected) operational risk loss events and whether newly identified threats are such that they require amendments to the existing internal rules and instructions.

In 2007, the Group introduced a computerised system of loss event reporting. Two applications – for reporting and recording loss events – were developed in-house. The first one is available to all Group’s employees and enables anonymous reporting of loss events by any reporting party. The second application enables users to describe the reported loss event. As required by operational risk internal reporting loss event reports are discussed by the Operational Risk Committee, whereas the Risk Management Department produces related quarterly reports. The Operational Risk Committee discusses big loss events in greater detail and takes adequate measures as they occur. It also investigates all operational risk profiles (assessed, realised, targeted) by organisational unit and at the level of the Group.

The Group carries out activities in the framework of operational risk protection and mitigation. Detailed operational risk management procedures are defined in the internal document “Key Operational Risks – Control and Mitigation Procedures”. Their implementation is the responsibility of individual organisational units.

The efficiency of operational risk protection and mitigation methods is controlled by internal control system which is comprised of internal controlling, internal auditing and compliance activities.

The Business Continuity Management Policy and Business Continuity Management of Procedure were prepared in 2008. The ensuing business continuity plans were regularly updated and tested. Treasury disaster recovery plans were prepared in 2008. Another assessment was made on the possible impact of product discontinuation on the operations of the Group (products denoting customer-dictated activities and reporting activities).

2.2.1 IT system risk management

The basic tasks of the Information and Banking Technology Division concern providing computer support to the information system (IS) of the Group, co-ordination with external providers, offering help to IS users, supporting e-commerce and maintaining the IS. The corporate policy, streamlining of operations and process optimization aimed at ensuring higher quality and competitiveness of Group services are taken into account in these efforts.

The Management Board requires adequate procedures. In view of this, the actual state is regularly monitored by means of operational checks and information technology (IT) risk analysis, which serves as a basis for relevant risk reduction measures. An IT risk analysis is carried out once a year. The set of controls is based on the ISO/IEC 17799:2005 standard and the set of threats is based on the extended recommendations on a uniform risk analysis method by the Bank Association of Slovenia. Information is collected through questionnaires and interviews and then correlated with the availability data resulting from analyses carried out in the framework of business continuity planning. The analysis is qualitative and takes into account 4 threat levels (depending on frequency and effect) and 4 vulnerability levels of resources (in view of existence of individual controls and their weight). Risk analysis results and requirements made by divisions together represent a basis for improvements (additional controls) to the information system.



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The development strategy is divided into priorities and IS construction on the foundation of:– developing client-server applications with the use of relational SQL databases and standard accesses,– using an Oracle database,– WindowsXP operation system installed on work stations,– UNIX, Windows 2003 and Windows 2000 operation systems installed on data and application servers,– communication links based on TCP/IP protocols,– using modern, object-oriented development tools (Delphi).

Efficient functioning of the information system is provided by several factors including:– information support development regarding the business goals and taking into account the rational use of

resources,– planning and introducing new information support mechanisms in accordance with the Group’s strategic objectives

and planning in the area of information technology,– supporting mobilization of resources for information support (personnel, funds, time),– control in all operating segments (inspections, audits, internal rules and control, obligatory control mechanisms and

routine implementation of control procedures, raising awareness),– streamlining procedures (e.g. consolidation of server capacities, standardization of disc resources, collection of data

into a single database, uniformity of access to the system and data),– staff education for bringing into force new methods and technologies in the functioning of the information system. In pursuing the policy and organization of providing information system security the Group’s main objective is to provide optimal availability, confidentiality and integrity of information.

The security policy of the IS is founded on:– Policy on the Protection of the Group,– Instructions on Security and Protection of the Information System and related policies, rules and protection

instructions,– Policy of Documentary Material Management,– Instructions on Protection of Personal Data Databases,– adhering to the required information protection standards (oSIST ISO/IEC 27001:2006, oSIST ISO/IEC 17799:2005

and SIST ISO/IEC 17799:2003).

Access level controls pertain to all entities, hardware and software from which it is possible to access terminal and local networks. Access is provided on the basis of granted rights with password protected user names. The security system applies to documents, data and communication as well as all hardware and software and depends on the level of exposure to unwanted external or internal factors. The system operates by employing a suitable method for data back-up protection and data access protection, programmes and communication channels.

Access to the public network is provided through double high-speed connections to different Internet service providers (Softnet, Siol). Double firewalls create several protected segments, with external and internal segments being further protected by way of routers.

The Group developed a data protection programme and a combination of differential and complete backups was introduced.

General, system and other controls take the form of physical and logical controls. Physical controls include physical safeguarding of premises, video surveillance of access to buildings, alarm protection and magnetic card entry control of authorised persons into certain premises. Logical controls are performed with our own application and purchased software.




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2.2.2 Operations of internal audit department

a) Organisational position of internal audit departmentThe Internal Audit department performs constant and overall control over the Bank’s operations and operations of subsidiaries in relation to: controlling and evaluating the efficiency of risk management systems and the internal control system; evaluation of the process of assessing the necessary internal capital regarding its own assessment of the Group’s risk exposure; assessment of the accuracy of the information technology system; assessment of the accuracy and reliability of accounting records and financial reports; verification of compliance of the Group’s operations with regulations.

The Internal Audit department is organised as an independent department, directly subordinate to the Management Board. Its authorizations, responsibilities, tasks and methods of operations are defined in the Standing orders on the Internal Audit department in detail. These standing orders were adopted by the Management Board with the consensus of the Supervisory Board. The Management Board also included the orientation which the Internal Audit department has to follow into the long-term strategy for the period 2007-2010. The annual plan of activities of the Internal Audit department is confirmed each year by the Management Board with the consensus of the Supervisory Board. The annual plan of activities is based on a global assessment of the risk profile of the audit environment in the Group. For more efficient and qualitative execution of tasks, other internal acts are set out for the Internal Audit department (manual for internal audit, methodology for working plans on the basis of risk assessment, the program for ensuring and improving the quality of operations).

In accordance with the Standing orders on the Internal Audit department, performing controls of contractual exchange offices that have a contractual relationship with the bank is included among the basic areas of the department’s work in addition to internal audit. Execution of tasks of the primary officer responsible for monitoring potential money laundering activities falls under the responsibilities of the Legal and compliance department as of 1 January 2008.

The Internal Audit department employs six internal auditors with long-term experience in different areas of financial operations. Three of them have either a ‘certified internal auditor’ or ‘auditor’ licence. The external audit company KMPG with its certified IT auditors is used for the purpose of auditing information technology.

b) Operations and control of the management systemIn 2008, the Internal Audit Department (IAD) followed the approved Work Programme for 2008, which was amended in line with strategic plans, regulatory requirements based on the Group’s compliance with the new capital adequacy rules under the Basel II banking accord and additional requirements by the Management Board. The IAD carried out a self-assessment period audit to check compliance with the Code of Ethics, International Standards for the Professional Practice of Internal Auditing, the efficiency and effectiveness of internal auditing and its compliance with the internal Rules of the Internal Audit Department.

In 2008 the IAD: – provided opinions regarding the fulfilment of conditions for launching new products and services and adequacy of

risk management procedures; – audited the Investment Banking, focusing on capital investments and financial instrument transactions;– audited some material business functions, including payment transactions, retail and corporate crediting, cash and

ATM transactions in the branch network and administration services;– assessed the effectiveness of the risk management system and internal control system regarding foreign exchange,

interest rate and operational risks, including the internal capital adequacy assessment process and verified the Group’s compliance with the Basel II banking accord;

– audited business with credit brokers;– audited some key business support software applications used and outsourcing practices;



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– assessed the adequacy of the risk management system and internal control system regarding capital investments and corporate crediting; gave recommendations on how to upgrade individual elements of the governance system;

– controlled contractual exchange offices;– monitored the adherence to the requirements by external auditors and supervisory institutions;– audited the management of key projects in Abanka (Basel II, project, SEPA project, retail credit operations redesign

project);– participated in work groups for launching new products and services and compliance with new regulatory

requirements as well as provided advice and assistance in upgrading work processes, procedures and internal instructions.

c) Reporting on performed workAll managerial levels, including the Management Board, were informed in writing about the findings of the audits performed by the Internal Audit department. A summary of all important findings and recommendations of audit procedures undertaken as well as fulfilment of the Annual plan of activities for the year 2008 was given to the Management and Supervisory Boards every three months. The Internal Audit department also monitored realization of improved measures on the basis of investigation of reports of responsible people, at the same time reporting it to the Management and Supervisory Boards.

d) Quality of Internal AuditingIn January 2009 an external audit of the quality of Abanka internal auditing was carried out by an independent external auditor. The audit covered the internal auditing activities in 2008 and examined compliance with directly transposed International Standards for the Professional Practice of Internal Auditing, Code of Ethics of Internal Auditors and Code of Internal Auditing Principles.

Based on the audit a combined evaluation of internal auditing in Abanka was produced stating that in all material aspects standards are generally complied with.

2.2.3 Prevention of money laundering and terrorist financing

The Group continued implementing a set of activities in 2008 devised to achieve compliance with the new legislation on the prevention of money laundering and terrorist financing. Their aim is to set up an efficient system which would enable meeting legal requirements and upgrading the integrated risk management policy in this area.

The Overall Instructions on the Implementation of the Prevention of Money Laundering and Terrorist Financing Act are in place in the Bank and complied with. In addition, a Risk Analysis was made in terms of possible abuses for the purpose of money laundering and terrorist financing. Both documents were approved by the Management Board. The instructions define the procedures, tasks, competences and responsibilities of employees for integrated implementation of legal requirements and implementation of a detection and prevention of money laundering and terrorist financing system. The Overall Instructions document served as a basis for operating instructions applicable to individual areas and products.

The year 2008 witnessed preparation of a new plan of activities for meeting the requirements of the Prevention of Money Laundering and Terrorist Financing Act (ZPPDFT) and establishing a system for detection and prevention of money laundering and terrorist financing. The purpose was to follow the development of the system against new legal requirements and provide for integrated risk management in this segment.

In order to provide for an integrated and efficient system for detection and prevention of money laundering and terrorist financing, a Bank Anti Money Laundering Officer and two deputies were appointed, as well as division officers




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who are in charge of coordinating the implementation of the legislation within individual divisions and communicating with the Bank Anti Money Laundering Officer and other line managers.

In parallel with these activities the Bank is upgrading IT support enabling more efficient implementation of prescribed procedures. For the purpose of risk management an overall system of internal controls was set up to follow the acquisition of required information and implementation of all tasks and prescribed procedures, including monitoring the business operations of customers and detection of unusual transactions. A new approach was taken in the implementation of measures based on the risk assessment of customers, business relations, products and services.

The major activities of other Group members (subsidiaries) were focused on amending internal documents and instructions aimed at setting up systems for effective detection and prevention of money laundering and terrorist financing so as to achieve compliance. Working procedures include the required activities for implementation of prescribed tasks. Subsidiaries appointed anti money laundering officers and their deputies.

