Annual Report 2010 - ProCredit Bank · be added to our network, particularly in the Chisinau...

Annual Report 2010

Exchange rate as of December 31:

2010: USD 1 = MDL 12.1539

2009: USD 1 = MDL 12.3017

USD ’000 Change 2010 2009

Balance Sheet DataTotal Assets Gross Loan Portfolio Business Loan Portfolio USD < 10,000 USD > 10,000 < 30,000 USD > 30,000 < 150,000 USD > 150,000 Agricultural Loan Portfolio Housing Improvement Loan Portfolio OtherAllowance for Impairment on Loans Net Loan PortfolioLiabilities to CustomersLiabilities to Banks and Financial Institutions (excluding PCH)Total Equity

Income Statement Operating IncomeOperating ExpensesOperating Profit Before TaxNet Profit Key Ratios Cost/Income Ratio ROECapital Ratio

Operational Statistics Number of Loans OutstandingNumber of Loans Disbursed within the YearNumber of Business and AgriculturalLoans OutstandingNumber of Deposit AccountsNumber of StaffNumber of Branches and Outlets

132.3%160.5%161.9%

57.7%155.0%271.9%231.7%137.4%100.0%100.0%117.0%161.3%

74.1%

123.7%32.3%

114.1%25.6%

–74.8%–74.8%

67.5%17.7%

65.1%71.3%

–14.8%–14.8%

46,84531,82728,03610,830

4,1856,1806,8423,791

––

58631,24219,679

8,59510,236

4,1157,740

–3,625–3,625

163.14%–34.35%

24.92%

6,7156,192

6,71522,653

53327

108,81082,90773,42817,07910,67022,98522,694

8,998473

81,271

81,63634,269

19,22913,544

8,8099,723–914–914

100.64%–7.69%21.42%

11,2497,288

11,08538,802

45423

Key Figures

A n n u a l R e p o r t 2 0102

Mission Statement 4

Letter from the Board of Directors 5

The Bank and its Shareholders 6

Special Feature 8

Management Business Review 10

Risk Management 20

Branch Network 26

Organisation, Staff and Staff Development 28

Business Ethics and Environmental Standards 31

The ProCredit Group: Responsible Neighbourhood Banks for Small Businesses and Ordinary People 32

ProCredit in Eastern Europe 36

Our Clients 40

Financial Statements 44

Contact Addresses 82

C o n t e n t s 3

Mission Statement

ProCredit Bank in Moldova is a development-oriented full-service bank. We offer excellent

customer service and a wide range of banking products. In our credit operations, we focus

on lending to very small, small and medium-sized enterprises, as we are convinced

that these businesses create the largest number of jobs and make a vital contribution

to the economies in which they operate.

Unlike other banks, our bank does not promote consumer loans. Instead we focus on

responsible banking, by building a savings culture and long-term partnerships with our

customers.

Our shareholders expect a sustainable return on investment, but are not primarily

interested in short-term profit maximisation. We invest extensively in the training of our

staff in order to create an enjoyable and efficient working atmosphere, and to provide

the friendliest and most competent service possible for our customers.


Letter from the Board of Directors

Members of the

Board of Directors as of

December 31, 2010:

Stephan Boven

Lorenz Gessner

Daan Christiaan Lameris

Ilinca Rosetti

Adalbert Winkler

Members of the

Management Team as of

December 31, 2010:

Asmus Rotne

Kemal Seitveliiev

Vladislav Garbu

Eugenia Gashikulina

Natalia Osadcii

Although the impact of the worldwide economic crisis was still being felt, 2010 saw many improvements in Moldova. The political situation remains problematic insofar as the country did not succeed in electing a president. Even so, it does have a functioning government, and there was no repeat of the violent pro-tests that took place in 2009.

On the economic front, the picture is encouraging – Moldova has returned to growth. The recovery in Russia has certainly helped the country to overcome the difficulties of the previous year. Although fore-casts on GDP growth vary, there is consensus that positive growth will be achieved in 2011 and thereaf-ter, and despite the more difficult situation in the neighbouring countries, there is little reason to assume that Moldova is in danger of falling back into recession.

In line with the economic recovery, the banking sector has shown clear signs of improvement. Lending activities in 2009 were depressed not only due to the recession, but also as a consequence of reduced li-quidity levels. Customer deposits – the main source of funding – have shown a positive trend over the course of 2010. This has enabled the banking sector to become more active again in providing finance to the real sector.

Against this background, ProCredit Bank showed a very strong development. The loan portfolio more than doubled during the year and the bank has quickly gained market share. Contrary to the past, the loan port-folio growth was distributed over all size segments, thanks largely to the bank’s capacity building efforts, especially in the area of small business lending, but also in lending to somewhat larger clients. On the back of this achievement, ProCredit Bank will further strengthen its capacity in its core segment of very small clients and in the agricultural sector in 2011 where we are expecting strong loan demand.

ProCredit Bank has built a diversified funding base. The financing of the bank has been supported by credit lines from international financial institutions and the parent company, ProCredit Holding in Frankfurt. In addition, ProCredit Bank has systematically worked to build a broad savings and deposit base. Customer funds increased by more than 80% in 2010, and we will continue to develop this area intensively.

Finally, it is worth mentioning that the bank reached financial breakeven in mid-2010 according to IFRS. We envisage continued growth and a stable cost base, which should result in satisfactory profitability for the whole of 2011.

After years of very strong growth in terms of the number of staff and the regional network, 2010 saw a moderate reduction. While we will make sure that the bank has sufficient capacity to serve its quickly growing client base, our analysis shows that further efficiency gains are possible. Consequently, few ad-ditional staff will be required in the near future, and only a limited number of new business locations will be added to our network, particularly in the Chisinau region.

More important for us, however, is the further development of our staff through ongoing training efforts on all levels. The bank continued to grow its pool of middle manager graduates from the two ProCredit academies in Germany and Macedonia, and in 2010 we launched the “ProCredit Banker Programme” for entry-level positions, providing candidates with six-months’ all-round training in banking. The pro-gramme is unique in Moldova, and candidates who complete it successfully are offered positions in the bank. This new approach has a key role to play in building a strong base of well trained staff who work effectively together in a motivating environment. In our view, this is a precondition for serving our exist-ing clients well and for convincing new clients to choose ProCredit Bank.

Stephan Boven Chairman of the Board of Directors

5L e t t e r f r o m t h e B o a r d o f D i r e c t o r s

The Bank and its Shareholders

ProCredit Holding is the parent company of a global

group of 21 ProCredit banks. ProCredit Holding was founded as Internationale Micro Investitionen AG (IMI) in 1998 by the pioneering development finance consultancy company IPC.

ProCredit Holding is committed to expanding ac-cess to financial services in developing coun-tries and transition economies by building a group of banks that are the leading providers of fair, transparent financial services for very small, small and medium-sized businesses as well as the general population in their countries of operation. In addition to meeting the equity needs of its subsidiaries, ProCredit Holding guides the development of the ProCredit banks, provides their senior management, and sup-ports the banks in all key areas of activity, in-cluding banking operations, human resources and risk management. It ensures that ProCredit corporate values, international best practice procedures and Basel II risk management princi-ples are implemented group-wide in line with standards also set by the German supervisory authorities.

IPC is the leading shareholder and strategic in-vestor in ProCredit Holding. IPC has been the driv-ing entrepreneurial force behind the ProCredit group since the foundation of the banks.

ProCredit Holding is a public-private partnership. In addition to IPC and IPC Invest (the investment vehicle of the staff of IPC and ProCredit), the other private shareholders of ProCredit Holding include the Dutch DOEN Foundation, the US pension fund TIAA-CREF, the US Omidyar-Tufts Microfinance Fund and the Swiss investment fund responsAbility. The public shareholders of ProCredit Holding include KfW (the German pro-motional bank), IFC (the private sector arm of the World Bank), FMO (the Dutch development bank), BIO (the Belgian Investment Company for Developing Countries) and Proparco (the French Investment and Promotions company for Economic Cooperation).

ProCredit Holding has an investment grade rating (BBB-) from Fitch Ratings Agency. As of the end of 2010, the equity base of the ProCredit group is EUR 428 million. The total assets of the ProCredit group are EUR 5.2 billion.

ProCredit Bank in Moldova is a member of the ProCredit group, which is led by its Frankfurt-based parent company, ProCredit Holding. ProCredit Holding is the majority owner of ProCredit Bank in Moldova and holds 84.2% of the shares.

ProCredit Bank in Moldova was founded in December 2007 by an alliance of international development-oriented investors, many of which are shareholders in ProCredit Holding today. Their goal was to establish a new kind of finan-cial institution that would meet the demand of small and very small businesses in a socially responsible way. The primary aim was not short-term profit maximisation but rather to deepen

the financial sector and contribute to long-term economic development while also achieving a sustainable return on investment.

Over the years, ProCredit Holding has consoli-dated the ownership and management structure of all the ProCredit banks to create a truly global group with a clear shareholder structure and to bring to each ProCredit institution all the best practice standards, synergies and benefits that this implies.

Today’s shareholder structure of ProCredit Bank in Moldova is outlined below. Its current share capital is USD 20.3 million.

Sector

InvestmentBankingInvestment

Shareholder(as of Dec. 31, 2010) ProCredit HoldingKfWDOEN Foundation

Total Capital

Headquarters

GermanyGermanyThe Netherlands

Share

84.2%9.6%6.3%

100%

Paid-in Capital(in USD)

17,119,3421,945,1031,275,720

20,340,165


KfW Entwicklungsbank (KfW Development Bank): On behalf

of the German Federal Government, KfW Entwicklungsbank finances investments and ac-companying advisory services in developing and transition countries. Its aim is to build up and ex-pand the social and economic infrastructure of the respective countries, and to advance sound financial systems while protecting resources and ensuring a healthy environment.

KfW Entwicklungsbank is a leader in supporting responsible and sustainable microfinance and is involved in target group-oriented financial insti-tutions around the world. It is part of KfW, which has a balance sheet total of EUR 442 billion (as of December 31, 2010). KfW is one of the five biggest banks in Germany and is AAA-rated by Moody’s, Standard & Poor’s and Fitch Ratings.

Stichting DOEN, or the DOEN Foundation, was set up in

1991 by the Dutch Postcode Lottery. The DOEN Foundation’s ambition is to help build a sustain-able world in which everyone can make a contri-

bution. DOEN is looking for sustainable, cultural and socially-minded pioneers who will make a positive contribution to the following develop-ments: cultivating positive effects on Climate Change, cultivating Culture and Cohesion and promoting New Economy. The DOEN Foundation funds initiatives from annual contributions re-ceived under long term contracts from its found-er, the Dutch Postcode Lottery, and the two other Dutch charity lotteries, the BankGiro lottery and the Friends Lottery.

The DOEN Foundation has been financing entre-preneurial and sustainable initiatives that im-prove access to a responsible financial sector since 1994. The DOEN foundation considers ac-cess to finance an important tool for sustainable development and for building civil society.

7Th e B a n k a n d i t s S h a r e h o l d e r s

Special Feature

“How does a bank work?” This is one of the first questions that anyone would like to have ad-dressed when deciding to collaborate with a bank. For ProCredit Bank the response to this question is always: we work efficiently, profes-sionally and – most importantly – transparently.

In May 2010 ProCredit Bank in Moldova launched the transparency campaign “What You Need to Know About a Bank”. Its purpose was to inform private individuals in an accurate and transparent manner about the workings of a bank and its role in the economy. Furthermore, it aimed to explain what loans and savings accounts are and how to plan a monthly budget.

The transparency campaign was supported by the National Bank of Moldova, which welcomed ProCredit Bank’s initiative. At the press confer-

ence organised by ProCredit Bank to kick-off the campaign, the governor of the National Bank of Moldova, Dorin Dragutanu, emphasised how important it is that people understand banking issues and take well-informed decisions when choosing their financial partner. He explained that transparent banking is the basis for developing a stable and sound financial system. Mr. Dragutanu also encouraged other banks to join ProCredit Bank’s initiative.

The brochure titled “What You Need to Know About a Bank” is the key element of the campaign, as it provides answers to the questions most frequent-ly asked about banking services. Forewords from both the governor of the National Bank of Moldova and the management of ProCredit Bank in Moldova explain the impact of transparency in the bank-ing system. The brochure was distributed through

What You Need to Know About a BankA ProCredit Transparency Campaign in Moldova


“Saptamana”, a national newspaper, making it available to the general public. Currently, the bro-chure is available at all ProCredit Bank branches.

In order to reach out to younger generations, ProCredit Bank held lectures entitled “A Lesson About a Bank” in the economics departments of several major universities throughout the coun-try. Students were provided with useful informa-tion about the banking system and were also informed about the most important aspects to consider when communicating with clients. The presentations were conducted by several ProCredit Bank staff members, who were sup-ported at each lesson by a representative of the National Bank of Moldova.

During the 3-week transparency campaign we managed to raise the general public’s awareness on what a bank is and how a bank should work, namely transparently and honestly. We believe that our efforts will result in a more solid under-standing of banking issues among ordinary people and that they will in turn develop more trust in the banking system.

S p e c i a l F e at u r e 9

Management Business Review

Management Team

from left to right:

Kemal Seitveliiev

Deputy Chairman of the Management Board

Natalia Osadcii

Executive Director

Asmus Rotne

Chairman of the Management Board

Eugenia Gashikulina

Executive Director

Vladislav Garbu

Deputy Chairman of the Management Board

A n n u a l R e p o r t 2 01010

Political and Economic Environment

After the severe contraction of 2009, Moldova’s economic and financial sectors managed to grad-ually recover in 2010. Having held three parlia-mentary elections over the past two years, Moldova was steeped in a climate of political un-certainty, making it difficult for the government to improve fiscal transparency and implement economic policy. On the other hand, relations be-tween the EU and Moldova grew stronger in 2010, with agreements reached on visa facilitation and free trade. In November, the country re-elected the Alliance for European Integration, which an-nounced an ambitious programme to stimulate investment and innovation, create jobs and build a market-based economy.

Very small businesses were deeply affected by the country’s political instability and precarious business environment, which caused many cli-ents to suspend their investment plans.

Moldova’s macroeconomic situation improved in tandem with the economic upswing in other European countries in 2010; increased export de-mand spurred industrial output and trade turno-ver, while household consumption was boosted by higher remittances from abroad. In addition, due in part to the severe flooding in summer and the lingering effects of the economic crisis, the country received extensive external funding from international financial institutions. The net inflow of foreign direct investment grew by more than 55.6%, totalling USD 199 million; meanwhile, new long-term loans increased by 96% compared with 2009, to USD 607 million.

With the help of IMF medium-term financing facili-ties, the government was able to implement key elements of its stabilisation programme, such as fiscal adjustment, targeted social support, a flex-ible exchange rate regime, structural reforms and efforts to reduce inflation. As part of its privatisa-tion programme for 2010, the government con-ducted an inventory of public assets, selling off a few small enterprises and some real estate.

The country’s main economic indicators showed a positive trend in 2010; largely fuelled by the services sector, real GDP increased by 6.9% year-on-year. Final consumption also grew, by 7.1%

compared to the same period of 2009, primarily due to the 9% increase in household consump-tion. However, inflation jumped to 8.1%, com-pared to only 0.40% in 2009, driven by energy price hikes.

The value of the local currency against the euro fluctuated significantly during the year, but by year-end it had appreciated by 8.6% since end-2009. It had also gained 1.20% on the US dollar.

Moody’s Investors Service assigned a B3 long-term issuer rating and a Not-Prime short-term is-suer rating to the local and foreign-currency debt of the Republic of Moldova (Moldova was unrated in 2009). The rating outlook was stable.

Financial Sector Developments

Moldova has 15 registered banks and 29 microfi-nance institutions. Total banking sector assets increased by 5.93% to MDL 42.3 billion (USD 3.5 billion) in 2010 (2009: 2.20%). The five largest banks held 69.2% of these assets, compared to 67.8% in the previous year. After stagnating in early 2010, the sector’s loan portfolio eventually climbed to 26.9 billion (USD 2.2 billion), a 12.7% increase year-on-year.

The interest rate on loans disbursed in MDL fell to a historic low of 14.8% in December, down from 18.6% at the end of 2009. The rate for foreign currency loans in 2010 was 9.4%, compared to 10.6% at the end of the previous year. The share of non-performing loans in the banking sector decreased from 16.4% of the total loan portfolio in 2009 to 13.3% in 2010.

Banks were very liquid in 2010; the ratio of liquid assets to total assets was 34.2%, down from 38.3% year-on-year, but well above the NBM min-imum of 20%.

The level of deposits in the sector increased by 14% year-on-year, to MDL 27.9 billion (term de-posits, +12.7%; term deposits in local currency, +17.6%). Due to the increased level of liquidity, the banks lowered interest rates on customer de-posits to 6.5% in local currency (9.8% in December 2009) and 3.30% in foreign currency (3.80% in December 2009).

M a n a g e m e n t B u s i n e s s R e v i e w 11

The NBM increased its refinancing rates from 5.0% in January 2010 to 7.0% in May 2010 to re-duce inflationary pressures in the medium term, and this slowed down the decrease of interest rates on deposits.

In 2010, the National Bank made several changes to domestic banking regulations to strengthen its surveillance mechanism, which is designed to reduce risk and fortify the system. The NBM also reduced the maximum exposure of any bank to-wards a related party or a group of related par-ties from 20% to 10% of total capital.

To ensure an adequate level of capital, banks are required to submit their internal capital manage-ment policies to the National Bank. In addition, as a safeguard against decapitalisation, the banks have to notify the NBM about their plans to distribute dividends.

The NBM also introduced a supervisory proce-dure with which to address banking violations and financial instability, to be carried out by a special commission that will have full access to banks’ information, documents and registers.

In 2010 the Bureau of Credit History obtained a licence to provide services involving the creation, processing and storage of credit histories.

ProCredit Performance

Ever since ProCredit Bank was established in December 2007, our key objective has been to provide a full range of products and services in a responsible and sustainable manner. Over the years we have made every effort to build and maintain stable relationships with our clients and partners. This goal cannot be achieved with-out a professional, efficient staff who provide high-quality service and are able to respond to our clients’ needs.

ProCredit Bank provides a full range of services and products all under one roof. Our well-trained employees are able to identify precisely which products best suit our clients’ needs.

ProCredit Bank aims to be the “house bank” for very small and small enterprises that need a flex-

ible banking partner able to understand and re-spond to their needs proactively and support their future development. This objective inspired us to rethink and optimise our business model. Our branches reflect the renewed emphasis on our customers: business clients and private indi-viduals are served by specialised employees. In keeping with this philosophy, we introduced Business Client Advisers to serve our small enter-prise clients. This level of service allows us to be-come closer to our clients, because we are offer-ing personalised professional advice along with our excellent products and services.

In 2010 we modified some of our existing prod-ucts and services and introduced new ones. For private individuals, we launched two new credit products, ProRenovare and ProPractic, home im-provement loans and an overdraft facility for sal-ary accounts, respectively. We also introduced our convenient internet banking services to this client segment and implemented a new interna-tional money transfer service. For business cli-ents we launched a real estate investment loan, created special business banking packages and offered companies the option of managing vari-ous banking operations via e-banking. All of these products and services were introduced with one very simple aim: to satisfy our clients and thus build up long-lasting partnerships.

At the same time, ProCredit Bank is a responsible neighbourhood bank that provides simple, clear products and services. In addition to this straight-forward approach to business, we also invest considerable effort in fostering a savings culture and promoting financial literacy among the pop-ulation. A good example of these efforts is our Transparency Campaign, which was described in more detail above.

Despite the various challenges that came our way in 2010, we achieved strong growth. By end-2010, our loan portfolio had more than doubled to USD 82.9 million, which represents a 160% in-crease over the previous year. With a PAR>30 of 1.10%, ProCredit Bank’s loan portfolio demon-strated the highest quality in the Moldovan bank-ing sector. We are well aware that we owe this success to our dedicated, professional employ-ees, who continuously strive to develop and im-prove our standards of customer service.

A n n u a l R e p o r t 2 01012

< USD 1,000 USD 30,001 – USD 150,000 USD 1,001 – USD 10,000 > USD 150,000USD 10,001 – USD 30,000 * 31 Dec 2010

Number of Loans Outstanding – Breakdown by Loan Size*

32.1%58.3%

3.2%

0.6%

5.8%

Loan Portfolio Development

Number (in ’000) Volume (in USD million)

< USD 10,000 > USD 150,000 USD 10,001 – USD 30,000 Total number outstanding USD 30,001 – USD 150,000

0

20

40

60

80

100

Dec Jun 10

Dec Jun09

Dec Jun 08

0

5

10

15

20

25

Lending

The development of ProCredit Bank’s loan portfo-lio in 2010 was quite remarkable. The bank dis-bursed over 7,000 loans totalling USD 72 million during the year, resulting in an average loan amount of USD 9,968. Another driver of this growth was the transfer of the finance company ProCredit in Moldova’s loan portfolio of USD 8.2 million to ProCredit Bank in July. These two factors led to growth of more than 150% (USD 50 million).

In 2010 we employed the new strategy of seg-menting our business clients into three catego-ries: very small, small and medium. The bank was particularly successful in developing its small (exposures between USD 30,000 – USD 150,000) and medium (above USD 150,000) loan portfolios, with growth of 271% and 201%, respectively. This success was also brought about by our new personalised, client-oriented approach along with the introduction of Business Client Advisers and Client Relationship Officers, who are responsible for acquiring small and me-dium clients and cultivating the bank’s relation-ship with them. The very small (below USD 30,000) loan portfolio also grew by 95%. Net growth in this category, excluding the transfer of the ProCredit finance company’s portfolio to ProCredit Bank, was an impressive 74.85%. The bank also took the important step of introducing a minimum loan amount of USD 2,000, which

helps us to avoid contributing to client over-in-debtedness and allows us to concentrate on cli-ents with a sustainable income.

In October the bank expanded its credit line product, which appealed to business clients with stable bank account turnover and led to a total outstanding portfolio in our credit line business of USD 4.1 million as of the end of 2010. As part of its efforts to support private individuals wish-ing to invest in home improvements, especially energy-saving measures, the bank launched the ProRenovare loan product in September. As of end-year, this loan portfolio to private individu-als amounted to MDL 5,963,302 (USD 490,649), or 0.58% of the total loan portfolio. Another new credit product for private individuals was the ProPractic loan, an overdraft service for salary account holders.

The quality of the loan portfolio remained stable throughout the year. The overall PAR>30 days constituted 1.10% of the total loan portfolio by the end of 2010.

Net write-offs totalled 0.31% of the total portfo-lio. Loan loss provisions were equal to 1.53% of the total portfolio and covered the portfolio at risk by a comfortable margin of 138%. For a more detailed discussion of portfolio quality, see the Risk Management section of this report.