Regular professional training is organised for employees in the entire Group about detection and prevention of money laundering and terrorist financing. This includes both in-house and external training formats. The Bank organises training and provides information on major legal changes at the Group level. In this framework the Bank Anti Money Laundering Officer organised a training session for representatives of all members of the Group.

2.3 Risk arising from bonds issued by Abanka The first part of this section deals with outstanding bonds and their attributes and the second part describes the risk factors that are associated with the bonds issued by the Bank.

In 2008, 11 issues of Abanka bonds were outstanding (AB06, AB07, AB08, AB09, AB10, AB11, AB12, AB13, VIP5, VIP6, VIP7).

List of Abanka bonds outstanding in 2008

Issue Bond status Issue date Maturity date Nominal value

1 AB06 subordinated 15 May, 2002 15 May, 2009 13,500

2 AB07 subordinated 21 May, 2003 21 May, 2010 17,300

3 AB08 subordinated 1 March, 2004 1 March, 2011 10,000

4 AB09 ordinary 1 March, 2004 1 March, 2011 10,000

5 AB10 ordinary 1 Oct., 2004 1 Oct., 2011 21,000

6 AB11 ordinary 1 Dec., 2005 1 Dec., 2010 20,865

7 AB12 ordinary 12 Dec., 2005 12 Dec., 2010 20,865

8 AB13 subordinated 23 June, 2006 24 June, 2008 5,097

9 VIP5 subordinated 15 July, 1998 15 July, 2008 2,000

10 VIP6 subordinated 9 Sept., 1999 9 Sept., 2009 2,000

11 VIP7 subordinated 18 Dec., 2000 18 Dec., 2010 2,000

Abanka bonds, sixth issue (AB06) are 7-year bonds which started bearing interest on 15 May 2002. The principal repayment is made at maturity, i.e. 15 May 2009. The nominal value of the issue is EUR 13,500 thousand. One hundred thirty-five thousand bonds were issued in denominations of EUR 100 each. The bonds carry an annual interest rate of 5.90%. Interest is calculated by the compound method and is paid semi-annually.



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Abanka bonds, seventh issue (AB07) are 7-year bonds which started bearing interest on 21 May 2003. The principal repayment is made at maturity, i.e. 21 May 2010. The nominal value of the issue is EUR 17,300 thousand. One hundred seventy-three thousand bonds were issued in denominations of EUR 100 each. The bonds carry an annual interest rate of 5.30%. Interest is calculated by the compound method and is paid semi-annually.

Abanka Vipa bonds of the 8th issue (AB08) are 7-year bonds which started bearing interest on 1 March, 2004. The principal repayment is made at maturity, i.e. 1 March, 2011. The nominal value of the issue is EUR 10,000 thousand, denominated in euros and is comprised of 100,000 bonds of EUR 100 each. The annual interest rate on AB08 bonds is 4.90%, calculated linearly and payable on an annual basis.

Abanka Vipa bonds of the 9th issue (AB09) are 7-year bonds which started bearing interest on 1 March, 2004. The principal repayment is made at maturity, i.e. 1 March, 2011. The nominal value of the issue is EUR 10,000 thousand, denominated in euros and comprising 100,000 bonds of EUR 100 each. The annual interest rate on AB09 bonds is 4.70%, calculated linearly and payable on a yearly basis.

Abanka Vipa bonds of the 10th issue (AB10) are 7-year bonds which started bearing interest on 1 October, 2004. The principal repayment is made at maturity, i.e. 1 October, 2011. The nominal value of the issue is EUR 21,000 thousand, denominated in euros and comprising 21,000 bonds of EUR 1,000 each. The annual interest rate on AB10 bonds is 4.60%, calculated linearly and payable on a yearly basis.

Abanka Vipa bonds of the 11th issue (AB11) are 5-year bonds which started bearing interest on 1 December, 2005. The principal repayment is made at maturity, i.e. 1 December, 2010. The nominal value of the issue is EUR 20,865 thousand, denominated in euros and comprising 500,000 bonds of EUR 41.73 each. The annual interest rate on AB11 bonds is 4.00%, calculated linearly and payable on a yearly basis.

Abanka Vipa bonds of the 12th issue (AB12) are 5-year bonds which started bearing interest on 12 December, 2005. The principal repayment is made at maturity, i.e. 12 December, 2010. The nominal value of the issue is EUR 20,865 thousand, denominated in euros and comprising 500,000 bonds of EUR 41.73 each. The annual interest rate on AB12 bonds is 3.80%, calculated linearly and payable on a yearly basis.

Abanka Vipa bonds of the 13th issue (AB13) are 2-year bonds which started bearing interest on 23 June, 2006. The principal repayment is made at maturity, i.e. 24 June, 2008. The nominal value of the issue is EUR 5,097 thousand, denominated in euros and comprising 50,970 bonds of EUR 100 each. The annual interest rate on AB13 bonds is 6M EURIBOR + 0.50%, calculated linearly and payable on a semi-annual basis.

Banka Vipa bonds of the 5th issue (VIP5) are 10-year bonds which started bearing interest on 15 July, 1998. The principal repayment is made annually, but there was a repayment grace period until 15 January, 2001. The maturity date is 15 July, 2008. The nominal value of the issue is EUR 2,000 thousand, denominated in euros and comprising 10,000 bonds of EUR 200 each. The annual interest rate on VIP5 bonds is 6.00%, calculated linearly and payable on a semi-annual basis.

Banka Vipa bonds of the 6th issue (VIP6) are 10-year bonds which started bearing interest on 9 September, 1999. The principal repayment is made annually, but there was a repayment grace period until 9 March, 2002. The maturity date is 9 September, 2009. The nominal value of the issue is EUR 2,000 thousand, denominated in euros and comprising 10,000 bonds of EUR 200 each. The annual interest rate on VIP6 bonds is 5.50%, calculated linearly and payable on a semi-annual basis.

Banka Vipa bonds of the 7th issue (VIP7) are 10-year bonds which started bearing interest on 18 December, 1999. The principal repayment is made annually, but there was a repayment grace period until 18 June, 2003. The maturity date




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is 18 December, 2010. The nominal value of the issue is EUR 2,000 thousand, denominated in euros and comprising 10,000 bonds of EUR 200 each. The annual interest rate on VIP7 bonds is 6.20%, compounded and payable on a semi-annual basis.

Pursuant to Commission Regulation (EC) 809/2004 of 29 April, 2004 implementing The Prospectus Directive 2003/71/EC became fully binding on 1 July, 2005, Abanka discloses the relevant information on risk factors that arise from the securities issued by Abanka.

a) Bond-related default riskIn 2008 there were 11 issues of Abanka bonds, of which 7 were subordinated (AB06, AB07, AB08, AB13, VIP5, VIP6, VIP7), meaning that in the case of the Bank’s bankruptcy or liquidation their payment is subordinated to senior debt instruments and effected only after meeting all non-subordinated debt obligations to regular creditors. On the other hand, regular bond holders are in such a case repaid under the same terms and conditions as other non-subordinated creditors of the issuer. The obligations of Abanka arising from its bond issues are not specially secured, but they are guaranteed by the total assets of the Bank. Abanka estimates that bond default risk related to both regular and subordinated bond issues is low.

The subordinated bond issue AB13 included in the calculation of supplementary capital (tier 2) involves an additional risk of default both on the principal and interest, in the event that their payment would reduce regulatory capital to a point below the prescribed capital adequacy requirements.

b) Bond-related liquidity riskIn 2008, 11 bond issues of Abanka were listed on the regulated market of the Ljubljana Stock Exchange. However, there is no guarantee that active trading in the listed bonds will actually develop and/or that it will continue until their maturity. The absence of active trading may have a negative impact on the market price and liquidity of the bonds. Due to the current financial crisis which began 2008, liquidity of bank bonds have decreased and the liquidity of Abanka bonds has also decreased as a consequence. There is an assessment that the lower liquidity of Abanka bonds is a reflection of the overall situation on the financial markets and not a reflection on Abanka’s current business.

c) Bond-related market riskBond investments are exposed to market risk. Due to adverse market conditions caused by movements in money and foreign exchange markets, interest rates, global capital markets as well as other factors, including the performance and credit rating of the bond issuer, bond prices may fall below the purchase price paid by the investor, which in the case of their sale will result in a capital loss for the bond holder. Market conditions also depend on regulatory environment changes, especially in the regulation of money and capital markets, taxes, international operations and international capital flows.

Since the subordination of payments under subordinated bonds (AB06, AB07, AB08, AB13, VIP5, VIP6, VIP7) reflects their status in respect to senior debt instruments, in the event of the issuer’s bankruptcy or liquidation, the required returns on subordinated bonds are higher than on regular bonds, all other features being the same. Consequently, subordinated bond prices are more exposed to market changes and as a result the market risk related to subordinated bonds is estimated to be higher.

d) Bond-related interest rate riskThe interest payable on AB13 bonds – calculated on the basis of EURIBOR as the reference variable interest rate plus a (fixed) margin – cannot be exactly determined in advance, which means that it is exposed to interest rate risk. In the event EURIBOR, as the variable interest rate component, decreases, interest payable on bonds will decrease accordingly and vice versa, in the event of a rise in the latter, the former will also increase in proportion.



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3 Critical accounting estimates, and judgements in applying accounting policies

The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

a) Impairment losses on loans and advancesThe Group constantly monitors the quality of its credit portfolio and assesses credit risk losses. In determining whether an impairment loss should be recorded in the income statement, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

In determining impairment losses on a particular asset in the loan portfolio, credit spreads are taken into account in the process of discounting the estimated future cash flows of the financial instrument. For wider credit spreads the Group charges higher interest rates which, in turn, result in increased impairment losses.

The Group measures the impact of credit portfolio deterioration on the amount of credit risk losses, on profit or loss as well as on regulatory capital and the capital adequacy ratio of the Group regularly. It uses sensitivity analyses to provide additional information on potential credit risk losses and necessary impairments of financial assets. The sensitivity analysis is based on various scenarios. One of them simulates that 2% of A, B, C and D loans are downgraded by one credit rating category. The result has shown that credit risk losses would increase by 3.9% or 5.7 million EUR. The other scenario was conducted in accordance with assumption that 1% of A, B and C loans are downgraded by one credit rating category, 1% of these loans are downgraded by two credit rating category and 2% of D rated loans are downgraded by one credit rating category. The result has shown that credit risk losses would increase by 8.2% or 11.9 million EUR.

b) Impairment of available for-sale equity investmentsThe Group determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgment. In making this judgment, the Group evaluates, among other factors, the normal volatility in share price. In addition, impairment may be appropriate when there is evidence of a deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows. Had all the declines in fair value below cost been considered significant or prolonged, the Group would suffer an additional loss of EUR 6,399 thousand (2007: EUR 248 thousand), being the transfer of the total debit balance in the fair value reserve to profit or loss.

c) Fair value of derivatives and unlisted debt and equity securities available-for-saleThe fair value of financial instruments that are not quoted in active markets are determined by using valuation techniques. The valuation techniques (e.g. models) are created/reviewed and used by the risk management department, which is independent of the trading units. All models reflect comparative market prices and actual data.