A n n u a l R e p o r t 2 01014

00.51.01.52.02.53.03.54.04.55.0

Dec Jun 10

Dec Jun 09

Dec Jun 08

Net write-offs:in 2008: USD 5,612

in 2009: USD 248,695in 2010: USD 380,389

Loan Portfolio Quality (arrears >30 days)

in % of loan portfolioin %

Business Loan Portfolio – Breakdown by Maturity

< 12 months 12 – 24 months > 24 months

0102030405060708090

100

Dec Jun 10

Dec Jun 09

Dec Jun 08

Deposits and Other Banking Services

Despite the difficult macroeconomic conditions and political instability, ProCredit Bank’s non-credit business developed well in 2010. The bank focused on improving efficiency and delivering better service to its clients. Fast and convenient services, along with fair pricing and technologi-

cally advanced yet easy-to-use banking products, pleased existing customers and won new ones.

The third year of ProCredit Bank’s operations in Moldova was marked by significant growth of its deposit portfolio, reflecting the high level of pub-lic confidence and trust in our bank. During 2010 clients opened 21,628 deposit accounts, increas-

M a n a g e m e n t B u s i n e s s R e v i e wM a n a g e m e n t B u s i n e s s R e v i e w 15

Customer Deposits


Term Savings Sight Total number

0

5

10

15

20

25

30

35

Dec Jun 10

Dec Jun 09

Dec Jun 08

0

10

20

30

40

50

60

70

74.2%

9.3%

0.1%

o.05%

1.4%

14.9%

< USD 100 USD 10,001 – USD 50,000 USD 101 – USD 1,000 USD 50,001 – USD 100,000USD 1,001 – USD 10,000 > USD 100,000 * 31 Dec 2010

Number of Customer Deposits – Breakdown by Size*

ing our deposit base by 82.8% to USD 34.3 mil-lion. The average balance in accounts also grew, rising to USD 841. At the end of December, the deposits-to-loans ratio was 41.5%.

To sustain the branches’ client acquisition efforts, the new position of Private Individuals Business Development Co-ordinator was introduced at the head office level. In line with our mission, branch-es organised regular meetings for employees in public sector institutions in order to provide de-tailed information about ProCredit Bank’s prod-ucts and services and describe the concept of a neighbourhood bank. Savings accounts were also very well received in 2010, showing a 141% in-crease in volume.

In response to demand from our clients, ProCredit Bank launched several new products and servic-es, including internet banking. We also enlarged the range of providers covered by our utility pay-ments services and our fast money transfer serv-ices. In addition, we issued many new debit cards, increasing the total from 3,329 to 8,243, which is more than 145%.

As in previous years, ProCredit Bank in Moldova worked hard to foster a savings culture and boost financial literacy in Moldova. In line with these goals, we organised several events, including our Transparency Campaign and International Savings Day, which enjoyed support from the National Bank and the Moldovan Bank Association. The

events were publicised by means of presenta-tions in universities, booklets, flyers, newspa-per articles, press conferences and TV reports, all intended to convey the idea that transparency and savings offer people and banks long-term development opportunities.

Financial Results

The bank’s total assets grew by 132.3% in 2010 to USD 108.8 million (MDL 1.3 billion); this consider-able growth was mainly due to the favourable de-velopment of the loan portfolio, which rose by 160.5% to USD 82.9 million. As a result of in-creased efforts to promote lending, the share of the portfolio in total assets increased to 76.2%, up from 67.9% in 2009.

Thanks to our staff’s success in attracting new customers by providing them with high-quality services and products, deposits increased by 74.1% to USD 34.3 million. Because the growth of loans outpaced that of deposits, however, the extent to which deposits financed loans dropped from 61.8% in 2009 to approximately 41.3% of the total loan portfolio in 2010. Term deposits (primarily 6–12 months), savings accounts and current accounts made up 63.3%, 20.9% and 15.7% of the total deposit portfolio, respectively.

In order to ensure a continuous lending process, the bank diversified its funding profile and boost-

A n n u a l R e p o r t 2 01016

Incoming Outgoing Number

Domestic Money Transfers


0

20

40

60

80

100

120

Jul–Dec

Jan–Jun 10

Jul–Dec

Jan–Jun 09

Jul–Dec

Jan–Jun08

0

20

40

60

80

100

120

International Money Transfers


Incoming Outgoing Number

0

10

20

30

40

50

Jul–Dec

Jan–Jun 10

Jul–Dec

Jan–Jun 09

Jul–Dec

Jan–Jun08

0

2

4

6

8

10

ed its funding base by 297.2% to USD 59 million. Two long-term loan agreements in the amount of USD 16.7 million were signed with IFIs; funding from the local market consisted of USD 0.95 mil-lion. ProCredit Holding remains the key provider of long-term resources, extending its funding to USD 39.7 million in 2010. Loans from international fi-nancial institutions (including ProCredit Holding) accounted for 61.9% of the bank’s liabilities.

The bank’s interest income amounted to USD 12.4 million (MDL 152.8 million), increasing by 141.8% year-on-year; the main driver of the rise

was loan interest payments. Interest expenses amounted to USD 4.9 million (MDL 60.8 million), increasing by 99.7% over the 2009 equivalent figure, due to the considerable growth of custom-er deposits and funds borrowed from IFIs. Net fee and commission income totalled USD 1.7 million (MDL 20.5 million), up 4.6% over 2009. The most important sources of this income were cash transactions and payment transfers. The ratio of net interest income to total operating income was 84.4% at year-end, with net interest income total-ling USD 7.4 million (MDL 92 million).


Loan loss provisions amounted to USD 1.3 mil-lion (MDL 15.5 million), increasing by 117% over 2009, in line with loan portfolio growth. Relative to the gross loan portfolio, the ratio of allowanc-es for loan impairment was 1.53% as of end-2010. PAR>30 averaged 1.27% during 2010, the lowest figure in the Moldovan banking sector, while PAR>30 in the sector as a whole was 13.3% as of end-2010 and averaged 16.5% during the year (source: NBM). PAR >90 days stood at 0.68% at year-end.

Operating expenses totalled USD 9.7 million (MDL 120.2 milion) , up 25.6% from 2009. This rise was due to increased personnel expenses, which grew by 28.5%; general and administrative expenses also edged up slightly. However, the bank imple-

mented strict cost-efficiency policies that helped to reduce the cost-to-income ratio from 163% to 110.3%. The bank ended the year with a net loss of USD 0.9 million (MDL 11.3 million), a decrease of 74.8% compared with the loss of USD 3.6 mil-lion (MDL 40.3 million) reported in 2009. However, the bank recorded a net profit of USD 171,151 in the third quarter of the year and of USD 127,081 in the fourth quarter.

While there was a capital increase of USD 4.1 mil-lion (MDL 50 million) in September 2010, the rela-tive stakes of the shareholders did not change significantly. At year-end, the capital adequacy ratio was 22.8% (according to NBM standards), which was substantially above the local require-ment of 12.0%.

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Outlook

In 2011 we will concentrate our efforts on busi-ness consolidation and improving operational ef-ficiency at all levels. We will continue to support local economic development by offering loans and other banking services to sustainable busi-nesses that promote job creation development and trigger local production. To become “the Neighbourhood Bank” for our customers, we will continue to implement new services tailored to our clients’ needs.

Having successfully launched internet banking services for private individuals and legal entities, our next goal is to enable customers to make util-ity payments via e-banking, an attractive option that is likely to draw more clients. We also plan to offer our clients direct debit services as well as provide overdraft services for salary receivers.

Well on the way to becoming the “house bank for SME”, in 2011 we will continue to develop our range of products and services, employing the same personalised, tailored approach to our cli-ents in the various segments. In keeping with our

goal of becoming the leading bank for sustaina-bly growing enterprises, we will work proactively to help these companies overcome difficulties and take advantage of opportunities. We plan to focus on the very small segment, which has high potential for growth and whose entrepreneurs clearly value a long-term banking relationship that can help them to prosper, expand and create more jobs.

A further aim will be to enlarge our branch net-work, which continues to play a key role in our strategy. In 2011, two branches will be relocated to more convenient locations for our clients, one in Chisinau and one in the regions.

Last but not least, the bank will continue to invest heavily in developing both the professional com-petencies and the soft skills of our staff. Meeting all of these challenges will bring us even closer to reaching our final goal of becoming a “house bank” for business clients and a responsible neighbourhood bank for private individuals.


Risk Management

In 2010, banking operations were still very strongly influenced by the financial crisis. At the same time, however, this situation has created opportunities for a bank that has consistently taken a rigorous approach to risk management. We believe that this has been one of the key factors behind ProCredit Bank’s success in re-taining the trust of our customers.

While ultimate responsibility for risk manage-ment lies with the Management Board, it is the Risk Management Department which develops and implements mechanisms to identify, assess, and mitigate the bank’s exposure to risk. The other two units which make up the Risk Division are the Credit Risk Department and the AML and Compliance Department, each of which is directly supervised by a member of the Management Board. These units report to the various commit-tees which are responsible for decision-making in connection with risk. The Credit Risk Committee closely monitors loan portfolio quality, the Assets and Liabilities Committee (ALCO) manages the short- and long-term liquidity position, and the General and Operational Risk Committee manages exposures to market risk and proposes measures to mitigate operational risks.

The risk management policies in effect at ProCredit Bank in Moldova are based on the Group Handbook on Risk Management and Control, which in turn is based on the German Federal Financial Supervisory Authority’s policy document “Minimum Requirements for Risk Management”. ProCredit Bank in Moldova re-ports its risk position to the Group Risk Management Committee (GRMC) at monthly in-tervals. The group’s risk management depart-ments also monitor the bank’s key risk indica-tors on an ongoing basis, providing guidance whenever required.

Risk management policies throughout the ProCredit group are based on the concept of “risk-bearing capacity”, i. e. the principle that each bank’s aggregated risk exposures must not exceed its capacity to bear risk, and the resourc-es available to cover risk are sufficient to absorb any losses that may arise and protect creditors’ investments. Statistical models and other proce-dures are used to quantify the risks incurred, and thresholds and limits are set for each risk catego-

ry and for the aggregate exposure. Throughout 2010 the level of risk remained well within the limit in nearly every category. One exception was interest rate risk, which rose sharply in early 2010. However, timely measures were taken which proved extremely effective in offsetting this increase.

ProCredit Bank’s culture of internal and external transparency is crucial to our risk management efforts. Thanks to our clearly defined proce-dures and our encouragement of open commu-nication, our well-trained staff are in a strong position to detect risks and take the steps nec-essary to mitigate them.

Credit Risk Management

Given that lending to small businesses is ProCredit Bank’s main asset-side operation, it is not surpris-ing that classical credit risk, i. e. the risk that bor-rowers will be unable to repay, accounts for the largest share of risk in this category.

ProCredit Bank in Moldova has adopted the ProCredit Group Credit Risk Management Policy and the Group Collateral Valuation Policy, which together reflect the experience gained in more than two decades of successful lending opera-tions in developing and transition economies. Credit decision-making authority at the bank is clearly defined; all decisions to issue a loan, or change its terms, are taken by a credit commit-tee, and all credit risk assessments are carefully documented. Above all, the bank seeks to build and maintain long-term relationships with its customers, thus ensuring that it is fully aware of their financial situation, and great care is taken to avoid overindebting them.

Credit risk is also mitigated by the fact that our portfolio is highly diversified. The businesses we serve operate in a wide range of sectors, and their exposure to global market fluctuations is very limited. Moreover, the vast majority of our credit exposures are relatively small. As of end-2010, loans up to USD 30,000 made up 41.50% of the total outstanding portfolio, which stood at USD 34.4 million. The ten largest exposures ac-counted for only 16.3% of the portfolio.

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As the vast majority of the bank’s loans are re-payable in monthly instalments, a borrower’s failure to meet a payment deadline is treated as an initial sign of potential default and draws an immediate response from the bank. When a pay-ment of interest or principal is overdue by more than 30 days, the loan in question is assigned to the portfolio at risk (PAR>30), which serves as the key indicator of classical credit risk.

In 2010 the bank’s PAR>30 improved steadily to 1.1% as of year-end. The highest level of PAR is concentrated in the very small loans segment, which accounts for just over half of the total vol-ume of PAR>30. It should be noted that ProCredit Bank’s PAR is much better than the average for the Moldovan banking sector as a whole, where 13.33% of loans were still non-performing at the end of 2010 (source: http://bnm.md/ru/finan-cial_indices_of_bank_system).

One of the ways in which ProCredit Bank has met the challenge to portfolio quality posed by the fi-

nancial crisis is to offer loan restructuring to those clients that are judged to have the poten-tial to regain stability. Restructurings follow a thorough analysis of each client’s changed pay-ment capacity. The decision to restructure a cred-it exposure is always taken by a credit committee and aims at full recovery. As of the end of 2010, the total volume of restructured loans in the “watch” category came to USD 775,472, and none had migrated to the “impaired” category. The aggregate restructured portfolio grew during the year from USD 1.28 million in January 2010 to USD 3.63 million in December 2010 and its share of the total gross loan portfolio grew from 3.92% in January 2010 to 4.34% in December 2010.

ProCredit Bank in Moldova takes a conservative approach to loan loss provisioning. Impairment allowances for these exposures are calculated on the basis of historical default rates. For all unim-paired credit exposures, portfolio-based allow-ances for impairment are made. At the end of the year the coverage ratio (loan loss provisions as a

R i s k M a n a g e m e n t 21

percentage of PAR>30) stood at 140%, but stead-ily decreased towards the new, fully adequate target of 120%. By the same token, provisions also shrank relative to the total loan portfolio, from 1.9% in January to 1.53% by year-end.

Loans considered to be irrecoverable are consist-ently written off. Nonetheless, recovery efforts continue even after a loan has been written off, and collateral collection is rigorously enforced. In 2010 net write-offs totalled USD 260,235, or 0.31% of the gross loan portfolio.

Looking ahead to 2011, the tense political situa-tion in Moldova and the vulnerability of the country’s economy indicate that credit risk will remain at a medium level, though moderate eco-nomic growth and significantly increased remit-tances from abroad compared with 2009 give cause for optimism.

Counterparty and Issuer Risk Management

Counterparty and issuer risks evolve especially from the bank’s need to invest excess liquidity, to conclude foreign exchange transactions, or to buy protection on specific risk positions. The risk of incurring losses caused by the unwill-ingness or inability of a financial counterparty or issuer to fulfil its obligations is managed according to the Group Counterparty Risk Management Policy, which defines the counter-party selection process and limits the size of ex-posures, and according to the Group Treasury Policy, which specifies the set of permissible transactions and the rules for their processing. As a matter of principle, only large international banks and local banks with a good reputation and financial standing are eligible counterpar-ties. Exceptions to size limits are conditional on approval by the GRMC.

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Country Risk Management

Given ProCredit Bank’s focus on lending to busi-nesses in the local market, it does not normally enter into cross-border transactions, and there-fore its exposure to country risk is limited. However, the bank sometimes needs to invest excess liquidity in bonds issued by highly rated international institutions, and exchanges cur-rencies with other members of the ProCredit group. The group as a whole is exposed to coun-try risk insofar as all ProCredit banks operate in transition economies or developing countries. However, over the years the ProCredit business model has proven relatively resistant to macro-economic and political shocks. The sovereign risk represented by Moldova is assessed as me-dium and stable. The lending agreement con-cluded between the Moldovan government and the IMF is expected to limit sovereign risk in the forthcoming period.

Liquidity Risk Management

To determine the robustness of the bank’s liquid-ity in the face of potential shocks, the bank per-forms regular stress tests based on scenarios defined by the Group Liquidity Risk Management Policy. Whenever necessary to bridge liquidity shortages, ProCredit Bank in Moldova, like the other group banks, is able to obtain a standby line from ProCredit Holding. It can also purchase National Bank Certificates with a short maturity of up to seven days, which are considered highly liquid, as they can be sold within a few days with-out a discount.

Several factors inherent to the bank’s business model offset liquidity risk. Firstly, the bank’s di-versified, high quality portfolio of loans means that incoming cash flows are highly predictable. Secondly, our customer deposits are spread across a large number of depositors each holding relatively small amounts. Indeed, during 2010 the average balance in our term deposit accounts decreased by 7% from USD 4,400 in January to USD 4,092 in December. To further reduce the bank’s vulnerability to withdrawal of large vol-umes of funds, we have established a guideline that the ten largest customer deposits taken together must not be allowed to exceed 20% of

total deposits. In fact, this deposit concentration indicator fell from 23% at the start of the year to 13% by year-end.

Currency Risk Management

ProCredit Bank in Moldova has a low level of ex-posure to market risk because it does not trade in securities or in commodities, nor does it engage in derivative transactions except for hedging purposes. Currency risk is managed in accord-ance with the Group Foreign Currency Risk Management Policy. The bank continuously mon-itors exchange rate movements and foreign currency markets, and determines its currency positions on a daily basis. Any exceptions to group policy or limits are subject to approval by the GRMC. Stress tests are regularly carried out to assess the impact of exchange rate move-ments on open currency positions (OCP) in each operating currency based on two scenarios: most probable and worst case.

Group policy forbids the bank to maintain OCPs for speculative purposes. However, FX deriva-tives may be used for hedging purposes to close certain positions, in which case they are closely monitored at both local and group level. As of end-2010, the bank had OCPs of 1.21% in euros and 4.12% in US dollars. Strategic long positions were approved as a hedging instru-ment against the depreciation of the local cur-rency, although in fact the MDL appreciated against the euro (by 8.9% in comparison to January 2010) and the dollar (by 2.99%). This caused the bank to incur losses, and prompted it to set a target of closing its OCPs in the final quarter of the year.

Interest Rate Risk Management

During 2010 interest rates on both loans and de-posits exhibited a downward trend. Maturity gap analysis and stress testing are used to measure and analyse the impact of interest rate shifts on interest income.

A key policy measure undertaken in 2010 to miti-gate interest rate risk was the introduction of variable interest rates on loans, allowing the


bank to raise (or lower) the rates it charges in line with shifts in the market interest rates. This had a very favourable effect, as is reflected in the low-ering of the economic value impact of interest rate risk from 16.79% of total regulatory capital at the end of May 2010 to 0.4% as of the end of the fourth quarter.

Operational Risk Management

The Group Operational Risk Policy is in full com-pliance with Basel II and German banking legis-lation. To minimise operational risk, all process-es are precisely documented and subject to effective control mechanisms. Job descriptions are comprehensive, duties are strictly segregat-ed, and dependency on key individuals is avoid-ed. When recruiting, the bank pays close atten-tion to personal integrity, a quality which is reinforced through the bank’s strictly enforced code of conduct and through comprehensive training programmes designed to promote a cul-ture of transparency and risk-awareness.

The group-wide Risk Event Database (RED) en-sures that operational risks are addressed in a systematic and transparent manner, with all re-medial and preventive action clearly documented and accessible to management, both at the level of the bank and at the group level. Staff are re-quired to report all events which represent an ac-tual or potential loss for the bank irrespective of the amount of loss.

As part of their initial training, all new staff mem-bers are taught how to recognise and avoid op-erational risk and how to maintain information security. Additional training on these issues, and on how to use the RED, is given to the main users of the system, e. g. departmental manag-ers, branch managers, etc. In 2010, ProCredit Bank in Moldova reported 121 risk events repre-senting a total net risk amount of EUR 6,798. Over half of the reported events were encoun-tered in the IT Department (60% of the total), while the Card Service Operation Department, Administration Department and Front Office Operation Department accounted for 16%, 10% and 5% of the events, most of which were related to front office cash operations and account man-agement activities.

Every year the bank conducts a risk assessment procedure by completing a group-wide question-naire on fraud risk and operational risk. Each of the risks described here must be mitigated by ap-propriate controls, the adequacy of which is the subject of the assessment. If the controls are judged to be insufficient, an action plan for rem-edying the situation is drawn up. The completed assessment is sent to the Group Operational Risk Management Department.

In 2010 the bank introduced the group-wide New Risk Approval (NRA) process, which is applied to all materially new or changed products, services or business processes. Only after the elimination of any obstacles or deficiencies revealed by the NRA process does management give its approval for the innovation to go ahead.

The bank’s Business Continuity Policy ensures that the bank can maintain or restore its opera-tions in a timely manner in the event of a serious disruption. According to this policy, the initial emergency is handled by an emergency response team; once it has been contained, the business continuity management team takes over. This team consists of senior managers from the main business departments, supported by a task force of technicians with the appropriate specialist skills. The bank’s Business Continuity Plan also

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specifies the procedure for moving critical opera-tions to temporary locations, the resources that need to be mobilised in each type of case and the expected cost of disruptions in specific areas. It also offers guidance on avoiding disruption in the first place.

Anti-Money Laundering

ProCredit Bank in Moldova fully endorses the fight against money laundering and terrorist financing, and has implemented the Group Anti-Money Laundering Policy, which meets the requirements of German and EU legislation. No customer is accepted and no transaction is exe-cuted unless the bank understands and agrees to the underlying purpose of the business rela-tionship. The Group Anti-Money Laundering Department (Group AML) conducts an annual survey of all ProCredit banks and updates the policy accordingly. In addition, all ProCredit banks submit quarterly reports on their AML activities to Group AML.

At ProCredit Bank in Moldova, responsibility for AML activities is exercised by the AML and Compliance Department. According to local regu-lations, any transaction (or any series of transac-tions within 30 days) exceeding MDL 500,000

must be reported to the local authorities. In addi-tion, any attempt to execute a transaction that arouses suspicion of money laundering, terrorist financing or some other criminal activity must be reported. Front-office staff receive intensive training in how to recognise suspicious transac-tions. In cases of doubt, Group AML takes the final decision on how to handle the suspicious transactions and customers reported by the bank.

Capital Adequacy

The bank’s capital adequacy is calculated on a monthly basis and reported both to the man-agement and to the Group Risk Management Committee, together with rolling forecasts to ensure future compliance with capital adequacy requirements. Strong support from our share-holders once again enabled the bank to maintain a comfortable capital cushion. During 2010 it re-ceived a total of USD 4.0 million in additional subordinated debt, and in September there was a USD 4.0 million increase in paid-in capital. At year-end 2010 the capital adequacy ratio (tier 1 and tier 2 capital/risk-weighted assets) stood at 21.42%, well above the group-wide target of 12%, which is also the locally required minimum.


Drochia

Edineţ Soroca

Floreşti

Ocniţa

Orhei

Comrat

Chişinău (9)

Cahul

Hânceşti

Bălţi (2)

Străşeni

Ungheni

Moldova

Ukraine

Ukraine

Romania

Black Sea

Căuşeni

Branch Network

At the end of 2010, ProCredit Bank in Moldova had a total of 23 branches located in 14 differ-ent towns and cities across the country. In order to ensure efficient communication between the branches and the bank’s headquarters, and among branches in the same part of the country, the network is organised into three regions. There are 10 units in and around the capital, Chisinau, eight branches in the North region and another five branches in the South and Centre regions. As Moldova is a predominantly agricultural country, almost all branches out-side the Chisinau region serve agricultural busi-

nesses. Three of the Chisinau branches serve villages located near the capital city and there-fore have a sizeable farming clientele.