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d) Deferred taxesThe Group created deferred taxes for the temporary differences between the tax and book values of assets. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Applied tax rates are based on Corporate tax law (ZDDPO-2), where expected future tax rates are: 2009 (21%), 2010 (20%).

The Group forecasts future taxable profit against which it will be possible to charge the temporary differences. For temporary differences arising from the impairment of tangible fixed assets and intangible assets, the Group assesses that these impairments will be eliminated when the revaluation adjustment is eliminated; this will occur no later than at the point of total depreciation of fixed assets. Therefore, a 20% tax rate was applied during the calculation of these deferred taxes. For temporary differences arising from different depreciation rates for accounting and tax purposes a 20% tax rate was applied because according to the Group, these temporary differences can be eliminated no later than at the point of total depreciation of fixed assets. Temporary differences arising from the revaluation and impairment of securities available-for-sale and from created impairment of loans and receivables of subsidiaries may, according the Group’s assessment, be eliminated in 2009. Therefore a tax rate of 21% was applied in the calculation of these deferred taxes. The Group expects that provisions formed for employee benefits and for the repayment of National Housing Savings Scheme (NHSS) premiums will be drawn only after 2009. A 20% tax rate was applied for these temporary differences.

4 Segment analyses

a) By business segment The Group provides services in three business segments: – Retail banking – incorporating transaction accounts, saving products (deposits, investment saving products), loans

(overdraft, consumer, housing, mortgage), exchange operations, bank card operations, on-line banking, mobile banking, bankassurance products, selling mutual funds products, payment transactions, leasing;

– Corporate banking – incorporating transaction accounts, cash management, saving products (deposits, certificate of deposits), loans (overdraft, short term, investment), guarantees and letters of credit, documentary operations, payment transactions, factoring, corporate leasing;

– Financial markets – incorporating fixed income trading, trading money market instruments, financial derivatives trading, liquidity management, ALM, brokerage, assets management, corporate finance, proprietary trading, correspondent banking, raising loans, loan granting to foreign banks (participation in syndicated loans, bilateral facilities), investment management.

The Group’s operational activities in the field of custody and administrative services, IT and banking technology are not disclosed separately but included in the “other” segment.

For the purpose of intracompany accounting, transactions between divisions were treated on the basis of an agreed and harmonised set of transfer instruments to account for the transfers of various effects (internal transfers/allocation of indirect costs by business segment, debiting overheads to commercial divisions, internal transfers of earnings between divisions).



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Liabilities, interest expenses and other non-interest expenses from financing were allocated to those business segments which generated them. No other material expense items are attributed to business segments.

Assets and liabilities by business segment represent a majority of total balance sheet assets and liabilities but they exclude tax liabilities which are disclosed at the group level and not allocated to business segments. The Central Support Service’s activities are not accounted for by business segment either.

Business segment results depend on a system of opportunity interest rates, which is based on alternative/opportunity interest rates applied to interest-bearing asset and liability items aimed at establishing opportunity income and expenses. This serves as a basis for calculating opportunity interest margins for individual business segments (as a difference between earned income and opportunity income) as well as opportunity interest margins for individual segments of expenses (as a difference between opportunity expenses and incurred expenses). This is also the basis for establishing positive and negative opportunity interest margins and consequently positive or negative contributions to the performance of individual business segments.

Primary segment information

As at 31 December 2008Retail

bankingCorporate

bankingFinancial markets Other Group

External revenues 52,762 150,655 46,985 5,044 255,446

Revenues from other segments – – – – –

Revenues 52,762 150,655 46,985 5,044 255,446

Segment result 2,695 31,435 (5,769) (2,259) 26,102

Operating profit – – – – 26,102

Share of results of associates, joint ventures – – (60) – (60)

Profit before tax – – – – 26,042

Income tax expense – – – – (5,644)

Net profit for the year 20,398

Segment assets 494,425 2,333,039 1,032,060 30,443 3,889,967

Associates and joint ventures – – 955 – 955

Unallocated assets – – – – 20,074

Total assets 3,910,996

Segment liabilities 1,058,091 816,542 1,682,594 9,682 3,566,909

Unallocated liabilities – – – – 7,331

Total liabilities 3,574,240

Other segment items

Capital expenditure 1,780 1,159 171 3,508 6,618

Depreciation 1,494 554 192 4,617 6,857

Impairment charge (2,115) (1,290) (11,119) (171) (14,695)

Other non-cash expenses – – – – –




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As at 31 December 2007Retail

bankingCorporate

bankingFinancial markets Other Group

External revenues 46,856 105,449 42,764 5,907 200,977

Revenues from other segments – – – – –

Revenues 46,856 105,449 42,764 5,907 200,977

Segment result (950) 6,599 41,531 593 47,773

Operating profit – – – – 47,773

Share of results of associates, joint ventures – – (61) – (61)

Profit before tax – – – – 47,712

Income tax expense – – – – (10,902)

Net profit for the year 36,810

Segment assets 470,292 1,991,750 1,003,871 27,434 3,493,347

Associates and joint ventures – – 1,001 – 1,001

Unallocated assets – – – – 22,726

Total assets 3,517,074

Segment liabilities 983,309 732,565 1,427,461 10,636 3,153,971

Unallocated liabilities – – – – 9,921

Total liabilities 3,163,892

Other segment items

Capital expenditure 3,423 1,771 460 4,398 10,052

Depreciation 2,063 411 230 3,955 6,659

Impairment charge (2,348) (9,056) 197 (213) (11,420)

Other non-cash expenses – – – – –

Segment revenues in 2008 and 2007 consist of interest and similar income, fee and commission income and dividend income.

Capital expenditure relates to purchases of tangible and intangible assets in the current business year.

b) Geographical concentrationCountry risk is also part of the credit risk assumed by the Group. In order to facilitate country risk management the Bank produced a set of rules which stipulate procedures of establishing and monitoring risk exposures to foreign countries as well as procedures for setting and monitoring the respective risk exposure limits. According to these rules the Bank establishes risk exposures to individual foreign countries quarterly, in line with the credit ratings assigned by external credit assessment institutions. This serves as a basis for classification of foreign countries into seven internal rating categories which in turn determine exposure limits per country. In this way adequate spreading of risk to achieve the highest possible return is ensured.



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Geographical concentrations of assets, revenues and capital expenditure

As at 31 December 2008 Total assets RevenuesCapital

expenditure

Slovenia 3,132,784 209,123 6,618

Other European Union countries 480,428 30,827 –

Other former Yugoslavia 165,683 8,615 –

Other countries 131,146 6,881 –

Investments in associates and joint ventures 955 – –

3,910,996 255,446 6,618

As at 31 December 2007 Total assets RevenuesCapital

expenditure

Slovenia 2,636,402 164,077 10,052

Other European Union countries 602,221 24,563 –

Other former Yugoslavia 130,298 5,483 –

Other countries 147,152 6,854 –

Investments in associates and joint ventures 1,001 – –

3,517,074 200,977 10,052

Revenues consist of interest and similar income, fee and commission income and dividend income.

Capital expenditure relates to purchases of tangible and intangible assets in the current business year.

The Group operates principally in Slovenia, where it is based. Inter-bank exposures account for more than one half of all international transactions, whilst the rest are transactions with foreign companies and at the central government level.




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2008 2007

Interest income and similar income

Loans and advances 181,795 130,328

– to banks 11,308 5,152

– to customers 170,487 125,176

Available-for-sale securities 17,685 16,021

Financial assets held to maturity 508 1,398

Financial assets held for trading 8,326 9,242

Financial assets at fair value through profit or loss 616 –

Cash and short-term funds 2,555 1,569

Reverse repos 55 122

Other 2,261 958

213,801 159,638

Interest expenses and similar expenses

Deposits 69,397 46,779

– from banks 7,682 5,398

– from customers 61,715 41,381

Repos 189 231

Debt securities in issue 5,873 6,056

Financial liabilities held for trading 3,635 1,735

Financial liabilities at fair value through profit or loss – 10

Loans from banks 53,568 35,152

Subordinated liabilities 2,348 2,490

Other 5 3

135,015 92,456

Net interest income 78,786 67,182

Interest income accrued on impaired financial assets is EUR 7,503 thousand (2007: EUR 7,059 thousand).

6 Dividend income

2008 2007

Trading securities 939 521

Available-for-sale securities 2,655 1,123

3,594 1,644


5 Net interest income


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7 Net fee and commission income and expenses

Breakdown by type of transaction:

2008 2007

Income

Payment transactions in Slovenia 20,403 18,416

International payment transactions 2,465 2,782

Lending transactions 1,480 1,409

Administrative services 3,605 4,395

Guarantees granted 4,066 3,896

Currency exchange transactions 164 175

Brokerage and fiduciary activities 3,951 6,324

Fund management 1,917 2,294

Safekeeping of effects and valuables – 4

38,051 39,695

Expenses

Banking services in Slovenia 4,944 4,773

International banking services 980 1,195

Currency exchange transactions 33 33

Brokerage and fiduciary activities 105 99

Stock exchange transactions and other securities transactions – 1

Fee expenses for other transactions 168 156

6,230 6,257

Net fee and commission income 31,821 33,438

8 Realised gains and losses on financial assets and liabilities not measured at fair value through profit or loss

2008 2007

Net realised gains from available-for-sale financial assets 2,574 7,053

Net realised losses from held-to-maturity investments – (42)

Realised losses from loans and other financial assets and liabilities (125) (509)

Realised gains from loans and other financial assets and liabilities 537 382

2,986 6,884



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9 Net gains and losses on financial assets and liabilities held for trading

2008 2007

Foreign exchange transaction gains 864 813

Net gains/(losses) from derivatives 5,083 (1,259)

Net gains/(losses) from securities:

– interest rate instruments (7,216) (3,180)

– equity holdings (5,503) 8,661

Unrealised (losses) from trading securities (6,162) (4,952)

(12,934) 83

The impact of reclassifying financial instruments from financial assets held for trading to financial assets available for sale and to loans is disclosed in notes 21 and 22.