In 2010, as part of our effort to respond in a more differentiated manner to our customers’ needs, we made significant improvements to the struc-ture of our branch network. Our lending busi-ness is now concentrated in a smaller number of specialised branches, where the majority of our business client advisers and credit analysts are now based. These branches provide not only credit products but also all of the bank’s other

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services for business clients and private individ-uals, including various types of account servic-es, foreign exchange, money transfers and utili-ties payments.

In addition to these full-scale branches, the bank now also operates smaller service points in strate-gic, often densely populated neighbourhoods. The service points are designed to be convenient places for both private individuals and enterpris-es to do their day-to-day retail banking business, but do not process loan applications. Before de-ciding which branches should be converted into service points, the bank performed a careful anal-ysis of the market potential and available resourc-es in each location. During 2010, a total of eight branches were converted to service points, while four branches were closed in order to concentrate the available resources in locations where they could make the greatest impact on service quality.

Also in line with the shift towards a more pro-nounced customer focus, improvements were made

to the interior design of our branches. Signposting now directs business clients to physically sepa-rate areas staffed by experts in serving enterpris-es, and rooms for confidential negotiations have been created wherever space has allowed.

Our retail services include VISA cards, which both business clients and private individuals can use to withdraw cash at any of our 25 ATMs, or to make cashless purchases using POS terminals operated by local merchants, many of whom are themselves customers of ProCredit Bank in Moldova.

As the majority of the population live in the capi-tal, and more than 50% of registered businesses are based there, Chisinau will remain the focal point of our branch network in the foreseeable fu-ture. In 2011 we plan to open new service points in busy districts of the city and we also hope to open a new branch in a district with strong poten-tial for business development among the enter-prises based there.

B r a n c h N e t w o r k 27

Organisation, Staff and Staff Development

In line with the group-wide focus on enhancing the quality of the relationship with our customers and improving service quality in 2010, the bank intensified its efforts to advance the professional and personal development of its staff. During the year, our employees participated in a total of 3,540 internal training days, not including at-tendance at the international ProCredit Academies.

The bank’s Training Department is divided into a Professional Training Unit, which organises courses in operational and technical skills, and a Development Training Unit, which focuses on programmes designed to foster interpersonal skills, such as sales and negotiation techniques, as well as English and mathematics courses.

In the context of the ProCredit group’s interna-tional initiative to raise the level of mathemati-cal knowledge among its staff, ProCredit Bank in Moldova hired a dedicated maths trainer and organised two or three trainings per month, attended by a total of 218 staff members from all sections of the bank. In addition, we organ-ised a distance learning course to support indi-vidual preparation for the group-wide maths tests. By the end of September, all of the bank’s employees had successfully reached the group’s level 1 standard.

A large proportion of the training provided to cur-rent and potential middle managers takes place outside Moldova at the international ProCredit Academies. In 2010, five colleagues from ProCredit Bank in Moldova graduated from the ProCredit

Regional Academy for Eastern Europe in Veles, Macedonia, while another five completed the first year of their two-year course. Four of the bank’s staff earned their “ProCredit Banker” di-ploma, marking the successful completion of the highly intensive three-year programme offered at the central ProCredit Academy in Fürth, Germany.

Middle management staff attended an in-house “Leadership Development Programme” offered by an external provider. Here the focus was on developing managerial skills and the ability to handle challenging interpersonal situations.

The adoption of a new group-wide business strat-egy in 2010, with its increased emphasis on build-ing long-term customer relationships, necessitat-ed various changes to the bank’s organisational structure. At head office level, two new divisions were created to reflect the shift from a product-based to a client-based approach: the Business Clients Division and the Private Individual Clients and Front-Office Operations Division. Within the Business Clients Division, new Small Business and Very Small Business departments were estab-lished, corresponding to the bank’s newly defined segmentation guidelines.

The internal organisation of the branches was also revised, with separate front office areas for business clients and private individuals, re-spectively. In this context, various assessments were undertaken to ensure that staff had the requisite skills for their assignments within this modified structure. For example, the Business

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Client Advisers, who are responsible for advis-ing clients on all of the bank’s products and services and for acquiring new customers, were chosen for this new position on the strength of their communication skills. At the same time, experienced loan officers with the strongest analytical expertise were appointed to the new-ly created Credit Analyst position, whose func-tion is to evaluate applications for credit servic-es submitted by comparatively large, complex business clients. In all cases, intensive training was given to reassigned staff to prepare them for their new duties.

Given the bank’s focus on consolidation and quality in 2010, recruitment of new personnel took place on a much more limited scale than in previous years. Nonetheless, 56 people joined the bank in 2010, bringing the total at year-end to 538 (including support staff). In line with the ProCredit group’s new recruitment policy, all shortlisted applicants are now invited to take a maths and logic test, which is set by ProCredit Holding. Successful candidates then take part in group discussions and role plays, where among

other things their interpersonal skills are as-sessed, followed by individual in-depth inter-views with senior staff of the bank.

Another innovation in the year under review was the introduction of the ProCredit Banker Programme, which is offered to candidates who show potential but do not yet have the requisite qualifications for a full-time position. This six-month programme, which covers maths and basic accounting as well as banking-specific subjects, is co-ordinated by a newly created Recruitment and Evaluation Unit within the HR Department, working in close collab-oration with the Training Department.

ProCredit Bank in Moldova understands that the key to providing high quality service lies in build-ing a team of motivated, professionally compe-tent staff who are jointly committed to the bank’s mission and objectives, and who work well to-gether on the basis of mutual trust and respect. For this reason, in addition to its substantial in-vestment in training, the bank also organised a summer event where all employees gathered to engage in shared activities in an informal setting.

O r g a n i s at i o n , S ta f f a n d S ta f f D e v e l o p m e n t 29

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Part of the overall mission of the ProCredit group is to set standards in the financial sectors in which we operate. We want to make a difference not only in terms of the target groups we serve and the quality of the financial services we pro-vide, but also with regard to business ethics. Our strong corporate values play a key role in this re-spect. Six essential principles guide the opera-tions of the ProCredit institutions:

• Transparency: We adhere to the principle of providing transparent information both to our customers and the general public and to our employees, and our conduct is straightforward and open;

• A culture of open communication: We are open, fair and constructive in our communication with each other, and deal with conflicts at work in a professional manner, working together to find solutions;

• Social responsibility and tolerance: We offer our clients sound advice and assess their eco-nomic and financial situation, business poten-tial and repayment capacity so that they can benefit from the most appropriate loan prod-ucts. Promoting a savings culture is an impor-tant part of our mission, and we are committed to treating all customers and employees with fairness and respect, regardless of their ori-gin, colour, language, gender or religious or political beliefs;

• Service orientation: Every client is served in a friendly, competent and courteous manner. Our employees are committed to providing excel-lent service to all customers, regardless of their background or the size of their business;

• High professional standards: Our employees take personal responsibility for the quality of their work and always strive to grow as pro-fessionals;

• A high degree of personal commitment: This goes hand-in-hand with integrity and honesty – traits which are required of all employees in the ProCredit group.

These six values represent the backbone of our corporate culture and are discussed and actively applied in our day-to-day operations. Moreover, they are reflected in the ProCredit Code of Conduct, which transforms the group’s ethical principles into practical guidelines for all staff. To make sure that new employees fully under-

stand all of the principles that have been defined, induction training includes sessions dedicated to the Code of Conduct and its significance for all members of our team. Regular refresher training sessions help to ensure that employees remain committed to our high ethical standards and are kept abreast of new issues and developments which have an ethical dimension for our institu-tion. These events allow existing staff to analyse recent case studies and discuss any grey areas.

Another aspect of ensuring that our institution ad-heres to the highest ethical standards is our con-sistent application of best practice systems and procedures to protect ourselves from being used as a vehicle for money laundering or other illegal activities such as the financing of terrorist activi-ties. An important focus here is to “know your customer”, and, in line with this principle, to carry out sound reporting and comply with the applica-ble regulations. Updated anti-money laundering and fraud prevention policies are being intro-duced across the group to ensure compliance with German regulatory standards.

We also set standards regarding the impact of our lending operations on the environment. ProCredit Bank in Moldova has implemented an environmental management sys-tem based on continuous assess-ment of the loan portfolio accord-ing to environmental criteria, an in-depth analysis of all economic activities which potentially involve environmental risks, and the re-jection of loan applications from enterprises engaged in activities which are deemed environmen-tally hazardous and appear on our institution’s exclusion list. By incorporating environmen-tal issues into the loan approv-al process, ProCredit Bank in Moldova is also able to raise its clients’ overall level of environmental awareness. We also ensure that requests for loans are evalu-ated in terms of the applicant’s compliance with ethical business practices. No loans are issued to enterprises or individuals if it is suspected that they are making use of unsafe or morally objec-tionable forms of labour, in particular child labour.

Business Ethics and Environmental Standards

B u s i n e s s E t h i c s a n d E n v i r o n m e n ta l S ta n d a r d s 31

The ProCredit Group: Responsible Neighbourhood Banks for Small Businesses and Ordinary People

The ProCredit group comprises 21 financial insti-tutions providing banking services in transition economies and developing countries. ProCredit banks are responsible neighbourhood banks. This means, in the neighbourhoods in which we work, we aim to:

• be the house bank of choice for the very small, small and medium-sized enterprises which create jobs and drive economic development, and

• provide secure and transparent savings and banking services to ordinary people who are looking for an affordable bank they can trust.

At the end of 2010 our 15,600 employees, working in some 740 branches, were serving 3 million cus-tomers in Eastern Europe, Latin America and Africa.

The history of the ProCredit group is a rich one and forms the basis of what we are today. The first ProCredit banks were founded more than a decade ago with the aim of making a develop-ment impact by promoting the growth of small businesses. We sought to achieve this by provid-ing loans tailored to their requirements and offer-ing deposit facilities that would encourage low-income individuals and families to save. The group has grown strongly over the years, and today we are one of the leading providers of banking serv-ices to small business clients in most of the coun-tries in which we operate.

Our origins lie in our pioneering microfinance po-sitioning. This positioning has developed as our markets and our clients have developed so our socially responsible approach remains as rele-vant today as ever. Its importance has been un-derscored by the financial crisis and subsequent significant macroeconomic decline which most of our countries of operation experienced over the last two years. As enterprises adjust to and ex-pand again in their new economic reality and or-dinary people rebuild their trust in banks, it is clear that our customers need a reliable banking partner now more than ever. This has also given us the impetus to further strengthen our compre-hensive customer-oriented approach with more highly specialised and well trained staff.

Unlike most other banks operating in our mar-kets, we have always avoided aggressive con-

sumer lending and speculative lines of business. Instead, the ProCredit banks work in close con-tact with their clients to gain a full understanding of the problems small businesses face and the opportunities that are available to them. Our credit technology, developed over many years with the support of the German consulting com-pany IPC, relies on the careful individual analysis of credit risks. By making the effort to know our clients well and maintain long-term relationships based on trust and understanding, we are well positioned to support them not only when the economy is buoyant, but also during a downturn and recovery. Over the last two years, the ability of our loan officers to proactively make appropri-ate adaptations to payment plans where neces-sary to reflect clients’ new and more challenging sales environments has played an important role in maintaining good loan portfolio quality.

We not only extend loans, but also offer our en-terprise clients a broad range of other banking services such as cash management, domestic and international money transfers, payroll serv-ices, POS terminals and payment and credit cards. These services are geared towards assist-ing our business clients to operate more effi-ciently and more formally and thus help to strengthen the real economy and the banking sector as a whole. In these terms ProCredit has a “whole customer” focus rather than a simple product focus. Our staff and our branches are be-coming more specialised and better equipped to cater to the needs of different client segments.

Today we have less of a focus on traditional “mi-crofinance” than we did in the past. At the end of 2009, we increased the minimum loan size for en-terprise clients to EUR/USD 2,000 in most coun-tries since we found that below this limit there is such broad access to loans from consumer fi-nance providers that “excess” had become more of a challenge for many clients than “access”. For these groups we prefer to offer deposit accounts and other banking services rather than credit.

Our targeted efforts to foster a savings culture in our countries of operation have enabled us to build a stable deposit base. ProCredit deposit fa-cilities are appropriate for a broad range of lower- and middle-income customers. We place partic-ular emphasis on working with the owners,

A n n u a l R e p o r t 2 01032

ProCredit Holding Germany

ProCredit Bank Serbia

ProCredit Bank Bosnia and Herzegovina

ProCredit Bank Kosovo

ProCredit Bank Albania

ProCredit Bank Macedonia

ProCredit Savings and Loans Ghana

ProCredit Bank Democratic Republic of Congo

Banco ProCredit Mozambique

ProCredit Bank Ukraine

ProCredit Bank Moldova

ProCredit Bank Romania

ProCredit Bank Georgia

ProCredit Bank Armenia

ProCredit Bank BulgariaProCredit Mexico

Banco ProCredit Honduras

Banco ProCredit El Salvador

Banco ProCreditNicaragua

Banco ProCreditColombia

Banco ProCredit Ecuador

Banco Los AndesProCredit Bolivia

The international group

of ProCredit institutions;

see also

www.procredit-holding.com

employees and families associated with our core target group of very small, small and medium-sized businesses. ProCredit banks offer simple savings products and place great emphasis on promoting children’s savings accounts and on run-ning financial literacy campaigns in the broader community. In addition to deposit facilities, we of-fer our clients a full range of standard retail bank-ing services. Over 2010 ProCredit institutions managed to maintain a high level of liquidity given the stability of their loyal retail deposit base.

The ProCredit group has a simple business mod-el: providing banking services to a diverse range of enterprises and the ordinary people who live and work around our branches. As a result, our banks have a transparent, low-risk profile. We do

not rely heavily on capital market funding and have no exposure to complex financial products. Furthermore, our staff are well trained, flexible and able to provide competent advice to clients, guiding them through difficult times as well as good times. Despite the turmoil of the global fi-nancial markets, the performance of the ProCredit group has been remarkably stable: we ended 2010 with a good liquidity position, comfortable capital adequacy, PAR over 30 days of 3.7%, and a modest profit. Given the very difficult macro-economic situation in many of our countries of op-eration, this was a strong performance.

Our shareholders have always taken a conserva-tive, long-term view of business development, aiming to strike the right balance between a

The P ro Cr edi t Group : R e sp onsibl e N eighbour hood B a nk s f or Sm a l l B usine sse s a nd O r din a r y P eopl e 33

shared developmental goal – reaching as many small enterprises and small savers as possible – and achieving commercial success.

Strong shareholders provide a solid foundation for the ProCredit group. It is led by ProCredit Holding AG, a German-based company that was founded by IPC in 1998. ProCredit Holding is a public-private partnership. The private share-holders include: IPC and IPC Invest, an invest-ment vehicle set up by IPC and ProCredit staff members; the Dutch DOEN Foundation; the US pension fund TIAA-CREF; the US Omidyar-Tufts Microfinance Fund; and the Swiss investment fund responsAbility. The public shareholders include the German KfW Bankengruppe (KfW banking group); IFC, the private sector arm of the World Bank; the Dutch development bank FMO; the Belgian Investment Company for Developing Countries (BIO) and Proparco, the French Investment and Promotions Company for Economic Co-operation. The group also receives strong support from the EBRD and Commerzbank, our minority shareholders in Eastern Europe, and from the Inter-American Development Bank (IDB) in Latin America. With the strong support of its shareholders and other partners, the ProCredit group ended the year with a total capital adequa-cy ratio of 16.5% – a figure that reflects their con-fidence in the group.

ProCredit Holding is not only a source of equity for its subsidiaries, but also a guide for the devel-opment of the ProCredit banks, providing the personnel for their senior management and of-fering support in all key areas of activity. The holding company ensures the implementation of ProCredit corporate values, best practice bank-ing operations and Basel II risk management principles across the group. The group’s busi-ness is run in accordance with the rigorous regu-latory standards imposed by the German banking supervisory authority (BaFin).

ProCredit Holding and the ProCredit group place a strong emphasis on human resource manage-ment. Our “neighbourhood bank” concept is not limited to our target customers and how we reach them; it also concerns the way in which we work with our staff and how we encourage them to work with their customers. The strength of our relationships with our customers will continue to be central to working with them effectively in 2010 and achieving steady business results. In 2010 there was a strong focus on staff quality and efficiency, which resulted in a 20% reduction in the number of staff over the year. This focus has been supported by the introduction of a new group-wide recruitment policy and a demanding training programme for all staff. This is comple-mented by a six month stipend or intern pro-

A n n u a l R e p o r t 2 01034

gramme provided by ProCredit banks for new en-trants into the banking sector which symbolises our commitment to skill development in all our countries of operation.

A responsible approach to neighbourhood bank-ing requires a decentralised decision-making process and a high level of judgment and adapt-ability from all staff members, especially our branch managers. Our corporate values embed principles such as open communication, trans-parency and professionalism into our day-to-day business. Key to our success is therefore the re-cruitment and training of dedicated staff. We maintain a corporate culture that promotes the professional development of our employees while fostering a deep sense of personal and so-cial responsibility. This entails not only intensive training in technical and management skills, but also frequent staff exchanges between our mem-ber institutions. In this way, we take full advan-tage of the opportunities for staff development that are created by the existence of a truly inter-national group.

A central plank in our approach to training is the ProCredit Academy in Germany, which provides a part-time “ProCredit Banker” training pro-gramme over a period of three years for high-po-tential staff from each of the ProCredit institu-tions. The curriculum includes intensive technical training and also exposes participants to sub-jects such as anthropology, history, philosophy

and ethics in an open and multicultural learning environment. Our goal in covering such varied topics is to give our future managers the opportu-nity to develop their knowledge and views of the world. At the same time, we aim to improve their communication and staff management skills. The group also operates three Regional Academies in Latin America, Africa and Eastern Europe to sup-port the professional development of middle managers at the local level.

The group’s strategy for 2011 focuses on two key interrelated themes “high quality customer rela-tions” and “efficiency”. We will further expand our business as the “house bank” of choice for small and very small enterprises, offering tai-lored loans and other banking services. At the same time we will continue to improve the speed and convenience of our services for all clients. Strong investment in our staff will also remain a key priority since it is their skills which enable us to build strong, broad-based relationships with our clients, which are a particularly important fac-tor of success in volatile macroeconomic condi-tions. As a group of responsible banks for ordi-nary people with prudent policies and well-trained staff to ensure our steady performance, we look forward to consolidating our position as a “house bank” for small businesses, their employees, and the ordinary people who live and work in the neighbourhoods around our branches.

The P ro Cr edi t Group : R e sp onsibl e N eighbour hood B a nk s f or Sm a l l B usine sse s a nd O r din a r y P eopl e 35

ProCredit in Eastern Europe

ProCredit operates in 11 countries across Eastern Europe. It is a leading provider of banking servic-es to very small, small and medium-sized busi-nesses in the region. ProCredit banks provide a high standard of transparent, professional serv-ices to all their clients – the ordinary people who live and work in the vicinity of the 457 ProCredit branches across the region.

2010 proved to be another challenging year for the South Eastern and Eastern European coun-tries in which ProCredit works. Most countries in South Eastern Europe experienced no GDP growth or GDP decline over the year as they continued to adjust to the fallout of the financial sector crisis. Only Albania and the more eastern countries (Armenia, Georgia, Moldova and Ukraine) experi-enced more steady GDP growth of 4–5%. The de-velopment of banking sectors in the region also continued to be depressed as non-performing loans (NPLs, i.e. loans more than 90 days over-due) that were originally disbursed in the pre-cri-sis boom years now work their way through the system. In most markets, sector NPLs were over 10% at the end of 2010.

Macroeconomic stability and signs of recovery are currently being driven above all by strong com-modity prices. However, government spending re-mained very tight, consumer confidence low and activity in the small and medium enterprise sector depressed in 2010. Prospects for 2011 are some-what more encouraging and ProCredit banks are working closely with their enterprise clients to sup-port their ability to respond to gradually emerging opportunities. Indeed, more widely, the role of ProCredit banks against this still vulnerable eco-nomic backdrop is a valuable one as our clients and the financial markets in which we operate ad-just to the new economic reality in the region.

For the financial sectors in which we work, ProCredit banks have represented consistency, good risk management and a high degree of fi-nancial transparency throughout the past two un-settled years. ProCredit banks have been notable in continuing to lend steadily and responsibly to support small businesses whilst banking sectors as a whole have tended to be restrictive or erratic.

For our enterprise clients, ProCredit banks remain a reliable and responsible partner. We specialise

in working with very small, small and medium en-terprises, because these segments are central to developing the economy and employment oppor-tunities. Our approach is based on building strong relationships with our clients and a thorough un-derstanding of their business.

This means we disburse loans which help a busi-ness to develop and are in line with a company’s ability to repay. It also allows us, for example, where necessary to appropriately adapt loan re-payment schedules if the sales pattern of a busi-ness has changed significantly. This has helped some of our clients endure through the crisis and has meant that arrears and write-off figures for the ProCredit banks in Eastern Europe are rela-tively low. The combined PAR (Portfolio at Risk > 30 days) for the Eastern European institutions as a percentage of their loan portfolio was 4.1% at the end of 2010 (PAR>90 days stood at 3.0%). Write-offs for the group in the region amounted to 1.2% of the loan portfolio.

Asset quality decline amongst the Eastern European institutions was concentrated in Bosnia, Bulgaria, Romania and Ukraine, coun-tries in which the pre-crisis boom in consumer lending was most extreme and the level of over-indebtedness in the banking sector as a whole therefore most marked. The performance of ProCredit banks across the region and in these countries remains very strong when compared to the market as a whole. In these terms ProCredit continues to demonstrate that with a responsible approach to lending, based on a thorough under-standing of the real situation of an enterprise, a high degree of financial stability can be achieved for clients and in bank performance.

At the same time our enterprise loan portfolio grew over 2010. The outstanding loan portfolio of the 11 ProCredit banks in Eastern Europe stood at EUR 2.7 billion at the end of 2010 (an increase of 6.9% from the end of 2009). In 2010, ProCredit staff have been proactive in acquiring new clients and serving existing clients, especially support-ing responsible investment opportunities as well as good management of working capital, liquidi-ty and receivables. Our lending activities aim in particular to foster local production and service industries, and include the provision of agricul-tural loans. We are keen to support a sector that

A n n u a l R e p o r t 2 01036

Poland

Belarus

Turkey

Slovakia

Czech Republic

HungaryAustria

Slovenia

Greece

Armenia Azerbaijan

Georgia

Russia

Ukraine

Moldova

Romania

Bulgaria

Serbia

Kosovo

MacedoniaAlbania

Bosnia and Herze- govina

Montenegro

CroatiaItaly

Germany

Switzerland

has been particularly neglected by other banks and that is vital for employment and social cohe-sion outside the main urban areas.

In 2010, in addition to developing their core seg-ments (very small and small enterprises taking loans with a volume of less than EUR 150,000), ProCredit banks also grew with clients in the “medium enterprise” segment (defined as clients taking loans above EUR 150,000) by some 20%, illustrating a need from such businesses for capi-tal which was not being provided by other banks. For very small and small businesses in the re-gion, ProCredit banks remain the leading bank group specialised in meeting their needs. These businesses are still relatively informal, but are operating in steadily formalising markets which are becoming more competitive. It takes a focused bank with well trained staff to work sustainably with this segment. In summary, ProCredit banks have firmly established themselves as broad-based enterprise banks able to cover the full spectrum of demand. For our private person clients, ProCredit banks have also been a symbol of stability and transpar-ency in turbulent years. ProCredit has focused for many years on promoting a savings culture be-cause setting money aside can help clients build a buffer against the vagaries of life, and the ratio

of deposits to GDP in Eastern European countries is still well below Western European levels.

We offer simple and reliable retail banking serv-ices. Our belief in transparent, direct communi-cation is particularly important in fostering cli-ents’ trust in these difficult times. We understand that our clients want to know in simple language how to save safely; they also want to access their money when they need it and they want access to convenient and efficient transaction services. In 2010, as in 2009, our experience confirmed that our clients appreciate the transparent, responsi-ble approach we take.

ProCredit banks fund most of their lending ac-tivities from local savings. The ratio of deposits to loans in the ProCredit banks in the region is close to 90%. Not only did we not have to rely on unpredictable capital markets for funds in 2010, but ProCredit banks in the region remained high-ly liquid throughout the year and our cost of funds declined.

Looking forward, in addition to the savings serv-ices they provide, ProCredit banks will continue to be very conservative with consumer loans for their private person clients, but will expand their provision of convenient banking services, such as e-banking and direct debit, and will continue

P r o C r e d i t i n E a s t e r n E u r o p e 37

to provide responsible housing improvement, en-ergy efficiency and other loans which help build a family’s assets.

For our staff, ProCredit banks offer unique oppor-tunities for professional development and job sat-isfaction given our strong client orientation, open communication culture and unusual commitment to staff training. In terms of institution building ac-tivities, ProCredit banks in Eastern Europe were, like the rest of the ProCredit group, focused above all on quality and efficiency rather than quantity in 2010. The pre-crisis boom years in Eastern Europe encouraged all banks, including ProCredit banks, to invest heavily in staff numbers and branch in-frastructure, which needed to be brought back in line with prevailing economic conditions. This has provided the context for ProCredit banks to also review staff standards and our training efforts as well as bank processes and procedures – to en-sure our institutions are ideally aligned with de-mand and the efficient services required by our clients. As a result, branch infrastructure has been reviewed, staff numbers reduced and greater job specialisation implemented.

Our staff is the key element in our approach to being a stable, down-to-earth and personal banking partner. The ProCredit group invests a lot to achieve high standards in staff recruitment and development. Staff exchanges, cross-border training programmes and regional workshops are an important part of our approach. To comple-ment the international academy in Germany, we have an Eastern European Academy, located near Skopje in Macedonia, which is dedicated to the training of ProCredit middle managers. The re-gional academy is an important channel for rapid and consistent communication region-wide and one that helps us adapt quickly to face new chal-lenges. A language centre at the academy also provides residential English courses, maximising the potential for international exchange within the group. Investment in our staff is an ongoing commitment and will remain a central plank in the ProCredit Bank approach. A qualified, moti-vated and professional team lies at the root of our lasting success across Eastern Europe.

A n n u a l R e p o r t 2 01038

Highlights*

Founded in October 199840 branches29,791 loans / EUR 172.1 million in loans195,053 deposit accounts / EUR 242.0 million672 employees

Founded in December 20079 branches4,512 loans / EUR 39.0 million in loans18,116 deposit accounts / EUR 19.4 million240 employees

Founded in October 199726 branches20,746 loans / EUR 119.2 million in loans97,249 deposit accounts / EUR 111.7 million460 employees

Founded in October 200175 branches42,286 loans / EUR 562.5 million in loans220,971 deposit accounts / EUR 373.5 million1,268 employees

Founded in May 199958 branches49,060 loans / EUR 250.7 million in loans436,898 deposit accounts / EUR 202.4 million1,640 employees

Founded in January 200062 branches93,510 loans / EUR 494.8 million in loans409,502 deposit accounts / EUR 676.1 million1,107 employees

Founded in July 200330 branches26,790 loans / EUR 148.5 million in loans118,067 deposit accounts / EUR 139.2 million541 employees

Founded in December 200723 branches11,249 loans / EUR 61.4 million in loans38,802 deposit accounts / EUR 24.7 million454 employees

Founded in May 200237 branches28,900 loans / EUR 180.8 million in loans118,147 deposit accounts / EUR 133.5 million830 employees

Founded in April 200157 branches95,198 loans / EUR 507.2 million in loans329,216 deposit accounts / EUR 316.2 million1,299 employees

Founded in January 200140 branches17,089 loans / EUR 190.3 million in loans125,129 deposit accounts / EUR 130.0 million1,017 employees

Contact

Legal address: Sami Frashëri St., TiranaMailing address: Dritan Hoxha St., TiranaP.O. Box 2395Tel./Fax: +355 4 2 389 300 / 22 33 [email protected]

105/1 Teryan St., area 110009 YerevanTel./Fax: + 374 10 514 860 / [email protected]

8 Emerika Bluma71000 SarajevoTel./Fax: +387 33 250 950 / [email protected]

26 Todor Aleksandrov Blvd.1303 SofiaTel./Fax: +359 2 813 5100 / [email protected]

154 D. Agmashenebeli Ave.0112 TbilisiTel./Fax: +995 32 202222 / [email protected]

16 “Mother Tereze” Boulevard10000 PrishtinaTel./Fax: +381 38 555 777 / 248 [email protected]

109a Jane Sandanski Blvd.1000 SkopjeTel./Fax: +389 2 321 99 00 / [email protected]

65 Stefan cel Mare Ave.office 901, ChisinauTel./Fax: +373 22 836555 / [email protected]

62–64 Buzesti St., Sector 1011017 BucharestTel./Fax: +40 21 201 6000 / 305 [email protected]

17 Milutina Milankovica11070 BelgradeTel./Fax: +381 11 20 77 906 / [email protected]

107a Peremohy Ave.03115 KyivTel./Fax: +380 44 590 10 17 / [email protected]

Name

ProCredit BankAlbania

ProCredit BankArmenia

ProCredit BankBosnia and Herzegovina

ProCredit BankBulgaria

ProCredit Bank Georgia

ProCredit BankKosovo

ProCredit BankMacedonia

ProCredit BankMoldova**

ProCredit BankRomania

ProCredit BankSerbia

ProCredit BankUkraine

* The figures in this section have been compiled on the basis of the financial and operational reporting performed in accordance with group-wide standards; they may differ from the figures reported in the bank’s local statements.

** Not including finance company ProCredit Moldova.

P r o C r e d i t i n E a s t e r n E u r o p e 39

Our Clients

Andrei Balan, 30, manages a mushroom produc-tion and selling company operating under the name Histrios. Mr Balan studied law and gradu-ated from university in 2002, but his interest and passion for business management led him to this particular company, which is located 25 kilome-tres from the capital city, Chisinau.

Histrios was established four years ago and is the first and biggest company in Moldova special-ised in cultivating champignon mushrooms. The mushrooms are grown using ecologically-friend-ly methods in facilities designed according to the most modern Dutch technologies. Besides supervising the mushroom production, Mr Balan expanded the business by establishing country-wide sales networks under the Delmark brand.

Mr Balan’s first contact with ProCredit Bank was a telephone conversation with one of the bank’s em-ployees. After several meetings with bank staff, he decided to take advantage of ProCredit Bank’s tailored services for business clients. In November 2009, he received two loans – for USD 240,000 and EUR 380,000 (MLD 2,659,680 and 6,256,548) – to refinance loans disbursed by another bank. Shortly thereafter, Mr Balan applied for another loan and received USD 200,000 (MLD 2,221,180) to help him develop several areas of the business.

In the past Mr Balan had worked with other local banks, but now he is satisfied with the business relationship he has with ProCredit Bank, and es-pecially with the option of performing payment transactions in any office. Mr Balan says:

“ProCredit Bank helped us develop our business. The bank granted a loan with a grace

period, which is essential for us. Favourable loan conditions allowed us to invest more in

marketing, which is a vital element of our business at the moment.”

Mr Balan appreciates the excellent customer service that ProCredit Bank provides. For him, ProCredit Bank represents

“a young bank with potential and without bureaucracy.”

In the future Mr Balan plans to apply for another loan to invest in mushroom preparation for ex-port, especially to countries in the European Union. Mr Balan is convinced that he can achieve his goals together with his financial partner – ProCredit Bank.

Andrei Balan,Manager of a Mushroom Production Company

A n n u a l R e p o r t 2 01040

Elena Josan, 50, is the owner of a company which produces construction materials near the capital city, Chisinau. She founded the company in 1998 and today manages the business together with her husband Gheorghe and their three children: Maria, Natalia and Sergiu.

Ms Josan became aware of ProCredit a long time ago through an advertisement she saw in a newspaper. In April 2003 she received her first loan of USD 5,000 (MDL 73,614), which was used to purchase equipment for the manufacture of construction ma-terials. Nine months later, Ms Josan applied for an-other loan – double the amount of the first loan – in order to buy a truck and facilitate the transportation of her products to commercial centres.

Ms Josan recognised early on that her business re-quires continuous investment in order to steadily expand the range of products and the client base. ProCredit Bank has supported Ms Josan’s pursuit of her business objectives with several loans for investments in more advanced technology and new methods of production. In this context, Ms Josan has been issued loans totalling USD 39,000 (MLD 454,950) over the past three years alone.

“I am more than satisfied with my collaboration with ProCredit Bank. Over the years, I have

received products and services that perfectly match my business needs. The bank provides flexible repayment schedules, which is such

an advantage in my field. These conditions have allowed me to purchase necessary equipment and cover raw material shortages during the

production process,”says Ms Josan.

Ms Josan also highly appreciates the high level of customer service provided by ProCredit Bank staff. Although she also works with other banks, she believes that ProCredit Bank offers her the most reliable and direct support:

“Whenever I visit your bank, I experience professionalism and efficiency, which is hard to

find at other banks. The staff are warm and welcoming to all the bank’s clients.”

In the near future Ms Josan plans to continue invest-ing in her enterprise by purchasing her own facili-ties in order to avoid making rental payments. To achieve this Ms Josan will require support from ProCredit Bank once again and intends to apply for a loan amounting to USD 100,000 (MDL 12,153,900). She also intends on opening current accounts for her business, allowing her to take advantage of ProCredit Bank’s tailored services for businesses.

Elena Josan,Manufacturer of Construction Materials

O u r C l i e n t s 41

Grigore Mogildea is the owner of the company Beta-Omega. Although he is a trained physicist, he had always been interested in starting his own business because he believes that this can en-sure a stable and long-term income. He began to actively pursue this dream 13 years ago when he opened a mini-supermarket in a suburb of the capital city, Chisinau. Today, this satisfied ProCredit Bank customer owns three thriving en-terprises and has enlisted the help of his two grown children to help him run the businesses, particularly for administrative duties.

When asked about his working relationship with ProCredit Bank, Mr Mogildea stated:

“I really appreciate ProCredit’s services for small businesses like mine – with ProCredit’s assistance, I was able to overcome difficulties

and achieve my goals.”

His business relationship with ProCredit com-menced in May 2003, when Mr Mogildea applied for two loans amounting to USD 2,000; he used these funds to further develop his mini-supermarket and improve the quality of the products he sells. In 2004 Mr Mogildea decided to open a banquet hall, the first of its kind in the area, which provided 15 new jobs. Mr Mogildea was later granted three loans amounting to USD 10,500 (MLD 133,980) in total which he used to buy necessary equipment and con-struction materials for the banquet hall.

With his banquet hall business growing, Mr Mogildea decided to start a new business: the production of ayran, a yogurt based non-alcohol-ic beverage. He turned to ProCredit Bank, apply-ing for two more loans totalling USD 13,000 (MLD 160,000) to purchase bottles for the new prod-uct, which he sells in his mini-supermarket and through commercial centres in Chisinau.

Mr Mogildea is an entrepreneur oriented towards continuous and stable development and there-fore invests in his businesses every year. Over the years, he has been issued nine loans amount-ing to USD 25,510 (MLD 320,820) in total. Mr Mogildea also uses other banking services es-sential to his business development such as cash management and domestic transfers.

“Over a period of 13 years, I worked with other banks but the relationship with ProCredit Bank

is the best because it operates quickly and efficiently. I highly appreciate the dynamic

and skilled bank staff,”says Grigore Mogildea.

Mr Mogildea has many business plans for the fu-ture, one of which is to open a bakery where he can produce baked goods to sell in his mini-su-permarket. This would be a great opportunity to further diversify his businesses and create new jobs for people in his area. He intends to achieve all this and more together with ProCredit Bank.

Grigore Mogildea, Entrepreneur, Non-Alcoholic Beverage Producer

A n n u a l R e p o r t 2 01042

Maria Losi, 63, is a music school teacher in Soroca, a small town in the north of Moldova, and has a married son who lives nearby. Ms Losi does not operate a business but she does have multi-ple savings accounts with ProCredit Bank.

Her first experience with the bank was in March 2010 when her employer began participating in the ProCredit Bank payroll card programme. As part of this programme, Ms Losi began to receive her salary through a current account at ProCredit Bank and was issued a debit card for use at the bank’s ATMs. Ms Losi previously used services at other banks, but she quickly came to prefer and highly appreciate the stability and reliability of-fered by ProCredit Bank.

“The fact that the bank providing me with services is part of a group based in Germany and that all its staff are highly professional

inspires confidence and a sense of security,”says Ms Losi.

Ms Losi is a responsible person who thinks about the future of her family and is convinced of the necessity of saving. Her initial positive experi-ence with ProCredit Bank in March 2010 led to the opening of her first long-term deposit ac-count, which was soon followed by a second ac-count in which she deposited USD 9,512 (MLD 115,000). Since then, Ms Losi has opened a number of long-term deposit accounts and has

come to truly appreciate ProCredit Bank’s com-mitment to promoting a savings culture through various initiatives in the community.

“Even though I do not have a business, I seek to save as much money as possible in order

to ensure a stable future for my son and grand-children. For that reason I took the decision to

keep my savings in a trustworthy and competent bank – and ProCredit Bank is just that!”

Her future plans include taking advantage of the bank’s other products and services, such as mak-ing monthly utility payments through the bank, as they are easily accessible and will help her save time. Ms Losi also plans to continue saving and may even open additional deposit accounts with ProCredit Bank in the future.

Maria Losi,Deposit Customer

O u r C l i e n t s 43

Financial StatementsFor the year ended 31 December 2010.Prepared in accordance with International Financial Reporting Standards.

A n n u a l R e p o r t 2 01044

F i n a n c i a l S tat e m e n t s 45

Statement of Comprehensive IncomeFor the year ended 31 December 2010

These financial statements have been approved for issue on 18 March 2011 and signed by:

Asmus Rotne Elena Gornet Chaiman of the Management Board Chief Accountant

Notes Year ended Year endedIn USD 31 December 2010 31 December 2009 Interest and similar income 3 12,353,867 5,109,905Interest and similar expenses 3 (4,916,065) (2,462,100)Net interest income 7,437,802 2,647,805 Allowance for impairment losses on loans and advances 4 (852,590) (629,414)Net interest income after allowances 6,585,212 2,018,391 Fee and commission income 5 1,916,169 1,831,442Fee and commission expenses 5 (257,045) (244,545)Net fee and commission income 1,659,124 1,586,897

Trading result 6 458,993 511,646Net other operating income/(expense) 7 105,191 (2,043)Operating income 8,808,520 4,114,891

Personnel expenses 8 (3,803,573) (2,959,340)Administrative expenses 9 (5,918,983) (4,780,704)Operating expenses (9,722,556) (7,740,044) Loss before tax (914,036) (3,625,153)

Income tax expenses 10 – –

Loss for the year (914,036) (3,625,153)

Other comprehensive income:

Translation difference 108,621 (1,330,347)Other comprehensive income, net of tax 108,621 (1,330,347)

Total comprehensive income for the year (805,415) (4,955,500)

The notes on pages 50 to 80 are an integral part of these financial statements.

A R t

A n n u a l R e p o r t 2 01046

Balance SheetAs at 31 December 2010

These financial statements have been approved for issue on 18 March 2011 and signed by:

Asmus Rotne Elena Gornet Chaiman of the Management Board Chief Accountant

Notes 31 December 2010 31 December 2009 In USD AssetsCash and balances with Central Bank 11 12,071,321 5,344,296Available for sale debt instruments 12 9,043,345 1,460,812Loans and advances to banks 13 2,805,410 5,819,674Available for sale equity investments 14 254,153 –Loans and advances to customers, gross 15 82,907,073 31,827,285Allowance for losses on loans and advances 16 (1,271,234) (585,706)Intangible assets 17 662,931 656,216Property and equipment 18 1,854,002 1,854,283Other assets 20 482,817 468,246Total assets 108,809,818 46,845,106

LiabilitiesLiabilities to banks 21 963,056 1,500,417Borrowed funds 22 38,364,099 10,782,377Liabilities to customers 23 34,269,276 19,678,762Liabilities to International Financing Institutions 24 16,747,161 4,056,299Other financial liabilities 25 316,705 334,420Other liabilities 26 129,072 130,991Provisions 27 190,739 126,079Subordinated debt 28 4,285,458 –Total liabilities 95,265,566 36,609,345

Equity Share capital 29 20,333,638 16,024,858Accumulated loss (7,491,689) (6,577,653)Translation difference 702,303 788,556Total equity 13,544,252 10,235,761 Total equity and liabilities 108,809,818 46,845,106


A R t


Statement of Changes in EquityFor the year ended 31 December 2010

Share Retained Translation Total In USD capital earnings reserveBalance at 1 January 2009 13,845,888 (2,952,500) (21,285) 10,872,103Loss of the year 2009 - (3,625,153) - (3,625,153)Currency translation differences (2,140,188) - 809,841 (1,330,347)Total comprehensive income (2,140,188) (3,625,153) 809,841 (4,955,500)Share issue 4,319,158 - - 4,319,158Balance at 31 December 2009 16,024,858 (6,577,653) 788,556 10,235,761

Balance at 1 January 2010 16,024,858 (6,577,653) 788,556 10,235,761Loss of the year 2010 - (914,036) - (914,036)Currency translation differences 194,874 - (86,253) 108,621Total comprehensive income 194,874 (914,036) (86,253) (805,415)Share issue 4,113,906 - - 4,113,906Balance at 31 December 2010 20,333,638 (7,491,689) 702,303 13,544,252


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Cash Flow StatementFor the year ended 31 December 2010

Year ended Year endedIn USD 31 December 2010 31 December 2009 Loss before tax (914,036) (3,625,153) Non-cash items included in the loss for the year and transition to the cash flow from operating activities Allowance for losses on loans and receivables 852,590 629,414Depreciation 527,428 391,028Amortisation 192,669 158,454Unrealised gains/losses from currency revaluation 57,641 (349,531)Addition/release of provision 179,139 68,688Other non cash items (120,503) –Gains/losses from disposal of software 191 –Gains/losses from disposal of property, plant and equipment 25,262 –Interest income (12,353,867) (5,109,905)Interest expense 4,916,065 2,462,100 Cash flows from operating activities before change in assets and liabilities (6,637,421) (5,374,905) Increase/decrease of assets and liabilities from operating activities after non-cash itemsLoans and advances to Central Bank (4,972,976) 3,704,343Increase/decrease in equity investments available for sale (254,153) –Loans and advances to customers (42,789,061) (19,584,007)Other assets (14,572) 278,274Liabilities to banks (537,360) (2,479,857)Liabilities to customers 14,590,514 10,009,836Other liabilities (19,634) (141,630) Interest received 11,939,997 4,919,626Interest paid (4,676,869) (2,232,799) Net cash used in operating activities (33,372,135) (10,901,119)

Purchase of/proceeds from sale of: Purchases of property, plant and equipment (439,438) (973,999)Purchases of intangible assets (187,926) (371,262)Cash flow used in investing activities (627,364) (1,345,261) Shares issued 4,195,863 4,783,524Borrowings received from parent 31,981,856 8,317,386Subordinated debts 4,000,000 –Cash flow from financing activities 40,177,719 13,100,910 Currency translation difference 20,317 (10,253) Cash and cash equivalents at the end of previous period 10,178,695 11,041,058Cash flow from operating activities (33,251,632) (10,901,119)Cash flow from investing activities (709,118) (1,345,261)Cash flow from financing activities 40,177,719 13,100,910Effects of exchange rate changes 123,780 (1,706,640) Cash and cash equivalents at the end of period 16,501,013 10,178,695



General InformationFor the year ended 31 December 2010

B.C. ProCredit Bank S.A. (thereafter “the Bank”) was established in the Republic of Moldova in 2007 as a commercial bank. On Decem-ber 17, 2007 the Bank received the license of type “B” from the Na-tional Bank of Moldova authorizing to conduct banking activities in the Republic of Moldova. A type “B” license allows the Bank to en-gage in all banking activities except underwriting and investment administration services.

The Bank’s registered office is located at the following address:

B.C. ProCredit Bank S.A. of. 901, Stefan cel Mare si Sfant StreetMD-2012, ChisinauRepublic of Moldova

The Bank operates through its head office.

The Bank’s number of employees as at 31 December 2010 was 454 (31 December 2009: 533).

Notes to the Financial StatementsFor the year ended 31 December 2010All amounts in United States Dollars (USD) unless otherwise stated

1. Basis of presentation

1.1 Compliance with International Financial Reporting Standards

B.C. ProCredit Bank S.A. (“the Bank”) prepares its financial state-ments according to International Financial Reporting Standards (IFRS). Accordingly, the financial statements for the year ended 31 December 2010 are prepared in accordance with IFRS as issued by the IASB and its predecessor body. Additionally, the interpreta-tions issued by the International Financial Reporting Interpretations Committee (IFRIC) and its predecessor body have been applied.The Bank did not early adopt any standard not yet effective.The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless other-wise stated.All amounts are presented in US dollars, unless otherwise stated. For computational reasons, the figures in the tables may exhibit rounding differences of ± one unit.The fiscal year of the Bank is the calendar year.