10 Net gains/losses on financial assets and liabilities designated at fair value through profit or loss

2008 2007

Net income/(expense) arising on:

– debt securities (unrealised losses) (3,962) (1,142)

– deposits from customers (unrealised gains) 675 882

(3,287) (260)


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2008 2007

Other operating income

– income from non-banking services 120 108

– income from debit cards and deferred payment cards 2,863 2,441

– income from sale of vehicles, real estate and other 1,400 2,749

– other operating income 639 738

5,022 6,036

Other operating expenses

– taxes, contributions and other duties (366) (37)

– membership fees and similar (161) (151)

– expenses from card products (559) (521)

– other operating expenses (485) (580)

(1,571) (1,289)

Net other operating income 3,451 4,747

12 Administration cost

2008 2007

Staff costs 31,092 29,359

– wages and salaries 27,694 26,323

– social security costs 1,527 1,370

– pension costs 1,871 1,666

Professional services 14,153 13,309

Advertising and marketing 2,031 1,984

Other administration costs 1,840 2,710

Software development costs 2,162 2,089

Rent payable 836 751

Other costs 397 382

52,511 50,584

Auditors’ fees (including VAT): 2008 2007

– for auditing of annual report 102 106

– other auditing services 117 403

– other non-auditing services – 88

219 597


11 Net other operating income



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13 Depreciation

Note 2008 2007

Property and equipment 25 4,751 4,624

Investment property 25 18 18

Intangible assets 25 2,088 2,017

6,857 6,659

14 Provisions

Note 2008 2007

Provisions for employee benefits 34 98 200

Other provisions 34 100 739

Provisions for guarantees and commitments 34 (8,786) (646)

Net (release)/charge of provisions (8,588) 293

15 Impairment

Note 2008 2007

Impairment:

– available-for-sale financial assets 21 2,657 –

– loans and receivables to banks 22, 2.1.1.6 8,441 3

– loans and receivables to non-bank customers 23 11,775 11,179

– other assets 27 410 (23)

– other – (32)

23,283 11,127

The impairments of loans and receivables to banks of EUR 8,439 thousand refer to debt securities reclassified to loans and receivables to banks and are additionally disclosed in Note 2.1.1.6 Debt securities. Due to the impact of the financial crisis in 2008 the Group also impaired the equity securities available for sale whose fair value materially dropped below their cost.


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16 Income tax expense

Note 2008 2007

Current tax 6,137 10,270

Deferred tax (credit)/charge 35 (493) 632

5,644 10,902

The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the basic tax rate of the parent as follows:

2008 2007

Profit before tax 26,042 47,712

Tax calculated at a tax rate of 22% (2007: 23%) 5,729 10,976

Income not subject to tax (1,760) (1,404)

Expenses not deductible for tax purposes 1,675 1,330

Income tax expense 5,644 10,902

In 2001 the tax authorities carried out a full scope tax audit at the Bank for the years 1999 and 2000.

In accordance with local regulations, the tax authorities may inspect the Bank’s books and records at any time within 5 years subsequent to the reported tax year and may impose additional tax assessments and penalties. The Bank’s management is not aware of any circumstances which may give rise to a potential material liability in this respect.

The effective income tax rate for the year 2008 was 21.7% (2007: 22.8%).

17 Earnings per share

Basic earnings per share for both years is calculated by dividing the net profit attributable to equity holders of the Bank less payment of interest on the innovative instrument by the weighted average number of ordinary shares in issue during the year, excluding the average number of ordinary shares purchased by the Bank and held as treasury shares.

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares, which the Bank does not have as at 31 December, 2008.

2008 2007

Profit attributable to equity holders of the Bank in EUR thousand 20,406 31,169

Weighted average number of ordinary shares in issue 6,767,298 5,486,812

Number of treasury shares (Note 37) 9,213 11,870

Basic earnings per share (expressed in EUR per share) 2.44 5.68

Diluted earnings per share (expressed in EUR per share) 2.44 5.68



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18 Cash and cash balances with central bank

2008 2007

Cash in hand 23,698 24,766

Obligatory reserve 33,173 25,773

Other (overnight deposits with central bank) 172,546 9,917

229,417 60,456

Included in cash and cash equivalents (Note 40) 196,244 34,683

The obligatory reserve is not available for financing the Group’s day-to-day operations.

The final adjustment to the obligatory reserve requirements of the Eurosystem was made with the introduction of the euro, when the regulation on reserve requirements ceased to be in force, and the ECB Regulation on the application of minimum reserves entered into force.

Interest rate analysis of cash and cash balances with central bank is disclosed in Note 2.1.2.4.1. Fair value is disclosed in Note 2.1.6.

19 Financial assets and liabilities held for trading

Financial assets held for trading

2008 2007

Debt securities 23,921 164,819

Treasury bills – listed 698 1,032

Government bonds – listed 4,961 34,240

Other debt securities – listed 18,262 129,547

Equity securities 10,126 18,162

– listed 10,073 16,554

– unlisted 53 1,608

Derivatives 14,263 562

48,310 183,543

Current 18,984 43,126

Non-current 29,326 140,417

Included in cash and cash equivalents (Note 40) 694 1,030

As at the end of 2008, no securities held for trading by the Group were provided as collateral (2007: nil).


178


Interest rate analysis of financial assets held for trading is disclosed in Note 2.1.2.4.1. Additional information about fair value is disclosed in Note 2.1.6.

The financial assets which were reclassified from financial assets held for trading to financial assets available for sale and to loans are disclosed in notes 21 and 22.

Derivative financial instruments The Group uses the following derivative instruments for non-hedging purposes: Currency forwards represent commitments to purchase foreign and domestic currency, including undelivered spot transactions.

Currency and interest rate swaps are commitments to exchange one set of cash flows for another. Swaps result in an economic exchange of currencies or interest rates. No exchange of principal takes place, except for certain currency swaps. The Group’s credit risk represents the potential cost to replace the swap contracts if counterparties fail to perform their obligation. This risk is monitored on an ongoing basis with reference to the current fair value, a proportion of the notional amount of the contracts and the liquidity of the market. To control the level of credit risk taken, the Group assesses counterparties using the same techniques as for its lending activities.

Foreign currency options are contractual agreements under which the seller (writer) grants the purchaser (holder) the right, but not the obligation, either to buy (a call option) or sell (a put option) a specific amount of a foreign currency at a predetermined price at or by a set date or during a set period. The seller receives a premium from the purchaser in consideration for the assumption of foreign exchange risk. Options are negotiated between the Group and a customer (OTC). The Group is exposed to credit risk on purchased options only, and only to the extent of their carrying amount, which is their fair value.

The notional amounts of certain types of financial instruments provide a basis for comparison with instruments recognised on the balance sheet but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Group’s exposure to credit or price risks. The derivative instruments become favourable (assets) or unfavourable (liabilities) as a result of fluctuations in foreign exchange rates relative to their terms. The aggregate contractual or notional amount of derivative financial instruments on hand, the extent to which instruments are favourable or unfavourable, and thus the aggregate fair values of derivative financial assets and liabilities, can fluctuate significantly from time to time. The fair values of derivative instruments held are set out below.

Contract/notionalamount

Fair values

As at 31 December 2008 Assets Liabilities

Derivatives held for trading

Foreign exchange derivatives (OTC):

– currency forwards 121,840 1,936 2,074

– currency swaps 79,715 2,279 792

– OTC currency options 187,636 3,441 3,440

Interest rate derivatives (OTC):

– interest rate swaps 158,004 4,096 3,528

Equity derivatives – forwards (Note 20) 7,291 2,511 –

Total derivative assets/(liabilities) held for trading 14,263 9,834




179


Contract/notionalamount

Fair values

As at 31 December 2007 Assets Liabilities

Derivatives held for trading

Foreign exchange derivatives (OTC):

– currency forwards 20,345 119 89

– currency swaps 6,042 13 31

– OTC currency options 36,555 260 253

Interest rate derivatives (OTC):

– interest rate swaps 135,420 170 485

Equity derivatives – forwards (Note 20) 7,291 – 7,219

Total derivative assets/(liabilities) held for trading 562 8,077

20 Financial assets designated at fair value through profit or loss

2008 2007


Equity securities 4,780 14,510

Unit linked investments 2,005 2,167

24,313 25,063

Current 6,192 14,510

Non-current 18,121 10,553

Financial assets designated at fair value through profit or loss comprise various structured products referring both to bonds and unit linked investment. Structured products are debt securities derived from an underlying instrument which defines their return. The interest payments of the above debt securities are equity-indexed, which results in dissimilar risks inherent in the host and embedded derivative. The Group therefore designates the hybrid contracts as financial assets at fair value through profit and loss. Underlying instruments may be shares, indices, funds, commodities, etc.

An accounting mismatch would arise if the equity securities were accounted through equity, because the related derivatives are measured at fair value with movements in the fair value taken through the income statement. By designating those equities at fair value, the movement in the fair value will be recorded in the income statement.

In 2008, the Group did not earn any fees (2007: EUR 306 thousand) measured at fair value through profit and loss.

Interest rate analysis of financial assets designated at fair value through profit or loss is disclosed in Note 2.1.2.4.1. Additional information about fair value is disclosed in Note 2.1.6.



180



21 Available-for-sale financial assets

2008 2007


Treasury bills (listed) 9,628 –

Other debt securities – at fair value 398,509 447,167

– listed 397,660 447,167

– unlisted 849 –

Equities and equity holdings 21,629 22,818

Equity holdings – at fair value (unlisted) 2,125 6,254

Equities – at fair value: 19,504 16,564

– listed 16,019 6,484

– unlisted 3,485 10,080

Unit linked investments 8,952 16,132

Total available-for-sale financial assets 438,718 486,117

Current 94,658 148,325

Non-current 344,060 337,792

Included in cash and cash equivalents (Note 40) 9,590 –

Securities pledged under repurchase agreements with other banks are government bonds with a market value as at 31 December, 2008 of EUR 10,750 thousand (2007: EUR 128,951 thousand). All repurchase agreements fall due within 12 months.

As at 31 December, 2008 the Group held securities issued by the Slovene government and commercial banks as collateral for the purpose of payment settlement – STEP2 and for ECB instruments. The total value of the collateral was EUR 85,929 thousand (2007: EUR 57,978 thousand).

Interest rate analysis of available-for-sale financial assets is disclosed in Note 2.1.2.4.1. Additional information about fair value is disclosed in Note 2.1.6.

On 1 October, 2008 the Group reclassified EUR 1,693 thousand of financial assets, previously carried as securities held for trading, to available-for-sale securities. The accumulated loss arising from these securities before reclassification was EUR 844 thousand and is recognised as loss from securities held for trading. As at 1 October, 2008 the asset structure was as follows: bonds EUR 273 thousand, shares EUR 1,289 thousand, investment coupons EUR 131 thousand.

Movements in available-for-sale treasury bills are as follows:

2008 2007

As at 1 January – 103,213

Additions 20,628 –

Disposals (11,000) (103,213)

As at 31 December 9,628 –



181



Movements in other available-for-sale securities are as follows:

2008 2007

As at 1 January 486,117 395,020

Exchange differences on monetary assets 179 (184)

Reclassification from financial assets held for trading 1,693 –

Additions 266,804 399,803

Disposals (sale and redemption) (302,577) (317,232)

Reclassification to loans (Note 22) (4,500) –

Impairment (Note 15, 38) (2,657) –

(Losses)/gains from changes in fair value (Note 38) (15,969) 8,710

As at 31 December 429,090 486,117

22 Loans and receivables to banks

2008 2007

Placements with other banks 13,168 38,439

Loans and deposits to other banks 276,856 197,828

Gross loans 290,024 236,267

Provision for impairment (8,506) (65)

Net loans 281,518 236,202

Current 251,829 231,202


Included in cash and cash equivalents (Note 40) 245,432 228,026

As at 31 December, 2008 (2007: nil) the Group had no agreements to resell (‘reverse repos’) recorded as loans and receivables to banks.