1.2 Compliance with national law

For supervisory purposes the institution does qualify as a commer-cial bank according to the banking license issued by the National Bank of Moldova, authorizing to conduct banking activities in the Republic of Moldova and is therefore supervised by the National Bank of Moldova.These financial statements of the Bank for the fiscal year 2010 were approved for issue by the Management Board on 18 March 2011.

1.3 Use of assumptions and estimates

The Bank’s financial reporting and its financial result are influ-enced by accounting policies, assumptions, estimates, and man-

agement judgement which necessarily have to be made in the course of preparation of the financial statements. All estimates and assumptions required in conformity with IFRS are best estimates undertaken in accordance with the applicable stand-ard. Estimates and judgements are evaluated on a continuous basis, and are based on past experience and other factors, including ex-pectations with regard to future events and are considered appro-priate under the given circumstances. Accounting policies and management’s judgements and estimates for certain items are especially critical for the Bank’s results and financial situation due to their materiality in amount. This applies to the following positions:

Impairment of loansProCredit Bank uses rates for portfolio – based loan loss provisions which are in line with ProCredit Group (Group of Procredit banks) rates. To determine the group-wide rates to be applied for portfo-lio-based loan loss provisioning, the group performed an evalua-tion of the quality of the loan portfolio, taking into account histori-cal loss experiences of the majority of the institutions. This migration analysis is based on statistical data from 2000 until including 2010 and therefore it reflects both, average losses during a period of constant growth and favourable economic environments as well as average losses during a period of global recession in near-ly all of the ProCredit Group’s countries of operation. Further infor-mation on the bank’s accounting policy on loan loss provisioning can be found in note 2.6.

1.3 Accounting developments

(a) Standards effective for annual periods beginning on or after 1 January 2010

The following new standards and interpretations became effective for the Bank from 1 January 2010: • IFRIC 17, Distributions of Non-Cash Assets to Owners (effective

for annual periods beginning on or after 1 July 2009). The inter-pretation clarifies when and how distribution of non-cash as-sets as dividends to the owners should be recognised. An en-tity should measure a liability to distribute non-cash assets as a dividend to its owners at the fair value of the assets to be distributed. A gain or loss on disposal of the distributed non-cash assets should be recognised in profit or loss when the entity settles the dividend payable. The amendments have no impact on the Bank financial statements.

• IFRIC 18, Transfers of Assets from Customers (effective for an-nual periods beginning on or after 1 July 2009). The interpreta-tion clarifies the accounting for transfers of assets from cus-tomers, namely, the circumstances in which the definition of an asset is met; the recognition of the asset and the measurement of its cost on initial recognition; the identification of the sepa-rately identifiable services (one or more services in exchange for the transferred asset); the recognition of revenue, and the accounting for transfers of cash from customers. The amend-ments have no impact on the Bank financial statements.

• IAS 27, Consolidated and Separate Financial Statements (re-vised January 2008; effective for annual periods beginning on or after 1 July 2009). The revised IAS 27 requires an entity to attribute total comprehensive income to the owners of the par-ent and to the non-controlling interests (previously “minority interest”) even if this results in the non-controlling interests having a deficit balance (the previous standard required the excess losses to be allocated to the owners of the parent in most cases). The revised standard specifies that changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transac-tions. It also specifies how an entity should measure any gain

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or loss arising on the loss of control of a subsidiary. At the date when control is lost, any investment retained in the former sub-sidiary has to be measured at its fair value. The amendments have no impact on the Bank’s financial statements.

• IFRS 3, Business Combinations (revised January 2008; effec-tive for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). The revised IFRS 3 allows entities to choose to measure non-controlling interests using the previous IFRS 3 method (proportionate share of the acqui-ree’s identifiable net assets) or at fair value. The revised IFRS 3 is more detailed in providing guidance on the application of the purchase method to business combinations. The requirement to measure at fair value every asset and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, in a business combina-tion achieved in stages, the acquirer has to premeasure its pre-viously held equity interest in the acquiree at its acquisition-date fair value and recognises the resulting gain or loss, if any, in profit or loss for the year. Acquisition-related costs are ac-counted for separately from the business combination and therefore recognised as expenses rather than included in goodwill. An acquirer has to recognise a liability for any contin-gent purchase consideration at the acquisition date. Changes in the value of that liability after the acquisition date are recog-nised in accordance with other applicable IFRSs, as appropri-ate, rather than by adjusting goodwill. The revised IFRS 3 brings into its scope business combinations involving only mu-tual entities and business combinations achieved by contract alone. The amendments have no impact on the Bank’s financial statements.

• Bank Cash-settled Share-based Payment Transactions – Amendments to IFRS 2, Share-based Payment (effective for an-nual periods beginning on or after 1 January 2010). The amend-ments provide a clear basis to determine the classification of share – based payment awards in both consolidated and sepa-rate financial statements.

• The amendments incorporate into the standard the guidance in IFRIC 8 and IFRIC 11, which are withdrawn. The amendments expand on the guidance given in IFRIC 11 to address plans that were previously not considered in the interpretation. The amendments also clarify the defined terms in the Appendix to the standard. The amendments have no impact on the Bank s financial statements.

• Eligible Hedged Items – Amendment to IAS 39, Financial Instru-ments: Recognition and Measurement (effective with retro-spective application for annual periods beginning on or after 1 July 2009). The amendment clarifies how the principles that determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in particular situa-tions. The amendments have no material impact on the Bank s financial statements.

• IFRS 1, First-time Adoption of International Financial Reporting Standards (following an amendment in December 2008, effec-tive for the first IFRS financial statements for a period begin-ning on or after 1 July 2009). The revised IFRS 1 retains the substance of its previous version but within a changed struc-ture in order to make it easier for the reader to understand and to better accommodate future changes. The revised standard did not have a material impact on Bank financial statements.

• Additional Exemptions for First-time Adopters – Amendments to IFRS 1, First-time Adoption of IFRS (effective for annual peri-ods beginning on or after 1 January 2010). The amendments exempt entities using the full cost method from retrospective application of IFRSs for oil and gas assets and also exempt en-tities with existing leasing contracts from reassessing the clas-sification of those contracts in accordance with IFRIC 4, ‘Deter-

mining Whether an Arrangement Contains a Lease’ when the application of their national accounting requirements pro-duced the same result. The amendments have no impact on the Bank’s financial statements.

• Improvements to International Financial Reporting Standards (issued in April 2009; amendments to IFRS 2, IAS 38, IFRIC 9 and IFRIC 16 are effective for annual periods beginning on or after 1 July 2009; amendments to IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 36 and IAS 39 are effective for annual periods be-ginning on or after 1 January 2010). The improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations: clarification that con-tributions of businesses in common control transactions and formation of joint ventures are not within the scope of IFRS 2;

• clarification of disclosure requirements set by IFRS 5 and other standards for non-current assets (or disposal Banks) classified as held for sale or discontinued operations; requiring to report a measure of total assets and liabilities for each reportable segment under IFRS 8 only if such amounts are regularly pro-vided to the chief operating decision maker; amending IAS 1 to allow classification of certain liabilities settled by entity’s own equity instruments as non-current; changing IAS 7 such that only expenditures that result in a recognised asset are eligible for classification as investing activities; allowing classification of certain long-term land leases as finance leases under IAS 17 even without transfer of ownership of the land at the end of the lease; providing additional guidance in IAS 18 for determining whether an entity acts as a principal or an agent; clarification in IAS 36 that a cash generating unit shall not be larger than an operating segment before aggregation; supplementing IAS 38 regarding measurement of fair value of intangible assets ac-quired in a business combination; amending IAS 39 (i) to in-clude in its scope option contracts that could result in business combinations, (ii) to clarify the period of reclassifying gains or losses on cash flow hedging instruments from equity to profit or loss for the year and (iii) to state that a prepayment option is closely related to the host contract if upon exercise the bor-rower reimburses economic loss of the lender; amending IFRIC 9 to state that embedded derivatives in contracts acquired in common control transactions and formation of joint ventures are not within its scope; and removing the restriction in IFRIC 16 that hedging instruments may not be held by the foreign op-eration that itself is being hedged. In addition, the amend-ments clarifying classification as held for sale under IFRS 5 in case of a loss of control over a subsidiary published as part of the Annual Improvements to International Financial Reporting Standards, which were issued in May 2008, are effective for annual periods beginning on or after 1 July 2009. The amend-ments did not have a material impact on Bank financial state-ments.

(b) New standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 Janu-ary 2011 or later and which the Bank has not early adopted

• IFRS 9, Financial Instruments Part 1: Classification and Meas-urement. IFRS 9 issued in November 2009 replaces those parts of IAS 39 relating to the classification and measurement of fi-nancial assets. IFRS 9 was further amended in October 2010 to address the classification and measurement of financial liabili-ties. Key features of the standard are as follows:

· Financial assets are required to be classified into two meas-urement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amor-tised cost. The decision is to be made at initial recognition. The classification depends on the entity’s business model for


managing its financial instruments and the contractual cash flow characteristics of the instrument.

· An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entity’s business model is to hold the asset to collect the con-tractual cash flows, and (ii) the asset’s contractual cash flows represent only payments of principal and interest (that is, it has only “basic loan features”). All other debt instru-ments are to be measured at fair value through profit or loss.

· All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other eq-uity investments, an irrevocable election can be made at ini-tial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a re-turn on investment.

· Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward un-changed to IFRS 9. The key change is that an entity will be re-quired to present the effects of changes in own credit risk of financial liabilities designated as at fair value through profit or loss in other comprehensive income.

While adoption of IFRS 9 is mandatory from 1 January 2013, earlier adoption is permitted. The Bank is considering the im-plications of the standard, the impact on the Bank and the tim-ing of its adoption by the Bank.

• Classification of Rights Issues – Amendment to IAS 32 (issued on 8 October 2009; effective for annual periods beginning on or after 1 February 2010). The amendment exempts certain rights issues of shares with proceeds denominated in foreign currencies from classification as financial derivatives. The Bank does not expect the amendments to have any material ef-fect on its financial statements.

• Amendment to IAS 24, Related Party Disclosures (issued in No-vember 2009 and effective for annual periods beginning on or after 1 January 2011). IAS 24 was revised in 2009 by: (a) simpli-fying the definition of a related party, clarifying its intended meaning and eliminating inconsistencies; and by (b) providing a partial exemption from the disclosure requirements for gov-ernment-related entities. The Bank does not expect the amend-ments to have any material effect on its financial statements.

• IFRIC 19, Extinguishing Financial Liabilities with Equity Instru-ments (effective for annual periods beginning on or after 1 July 2010). This IFRIC clarifies the accounting when an entity rene-gotiates the terms of its debt with the result that the liability is extinguished through the debtor issuing its own equity instru-ments to the creditor. A gain or loss is recognised in profit or loss based on the fair value of the equity instruments com-pared to the carrying amount of the debt. The Bank does not expect IFRIC 19 to have any material effect on its financial statements.

• Prepayments of a Minimum Funding Requirement – Amend-ment to IFRIC 14 (effective for annual periods beginning on or after 1 January 2011). This amendment will have a limited im-pact as it applies only to companies that are required to make minimum funding contributions to a defined benefit pension plan. It removes an unintended consequence of IFRIC 14 relat-ed to voluntary pension prepayments when there is a minimum

funding requirement. The Bank does not expect the amend-ments to have any material effect on its financial statements.

• Improvements to International Financial Reporting Standards (issued in May 2010 and effective from 1 January 2011). The improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations: IFRS 1 was amended (i) to allow previous GAAP carrying value to be used as deemed cost of an item of property, plant and equipment or an intangible asset if that item was used in op-erations subject to rate regulation, (ii) to allow an event driven revaluation to be used as deemed cost of property, plant and equipment even if the revaluation occurs during a period cov-ered by the first IFRS financial statements and (iii) to require a first-time adopter to explain changes in accounting policies or in the IFRS 1 exemptions between its first IFRS interim report and its first IFRS financial statements;

• IFRS 3 was amended (i) to require measurement at fair value (unless another measurement basis is required by other IFRS standards) of non-controlling interests that are not present ownership interest or do not entitle the holder to a proportion-ate share of net assets in the event of liquidation, (ii) to provide guidance on acquiree’s share-based payment arrangements that were not replaced or were voluntarily replaced as a result of a business combination and (iii) to clarify that the contingent considerations from business combinations that occurred be-fore the effective date of revised IFRS 3 (issued in January 2008) will be accounted for in accordance with the guidance in the previous version of IFRS 3; IFRS 7 was amended to clarify certain disclosure requirements, in particular (i) by adding an explicit emphasis on the interaction between qualitative and quantitative disclosures about the nature and extent of finan-cial risks, (ii) by removing the requirement to disclose carrying amount of renegotiated financial assets that would otherwise be past due or impaired, (iii) by replacing the requirement to disclose fair value of collateral by a more general requirement to disclose its financial effect, and (iv) by clarifying that an en-tity should disclose the amount of foreclosed collateral held at the reporting date and not the amount obtained during the re-porting period; IAS 27 was amended by clarifying the transi-tion rules for amendments to IAS 21, 28 and 31 made by the revised IAS 27 (as amended in January 2008); IAS 34 was amended to add additional examples of significant events and transactions requiring disclosure in a condensed interim finan-cial report, including transfers between the levels of fair value hierarchy, changes in classification of financial assets or changes in business or economic environment that affect the fair values of the entity’s financial instruments; and IFRIC 13 was amended to clarify measurement of fair value of award credits. The Bank does not expect the amendments to have any material effect on its financial statements.

• Limited exemption from comparative IFRS 7 disclosures for first-time adopters – Amendment to IFRS 1 (effective for annual periods beginning on or after 1 July 2010). Existing IFRS pre-parers were granted relief from presenting comparative infor-mation for the new disclosures required by the March 2009 amendments to IFRS 7, Financial Instruments: Disclosures. This amendment to IFRS 1 provides first-time adopters with the same transition provisions as included in the amendment to IFRS 7. The Bank does not expect the amendments to have any effect on its financial statements.

• Disclosures – Transfers of Financial Assets – Amendments to IFRS 7 (issued in October 2010 and effective for annual periods beginning on or after 1 July 2011). The amendment requires ad-ditional disclosures in respect of risk exposures arising from

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transferred financial assets. The amendment includes a re-quirement to disclose by class of asset the nature, carrying amount and a description of the risks and rewards of financial assets that have been transferred to another party yet remain on the entity’s balance sheet. Disclosures are also required to enable a user to understand the amount of any associated lia-bilities, and the relationship between the financial assets and associated liabilities. Where financial assets have been derec-ognised but the entity is still exposed to certain risks and re-wards associated with the transferred asset, additional disclo-sure are required to enable the effects of those risks to be understood. The Bank is currently assessing the impact of the amended standard on disclosures in its financial statements.

• Recovery of Underlying Assets – Amendments to IAS 12 (is-sued in December 2010 and effective for annual periods begin-ning on or after 1 January 2012). The amendments relate to measuring deferred tax liabilities and deferred tax assets re-lating to investment property measured using the fair value model in IAS 40, Investment Property and introduce a rebutta-ble presumption that an investment property is recovered en-tirely through sale. This presumption is rebutted if the invest-ment property is held within a business model whose objective is to consume substantially all of the economic benefits em-bodied in the investment property over time, rather than through sale. SIC-21, Income Taxes – Recovery of Revalued Non-Depreciable Assets which addresses similar issues in-volving non-depreciable assets measured using the revalua-tion model in IAS 16, Property, Plant and Equipment was incor-porate into IAS 12 after excluding guidance regarding investment property measured at fair value. The Bank does not expect the amendments to have any material effect on its fi-nancial statements.

• Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters – Amendments to IFRS 1 (issued in December 2010 and effective for annual periods beginning on or after 1 July 2011). The amendment regarding severe hyperinflation creates an additional exemption when an entity that has been subject to severe hyperinflation resumes presenting or presents for the first time, financial statements in accordance with IFRSs. The exemption allows an entity to elect to measure certain assets and liabilities at fair value; and to use that fair value as the deemed cost in the opening IFRS statement of fi-nancial position.

• The IASB has also amended IFRS 1 to eliminate references to fixed dates for one exception and one exemption, both dealing with financial assets and liabilities. The first change requires first-time adopters to apply the derecognition requirements of IFRS prospectively from the date of transition, rather than from 1 January 2004. The second amendment relates to financial as-sets or liabilities at fair value on initial recognition where the fair value is established through valuation techniques in the absence of an active market and allows the guidance to be ap-plied prospectively from the date of transition to IFRS rather than from 25 October 2002 or 1 January 2004. This means that a first-time adopter does not need to determine the fair value of financial assets and liabilities for periods prior to the date of transition. IFRS 9 has also been amended to reflect these changes. The Bank does not expect the amendments to have any effect on its financial statements.

Unless otherwise described above, the new standards and inter-pretations are not expected to significantly affect the Bank’s finan-cial statements.

2. Summary of significant accounting policies

2.1 Measurement basis

These financial statements have been prepared under the historic cost convention, unless IFRS require recognition at fair value. The best evidence of fair value are quoted prices in an active mar-ket. If the market for a financial instrument is not active, the Bank establishes fair value by using a valuation technique. The objective of using a valuation technique is to establish what the transaction price would have been on the measurement date in an arm’s length exchange determined by normal business considerations. Valuation techniques include using recent arm’s length market transactions between knowledgeable, willing parties, if available, reference to the current fair value of another instrument that is sub-stantially the same, discounted cash flow analysis and option pric-ing models. If there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, the Bank uses that technique. The chosen valuation technique makes maximum use of market in-puts and relies as little as possible on entity-specific inputs. It in-corporates all factors that market participants would consider in setting a price and is consistent with accepted economic method-ologies for pricing financial instruments. Financial instruments measured at fair value for accounting pur-poses on an ongoing basis include all instruments at fair value through profit or loss and financial instruments classified as avail-able-for-sale. Details on the applied measurement techniques for the balance sheet positions are part of the accounting policies listed below. These financial statements have been prepared based on the going concern principle, which assumes that the Bank will continue its operations for the foreseeable future. In order to assess the rea-sonability of this assumption, the management reviews forecasts of the future cash inflows. Based on these reviews and on the ongo-ing support of Procredit Group, the management believes that the Bank will be able to continue to operate as a going concern for the foreseeable future and, therefore, this principle was applied in the preparation of these financial statements.The financial year begins on 1st January and ends up on 31st De-cember and includes all operations performed by the Bank. All the effective figures that reflect financial and economic results of Bank’s activity during the financial year are included in the finan-cial statements of the financial year.

2.2 Financial assets

The Bank classifies its financial assets in the following categories: financial assets at fair value through profit or loss, loans and re-ceivables, held-to-maturity investments and available-for-sale fi-nancial assets. In the reporting period there were no financial as-sets classified as at fair value through profit or loss or held to maturity. Management determines the classification of financial assets at initial recognition.

(a) Financial assets at fair value through profit or lossThis category has two sub-categories: financial assets held for trading (“trading assets”), including the derivatives held, and fi-nancial assets designated at fair value through profit or loss at in-ception. The Bank does not apply hedge accounting.Financial assets are designated at fair value through profit or loss when they are part of a separate portfolio that is managed and evaluated on a fair value basis in accordance with a documented risk management or investment strategy.


The monthly reporting on these portfolios and the included assets to key management personnel is also done on a fair value basis. The fair values reported are usually observable market prices; as a guideline, the Bank prefers to invest in securities for which market prices in active markets can be observed. Only in rare circumstanc-es is the fair value calculated based on current observable market data by using a valuation technique.Financial assets at fair value through profit or loss are initially rec-ognized at fair value, and transaction costs are expensed in profit and loss. Subsequently, they are carried at fair value. Gains and losses arising from changes in their fair value are immediately rec-ognized in profit and loss of the period. Together with interest earned on financial instruments designated as at fair value through profit and loss they are shown as “net result from financial assets at fair value through profit or loss”.Purchases and sales of financial assets at fair value through profit or loss are recognized on the trade-date – the date on which the Bank commits to purchase or sell the asset. Financial assets at fair value through profit or loss are derecognized when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risks and rewards of ownership.

(b) Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Bank provides money, goods or serv-ices directly to a debtor with no intention of trading the receivable.Loans and receivables are initially recognized at fair value plus transactions costs; subsequently they are measured at amortized cost using the effective interest method. At each balance sheet date and whenever there is evidence of potential impairment, the Bank assesses the value of its loans and receivables. Their carrying amount may be reduced as a consequence through the use of an allowance account (see note (4) for the accounting policy for impair-ment of loans, and notes (15) and (16) for details on impairment of loans). If the amount of the impairment loss decreases, the impair-ment allowance is reduced accordingly, and the amount of the re-duction is recognized in profit and loss. The upper limit on the re-lease of the impairment is equal to the amortized costs which would have been incurred as of the valuation date if there had not been any impairment. Loans are recognized when the principal is advanced to the bor-rowers. Loans and receivables are derecognized when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risks and re-wards of ownership.

(c) Held-to-maturity investmentsHeld-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank’s management has the positive intention and ability to hold to maturity. lf the Bank were to sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified as available for sale. At initial recognition, held-to-maturity investments are recorded at fair value plus transaction costs. Subsequently they are carried at amortised cost.

(d) Available-for-sale financial assetsAvailable-for-sale assets are those intended to be held for an indefi-nite amount of time, which may be sold in response to needs for li-quidity or changes in interest rates, exchange rates or equity prices.At initial recognition, available-for-sale financial assets are record-ed at fair value plus transaction costs. Subsequently they are car-ried at fair value. The fair values reported are either observable market prices or values calculated with a valuation technique based on current observable market. For very short-term financial

assets it is assumed that the fair value is best reflected by the transaction price itself. Gains and losses arising from changes in fair value of available-for-sale financial assets are recognized di-rectly in other comprehensive income (OCI) in the position “revalu-ation reserve from available-for-sale financial instruments”, until the financial asset is derecognized or impaired. At this time, the cumulative gain or loss previously recognized in OCI is recognized in profit or loss as “gains and losses from available - for - sale finan-cial assets”. Interest calculated using the effective interest rate method and foreign currency gains and losses on monetary assets classified as available-for-sale are recognized in the profit and loss under interest and similar income. Dividends on available-for-sale equity instruments are recognized in profit and loss when the enti-ty’s right to receive the payment is established.Purchases and sales of available-for-sale financial assets are re-corded on the trade date. The available-for-sale financial assets are derecognized when the rights to receive cash flows from the finan-cial assets have expired or where the Bank has transferred sub-stantially all risks and rewards of ownership.