Movements in provisions for impairment are as follows:

Note

As at 1 January 2007 840

Provision for impairment 15 3

Write-offs (778)


Provision for impairment 15, 2.1.1.6 8,441

Write-offs –

As at 31 December 2008 8,506


182


Due to the impact of the financial crisis on the functioning of securities markets, the Group used the option available under IAS 39 and reclassified financial instruments from financial assets held for trading and available-for-sale financial assets to loans and receivables to banks.

The reclassified banking sector bonds were held in the Group’s trading portfolio for a longer period of time. The Group estimated that during the financial crisis, capital market depth was materially lowered and that normal trading in banking sector bonds is practically impossible. The Group also identified a material gap between supply and demand for banking sector bonds, which was reflected in extremely big spreads between bid (selling) and offer (buying) prices and disproportionate impact on bond prices with low trading volumes. In the given circumstances these bonds were either illiquid or their liquidity was materially reduced. It was estimated that transactions in certain bonds represented sales which were unlikely to occur in normal market conditions (prompted by the fear of further developments on financial markets, need for raising liquidity etc.).

The impairments of bonds reclassified by the Group amounted to EUR 8,439 thousand, additionally disclosed in Note 2.1.1.6.

Reclassification of debt financial instruments

2008 2007

From “held for trading” to “loans and receivables”

Carrying amount as at 31 December 25,852 –

Fair value as at 31 December 22,867 –

Fair value of the loss recognised before reclassification (1,441) (859)

Fair value of the loss that would have been recognised in profit or loss if the financial asset had not been reclassified (2,718) –

Income recognised in profit or loss after reclassification 426 –

Impairment loss 2,800 –

Average effective interest rate 8.5% –

Estimated cash flow 31,632 –

2008 2007

From “available-for-sale” to “loans and receivables”

Carrying amount as at 31 December 2,700 –

Fair value as at 31 December 728 –

Impairment loss 5,639 –

Average effective interest rate 5.2% –

Estimated cash flow 2,700 –




183



23 Loans and receivables to non-bank customers

2008 2007

Corporate entities 2,437,975 2,090,934

Retail customers 463,049 411,644

Gross loans 2,901,024 2,502,578

Provision for impairment (127,230) (117,790)

Net loans 2,773,794 2,384,788

Current 1,502,916 1,113,412

Non-current 1,270,878 1,271,376

Receivables for interest are recognized together with the underlying financial instrument.

The Group accepted listed securities at fair value of EUR 139,149 thousand (2007: EUR 219,118 thousand) as collateral for loans, which it is permitted to sell or repledge.

Movements in provisions for impairment are as follows:

NoteCorporate

entitiesRetail

customers Total

As at 1 January 2007 98,668 9,586 108,254

Provision for impairment 15 10,006 1,173 11,179

Write-offs (1,589) (54) (1,643)

As at 31 December 2007 107,085 10,705 117,790

Provision for impairment 15 10,679 1,096 11,775

Write-offs (2,210) (125) (2,335)

As at 31 December 2008 115,554 11,676 127,230

All loans were written down to their recoverable amounts.

Loans to and receivables from banks and non-bank customers are further analysed in the following notes: Credit risk (Note 2.1.1), Foreign exchange risk (Note 2.1.2.3), Interest rate risk (Note 2.1.2.4), Liquidity risk (Note 2.1.3), Fair value (Note 2.1.6) and Related party (Note 45).


184


Loans and advances to customers include finance lease receivables as follows:

2008 2007

Gross investment in finance leases, receivable: 116,151 92,249

– no later than 1 year 17,934 39,388

– later than 1 year and no later than 5 years 53,103 43,642

– later than 5 years 45,114 9,219

Unearned future finance income on finance leases 22,914 14,783

Net investment in finance leases: 93,237 77,466

– no later than 1 year 17,153 34,451

– later than 1 year and no later than 5 years 46,201 35,603

– later than 5 years 29,883 7,412

24 Held-to-maturity investments

2008 2007

Debt securities – at amortised cost – listed (non-current) 13,378 13,308

As at 31 December 2008 the Group held securities issued by the Slovene government as collateral for the purpose of payment settlement – STEP2 and for ECB instruments. The total value of the collateral was EUR 13,378 thousand (2007: EUR 9,022 thousand).

The Group has not reclassified any financial assets to be measured at amortised cost rather than fair value during the year (2007: nil).

Debt securities have fixed interest rates.

Interest rate analysis of held-to-maturity investments is additionally disclosed in Note 2.1.2.4.1. Fair value is disclosed in Note 2.1.6.

Movements in held-to-maturity investments are as follows:

2008 2007

As at 1 January 13,308 13,958

Additions (purchase, amortisation of discount) 509 64,398

Disposals (maturity and redemption, amortisation of premium) (439) (65,048)

As at 31 December 13,378 13,308




185



25 Property and equipment, intangible assets, investment property and non-current assets and disposal groups classified as held for sale

Land and buildings

Comput-ers

Other equipment

Assets under

construc-tion

Total prop-

erty and equip-

ment

Intangi-ble

assets

Invest-ment

property

Non - current assets

held for sale

As at 31 December 2007

Cost 56,130 10,113 25,587 5,127 96,957 12,265 256 1,427

Accumulated depreciation 19,463 8,735 16,914 – 45,112 7,730 112 –

Net book amount 36,667 1,378 8,673 5,127 51,845 4,535 144 1,427

Cost

As at 1 January 2008 56,130 10,113 25,587 5,127 96,957 12,265 256 1,427

Additions 1,815 1,888 1,881 – 5,584 1,253 16 2,464

Disposals (55) (1,145) (1,609) (3,897) (6,706) (25) (27) (1,427)

As at 31 December 2008 57,890 10,856 25,859 1,230 95,835 13,493 245 2,464

Depreciation

As at 1 January 2008 19,463 8,735 16,914 – 45,112 7,730 112 –

Depreciation (Note 13) 1,038 1,966 1,747 – 4,751 2,088 18 –

Additions 26 – 8 – 34 – 16 –

Disposals (40) (974) (1,127) – (2,141) (23) (24) –

As at 31 December 2008 20,487 9,727 17,542 – 47,756 9,795 122 –

Net book amount as at 31 December 2008 37,403 1,129 8,317 1,230 48,079 3,698 123 2,464

All investment property generates income and expenses. There was EUR 12 thousand of rental income from investment property (2007: EUR 41 thousand) and EUR 7 thousand of direct expenses recognised in the income statement in 2008 (2007: EUR 31 thousand).

Non-current assets held for sale also arise from tangible fixed assets received as payment of claims amounting to EUR 722 thousand.


186



25 Property and equipment, intangible assets, investment property and non-current assets and disposal groups classified as held for sale (continued)

Land and buildings

Comput-ers

Other equipment

Assets under

construc-tion

Total prop-

erty and equip-

ment

Intangi-ble

assets

Invest-ment

property

Non - current assets

held for sale

As at 31 December 2006

Cost 57,002 9,946 24,511 872 92,331 10,936 474 544

Accumulated depreciation 18,438 8,639 15,543 – 42,620 5,880 106 –

Net book amount 38,564 1,307 8,968 872 49,711 5,056 368 544

Cost

As at 1 January 2007 57,002 9,946 24,511 872 92,331 10,936 474 544

Additions 927 1,009 3,601 4,255 9,792 1,674 48 966

Disposals (1,799) (842) (2,525) – (5,166) (345) (266) (83)

As at 31 December 2007 56,130 10,113 25,587 5,127 96,957 12,265 256 1,427

Depreciation

As at 1 January 2007 18,438 8,639 15,543 – 42,620 5,880 106 –

Depreciation (Note 13) 1,021 893 2,710 – 4,624 2,017 18 –

Additions 33 18 – – 51 – 21 –

Disposals (29) (815) (1,339) – (2,183) (167) (33) –

As at 31 December 2007 19,463 8,735 16,914 – 45,112 7,730 112 –

Net book amount as at 31 December 2007 36,667 1,378 8,673 5,127 51,845 4,535 144 1,427



187



26 Investments in associates and joint ventures

2008 2007

Associates


Additions/(disposals) 14 52

Share of results (63) (11)

As at 31 December – 49

Joint ventures

As at 1 January 952 –

Additions/(disposals) – 1,002

Share of results 3 (50)


Total as at 31 December 955 1,001

The principal associates, which are unlisted are:

2008 Name

Country of incorporation Assets Liabilities Equity Revenues

Profit/(Loss)

% Interest

held

KDSPV1 B.V. Netherlands 15 71 (56) – (83) 33.33

2007 Name


Profit/(Loss)

% Interest

held

KDSPV1 B.V. Netherlands 157 20 137 4 (32) 33.33

2008 Name

Country of incorporation Assets Liabilities

Liabilities to

investors in fund

units RevenuesProfit/ (Loss)

% Interest

held

Abančna DZU Delniški Evropa Slovenia 30,243 230 30,013 5,777 (26,323) 29.48

On 1 March, 2008 the associate Delniški Evropa Vipa Invest mutual fund was renamed Abančna DZU Delniški Evropa.

2007 Name

Country of incorporation Assets Liabilities

Liabilities to

investors in fund

units RevenuesProfit/ (Loss)

% Interest

held

Delniški Evropa Vipa Invest Slovenia 63,031 270 62,761 21,998 17,459 25.54

As at December 31, 2008 Abanka holds 883,373 units (2007: 883,373 units) of the Abančna DZU Delniški Evropa mutual fund which represents 29.48% of the units in issue (2007: 25.54%). The fund is managed by Abančna DZU, a company controlled by Abanka Vipa d.d. The value per unit as at December 31, 2008 is EUR 10.02 (2007: 18.15 EUR). The investment is measured at fair value through profit or loss therefore it is not accounted for using the equity method. The fund does not prepare financial statements in accordance with IFRS, but in accordance with Slovene GAAP.


188


The principal joint ventures, which are unlisted are:

2008 Name


Profit/(Loss)

% Interest

held

ASA Abanka Leasing d.o.o.Bosnia and

Herzegovina 46,316 44,364 1,952 2,201 8 49

2007 Name


Profit/(Loss)

% Interest

held

ASA Abanka Leasing d.o.o.Bosnia and

Herzegovina 8,317 5,197 1,944 169 (101) 49

27 Other assets

2008 2007

Due from customers 670 882

Receivables from card operations 1,233 1,840

Inventories 508 345

Prepayments 1,329 419

Receivables from factoring 28,758 35,121

Prepaid taxes 457 377

Other receivables:

– debtors 638 542

– cheques 127 101

– receivables from operations abroad – foreign equities in euros 1,258 –

Receivables from sale of eurobonds – 20,884

Other 2,174 4,830

37,152 65,341

Current 37,123 65,034

Non-current 29 307

The amount of non – financial other assets is EUR 2,294 thousand (2007: EUR 1,141 thousand) and the amount of financial assets is EUR 34,858 thousand (2007: EUR 64,200 thousand).




189


Movements in provisions for impairment of other financial assets are as follows:

Note

As at 1 January 2007 4,070


Write-offs (256)



Write-offs (177)


28 Deposits from central bank

2008 2007

Deposits 115 26

Securities-backed loans (Eurosystem monetary policy) 130,269 –

Total (current) 130,384 26

In late November and early December Abanka engaged in long-term financing operations of EUR 130 million at an average interest rate of 2.79%, which following the amendment of the Decision on the Minimum Requirements for Ensuring an Adequate Liquidity Position of (Savings) Banks improves category one liquidity ratio.

29 Financial liabilities designated at fair value through profit or loss

2008 2007

Structured deposit (non-current) 7,699 8,386

The payments of the above structured deposit are equity-indexed, which results in dissimilar risks inherent in the host and embedded derivative. The Group therefore designates the compound financial instruments as financial liabilities at fair value through profit or loss.

The contractual undiscounted amount that will be required to be paid at maturity of the above debt security is EUR 9,254 thousand (2007: EUR 9,268 thousand). The amount exceeds the book amount by EUR 1,555 thousand (2007: EUR 882 thousand).



190


There were no significant gains or losses attributable to changes in the credit risk for those financial liabilities designated at fair value in 2008.

Deposits classified as financial liabilities designated at fair value through profit or loss are related to securities held as assets.

Interest rate analysis of financial liabilities designated at fair value through profit or loss is disclosed in Note 2.1.2.4.1. Additional information about fair value is disclosed in Note 2.1.6.

30 Deposits from banks and non-bank customers

2008 2007

Deposits from banks 66,027 76,692

Current 61,309 70,488


The amount of deposits from banks with fixed interest rates is EUR 57,113 thousand at 31 December, 2008 (2007: EUR 68,217 thousand); the amount of deposits from banks with variable interest rates is EUR 8,914 thousand at 31 December, 2008 (2007: EUR 8,475 thousand).

2008 2007

Deposits from non-bank customers

Corporate entities 910,668 813,301

Retail customers 1,007,643 911,058

Total deposits from non-bank customers 1,918,311 1,724,359

Current 1,874,814 1,674,994


Fixed and variable interest rate deposits from non-bank customers account for 71% (2007: 73%) and 29% (2007: 27%) of the total respectively.

Deposits and certificates of deposit provided as collateral for loans granted in 2008 totalled EUR 21,895 thousand (2007: EUR 9,053 thousand). The fair value of those deposits approximates the carrying amount.

Interest rate analysis of deposits from banks and non-bank customers is additionally disclosed in Note 2.1.2.4.1. Fair value is disclosed in Note 2.1.6.

Loans and advances from banks and non-bank customers are further analysed as part of the balance sheet in the following notes: Foreign exchange risk (Note 2.1.2.3), Interest rate risk (Note 2.1.2.4), Liquidity risk (Note 2.1.3) and Related party transactions (Note 45).




191



31 Debt instruments

Interest rate on 31 December 2008 2007

Issued bills and certificates 1.1% 50 1,005

Certificates of deposit (falling due: 2009 to 2013) 3.7% - 6.3% 54,947 66,948

Bonds 9th issue due 1 March, 2011 in EUR 4.7% 9,874 9,873

Bonds 10th issue due 1 October, 2011 in EUR 4.6% 21,243 21,243

Bonds 11th issue due 1 December, 2010 in EUR 4.0% 17,348 17,323

Bonds 12th issue due 12 December, 2010 in EUR 3.8% 18,408 18,380

Total debt instruments 121,870 134,772

Current 9,215 33,157

Non-current 112,655 101,615

In 2008 no bond matured and there were no new issues.

Fair value is disclosed in Note 2.1.6.

32 Subordinated liabilities

Interest rate on 31 December 2008 2007

Issued subordinated debt securities

Short–term euro debt securities 10 27

Bonds 6th issue due 15 May, 2009 in EUR 5.9% 13,566 13,562

Bonds 7th issue due 21 May, 2010 in EUR 5.3% 16,740 16,739

Bonds 8th issue due 1 March, 2011 in EUR 4.9% 10,411 10,410

Bonds 13th issue due 24 June, 2008 in EUR 6M Euribor + 0.5 – 5,102

Bonds 5th issue (VIP5) due 15 July, 2008 in EUR 6% – 257

Bonds 6th issue (VIP6) due 9 September, 2009 in EUR 5.5% 254 509

Bonds 7th issue (VIP7) due 18 December, 2010 in EUR 6.2% 501 752

Total issued subordinated debt securities 41,482 47,358

Subordinated deposits – 6,403

Subordinated loan 3M Euribor + 1.9 118,969 –

Total issued subordinated debt instruments 160,451 53,761

Current 14,205 12,748

Non-current 146,246 41,013

Subordinated deposits are deposits with the characteristics of debt instruments and form a part of supplementary regulatory capital.


192


On 18 January, 2007 Abanka signed an agreement on a subordinated loan which classifies as an innovative instrument according to the definition in Article 11 of the Decision on Capital Calculation of (Savings) Banks (Official Gazette of the RS, no. 135/2006). The innovative instrument is a subordinated loan from VTB Europe, a bank with its head office in London. The innovative instrument fulfils all the Bank of Slovenia’s requirements for inclusion in the Tier 1 and Tier 2 capital of the Bank.

The subordinated loan was financed by a bond issue, so called loan participation notes, issued by a Dutch company established specifically for this transaction. The proceeds from the notes issue were paid to VTB Europe to fund the subordinated loan that it provided to Abanka. Any payments of interest and principal on the subordinated loan are the sole source of funds to cover payments of interest and principal on the notes. As such, holders of the notes are exposed to Abanka’s risk, though they have no recourse to any assets of Abanka.

Payments of principle and interest under the subordinated loan granted in January 2007 were entirely at the discretion of the management of Abanka and, therefore, the subordinated loan did not meet the definition of a financial liability in accordance with EU IFRS. Accordingly the subordinated loan was classified as an equity instrument in its entirety in the Annual Report for the year ended 31 December 2007.

In April 2008 the Management Board of Abanka declared a resolution in a Board Meeting regarding the discretionary right of the payment of interest of the subordinated loan and announced the modification to the public. The above modification resulted in a change in the accounting treatment of the notes and consequently a reclassification from equity to liabilities was made at fair value of EUR 117,539 thousand. Distributions to holders of the equity instrument which were made up to May 2008, were debited by the entity directly to retained earnings. Since then distributions to holders have increased interest expenses.

The third and final coupon of the 13th-issue AB13 bonds of EUR 102.72 matured on 24 June, 2008. The coupon consists of the principal of EUR 100, and interest of EUR 2.72. The total settled amount of the matured AB13 coupon was EUR 5,236 thousand.

The twentieth and final coupon of the 5th issue VIP5 of EUR 12.88 matured on 15 July, 2008. The coupon consists of the principal of EUR 12.50 and interest of EUR 0.38. The total settled amount of the matured VIP5 coupon was EUR 258 thousand.

The Group did not issue dividend bonds, convertible bonds or bonds with a pre-emptive right to the purchase of shares.

Fair value is disclosed in Note 2.1.6.




193



33 Repurchase agreements

2008 2007

Short-term financial liabilities to foreign banks – loan – repo (current) 10,681 123,887

Financial liabilities are linked to financial assets pledged under repurchase agreements with foreign banks. As at 31 December 2008 securities available for sale at fair value of EUR 10,750 thousand (2007: EUR 128,951 thousand) were pledged to third parties in sale and repurchase agreements.

Interest rate analysis of subordinated liabilities is disclosed in Note 2.1.2.4.1. Additional information about fair value is disclosed in Note 2.1.6.

34 Provisions

Note

Provisions for guarantees and

commitments Other provisions

Provisions for employee

benefits

As at 1 January 2007 18,427 3,072 2,843

Additional/(released) provisions 14 (646) 739 200

Utilised during year (72) (553) (258)

As at 31 December 2007 17,709 3,258 2,785

Additional/(released) provisions 14 (8,786) 100 98

Utilised during year - (491) (374)

As at 31 December 2008 8,923 2,867 2,509

Provisions for severance payments and jubilee payments were set aside by the Group as at 31 December, 2008 based on actuarial calculations.

The calculation is based on the following major assumptions:– a discount rate of 7.65%;– labour turnover from 2003 to 2008;– average wage growth in the Republic of Slovenia: 4.5% per annum;– employee mortality calculated on the basis of the mortality tables for the Slovene population from 2000 to 2002.

Employees are also entitled to jubilee payments for every decade of service. In 2008 the Group also established provisions of EUR 100 thousand for severance payments in the case of employment termination for business reasons.

Other provisions are disclosed in Note 41.

Other provisions include provisions for national housing savings scheme (NHSS). Whenever a saver in the NHSS fails to take up the option of a housing loan at the NHSS terms, the Group is obliged to repay all the premiums received by the saver during the saving period to the National Housing Fund. The Group has created EUR 2,682 thousand of provisions for that purpose. Provisions of EUR 119 thousand relate to legal proceedings and provisions of EUR 66 thousand relate to onerous contracts.


194



35 Deferred income tax

Deferred income tax is calculated on all temporary differences under the liability method using effective tax rates of 20% or 21% according to the tax rate valid in the year when elimination of temporary differences is projected (2007: 20% or 22%).

Movements in the deferred income tax account are as follows:

2007 Movement 2008

Deferred income tax liabilities

Available-for-sale investments (revaluation reserve) 3,162 (1,335) 1,827

Deferred income tax from retained earnings due to IFRS implementation 751 (751) –

Different depreciation rates for accounting and tax purposes 356 (6) 350

4,269 (2,092) 2,177

Deferred income tax assets

Available-for-sale investments (revaluation reserve) 1,089 1,514 2,603

Available-for-sale investments (impairment) – 558 558

Trading securities 126 (125) 1

Impairment of property and equipment and investment property 108 (7) 101

Different depreciation rates for accounting and tax purposes 120 62 182

Provisions for employee benefits 537 (73) 464

Other provisions 489 (99) 390

Impairment on loans and receivables 752 191 943

Other 30 (30) –

3,251 1,991 5,242

Included in income statement:

Note 2008 2007

Trading securities (125) (250)

Available-for-sale investments 558 –

Impairment of property and equipment and investment property (7) (9)

Different depreciation rates for accounting and tax purposes 68 (268)

Provisions for employee benefits (73) (34)

Other provisions (99) (134)

Impairment on loans and receivables 191 94

Other (30) (31)

16 483 (632)

Included in equity:

2008 2007

Available-for-sale investments – unrealised gains 1,335 86

Available-for-sale investments – unrealised losses 1,514 177

2,849 263

Deferred taxes were carried at a tax rate which the Bank believes will apply once the temporary differences between the tax and book values of assets are eliminated.