2.3 Foreign currency translation

(a) Functional and presentation currencyItems included in the financial statements of the Bank are meas-ured using the currency of the primary economic environment in which it operates, that is the functional currency Moldovan leu. Normally, it is the currency of the environment in which an entity primarily generates and expends cash. The financial statements of the Bank are presented in US dollars, which is ProCredit Bank pres-entation currency. The reason for using a different presentation currency is to meet the expectation of the parent company and pro-viders of external financing. All assets and liabilities for all balance sheets presented (including comparatives) have been translated from the functional currency (MDL) to the presentation currency (USD) at the closing rate exist-ing at the date of each balance sheet presented. Incomes and ex-pense items for all periods presented (including comparatives) have been translated using an average rate for the period. Share capital is also translated at closing rates. The exchange differences resulting from translating income statement at average rate and as-sets and liabilities at closing rates, as well as the exchange differ-ences arising on opening net assets’ retranslation at closing rates are recognized in other comprehensive income.Finally, exchange differences resulting from translation of retained earnings have been recognized directly as a separate component of equity – translation reserve, and exchange differences resulting from translation of other equity items (e.g. share capital) are in-cluded directly within the relevant components of the equity.

(b) Transactions and balancesForeign currency transactions are translated into the functional cur-rency using the exchange rates prevailing at the dates of the trans-actions. Foreign exchange gains and losses resulting from the set-tlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit and loss (trading result). Monetary items denominated in foreign currency are translated with the closing rate as of the reporting date. In the case of changes in the fair value of monetary assets denominated in foreign cur-rency classified as available for sale, a distinction is made between translation differences resulting from changes in amortised cost of securities and other changes in the carrying amount of the availa-ble for sale assest. Translation differences related to changes in the amortised cost are recognised in profit or loss, while other changes in the carrying amount are recognised in OCI.

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Non-monetary items measured at historical cost denominated in foreign currency are translated with the exchange rate as of the date of initial recognition.

The exchange rates for the year 2010 and 2009 are presented below:

2010 2009 USD EUR USD EURClosing rate 12.1539 16.1045 12.3017 17.6252Average rate 12.3663 16.3995 11.1134 15.5248

2.4 Cash and balances with Central Bank

For the purposes of the balance sheet, cash and balances with Cen-tral Bank comprise cash in hand and balances with less than three months’ maturity at Central Bank.For the purposes of the cash flow statement, cash and balances with Central Bank comprise balances with less than three months’ maturity from the date of acquisition, including: cash and non-re-stricted balances with Central Bank, non-pledged securities and other bills eligible for refinancing with Central Banks, and loans and advances to banks and amounts due from other banks.

2.5 Loans and receivables

The amounts reported under receivables from customers consist mainly of loans and advances granted. In addition to overnight and term deposits, the amounts reported under receivables from banks include current account balances.All loans and receivables to banks as well as loans and receivables to customers fall under the category “loans and receivables” and are carried at amortized cost, using the effective interest method. Amor-tized premiums and discounts are accounted for over the respective terms in profit and loss under net interest income. Impairment of loans is recognized on separate allowance accounts (Note 16).For the purposes of the cash flow statement, loans to banks with a remaining maturity of less than three months from the reporting date are treated as cash equivalents (Note 11).

2.6 Allowance for losses on loans and advances

(a) Assets carried at amortised cost – loans and advancesImpairment of loans and advancesThe Bank assesses at each balance sheet date whether there is ob-jective evidence that a financial asset or group of financial assets is impaired. If there is objective evidence that impairment of a loan or a portfolio of loans has occurred which influences the future cash flow of the financial asset(s), the respective losses are immediately recognized. Depending on the size of the loan such losses are ei-ther calculated on an individual loan basis or are collectively as-sessed for a portfolio of loans. The carrying amount of the loan is reduced through the use of an allowance account and the amount of the loss is recognized in profit and loss. The Bank does not recog-nize losses from expected future events that have not occurred at the balance sheet date.

Individually assessed loans and advancesLoans are considered individually significant if they have a certain size. Bank considers that all loans over USD 30,000 should be indi-vidually assessed for impairment. For such loans, it is assessed whether objective evidence of impairment exists, i.e. any factors which might influence the customer’s ability to fulfil his contractual payment obligations towards the Bank: • delinquencies in contractual payments of interest or principal;• breach of covenants or conditions;• initiation of bankruptcy proceedings;

• any specific information on the customer’s business (e.g. re-flected by cash flow difficulties experienced by the client) ;

• changes in the customer’s market environment;• the general economic situation.

Additionally, the aggregate exposure to the client and the realisa-ble value of collateral held are taken into account when deciding on the allowance for impairment.If there is objective evidence that an impairment loss has been in-curred, the amount of the loss is measured as the difference be-tween the assets carrying amount and the present value of its esti-mated future cash flows discounted at the financial asset’s original effective interest rate (specific impairment). If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. 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.

Collectively assessed loans and advancesThere are two cases in which loans are collectively assessed for im-pairment:• individually insignificant loans that show objective evidence of

impairment;• the group of loans which do not show signs of impairment, in

order to cover all losses which have already been incurred but not identified on an individual loan basis.

For the purposes of the evaluation of impairment of individually in-significant loans, the loans are grouped on the basis of similar credit risk characteristics, i.e. according to the number of days they are in arrears. Arrears of 30 or more days are considered to be an indicator of impairment. This characteristic is relevant for the esti-mation of future cash flows for the so defined groups of such as-sets, based on historical loss experiences with loans that showed similar characteristics.The collective assessment of impairment for individually insignifi-cant loans (lump-sum impairment) and for unimpaired loans (port-folio-based impairment) belonging to a group of financial assets is based on a quantitative analysis of historical default rates for loan portfolios with similar risk characteristics in the individual Pro-Credit Group subsidiaries (migration analysis), grouped into geo-graphical segments with a comparable risk profile. After a qualita-tive analysis of this statistical data, the holding company’s management prescribed appropriate rates to the banks of the Pro-Credit Group as the basis for their portfolio-based impairment al-lowances. Deviations from this guideline were allowed, if necessi-tated by the specific situation of a ProCredit institution (part of ProCredit Group).Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contrac-tual cash flows of the assets in the group and historical loss experi-ence for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experi-ence is based and to remove the effects of conditions in the histori-cal period that do not exist currently. The methodology and as-sumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any differences between loss esti-mates and actual loss experience.If the Bank determines that no objective evidence of impairment ex-ists for an individually assessed financial asset, whether individual-ly significant or not, it includes the asset in a group of financial as-sets with similar credit risk characteristics and collectively assesses them for impairment (impairment for collectively assessed loans).


Reversal of impairmentIf, in a subsequent period, the amount of the impairment loss de-creases and the decrease can be related objectively to an event oc-curring after the impairment was recognized, the previously recog-nized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in profit and loss.

Writing off loans and advancesWhen a loan is uncollectible, it is written off against the related al-lowance 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. Subsequent recoveries of amounts pre-viously written off decrease the amount of the allowance for loan impairment in profit and loss. The Bank writes off non-performing credit exposures in accordance with the following principles: • Non-performing loans under USD 10,000 shall be written off

after 180 days of arrears;• Non-performing loans of USD 10,000 and up to USD 30,000

shall be written off after 360 days of arrears; and• Non-performing loans of USD 30,000 and over shall be written

off after 360 days of arrears unless the Bank decides to keep the loan active, e.g. to allow for a legal collateral recovery proc-ess to finish.

Restructured loansRestructured loans which are considered to be individually signifi-cant are assessed for impairment on an individual basis. The amount of the loss is measured as the difference between the re-structured loan’s carrying amount and the present value of its esti-mated future cash flows discounted at the loan’s original effective interest rate (specific impairment). Restructured loans which are individually insignificant are collectively assessed for impairment.All loans exceeding USD 30,000 that have been restructured shall be individually assessed to determine the level of impairment. All loans that have been restructured more than once shall be individu-ally assessed, regardless of their amount. Once a restructured loan has been performing (defined as having no payment obligation to-wards the Bank in arrears by more than 30 days) for at least six con-secutive instalments after the restructuring, the Bank may treat the loan as unimpaired. If other loans to the client are outstanding, in addition to the restructured loan, the contamination principle shall apply, i.e. the other loans to the client and any related parties must also be assesed for impairment.

(b) Assets classified as available for saleThe Bank assesses at each balance sheet date whether there is ob-jective evidence that a financial asset or group of financial assets is impaired. In determining whether an available-for-sale financial asset is impaired the following criteria are considered:• Deterioration of the ability or willingness of the debtor to serv-

ice the obligation;• A political situation which may significantly impact the debt-

or’s ability for debt repayment;• Additional events that make it unlikely that the carrying

amount may be recovered.

In the case of equity investments, a significant or prolonged de-cline in the fair value of the investments below its cost is consid-ered as indicator in determining whether the assets are impaired. If any such evidence exists the cumulative loss – measured as the difference between the acquisition cost (net of any principal repay-ment and amortization for debt securities) and the current fair val-ue, less any impairment loss on that financial asset previously rec-ognized in profit or loss – is removed from OCI and recognized in profit and loss.

Impairment losses recognized in profit and loss on equity instru-ments are not reversed through profit and loss at any point thereaf-ter. 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 recognized in profit or loss, the impairment loss is reversed through profit and loss.The Bank primarily invests in government securities with fixed or variable interest rates. Impairments on these investments are rec-ognized when objective evidence exists that the government is un-able or unwilling to service these obligations.

2.7 Intangible assets

(a) Computer softwareAcquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortized on the basis of the expected useful lives. Software has a maximum expected useful life of 5 years.The assets are amortized using the straight-line method over their useful lives.

(b) Other intangible assetsThe items reported under “Other intangible assets” are: software in progress. The intangible assets in progress are not amortised.

2.8 Property and equipment

Land and buildings comprise mainly branches and offices. All prop-erty and equipment are stated at historical cost less scheduled de-preciation and impairment losses. Historical cost includes expendi-tures that are directly attributable to the acquisition of the items.Subsequent costs are included in the asset’s carrying amount or are recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reli-ably. All other repairs and maintenance are charged to profit and loss during the financial period in which they are incurred.Depreciation on assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:

Leasehold improvements shorter of rental contract life or useful lifeComputers 3 yearsFurniture 5 yearsMotor vehicles 5 yearsOther fixed assets 2 – 5 years

The assets’ residual carrying values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.Gains and losses on disposals are determined by comparing pro-ceeds with carrying amount. These are included in profit and loss.The Bank does not hold investment property.

2.9 Impairment of non-financial assets

Assets that have an indefinite useful life are not depreciated on a scheduled basis but are tested annually for impairment. Assets that are subject to depreciation/amortization are reviewed for indications of impairment whenever events or changes in cir-cumstances indicate that the carrying amount may not be recover-able. An impairment loss is recognized for the amount by which the asset’s carrying value exceeds its recoverable amount. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount exceeds its estimated recov-

A n n u a l R e p o r t 2 01056

erable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and value in use.For the purpose of assessing impairment, assets are grouped at the lowest level, for which there are separately identifiable cash flows (cash-generating units).

2.10 Leases

Leases are accounted for in accordance with IAS 17 and IFRIC 4 .

(a) ProCredit Bank as the lessee

Finance leaseAgreements which transfer to the lessee substantially all the risks and rewards incidental to the ownership of assets, but not neces-sarily a legal title, are classified as finance leases.In 2008 the Bank concluded a software lease agreement with Pro-Credit SA for a period of 5 years, where ProCredit Bank is the les-see. The finance lease is recognized as a financial liability and the finance charge is allocated to each lease period and recognized in income statement as interest expense.

Operating leaseOperating leases are all lease agreements which do not qualify as finance leases. Leases in which a significant portion of the risks and rewards of ownership are retained by another party, the lessor, are classified as operating leases. 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 recognized as an expense in the period in which termina-tion takes place.The total payments made under operating leases are charged to profit and loss under administrative expenses on a straight-line ba-sis over the period of the lease.

(b) ProCredit Bank as the lessor

Finance leasesWhen assets are held subject to a finance lease, the present value of the minimum lease payments is recognised as a receivable from customers under “loans and advances to customers”. Payments re-ceived under leases are divided into an amortisation component which is not recognised in profit and loss and an income component. The income component is recognised under “interest income”. Pre-miums received are recognised over the term of the lease using the effective interest rate method under “interest income”.

Operating leasesThe Bank does not enter into operating leases as a lessor.At the end of 2010 the Bank appears only as lessee in both types of leasing operations.

2.11 Income tax

(a) Current income taxCurrent income tax payable is calculated on the basis of the appli-cable tax law in the respective jurisdiction and is recognized as an expense.

(b) Deferred income taxDeferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial state-ments prepared in conformity with IFRS. Deferred tax assets and liabilities are determined using tax rates (and laws) that have been enacted by the balance sheet date and are expected to apply when

the related deferred income tax asset is realized or the deferred in-come tax liability is settled.The principal temporary differences arise from depreciation of property and equipment and tax losses carried forward. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or a liability in a transaction other than a business combination that at the time of the transaction affects neither the profit (before tax) for the period according to IFRS, nor the taxable profit or loss.The tax effects of income tax losses available for carry forward are recognized as a deferred tax asset when it is probable that future taxable profits will be available against which these losses can be utilized.Deferred tax assets are recognized where it is probable that future taxable profit will be available against which the temporary differ-ences can be utilized.Deferred tax related to fair value re-measurement of available-for-sale investments, which are recognized in OCI, is also credited or charged directly to OCI and subsequently recognized in profit and loss together with the deferred gain or loss. In 2010 the income tax rate was 0% and there are no indications for the future that it will be changed.

2.12 Liabilities to banks and customers

Liabilities to banks and customers are recognized initially at fair value net of transaction costs incurred. Borrowings are subse-quently stated at amortized cost; any difference between proceeds net of transaction costs and the repayment is recognized in profit and loss over the period of the borrowings using the effective inter-est rate method.All financial liabilities are derecognized when they are extin-guished – that is, when the obligation is discharged, cancelled or expires.

2.13 Provisions

Provisions are recognized if:• there is a present legal or constructive obligation resulting

from past events;• it is probable that an outflow of resources will be required to

settle the obligation; and• the amount can be reliably estimated.

Where there is a number of similar obligations, the likelihood that an outflow of resources will be required in a settlement is deter-mined by considering the class of obligations as a whole. Provisions for which the timing of the outflow of resources is known are measured at the present value of the expenditures, if the out-flow will be not earlier than in one year’s time. Contingent liabilities, which mainly consist of certain guarantees and credit commitments issued for customers, are possible obliga-tions that arise from past events. As their occurrence, or non-occur-rence, depends on uncertain future events not wholly within the control of the Bank, they are not recognized in the financial state-ments but are disclosed off-balance sheet unless the probability of settlement is remote (Note 33).

2.14 Financial guarantee contracts

Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss which he 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 state-ments at fair value on the date the guarantee was given. Subse-quent to initial recognition, the Bank’s liabilities under such guar-antees are measured at the higher of the initial measurement, less amortisation calculated to recognise in profit and loss the fee in-come earned on a straight-line basis over the life of the guarantee and the best estimate of the expenditure required to settle any fi-nancial obligation arising at the balance sheet date. These esti-mates are determined based on experience of similar transactions and history of past losses, supplemented by the judgement of man-agement. Any increase in the liability relating to guarantees is taken to profit and loss under “other operating expenses”.

2.15 Subordinated debt

Subordinated debt consists of liabilities to shareholders which in the event of insolvency or liquidation are not repaid until all non-subordinated creditors have been satisfied. There is no obligation to repay early. Following initial recognition at fair value, the subordinated debt is recognised at amortised cost. Fess and commisions are accounted for over the respective terms in profit and loss under “net interest income”.

2.16 Share capital

Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds as (negative) capital reserve.

2.17 Interest income and expense

Interest income and expenses for all interest-bearing financial in-struments are recognized within “interest income” and “interest expense” in profit and loss using the effective interest rate method. Interest income and expense are recognized in profit and loss on an accrual basis.Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest in-come is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Payments received in respect of written-off loans are not rec-ognized in net interest income but in allowances for loan losses.

2.18 Fee and commission income and expenses

Fee and commission income and expenses are recognized on an ac-crual basis when the service has been provided.Up front fees for granting loans that are likely to be drawn down are deferred (together with related direct costs) and recognized as an adjustment to the effective interest rate of the loan.

3. Net interest income

2010 2009Interest and similar incomeInterest income from cash and short term funds 174,091 105,573Interest income from loans and advances to customers 12,178,908 4,770,134Other interest income 868 234,198Total interest income 12,353,867 5,109,905

Interest and similar expensesInterest expenses on liabilities to banks 60,878 477,176Interest expenses on liabilities to customers 2,060,476 1,324,858Interest expenses on liabilities to international financial institutions 804,359 152,629Interest expenses on other borrowed funds 1,706,224 507,437Interest expenses on subordinated debt 284,128 –Total interest expenses 4,916,065 2,462,100

Net interest income 7,437,802 2,647,805

Interest income on impaired financial assets is USD 116,816 (2009: USD 31,145).

4. Allowance for impairment losses on loans and advances

Risk provisioning on loans and advances to customers are reflected in profit and loss as follows:

2010 2009Increase of impairment charge 1,272,629 779,712Write-offs – 1,982Release of impairment charge (350,111) (136,722)Recovery of written-off loans (69,927) (15,558)Total 852,591 629,414

The net increase in impairment charge, less releases, could be ana-lysed as followings:

2010 2009Allowance for impairment on loans and advances to customersSpecific impairment 50,377 59,037Allowance for individually insignificant impaired loans 351,873 209,520Allowance for collectively assessed loans 520,268 374,433Total allowance for impairment on loans and advances to customers 922,518 642,990

A n n u a l R e p o r t 2 01058

5. Net fee and commission income

2010 2009Fee and commission incomePayment transfers and transactions 738,010 344,793Account maintenance fee 60,723 25,015Letters of credit and guarantees 1,878 6,477Debit/credit cards 41,459 24,459Other fee and commission income 1,074,099 1,430,698Total fee and commission income 1,916,169 1,831,442

Fee and commission expensesOther commission expenses (47,956) (48,287)Commission expenses on card transactions (209,089) (196,258)Total fee and commission expenses (257,045) (244,545)

Net fee and commission income 1,659,124 1,586,897

Other fees and commission income include income from mainte-nance of ProCredit Company’s loan portfolio in the amount of USD 979,882 (2009: USD 1,369,091).Other commission expenses represent commission paid for trans-fers of amounts on nostro accounts.

6. Trading result

Trading result refers to the results of foreign exchange dealings with and for customers. The Bank does not engage in any foreign currency trading on its own account. In addition, this item includes the result from foreign currency operations and unrealized foreign currency revaluation effects. The Bank does not apply hedge ac-counting as defined by IAS 39.

2010 2009Currency transactions 516,634 162,115Revaluation general (57,641) 349,531Total 458,993 511,646

7. Net other operating results

2010 2009Other operating income 174,317 25,824Other operating expenses (69,126) (27,867)Total 105,191 (2,043)

Other operating income includes mainly: the income from transfer of loan portfolio from ProCredit Company in amount of USD 120,503 (2009: nil). During July 2010 Procredit SA (related party) trans-ferred to the Bank loans from its loans portfolio with a fair value of USD 8,627,920 and liabilities which represent borrowings from Procredit Holding AG with a fair value of USD 8,507,417; in addition it also transferred cars with a carrying value of USD 81,824. The purpose of the transaction was to transfer the loans portfolio from Procredit SA to the Bank as Procredit SA is ceasing its activity.Other operating expenses include expenses in the amount of USD 29,450 for deposit insurance fund (2009: USD 9,405) and expenses on disposal of property and equipement in the amount of USD 22,900 (2009: nil).

8. Personnel expenses

Personnel expenses can be broken down as follows:

2010 2009Salary expenses 3,068,467 2,390,927Social fund contributions (state pension fund) 735,106 568,413Total 3,803,573 2,959,340

9. Administrative expenses

2010 2009Office rent 2,115,128 1,850,321Depreciation fixed and intangible assets incl. leasehold improvement 720,097 549,482Service management fees 649,776 410,170Training 480,148 230,404Communication and IT expenses 414,856 295,007Marketing, advertising and entertainment 319,894 343,518Transport 321,791 153,884Consulting, legal and audit fees 168,956 160,757Security service 113,590 88,246Office supply 101,252 84,537Construction, repairs and maintenance 91,166 54,424Other administrative expenses 422,329 559,954Total 5,918,983 4,780,704

Other administrative expenses includes other taxes of USD 148,743 (2009: USD 173,599) and expenses for utilities and electricity in ammount of USD 173,629 (USD 117,990).

10. Income tax expenses

The Bank did not have any income tax expenses in 2010 or 2009 due to the fact that the income tax rate was established to be 0%; and there is no indication that the income tax rate will change during 2011.

11. Cash and balances with central bank

Cash and balance with Central Bank comprise the following items:

2010 2009Cash in hand 3,733,285 2,821,574Balances at Central Bank excluding mandatory reserves 918,972 76,634Mandatory reserve deposits 7,419,064 2,446,088Total cash 12,071,321 5,344,296

The following cash equivalents have been considered as cash for the cash flow statement:

2010 2009Available for sale financial instruments 9,043,345 1,460,812Loans and advances to banks 2,805,410 5,819,674Minimum reserve with Central Bank, which does not qualify as cash for the cash flow statement (7,419,063) (2,446,087)Cash and cash equivalents for cash flows statement 16,501,013 10,178,695


Mandatory reserves are Bank’s funds held in Moldovan lei (MDL) or freely convertible currency (USD, EUR) on accounts opened with the National Bank of Moldova. The reserves are calculated on the base of means attracted from deposit accounts and other similar liabili-ties. As of 31 December 2010 the reserve ratio established by the Central Bank was 8% (2009: 8%).

12. Available for sale debt instruments

2010 2009As at the beginning of the period 1,460,812 1,148,113Additions 97,075,674 16,784,392Disposal (89,631,365) (16,247,190)Exchange rate adjustments 138,224 (224,503)As at 31 December 9,043,345 1,460,812

Available for sale financial instruments represents short term cer-tificates issued by the National Bank of Moldova. Due to the fact that these certificates were bought during the year for short terms, less than one month, the fluctuation in fair value of these financial instruments was not significant thus no changes in fair value of available for sale financial instruments were recorded by the Bank during the year. For the estimation of fair value level 2 was applied.

13. Loans and advances to banks

Loans and advances to banks are as follows:

2010 2009Loans and advances to banks in OECD countries 2,771,552 4,313,016Loans and advances to banks in non-OECD countries 33,858 1,506,658Total 2,805,410 5,819,674

Loans and advances to banks in OECD countries as at 31 December 2010 and 31 December 2009 are nostro accounts balances held in Deutsche Bank, Commerzbank and CitiBank.Loans and advances to banks in non-OECD countries are nostro ac-counts balances held in ProCredit Bank Bulgaria, Raiffeisen Bank (Russia) and a local bank.