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For temporary differences arising from the impairment of tangible fixed assets and intangible assets, a 20% tax rate was applied during the calculation of these deferred taxes. For temporary differences arising from different depreciation rates for accounting and tax purposes a 20% tax rate was applied. Temporary differences arising from the revaluation and impairment of securities available-for-sale and from created impairment of loans and receivables of subsidiaries may, according to the Group’s assessment, be eliminated in 2009. Therefore a tax rate of 21% was applied in the calculation of these deferred taxes. The Group expects that provisions formed for employee benefits and for the repayment of National Housing Savings Scheme (NHSS) premiums will be drawn only after 2009. A 20% tax rate was applied for these temporary differences.

Further information on deferred tax charged directly to equity is presented in Note 38 Reserves and retained earnings.

36 Other liabilities

2008 2007

Liabilities from other taxes – non-financial 703 953

Creditors 2,395 4,430

Liabilities from factoring 27,997 32,300

Liabilities from card operations 736 1,519

Prepayments 293 207

Liabilities to employees 1,242 1,147

Cash in transit 13 7

Items in the course of payment 850 1,153

Other 5,973 7,380

Total liabilities (current) 40,202 49,096



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37 Basic equity, share premium and treasury shares

The Bank’s share capital is comprised of 7,200,000 registered par-value shares. All of them are ordinary shares. The number of shares with a voting right is 7,198,864. All shares issued are fully paid. Shareholders with a holding of at least 5% of the issued share capital as at 31 December, 2008 are as follows:

2008 Share 2007 Share

Zavarovalnica Triglav d.d. 25.6% Sava d.d. 23.8%

Sava d.d. 23.8% Zavarovalnica Triglav d.d. 21.3%

Zvon Ena Holding d.d. 17.2% Zvon Ena Holding d.d. 17.2%

Delniški vzajemni sklad Triglav Steber I 7.3% Delniški vzajemni sklad Triglav Steber I 7.3%

HIT d.d., Nova Gorica 6.1% HIT d.d., Nova Gorica 6.1%

The increase of the holding by Zavarovalnica Triglav d.d. arises solely from a technical transfer of 4.3% of ABKN shares from the account of Zavarovalnica Triglav d.d. – life insurance long-term business fund with KDD (Central Securities Clearing Corporation) to another account of Zavarovalnica Triglav d.d. with KDD, i.e. all transfers pertained to Zavarovalnica Triglav d.d. This technical transfer of the said shares did not involve any changes of the holder or owner of the shares, but was done in order to comply with the shareholding purpose requirements of Zavarovalnica Triglav d.d. with KDD.

Share IssueIn January 2008 Abanka published a prospectus for the public offer of newly issued Abanka shares.

The main features of the share issue were: – number of shares and value per share: 1,700,000 shares – no-par value shares not expressed as having a nominal

value; – selling price per share: EUR 60; – total issue value: EUR 102,000 thousand; – share type: ordinary, freely transferable, no-par value, dematerialised share with designation ABKN; – share rights: the same as arising from the previous issues of the ordinary registered shares with designation ABKN

by the same issuer;– public offer start and end date: sale in three rounds of recapitalisation, started on 15 January, 2008 and ended on

5 February 2008.

The outcome of the first round of recapitalisation: – the existing shareholders of Abanka with pre-emptive rights to the new shares in the ratio 1:1 in the first round of

recapitalisation subscribed and paid in 1,659,232 new shares, which represent 97.6% of the total issue.

The outcome of the second round of recapitalisation:– on the first day of the second round of recapitalisation all the remaining 40,768 new shares were subscribed and

paid in.



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On 16 July, 2008 limited transferable ABKR shares of the Bank were exchanged for freely transferable ABKN shares of the Bank at an exchange ratio of 1 to 1. Trading in 7,198,864 ABKN shares commenced on the Ljubljana Stock Exchange on 27 October, 2008.

In the normal course of its equity trading and market activities, the Group buys and sells its own shares. This is in accordance with the Bank’s By-Laws and in compliance with all aspects of the Slovene legislation.

These shares are treated as a deduction from the shareholders’ equity. Gains and losses on sales or redemption of own shares are credited or charged to reserves.

Our own share fund was decreased by 1,037 ABKR and by 2,220 ABKN shares or EUR 195 thousand in total on 30 May, 2008 and increased by 600 ABKN shares in amount of EUR 32 thousand in November 2008. As at 31 December, 2008 the Bank held 9,213 ABKN shares worth EUR 240 thousand in total.

Movements in basic equity:

Number of shares Total

As at 1 January 2007 5,500,000 22,951

Issue of shares – –

As at 1 January 2008 5,500,000 22,951

Issue of shares 1,700,000 7,094

As at 31 December 2008 7,200,000 30,045

Movements of treasury shares:

Number of shares Total

As at 1 January 2007 13,229 267

Sale (1,359) (13)

As at 1 January 2008 11,870 254

Sale (3,257) (46)

Purchase 600 32

As at 31 December 2008 9,213 240

Movements in share premium:

2008 2007

As at 1 January 58,062 57,994

Issue of shares 94,906 –

Appropriation of rewards in form of shares 149 68

As at 31 December 153,117 58,062



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38 Reserves from profit (including retained earnings) and revaluation reserves

2008 2007

Reserves including retained earnings 141,351 121,001

Net profit for the year 15,402 26,586

Revaluation reserve (2,941) 7,260

Total 153,812 154,847

Movements in reserves from profit:

2008 2007

As at 1 January 112,644 90,675

Transfer of net profit to reserves from profit 32,199 21,949

Other 11 20

As at 31 December 144,854 112,644

In accordance with a resolution by the General Meeting of Shareholders, in 2008 EUR 11 thousand of unpaid dividends, the payment of which fell due more than five years before (2007: EUR 20 thousand) was derecognized as a liability, the write back being reflected in equity.

Movements in retained earnings:

2008 2007

As at 1 January 8,357 8,357

Prior period errors – (1,617)

Restatement of opening balance 8,357 6,740

Transfer of net profit to retained earnings 7,386 5,541

Appropriation of dividends (7,260) (5,541)

Transfer of retained earnings to other reserves (11,234) –

Covering of the loss from the financial year in subsidiary (731) –

Covering of the loss brought forward – 1,617

Other (21) –

As at 31 December (3,503) 8,357

Movements of net profit for the financial year:

2008 2007

As at 1 January 26,586 24,548

Net profit for the financial year 20,406 36,799

Appropriation of interests from innovative instrument (3,895) (5,630)

Covering of the loss brought forward – (1,617)

Transfer of net profit to reserves from profit (27,695) (27,514)

As at 31 December 15,402 26,586



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Movements in revaluation reserves:

Note 2008 2007

Revaluation reserve – AFS investment

As at 1 January 7,260 7,747

Net gains/(losses) from changes in fair value 21 (15,969) 8,710

Impairment losses 21 (2,657) –

Less: addition to deferred income taxes – receivables/ (liabilities) 4,053 (1,893)

Impairment losses transferred to net profit 15 2,657 –

Less: transfer of deferred income taxes on impairment (558) –

Net (gains)/losses transferred to net profit on disposal 2,936 (9,518)

Less: released deferred income taxes on disposal (646) 2,214

As at 31 December (2,924) 7,260

Consolidated capital revaluation adjustment

As at 1 January – –

Exchange differences (17) –

As at 31 December (17) –

Total revaluation reserves (2,941) 7,260

39 Dividends per share

Final dividends are not accounted for until they have been ratified at the Annual General Meeting. At the meeting in May 2009, a dividend in respect of 2008 of EUR 1.01 per ordinary share (2007: actual dividend EUR 1.01 per ordinary share) is to be proposed. The consolidated financial statements for the year ended 31 December, 2008 do not reflect this resolution, which will be accounted for in shareholders’ equity as an appropriation of retained profits in the year ending 31 December, 2009.



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40 Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents comprise the following balances with less than three months maturity from the date of acquisition.

2008 2007

Cash and cash balances with central bank – Note 18 196,244 34,683

Treasury bills and other eligible bills – Note 19, 21 10,284 1,030

Loans and receivables to banks – Note 22 245,432 228,026

451,960 263,739

41 Contingent liabilities and commitments

a) Legal Proceedings As at 31 December, 2008 and 31 December, 2007, there were some legal proceedings against the Group, however management considers that the provision booked is appropriate and no further loss is expected.

The total amount of legal proceedings for which the Group is a defendant was EUR 218 thousand (2007: EUR 232 thousand). The Group made provisions for these legal proceedings on the basis of estimated future cashflow of EUR 119 thousand (2007: EUR 72 thousand). For all other legal proceedings the Group estimates that it is less than probable that a cash outflow will be required to settle the proceedings.

b) Capital expenditure commitmentsAs at 31 December, 2008 and 31 December, 2007, the Group had no capital expenditure commitments in respect of building and equipment purchases.

c) Credit related commitments The primary purpose of these instruments is to ensure that funds are available to customers upon request. Guarantees and standby letters of credit, which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet their obligations to third parties, carry the same credit risk as loans, documentary and commercial letters of credit (which are written undertakings by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions) are collateralised by the underlying shipments of goods to which they relate or cash deposits and therefore carry less risk than a direct borrowing.



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Cash requirements under guarantees and standby letters of credit are considerably lower than the amount of the commitment, because the Group does not generally expect the third party to draw funds under the agreement.

Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in the amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, since most commitments to extend credit are contingent upon customers maintaining specific credit standards.

While there is some credit risk associated with the remainder of commitments, the risk is viewed as modest, since it results from the possibility of unused portions of loan authorisations being drawn by the customer and, secondly, from these drawings subsequently not being repaid when due. The Group monitors the term to maturity of credit commitments, because long-term commitments generally involve greater credit risk than short-term ones. The total outstanding contractual amount of credit commitments to extend credit does not necessarily represent future cash requirements, since many of these commitments may expire or terminate without being funded.

The following table indicates the contractual amounts of the Group’s guarantees and commitments to extend credit to customers:

Guarantees and commitments Note 2008 2007

Performance bonds 344,731 291,239

Financial guarantees 78,108 101,794

Letters of credit 17,252 41,107

Avals 42 20

Loan commitments 237,260 347,880

Derivatives 11,272 3,017

Other 16,121 14,021

704,786 799,078

Provision for guarantees and commitments and other provisions: 34

– guarantees and commitments (8,923) (17,709)

– other provisions

- legal proceedings (119) (72)

- onerous contracts (66) (81)

- national housing savings scheme (NHSS) (2,683) (3,105)

692,995 778,111



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42 Investment services and transactions for customers

Brokerage transactions

2008 2007

Assets 6,734 5,841

Claims of settlement and transaction accounts for client assets 3,225 2,177

– from financial instruments 2,899 1,155

– against the CSCC (Central Securities Clearing Corporation) or the bank’s clearing account for sold financial instruments 326 1,022

Clients’ cash 3,509 3,664

– in the settlement account for client assets 1,853 3,664

– in banks’ transaction accounts 1,656 –

Liabilities 6,734 5,841

Liabilities of settlement and transaction accounts for client assets 6,734 5,841

– to clients from cash and financial instruments 6,546 5,411

– to the CSCC (Central Securities Clearing Corporation) or the bank’s clearing account for purchased financial instruments 130 348

– to the bank or the bank’s settlement account for commission, fees, etc. 58 83

Income and expenses from fees and commissions in connection with investment services and activities

2008 2007

Income from fees and commissions in connection with investment services and activities for clients 3,906 6,345

Reception, transmission and execution of orders 3,562 5,010

Management of financial instruments 345 1,335

Expenses from fees and commissions in connection with investment services and activities and ancillary investment services and activities for clients 218 407

Fees and commission in connection with the CSCC (Central Securities Clearing Corporation) and similar organisations 188 237

Fees and commission in connection with the stock exchange and similar organisations 30 170

43 Managed funds

The Group manages assets totalling EUR 69,197 thousand (2007: EUR 136,903 thousand) on behalf of third parties. Managed fund assets are accounted for separately from those of the Group. Income and expenses of these funds are for the account of the respective fund and no liability falls on the Group in connection with these transactions. The Group is compensated for its services by fees chargeable to the funds.



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44 Other items in the Cash flow statement

Other (gain)/loss from investing activities totalling (1,057) relates to held-to-maturity investments in the amount of EUR 509 thousand and shares of Visa Europe in the amount of EUR 548 thousand.

Other (gain)/loss from financing activities relates to interest from subordinated liabilities (EUR 175 thousand relate to subordinated deposits and EUR 6,507 thousand relate to Abanka’s subordinated bonds).

Other adjustments to total profit or loss before tax relate to net provisions (EUR 1,982 thousand new provisions less EUR 10,602 thousand utilised provisions).

45 Related party transactions

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions.

A number of banking transactions are entered into with related parties in the normal course of business. These include loans and deposits. The volume of transactions involving related parties for the year-end, and related expense and income for the year are as follows:

Type of related party

Members of the Board of directors and

Supervisory BoardEntities with significant

influence Associates and joint

ventures

2008 2007 2008 2007 2008 2007

Loans

Loans outstanding as at 1 January 250 101 84,233 42,732 4,450 –

Changes in related parties – 39 – (2,670) – –

Loans issued during the year 417 202 546,357 159,043 30,300 4,500

Loan repayments during the year (400) (92) (490,119) (114,872) (1,490) (50)

Loans outstanding as at 31 December 267 250 140,471 84,233 33,260 4,450

Interest income and fee earned 20 10 6,739 4,689 1,335 38

Deposits

Deposits as at 1 January 667 334 25,584 26,123 – –

Changes in related parties (86) 3 – (3,775) – –

Deposits received during the year 1,954 1,656 148,682 236,445 – –

Deposits repaid during the year (1,079) (1,326) (124,922) (233,209) – –

Deposits as at the end of the year 1,456 667 49,344 25,584 – –

Interest expense on deposits 26 12 1,619 654 – –

Foreign exchange trading

Aggregated gain/(loss) – – – (984) – –

Other revenue – fee income – – – – – –

Guarantees, comfort letters issued by the Group – – – – – –

Guarantees fee income – – – – – –


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Related parties consist of members of the Board of directors and the Supervisory Board, entities with significant influence and associates and joint ventures.

In June 2008, the management of the Bank was awarded remuneration in the form of shares issued by Abanka Vipa d.d. – 1,037 ABKR shares and 2,220 ABKN shares – with a fair value of EUR 60 per share as at the day of payment. The fair value of these shares equalled their selling price set in the recapitalisation process, described in Note 37. The difference between the book value and nominal amount per share is EUR 45.71, which was charged against the share premium account. The services acquired with equity-settled share-based payment transactions were recognised by the Group as labour costs at the time when received.

Loans granted by the Group to members of the Supervisory Board of the Bank stood at EUR 243 thousand at the end of 2008 (2007: EUR 250 thousand). The amount of loan repayments totalled EUR 260 thousand (2007: EUR 84 thousand). The average interest rate on the loans was 6.40% (2007: 5.98%).

Loans granted by the Group to members of the Management Board of the Bank and to directors of subsidiaries stood at EUR 24 thousand at the end of 2008 (2007: EUR 29 thousand). The amount of loan repayments totalled EUR 139 thousand (2007: EUR 13 thousand). The average interest rate on the loans was 7.18% (2007: 7.40%).

Loans granted by the Group to management personnel stood at EUR 800 thousand at the end of 2008 (2007: EUR 453 thousand). The amount of loan repayments totalled EUR 482 thousand (2007: EUR 484 thousand). The average interest rate on the loans was 6.46% (2007: 5.83%). Total earnings and benefits received by the Management Board of the Bank and the directors of the subsidiaries for their work in the financial year 2008 were EUR 1,299 thousand (2007: EUR 1,193 thousand). Fixed salaries amounted to EUR 942 thousand (2007: EUR 989 thousand), performance-related pay was EUR 320 thousand (2007: EUR 204 thousand) and other payments EUR 37 thousand.

Total earnings and benefits received by management personnel for their work in the financial year 2008 were EUR 3,603 thousand (2007: EUR 3,174 thousand). Salaries amounted to EUR 3,369 thousand (2007: EUR 3,048 thousand), jubilee payments totalled EUR 1 thousand (2007: EUR 1 thousand) and retirement benefits or redundancy payments equalled EUR 233 thousand (2007: EUR 125 thousand).

Total earnings and benefits received by members of the Supervisory Boards in the financial year 2008 were EUR 105 thousand (2007: EUR 93 thousand). Service remuneration amounted to EUR 81 thousand, attendance fees totalled EUR 23 thousand and reimbursements totalled EUR 1 thousand.




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46 Subsidiaries

2008 2007

Name Country % Interest % Interest

Abančna DZU d.o.o., Ljubljana – unlisted Slovenia 99.00 99.00

Afaktor d.o.o., Ljubljana – unlisted Slovenia 100.00 100.00

Vogo Leasing d.o.o., Šempeter pri Novi Gorici – unlisted Slovenia 100.00 100.00

Aleasing d.o.o., Celje – unlisted (former Eurofin Leasing) Slovenia 100.00 100.00

Argolina d.o.o., Ljubljana – unlisted Slovenia 100.00 100.00

Analožbe d.o.o., Nova Gorica – unlisted Slovenia 100.00 100.00

47 Acquisitions and disposals

a) Acquisitions

There were no acquisitions in 2008.

In accordance with the subsidiary’s strategy Afaktor established a company in Serbia. The company AFAKTOR– faktoring finansiranje d.o.o. Beograd was registered in December 2007, while it started to operate in 2008. Acquisitions in 2007 were as follows:

In accordance with the Group’s strategy Abanka Vipa d.d. acquired an additional stake of 25% of the company Argolina d.o.o., Slovenia from Relax d.o.o., Slovenia for EUR 25 thousand. This change was entered in the register of companies on 3 July, 2007.

The business acquired contributed revenue of EUR 1 thousand to the Group for the period from the acquisition to 31 December, 2007.

In the financial statements, the Group did not recognise the difference between the paid and fair value of investment. In this respect, the Group also did not identify any intangible assets at the acquisition.

Purchase consideration:

– cash paid 25

– direct cost relating to the acquisition –

Total purchase consideration: 25

– fair value of net identifiable assets acquired (see next page) 92


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The assets and liabilities arising from the acquisition are as follows:

Acquiree’s carrying amount

Acquiree’s fair value

Cash and balances with central bank – –

Property and equipment 14,398 14,610

Other assets 262 262

Other borrowed funds – banks (14,507) (14,727)

Other liabilities (53) (53)

100 92

Value of an additional 25% interest 25 23

Outflow of cash to acquire business, net of cash acquired:

– cash consideration 25

– cash and cash equivalents in subsidiary acquired –

Cash outflow on acquisition 25

To pursue its strategy of increasing market share into South-East Europe, Abanka Vipa d.d. purchased a 49% stake of ASA Holding d.o.o. in Bosnia which amounted to EUR 1,002 thousand. The companies agreed to establish a joint venture named ASA Abanka leasing d.o.o. The change of the ownership was entered in the register of companies on 13 July, 2007.

Purchase consideration:

– cash paid 1,002

– direct cost relating to the acquisition –

Total purchase consideration 1,002

The Group has recognized its interest in a jointly controlled entity using the equity method. The proportion of ownership interest held in the jointly controlled entity amounted to 49%.

Acquiree's carrying amount as at

December 31, 2007

Cash and balances with central bank 157

Loans and receivables 3,080

Property and equipment 203

Intangible assets 18

Other assets 617

Other borrowed funds - banks (2,196)

Other liabilities (927)

952

Income 170

Expenses (271)

(101)




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Outflow of cash to acquire business, net of cash acquired:

– cash consideration 2,001

– cash and cash equivalents in subsidiary acquired 110

Cash outflow on acquisition 1,891

Minority interest 2008 2007


Share of net (loss)/profit of subsidiaries (8) 11

Decrease in revaluation reserve – AFS investments (7) –

Minority interest in subsidiaries acquired – (24)


b) Disposals

There were no disposals in 2008 and 2007.

48 Post balance sheet events

No events occurred after the balance sheet date that affected the financial statements for 2008.



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INDEPENDENT AUDITOR’S REPORT


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Published by: Abanka Vipa d.d.

Editor: Marketing and Public Relations Department

Expert advisors:

Business Report: Alenka Plut, M.Sc.Econ., Mojca Mlinar, M.Sc.Econ.

Risk management: Kristijan Hvala, M.Sc.Econ., Jerneja Jeranko, M.Sc.Econ.

Consolidated Financial Report: Bisera Podjavoršek, Irena Drčič Rojc

Produced by: Imelda Ogilvy

Creative director: Jure Požun

Design: Claudia Sketelj

Photography: Ciril Jazbec, Istockphoto

Translation and language editing: Ago d.o.o., Amidas d.o.o.

Prepress: vizualgrif d.o.o.

E-version: Studio Tibor, eDition

April, 2009

Abanka Vipa d.d.

Slovenska cesta 58

1517 Ljubljana

Transaction account: 01000-0000500021

Identifi cation number for VAT: SI 68297530

Company registration number: 5026024

Telephone: +386 1 47 18 100

Telefax: +386 1 43 25 165

Telex: 31 228 Abanka

SWIFT: ABANSI2X

www.abanka.si

E-mail: [email protected]

ABANKA VIPA D.D. Annual Report 2008b89c2754-160a-433f-bb17-70eebd564… · bank profile 19 about...

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Transcript of ABANKA VIPA D.D. Annual Report 2008b89c2754-160a-433f-bb17-70eebd564… · bank profile 19 about...