14. Available for sale equity investments

Available for sale equity investments are as follows:

2010 2009Investments in companies situated in non-OECD countries 254,153 –Total 254,153 –

Equity invetments represents shares in 2 entities: ”Bireau of Credit History” in amount of USD 98,734 and “ProCredt Academy” (Mac-edonia), in amount of USD 155,419.The available for sale equity investments are recorded at fair value which at the initial recognition was the transaction price. After the initial recognition Bank is assessing the fair value of equity invest-ments using the Level 3 model (unobservable inputs).The investments were acquired during the year 2010 thus Bank is considering that at the end of reporting period the fair value of eq-uity investments is equal to transaction prices.

15. Loans and advances to customers

Loans and advances to customers could be analysed as follows:

At 31 December 2010 Gross Allowance Net Share of Number of Share of amount for impairment amount total portfolio outstanding total number (%) loans (%)Business loans 73,428,024 (1,121,375) 72,306,648 88.6% 7,834 69.6%Loan size up to 10 KUSD 17,078,812 (338,027) 16,740,785 20.5% 6,524 58.0%Loan size 10 to 30 KUSD 10,670,173 (178,671) 10,491,502 12.8% 809 7.2%Loan size 30 to 150 KUSD 22,984,659 (323,200) 22,661,458 27.8% 432 3.8%Loan size more than 150 KUSD 22,694,380 (281,477) 22,412,903 27.5% 69 0.6%

Agricultural loans 8,997,825 (144,377) 8,853,448 10.8% 3,251 29%Loan size up to 10 KUSD 5,110,771 (90,891) 5,019,880 6.1% 3,155 28.1%Loan size 10 to 30 KUSD 882,426 (17,615) 864,811 1.1% 68 0.6%Loan size 30 to 150 KUSD 1,151,594 (15,225) 1,136,369 1.4% 24 0.2%Loan size more than 150 KUSD 1,853,034 (20,646) 1,832,388 2.2% 4 0.1%

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16. Allowances for losses on loans and advances

Allowance for impairment losses on loans and advances cover the risks which arise from the category “loans and advances to custom-ers”. In addition to the allowance for specific impairment losses for receivables for which there is objective evidence of impairment, lump-sum specific provisions and a portfolio - based impairment provision were formed to cover impairment loss relating to the cus-tomer loan portfolio as a whole:

2010 2009Allowance for impairment on loans and advances to customersSpecific impairment 105,241 53,335Allowance for individually insignificant impaired loans 190,808 91,903Allowance for collectively assessed loans 975,185 440,468Total 1,271,234 585,706

The following table shows the movement in allowances for impair-ment losses for loans and advances to customers during the year:

2010 2009As at the beginning of the period 585,706 181,716Additions 1,272,629 779,713Used (255,765) (164,638)Releases (350,111) (136,723)Exchange rate adjustments 18,775 (74,362)As at 31 December 1,271,234 585,706

17. Intangible assets

2010 2009SoftwareNet book value as of the beginning of the period 650,031 491,570

Transfers from other intangible assets – 63,573Additions 182,404 354,342Disposal 191 –Amortisation charge (192,064) (158,402)Exchange rate adjustments 11,096 (101,051)

Net book value as of 31 December 651,658 650,032

Other intangible assetsNet book value as of 1 January 6,185 57,223Transfers to software – (63,573)Additions 5,522 16,920Amortisation charge 605 (52)Exchange rate adjustments (1,039) (4,334)

Net book value as of 31 December 11,273 6,184

Total net book value as at 31 December 662,931 656,216

As at 31 December Cost 1,052,863 851,108Accumulated amortisation (389,932) (194,892)

Net book value as at 31 December 662,931 656,216

At 31 December 2010 Gross Allowance Net Share of Number of Share of amount for impairment amount total portfolio outstanding total number (%) loans (%)Housing improvement loans 473,093 (5,389) 467,704 0.6% 149 1.3%Loan size up to 10 KUSD 306,078 (3,513) 302,565 0.4% 144 1.3%Loan size 10 to 30 KUSD 9,630 (110) 9,520 – 1 –Loan size 30 to 150 KUSD 157,385 (1,766) 155,619 0.2% 4 –Loan size more than 150 KUSD – – – – – – Consumer loans 8,131 (93) 8,039 – 15 0.1%Loan size up to 10 KUSD 8,131 (93) 8,039 – 15 0.1%Loan size 10 to 30 KUSD – – – – –Loan size 30 to 150 KUSD – – – – –Loan size more than 150 KUSD – – – – – Total 82,907,073 (1,271,234) 81,635,839 100.0% 11,249 100.0%

At 31 December 2009 Gross Allowance Net Share of Number of Share of amount for impairment amount total portfolio outstanding total number (%) loans (%)Business loans 28,036,428 (524,270) 27,512,158 88.1% 5,009 74.6%Loan size up to 10 KUSD 10,829,667 (207,715) 10,621,952 34.0% 4,552 67.8%Loan size 10 to 30 KUSD 4,184,888 (103,764) 4,081,124 13.1% 323 4.8%Loan size 30 to 150 KUSD 6,180,359 (102,010) 6,078,349 19.5% 113 1.7%Loan size more than 150 KUSD 6,841,514 (110,781) 6,730,733 21.5% 21 0.3% Agricultural loans 3,790,857 (61,436) 3,729,421 11.9% 1,706 25.4%Loan size up to 10 KUSD 2,358,716 (41,098) 2,317,618 7.4% 1,688 25.1%Loan size 10 to 30 KUSD 125,444 (1,797) 123,647 0.4% 10 0.2%Loan size 30 to 150 KUSD 327,350 (4,709) 322,641 1.0% 5 0.1%Loan size more than 150 KUSD 979,347 (13,832) 965,515 3.1% 3 – Total 31,827,285 (585,706) 31,241,579 100.0% 6,715 100.0%


The main part of intangible assets at the carrying value of USD 316,159 (2009: USD 335,391) represents the Bank‘s software that is subject of finance lease agreement.Intangible assets in progress are reflected as “Other intangible assets”.

18. Property and equipment

There are no assets related to a finance leases.

19. Deferred taxes

Deferred income taxes are calculated in full, under the liability method, on temporary differences arising between the tax base of assets and liabilities and their carrying amounts, using the applica-ble tax rates as stipulated by the tax legislation. As at 31 December 2010 the income tax rate was nil and there are no indications that in 2011 it will be changed. Consequently, the bank did not recognized as of 31 December 2010 and 31 December 2009 any deferred tax asset or liability.

20. Other assets

Other assets are as follows:

2010 2009Pre-payments 321,368 353,866Claims against insurances 386Claims from customs and taxes 11,300 11,030Other inventory items 41,100 30,171Others 109,049 72,793Total 482,817 468,246

Pre-payments are advance payments for operational lease of Bank premises in amount of USD 169,550 (2009: 204,349USD), and ad-vance payments for services of USD 146,325 (2009: USD 124,763). Other assets include amounts in course of settlements for interna-tional money transfer in amount of USD 73,492 (2009: USD 65,641).

The table below represents the breakdown of other assets into fi-nancial and non-financial:

2010 2009Other financial assets 109,050 72,910Other non-financial assets 373,768 395,336Total 482,818 468,246

21. Liabilities to banks

The liabilities to banks consist primarily of short-term bank depos-its obtained on the local interbank market:

2010 2009Liabilities to banks in non-OECD countries 963,056 1,500,417Total 963,056 1,500,417

Liabilities to banks as at 31 December 2010 include the short term borrowings from the National Bank of Moldova.

At 31 December 2010 Leasehold Assets under Furniture, fixtures IT and other Total improvements construction and vehicles equipmentNet book value at 1 January 2010 302,962 65,988 818,995 666,338 1,854,283Transfers 124,989 (538,902) 32,445 381,468 –Additions 520,770 – 422 521,192Disposals (12,884) (2,362) – (10,016) (25,262)Depreciation charge (70,065) – (126,695) (330,668) (527,428)Exchange rate adjustment current year 5,643 444 10,528 14,602 31,217Net book value as at 31 December 2010 350,645 45,938 735,273 722,146 1,854,002

As at 31 December 2010Cost 478,479 45,938 1,027,660 1,249,082 2,801,160Accumulated depreciation (127,835) – (292,387) (526,936) (947,158)Net book value as at 31 December 2010 350,644 45,938 735,273 722,146 1,854,002

At 31 December 2009 Leasehold Assets under Furniture, fixtures IT and other Total improvements construction and vehicles equipmentNet book value at 1 January 2009 563,995 211,857 563,081 253,806 1,592,739Transfers (132,577) (1,077,700) 460,482 749,795 –Additions – 973,427 – 572 973,999Disposals – (20,944) – – (20,944)Depreciation charge (59,867) – (80,861) (250,300) (391,028)Exchange rate adjustment current year (68,589) (20,652) (123,707) (87,535) (300,483)Net book value as at 31 December 2009 302,962 65,988 818,995 666,338 1,854,283

As at 31 December 2009Cost 367,518 65,988 909,756 936,936 2,280,198Accumulated depreciation (64,556) – (90,761) (270,598) (425,915)Net book value as at 31 December 2009 302,962 65,988 818,995 666,338 1,854,283

A n n u a l R e p o r t 2 01062

22. Borrowed funds

2010 2009Borrowed funds 38,364,099 10,782,377Total 38,364,099 10,782,377

Borrowed funds consist of borrowings from ProCredit Holding AG in the total amount of USD 36,845,536 (2009: USD 7,743,877) and from BlueOrchard Finance SA in the amount of USD 1,518,563 (2009: USD 3,038,500).

23. Liabilities to customers

Liabilities to customers consist of deposits due on demand, savings deposits and term deposits. The following table shows a breakdown by customer groups:

2010 2009Current accounts 5,392,874 3,354,057 private individuals 1,341,577 754,708 corporates 4,051,297 2,599,349

Savings accounts 7,169,659 2,980,030 private individuals 7,169,659 2,980,030 corporates – –

Term deposit accounts 21,706,743 13,344,675 private individuals 17,138,363 8,519,301 corporates 4,568,380 4,825,374Total 34,269,276 19,678,762

24. Liabilities to international financial institutions

Liabilities to international financing institutions are an important source of financing for the Bank. Medium - to long - term loans from international financing institutions are reported under this item.

The following table gives a detailed breakdown for this item.

2010 2009Liabilities with fixed interest rates up to 1 year – –up to 2 years – –up to 3 years – –up to 4 years – –more than 4 years 4,091,420 4,056,299Total liabilities with fixed interest rates 4,091,420 4,056,299

Liabilities with variable interest ratesup to 1 year – –up to 2 years – –up to 3 years – –up to 4 years – –more than 4 years 12,655,741 –Total liabilities with variable interest rates 12,655,741 –

Total liabilities to IFI 16,747,161 4,056,299

Liabililities from International Financial Insitutions represent one borrowing with fixed interest rate from International Finance Cor-poration (IFC) in amount of USD 4,091,420 (2009: USD 4,056,299) and 2 borrowings with variable interest rates from European Bank for Reconstruction and Development (EBRD) in amount of USD

10,233,672 (2009: nil) and European Fund for Southeast Europe (EFSE) in amount of USD 2,422,068 (2009: nil).

25. Financial liabilities

2010 2009Finance lease liabilities 316,705 334,420Total 316,705 334,420

2010 2009Lease liability (present value) 316,705 334,420 up to 1 year 109,798 92,565 more than 1 year 206,907 241,855 Future finance charges 10,801 10,618 Gross finance lease liabilities (minimum lease payments) 327,506 345,038 up to 1 year 113,544 95,597 more than 1 year 213,962 249,441

Finance lease liabilities have arisen from a finance lease agree-ment on Bank’s software, entered by the Bank in 2008.

26. Other liabilities

2010 2009Financial liabilities Liabilities for goods and services 120,409 77,228Liabilities to employees 594 209 Non-financial liabilities Non-income tax liabilities 7,924 48,295Liabilities to social fund on employees contributions 145 5,259

Total 129,072 130,991

Non-income tax liabilities are liabilities related to value-added tax.

27. Provisions

2010 2009At the beginning of the period 126,079 75,732Exchange rate adjustments 1,533 (18,341)Additions 203,533 75,610Used (116,012) –Releases (24,394) (6,922)At as 31 December 190,739 126,079

The provisions consist of provisions for unused vacation in amount of USD 169,474 (2009: USD 114,618) and provisions for off-balance sheet items, e.g. guarantees, credit commitments in amount of USD 21,265 (2009: USD 11,461). For the provisions for unused vacation and for off-balance sheet items the outflow of economic benefits is expected during the next one or two years.

28. Subordinated debts

2010 2009Subordinated debt 4,285,458 –Total 4,285,458 –


In 2010 Bank received two Subordinated borrowings from Procred-it Holding AG with maturity in 2015.

29. Share capital

As at 31 December 2010 the shareholder structure was as follows:

In 2010 the bank issued shares to: DOEN in the amount of MDL 3,500,000 (USD 293,710 at transaction exchange rate) and to the main shareholder ProCredit Holding AG in the amount of MDL 46,500,000 (USD 3,902,152 at transaction exchange rate). The total number of authorised and issued ordinary shares at the end of the year was 247,133 shares (2009: 197,133 shares) with a par value of USD 82,28 per share each (2009: USD 81,29 per share). All shares are fully paid.

30. Risk management

30.1 Management of the overall bank risk profile – capital man-agement

(a) Capital Management – ObjectivesOverall ProCreditBank is not allowed to take on more risk than it is capable of bearing. This rule is put into operation using specified limits for all types of risks and a risk bearing capacity model, which stipulates that at all times the predefined economic Tier I + II capital has to be available to cover potential losses. Therefore, the capital management of the bank has the following objectives:• Ensuring that the bank is equipped with a sufficient volume

and quality of capital at all times to cope with (potential) losses arising from different risks even under extreme circumstances;

• Full compliance with external capital requirements set by the regulator;

• Meeting the internally defined minimum capital adequacy re-quirements.;

• Enabling the bank to implement its plans for continued growth while following its business strategy.

(b) Capital Management – Compliance with internal and external capital requirements

External minimum capital requirements are imposed and moni-tored by the local banking supervision authorities of Republic of Moldova. Capital adequacy is calculated and reported on bank and group level to the respective risk committee on a monthly basis.During the reporting period, all regulatory capital requirements have been met at all times.Additionally, capital adequacy is monitored by using a uniform capital adequacy calculation across ProCredit Group according to

the guidelines of the Basle Committee (Basle II).The following table shows the Basel II capital adequacy ratios of the Bank:

Limit 2010 2009Tier 1 ratio (Tier 1 Capital/Total risk weighed assets) 8.00% 16.28% 23.82%Tier 1 + Tier 2 ratio (Total own funds/Total risk weighed assets ) 10.00% 21.42% 24.92%

The internal target for the total capital ratio of the Bank is at least 12%, while even a short-term drop of this ratio below 10% (lower limit) must be avoided by any available means and without consid-eration of loss of return. The internal target Tier I ratio is defined as at least 9% with a lower limit of 8%. The Bank has to comply with local regulatory capital requirements at all times.

(c) Capital Management – Processes and Procedures The capital management of ProCredit Bank is governed by the Group Policy on Capital Management and the Group Policy on Risk Bearing Capacity. To ensure that the above stated objectives are met at all times, the Bank uses four indicators. Aside from regula-tory and Basel II capital ratios, the leverage ratio and risk bearing capacity are monitored on a monthly basis by the the Bank’s Risk Management Committee. With respect to the leverage of the bank, an upper limit for the ratio of total liabilities to total equity (leverage ratio) was introduced in 2010, according to which the leverage ratio of each bank and the group should not exceed 18, target being 15. At the end of 2010 it was well below this limit at 7.1 (2009: 3.7).The Bank divides its regulatory capital into Tier 1 capital and Tier 2 capital to monitor capital adequacy.

2010 2009Ordinary share capital 20,333,638 16,024,858Accumulated loss (6,789,386) (5,789,097)Less intangibles (662,931) (656,216)Tier I capital 12,881,321 9,579,545 Subordinated loans 3,200,000 -Other inherent loss allowance 975,184 440,468Tier II capital 4,175,184 440,468 Total regulatory capital 17,056,505 10,020,013

Shareholder 31 December 2010 31 December 2009 Size of Number Amount Size of Number Amount stake in % of shares USD stake in % of shares USD ProCredit Holding 84.17% 208,000 17,113,848 81.92% 161,500 13,128,267Kreditantalt fur Wiederaufbau 9.56% 23,633 1,944,479 11.99% 23,633 1,921,117DOEN 6.27% 15,500 1,275,311 6.09% 12,000 975,474

Voting Capital 100.00% 247,133 20,333,638 100% 197,133 16,024,858Non-Voting Capital – – – – – Total 100.00% 247,133 20,333,638 100.00% 197,133 16,024,858

2010 2009RWA on balance 67,633,286 29,746,971 RWA off balance 328,885 1,626 RWA from open currency position 881,239 563,124 RWA from operational risk 10,787,222 9,900,684 Total Risk Weighted Assets 79,630,632 40,212,405

A n n u a l R e p o r t 2 01064

(d) Risk Bearing CapacityIn addition to regulatory capital ratios, the Bank assesses its capital adequacy by using the concept of risk bearing capacity to reflect the specific risk profile of the Bank, i.e. comparing the potential losses arising from its operation with the Bank’s risk bearing capacity.Risk-bearing capacity is defined as the bank’s equity (net of intan-gibles) plus subordinated debt, which amounted to USD 4 million as of the end of December 2010. The Resources Available to Cover Risk were set at 60% of the risk-taking potential. The goal of the Policy on Risk-bearing Capacity is to ensure that the Bank takes on only the amount of risk that can be covered by the available liable capital. This is achieved, on the one hand, by managing and mini-mising risks, and on the other hand by maintaining a sufficient level of liable capital. In order to ensure a high degree of creditor protec-tion, sufficient risk-bearing capacity must be ensured even under extreme conditions. In order to achieve this goal, the following steps are taken in the framework of the policy on risk-bearing ca-pacity for the Bank: • quantification of risks and determination of maximum permis-

sible risk levels;• establishment of measures for ongoing monitoring of the de-

fined risk limits; and• management and planning of the risk profile and the available

liable capital.

The establishment and ongoing monitoring of risk limits is intend-ed not only to prevent developments which put solvency at risk, but at the same time also to make information available on the basis of which the responsible managers can act, allowing them to initiate the necessary corrective measures in a timely manner.The long-term stability of the Bank (and at whole ProCredit group as well) is an objective which has maximum priority in the framework of corporate management.For calculating potential losses in the different risk categories the following concepts were used:• Credit risk (clients): Based on a regularly updated migration

analysis on the loan portfolio, the historical loss rates and their statistical distribution is calculated. The historical loss rates in different arrears categories (at a 99.75% confidence level) is applied to current loan portfolio to calculate potential loan losses.

• Counterparty risk: The calculation of potential losses due to counterparty risk is based on the probability of default arising from the respective international rating of the counterparty or its respective country of operation (after adjustment).

• Market risks: Whereas historical currency fluctuations are sta-tistically analysed and highest variances (99% confidence level) are applied to current currency positions, interest rate risk is calculated by determining the economic value impact of a standard interest rate shocks for EUR/USD (2 percentage points, Basel interest rate shock) and higher (historical) shock levels for MDL (11 percentage points).

• Operational risk: The Basel II Standard approach is used to cal-culate the respective value.

The table below shows the distribution of the resources available to cover risk among the different risk categories and the level of utili-sation as of the end of December 2010 :

Risk bearing capacity:

Limit 2010 2009Credit risk ≤25% 15.4% 5.5%Counterparty risk - banks ≤1% – 1.1%Counterparty risk - sovereigns ≤ 9% 7.4% 7.2%Currency risk ≤ 2.5% 0.9% 0.8%Interest rate risk ≤ 10% 2.6% 9.7%Operational risk ≤ 12.5% 5.1% 8.3%Total 31.4% 32.6%

Risk taking potential (USD) ≤60% 16,963,611 9,579,545

As the above table indicates, ProCredit Bank showed a modest level of utilisation of its resources available to cover risk as of 31 Decem-ber 2010. Counterparty and market risk is managed by using analy-sis and stress testing models, which reflect the conservative risk management approach, which guides the group’s treasury opera-tions. The economic capital required to cover operational risk is calculated according to the Basel II standard approach, thus it does not reflect the individual risk profile of the group in this area. Data collected during 2010 in the Risk Event Database (RED), which cap-tures risk event data on a bank and group-wide scale, indicates a significantly lower level of operational risk. All risks combined, as quantified by the methods established in the group’s policies, are considerably below the 60% of the group’s total risk-bearing poten-tial as defined.

30.2 Management of Individual Risks

In 2010, new specifications were introduced on a group level and accordingly in ProCredit Bank. In particular, additional processes were introduced for the management of: • credit risk• counterparty risk• liquidity risk• operational risk and• anti-money laundering activities

The bank places special emphasis on a general understanding of the factors driving risk and an ongoing analysis and company-wide discussion of possible developments/scenarios and their potential adverse impacts. The objectives of risk management include ensur-ing that all material risks are recognised in a timely manner, under-stood completely, and described appropriately. This includes, for example, ensuring that no products or services are offered unless they are thoroughly understood by all parties and can be handled.

(a) Credit RiskCredit risk is defined as the danger that the party to a credit trans-action will not be able, or only partially able, to meet its contractu-ally agreed obligations towards the Bank. Credit risk arises from customer credit exposures (classic credit risk), credit exposure from interbank placements and issuer risk. It is further divided into credit default risk and credit portfolio risk in order to facilitate fo-cused risk management. Credit risk is the single largest risk faced by the Bank.

The following table shows the maximum exposure to credit risk:

2010 2009Balances with Central Bank 8,338,036 2,522,722Loans and advances to banks 2,805,410 5,819,674Available for sale equity instruments 254,153 –Loans and advances to customers 82,907,073 31,827,285Other financial assets 109,049 72,911Total 94,413,721 40,242,592


Credit risk exposures relating to off-balance sheet items are as follows:

2010 2009Financial guarantees 185,943 93,081Credit commitments 1,446,301 744,389Total 1,632,244 837,470

Credit default risk from customer lending Credit default risk from customer credit exposures is defined as the risk of losses due to a potential non-fulfilment of the contractual payment obligations associated with a customer credit exposure.The management of credit default risk from customer credit expo-sures is based on a thorough implementation of the Bank’s lending principles:• intensive analysis of the debt capacity of the Banks’ clients;• careful documentation of the credit risk assessments, assuring

that the analysis performed can be understood by knowledge-able third parties;

• rigorous avoidance of overindebting our clients;• building a personal and long-term relationship with the client

and maintaining regular contact;• strict monitoring of loan repayment;• practising tight arrears management;• exercising strict collateral collection in the event of default;• investing in well-trained and highly motivated staff;• implementing carefully designed and well-documented proc-

esses;• rigorous application of the “four - eyes principle”.

The differentiation between individually significant and insignifi-cant credit exposures leads to distinct processes in lending for the different types of credit exposures – processes that management believes have been demonstrated in the past to ensure an effective management of credit default risk. The processes are distinguished mainly in terms of segregation of duties, which is fully implemented for individually significant cred-

it exposures; the information collected from the clients, ranging from audited financial statements to self-declarations; the key cri-teria for credit exposure decisions based on the financial situation of the client; in particular for individually insignificant credit expo-sures, the liquid funds and character of the client; and the collat-eral requirements. As a general rule, the lower the amount of the credit exposure, the stronger the documentation provided by the client, the shorter the term of the credit exposure, the longer the client’s history with the Bank and the higher the turnover of the cli-ent with the Bank, the lower will be the collateral requirements. The decision-making process ensures that all credit decisions on individually significant exposures, and most decisions on individu-ally insignificant exposures, are taken by a credit committee. As a general principle, we consider it very important to ensure that our lending business is conducted on the basis of organisational guide-lines that provide for appropriate rules governing organisational structures and operating procedures; job descriptions that define the respective tasks; a clear allocation of decision-making author-ity; and a clear definition of responsibilities.Credit exposures in arrears are defined as credit exposures for which contractual interest and/or principal payments are overdue. The high quality of the loan portfolio reflects the application of the above lending principles and the results of appropriate monitoring, in particular of our individually significant credit exposures. This is a crucial element of the bank’s strategy for managing arrears in the current economic crisis that is affecting a large number of its cli-ents. Once arrears occur, we rigorously follow-up on the non-repay-ment of our credit exposures, and by so doing we typically identify any potential for default on a credit exposure. Strict rules are applied regarding credit exposures for which, in the bank’s view, there is no realistic prospect that the credit exposure will be repaid and where typically the realisation of collateral has either been completed or the outcome of the realisation process is uncertain.The bank’s recovery and collection efforts are performed by specialised employees, typically with either a lending or legal background.The effectiveness of this tight credit risk management is reflected in the low arrears rate that our loan portfolio exhibits.

Breakdown of loan portfolio by days in arrears:

The quality of the loan portfolio is monitored on an ongoing basis. The measure for loan portfolio quality is the portfolio at risk (PAR), which is defined as s all loan exposures outstanding with one or more payment of interest or principal in delay by more than 30 days. This measure was chosen because the vast majority of all loans have fixed instalments with monthly payment of principal and interest. Exceptions are seasonal agricultural loans and invest-ment loans, which typically have a grace period of up to six months. No collateral is deducted and no other exposure - reducing meas-ures are applied when determining our PAR.Additionally, the quality of credit operations is assured by a credit controlling unit which is responsible for monitoring the Bank’s

0 1 to 30 31 to 60 61 to 90 91 to 180 > 180 Total days days days days days daysAt 31 December 2009 Business 27,157,044 736,011 84,412 8,734 41,142 9,085 28,036,428Agricultural 3,665,656 114,343 2,041 4,760 3,945 112 3,790,857Total 30,822,700 850,354 86,453 13,494 45,087 9,197 31,827,285

At 31 December 2010 Business 66,879,710 5,682,483 203,704 119,959 84,202 457,965 73,428,023Agricultural 8,873,343 70,170 25,187 7,497 21,375 254 8,997,826Housing 473,093 – – – – – 473,093Consumer 8,131 – – – – – 8,131Total 76,234,277 5,752,653 228,891 127,456 105,577 458,219 82,907,073

A n n u a l R e p o r t 2 01066

credit operations and compliance with its procedures. This unit, made up of experienced lending staff, ensure compliance, in form and substance, with the lending policy and procedures through on-site checks and system screening.Restructuring of a credit exposure is generally necessitated by eco-nomic problems encountered by the client that adversely affect the payment capacity, mostly caused by he significantly changed mac-ro-economic environment in which the bank’s clients currently op-erate. Restructurings follow a thorough, careful and individual analysis of the client’s changed payment capacity. The decision to restructure a credit exposure is always taken by a credit committee and aims at full recovery of the credit exposure. If a credit exposure is restructured, amendments are made to the parameters of the loan. Otherwise, these credit exposures for which the terms have been renegotiated would be past due or impaired. Watch restruc-tured credit exposures with less than 31 days in arrears represent USD 191,780 (2009: USD 5,667).The level of credit exposure defaults to be expected within a given year is analysed regularly, based on past experience in this area. Incurred losses are fully covered with loan loss provisions.

Individually significant credit exposures are reviewed for impair-ment on an individual basis (specific impairment). Impairment for individually insignificant credit exposures in arrears is calculated on a portfolio basis at historical default rates (see note (11) for further explanation); 30 or more days in arrears is considered as objective evidence of impairment. For all credit exposures not as-sessed individually for impairment the portfolio-based allowanc-es for impairment are made based on historical loss experience.

2010 2009Allowance for losses on loans and advances Specific impairment 105,241 53,335Allowance for individually insignificant impaired loans 190,808 91,903Allowance for collectively assessed loans 975,185 440,468Total 1,271,234 585,706

The development of allowances for losses on loans and advances during the year was as follows:

2010 2009As at the beginning of the period 585,706 181,716Additions 1,272,629 779,713Used (255,765) (164,638)Releases (350,111) (136,723)Exchange rate adjustments 18,775 (74,362)As at 31 December 1,271,234 585,706

According to credit policy, very small credit exposures are issued without being fully collateralised. Credit exposures with a higher

risk profile are covered with solid collateral, typically through mortgages. As the majority of credit exposures are fixed instalment loans of rather short maturity, the fair value of collateral usually decreases substantially more slowly than the outstanding loan amount, and therefore is not monitored. The collateral can be clas-sified into the following categories:

Mortgage Guarantees Inventories Other2010 68% 11% 19% 1%2009 60% 21% 19% 1%

Credit portfolio risk from customer lendingThe granularity of the credit exposure portfolios is a highly effec-tive credit risk mitigating factor. The core business of the Bank, lending to very small and small enterprises, necessitated a high degree of standardisation in lending processes and ultimately led to a high degree of diversification of these exposures in terms of geographic distribution and economic sectors. Nevertheless, lend-ing to medium-sized enterprises, i.e. larger credit exposures ex-ceeding the threshold of USD 150,000, constitutes a supplementa-ry area of our business in terms of our overall strategic focus. Most of these clients are dynamically growing enterprises, that have been working with the bank for many years.Nonetheless, the higher complexity of these businesses requires an appropriate analysis of both the business, the project that is to be financed and any connected entities. A strict division of front and back office functions is applied and requirements for both doc-umentation and collateral are typically more stringent.Overall, the loan portfolio of the Bank includes 189 credit expo-sures of more than USD 150,000. The structure of the loan portfolio is regularly reviewed within the Bank by Risk Management Department in order to identify potential

Allowance for impairment on restructured loans Gross outstanding Allowance for Net outstanding amount impairment amountAt 31 December 2010Specific impairment 1,072,625 97,816 974,809Allowance for individually insignificant impaired loans 74,060 46,621 27,439Allowance for collectively assessed loans 2,481,512 103,381 2,378,130Total 3,628,197 247,818 3,380,378

At 31 December 2009 Specific impairment 816,395 48,449 767,946Allowance for individually insignificant impaired loans 8,309 5,743 2,566Allowance for collectively assessed loans 1,285,016 18,074 1,266,942Total 2,109,720 72,266 2,037,454


events which could have an impact on large areas of the loan port-folio (common risk factors) and, if necessary, limit the exposure towards certain sectors of the economy.

The following table represents the structure of the loan portfolio by amounts:

For all credit exposures that are neither past due nor impaired a portfolio-based provision is applied to reflect losses that have been incurred but not yet identified by the Bank:

2010 2009Neither past due nor impaired loans Business 66,386,690 26,803,965Agricultural 8,776,865 3,659,754Housing improvement 473,093 –Consumer 8,131 – Total gross loan portfolio 75,644,779 30,463,719 Allowance for portfolio-based impairment (901,619) (435,773)Total 74,743,160 30,027,946

All past due loans up to USD 30,000 are collectively assessed. In case they are in arrears up to 30 days a portfolio-based impairment is applied. For individually insignificant credit exposures which show objective evidence of impairment, i.e. which are in arrears for more than 30 days, we apply a lump-sum approach; the impairment is determined depending on the number of days in arrears. In addi-tion, individual credit exposures which are regarded as insignifi-cant, or groups of individually insignificant credit exposures, may be classified as impaired if events, such as political unrest, a sig-nificant economic downturn, a natural disaster or other external events occur in the country.

2010 2009Past due but not impaired in arrears up to 30 daysBusiness 5,513,271 221,919Agricultural 70,171 109,562 Total past due but not impaired loans 5,583,442 331,481 Allowance for portfolio-based impairment (73,565) (4,695)Net outstanding amount 5,509,877 326,786

At 31 December 2010 Business Agricultural Housing Consumer < 10 000 USD 17,078,812 5,110,771 306,079 8,13110 000 to 30 000 USD 10,670,174 882,426 9,630 –30 000 to 150 000 USD 22,984,659 1,151,594 157,384 –> 150 000 USD 22,694,379 1,853,034 – –Total 73,428,024 8,997,825 473,093 8,131

At 31 December 2009 Business Agricultural< 10 000 USD 10,829,667 2,358,71610 000 to 30 000 USD 4,184,888 125,44430 000 to 150 000 USD 6,180,359 327,350> 150 000 USD 6,841,514 979,347Total 28,036,428 3,790,857

The ProCredit Bank follows a guideline that limits concentration risk in the loan portfolio by ensuring that large credit exposures (those exceeding 10% of regulatory capital) require the approval by the Group Credit Risk Management Committee. No single large credit exposure may exceed 15% of the bank’s regulatory capital.Larger credit exposures are analysed in details and monitored closely, both by the responsible employees through regular moni-toring activities enabling early detection of risks and through the regular reviews carried out by the Credit Risk Management Commit-tee of the Bank. Full information about any related parties is typi-cally collected prior to lending. All in all, this results in a high port-folio quality and a comparatively low need for allowances for individual impairment.Individually significant credit exposures are closely monitored by the Credit Risk Committee of the Bank. For such credit exposures, it is assessed whether objective evidence of impairment exists, i.e.:• days in arrears of more than 30 days;• delinquencies in contractual payments of interest or principal;• breach of covenants or conditions;• initiation of bankruptcy proceedings;• any specific information on the customer’s business (e.g. re-

flected by cash flow difficulties experienced by the client);• changes in the customer’s market environment;• the general economic situation.

Additionally, the net realisable value of collateral held is taken into account when deciding on the allowance for impairment.

Loans and advances to customers could be analysed as follows:

2010 2009Neither past due nor impaired 75,644,779 30,463,719Past due but not impaired 5,889,062 331,481Individually impaired 1,373,232 1,032,085

Total gross loan portfolio 82,907,073 31,827,285 Allowance for impairment (1,271,234) (585,706)Total net loan portfolio 81,635,839 31,241,579

A n n u a l R e p o r t 2 01068

2010 2009Impaired loans collectively assessed

Business 251,318 135,964in arrears 31 – 90 days 145,059 85,737in arrears over 90 days 106,259 50,227

Agricultural 54,303 10,859in arrears 31 – 90 days 32,683 6,802in arrears over 90 days 21,620 4,057

Total 305,621 146,823 Allowance for lump-sum specific impairment (190,808) (91,903)Net outstanding amount 114,813 54,920

For the calculation of the individual impairment a discounted cash flow approach is applied. The individual impairment of credit expo-sures to customers is as follows:

2010 2009Impaired loans individually assessed Business 1,276,744 874,580not in arrears 493,020 353,078in arrears up to 30 days 169,212 514,093in arrears 31 – 90 days 178,604 7,409in arrears over 90 days 435,908 –

Agricultural 96,487 10,682not in arrears 96,487 5,902in arrears up to 30 days – 4,780in arrears 31 – 90 days – –in arrears over 90 days – –

Total 1,373,231 885,262 Allowance for individual impairment (105,241) (53,335) Total 1,267,990 831,927

Individually significant credit exposures for which there is no need for an individual impairment allowance are covered by portfolio-based impairment allowances. For individually insignificant credit exposures which show objec-tive evidence of impairment, i.e. which are in arrears for more than 30 days, a lump-sum approach is applied; the impairment is deter-mined depending on the number of days in arrears. In addition, individual credit exposures which are regarded as in-significant, or groups of individually insignificant credit exposures, may be classified as impaired if events, such as political unrest, a significant economic downturn, a natural disaster or other external events occuring in the country. For all credit exposures that are not impaired a portfolio-based impairment is calculated.

Gross outstanding Allowance for Net outstanding amount specific impairment amountAt 31 December 2010Business 1,276,744 101,856 1,174,888Agricultural 96,487 3,385 93,102Total 1,373,231 105,241 1,267,990 At 31 December 2009 Business 874,580 52,588 821,992Agricultural 10,683 747 9,936Total 885,263 53,335 831,928

Gross outstanding Allowance for lump-sum Net outstanding amount specific impairment amountAt 31 December 2010Business 251,318 158,509 92,809Agricultural 54,303 32,299 22,004Total 305,621 190,808 114,813 At 31 December 2009 Business 135,964 85,216 50,748Agricultural 10,859 6,687 4,172Total 146,823 91,903 54,920


(b) Financial Risks

(i) Counterparty and issuer risk

Conceptual risk management frameworkThe objective of counterparty and issuer risk management is to pre-vent the bank from incurring losses caused by the unwillingness or inability of a financial counterparty (e.g. a commercial bank) or is-suer to fulfil its obligations towards the bank. This type of risk is further divided into:• principal risk – the risk of losing the amount issued due to the

counterparty’s failure to repay the principal in full on time; • replacement risk – the risk of loss of an amount equal to the

incurred cost of replacing an outstanding deal with an equiva-lent one on the market;

• settlement risk – the risk of loss due to the failure of a counter-party to honour its obligation to deliver assets as contractually agreed;

• issuer risk – the probability of loss resulting from the default and insolvency of the issuer of a security.

Counterparty and issuer risks evolve especially from the bank’s need to invest excess liquidity, to conclude foreign exchange trans-actions, or to buy protection on specific risk positions. Excess li-quidity is placed in the interbank market with short maturities, typi-cally up to three months. Foreign exchange transactions are also concluded with short maturities, typically up to two days. Further-more, as a result of the bank’s strong efforts to finance its lending activities with retail deposits, there is also an exposure towards the central bank. This is because the central bank requires banks oper-ating in its territory to hold a mandatory reserve in a central bank account, the size of which depends on the amount of deposits taken from customers or other funds used to fund the bank’s operations. The counterparty and issuer risks are managed according to the ProCredit group’s Counterparty Risk Management Policy (incl. Is-suer Risk), which describes the counterparty/issuer selection and the limit setting process, as well as by the Group Treasury Policy, which specifies the set of permissible transactions and rules for their processing. As a matter of principle, only large international banks of systemic importance and, for local currency business, lo-cal banks with a good reputation and financial standing are eligible counterparties. As a general rule, the bank applies limits of up to 10% of its regulatory capital on exposures to banking groups in non-OECD countries and up to 25% on those in OECD countries. Higher limits are subject to approval by the Group Risk Manage-ment Committee.

The bank ensures through its General and Operational Risk Com-mittee that every counterpart is approved, including a limit for the maximum exposure, based on a thorough analysis, typically per-formed by the risk management department in collaboration with the treasury department. Group policy forbids the bank to conduct any speculative trading activities. However, for the purpose of investing surplus liquidity, the bank is allowed to buy and hold securities (T-bills, bonds or cer-tificates). The inherent issuer risk is managed by the provisions of the bank’s conservative Treasury Policy, which is compliant to the ProCredit Group Treasury Policy. Among other requirements, the policy stipulates that the investments should preferably be issued by the central government of the country, or by international and/or multinational institutions with very high credit ratings (internation-al rating of AA- or better).

Facts and figures concerning counterparty and issuer riskThe bank incurs counterparty and issuer risk for the following reasons:

If the bank has excess liquidity, it needs to invest these funds. Usu-ally ProCredit Bank invests the available extra liquidity in National Bank certificates with short maturities of up to 7 days. When the demand for loans picks up, the bank will be able to use these funds for loan disbursements. The second reason for incurring counterparty and issuer risk is to hold liquid assets for liquidity risk management. These funds are also held as cash in highly rated commercial banks or central bank accounts, either Nostro or overnight placements.As mentioned above, a part of the bank’s exposure consists of the mandatory reserve required by the central bank and held in a spe-cific central bank account. Furthermore, as a consequence of doing business in multiple curren-cies, the bank needs to exchange currencies with other banks. These exposures usually have very short maturities (up to two days). Finally, financial markets provide instruments to manage different types of risks such as currency, interest rate and liquidity risk. The bank uses these instruments solely for risk management purposes, and not for speculative purposes.

Gross outstanding Allowance for portfolio- Net outstanding amount based impairment amountAt 31 December 2010Business 71,899,962 861,010 71,038,952Agricultural 8,847,035 108,693 8,738,342Housing improvement 473,093 5,389 467,704Consumer 8,130 92 8,038Total 81,228,220 975,184 80,253,036 At 31 December 2009 Business 27,025,884 386,466 26,639,418Agricultural 3,769,316 54,002 3,715,314Total 30,795,200 440,468 30,354,732

A n n u a l R e p o r t 2 01070

The following table provides an overview of the types of counter-parts and issuers with whom the bank concludes transactions.

Interbank placements, FX transactions and cash deals are transac-tions with banks which are subdivided into those based in OECD countries and those in non-OECD countries. The total exposure to banks decreased in 2010 by USD 3m and amounted to 13.9%(2009: 58.9%) of the total counterparty and issuer risk exposure. The ex-posure is distributed across three OECD and three non-OECD bank-ing groups. In December 2010 the average exposure with OECD banking groups was USD 5.3 Mio, while the average exposure to non-OECD ones was only USD 88 thousand. The exposure to the central bank is related to the mandatory re-serve requirement and makes up a significant share of the bank’s counterparty and issuer exposure. The other exposure to the cen-tral bank relates to Nostro account, NBM certificates and overnight placements with the central bank. At the end of 2010 share of total exposure to the Central Bank increased significantly to 86.1% (De-cember 2009: 41.1%). Exposure in foreign currencies makes up 25% of total exposure to Central Bank, this being caused by the mandatory reserves in foreign currencies. Other types of expo-sures to the NBM are in local currency. The increase of the exposure is caused primarily by the fact that the Bank received borrowings from IFIs and PCH in local currency (MDL facilities), which were placed with NBM. The maturity of all Bank’s exposures is extremely low, maximum being for NBM certificates of up to 7 days. The other exposures are either due the next day (Overnight placements, foreign exchange transactions, cash deals) or at sight (nostro). Given that the average maturity of the bank’s counterparty and is-suer risks is quite low, the bank considers its counterparty and is-suer risk to be low.

(c) Liquidity Risk

The bank’s liquidity risk management (LRM) system is adapted to its specific characteristics. On the one hand, the Bank was founded as a lending institution and financial intermediary for ordinary people. Consequently, its loan portfolio is the largest single component on the asset side, and is primarily funded through locally mobilised de-posits. On the other hand, the loan portfolio is characterised a large number of exposures to small businesses and is therefore highly diversified. The majority of loans are disbursed as instalment term loans, and the default rate is low. Therefore cash flows are highly predictable. All of these factors justify the use of a relatively simple and straightforward LRM system.Liquidity risk in the narrowest sense (risk of insolvency) is the dan-ger that the bank will no longer be able to meet its current and fu-ture payment obligations in full, or in a timely manner.Liquidity risk in a broader sense (funding risk) is the danger that additional funding can no longer be obtained, or can only be ob-tained at increased market interest rates.The bank’s ALCO determines the liquidity strategy of the bank and sets the liquidity risk limits. The treasury department manages the bank’s liquidity on a daily basis and is responsible for the execution of the ALCO’s decisions. Compliance with strategies, policies and limits are constantly monitored by the back office and risk manage-ment departments.

In addition to the requirements set by the local regulatory authori-ties, the standards that the bank applies in this area are guided by the Group Liquidity Risk Management Policy and the Group Treas-ury Policy. Both policies were implemented by the bank in 2009. These policies are also in line with the Principles for Sound Liquid-ity Risk Management defined by the Basel Committee on Banking Supervision. Limit breaches and exceptions to these group policies are subject to decisions of the Group Risk Management Committee.The key tools for measuring liquidity risks are liquidity gap analy-ses, which estimate future funding needs or the levels of excess li-quidity, applying different assumptions. Starting with the estima-tion of the future liquidity in a normal financial environment, the assumptions are increasingly tightened in order to analyse the bank’s liquidity situation in a worst-case scenario (stress test). Based on the maturity gap analyses, certain key liquidity indicators are calculated on at least a monthly basis and are closely moni-tored. One important indicator of short-term liquidity is the suffi-cient liquidity indicator (SLI), which compares the amounts of as-sets and liabilities available within the next 30 days, and must not fall below 1 for each material currency. This implies that the bank always has sufficient funds to be able to repay the liabilities ex-pected to be due within the next 30 days. Another short-term key indicator is the highly liquid assets indica-tor, which relates highly liquid assets to customer deposits. The indicator must always exceed 20%, which implies that the bank al-ways holds funds which can quickly be converted into cash in order to repay 20% of all customer deposits. The bank also analyses its liquidity situation from a more structural perspective, taking into account the liquidity gaps of the different time buckets and additional sources of potential liquidity. This analysis also takes into account credit lines which can be drawn by the bank with some lead time, potential outflows due to margin calls, and other assets which take some time to liquidate.Depositor concentrations are monitored in order to avoid depend-encies on a few large depositors. According to the bank’s internal guidelines a significant depositor concentration exists if the 10 largest deposits exceed 20% of total customer deposits. The sufficient liquidity indicator is a limit and must not be exceed-ed. The highly liquid assets indicator, the liquidity position and the depositor concentration measures are reporting triggers, which may be exceeded but require that the reasons and mitigating meas-ures be reported to the bank’s ALCO and the Group ALCO. As well as prescribing the close monitoring of these indicators, the Group Liquidity Risk Management Policy also defines reporting triggers. If the highly liquid asset indicator drops below 20%, if the short-term liquidity position becomes negative, or if the depositor concentration rises above 20%, the bank’s ALCO and the Group ALCO or Group Risk Management Committee must be involved in decisions on appropriate measures.In order to safeguard the liquidity of the bank even in stress situa-tions, the potential liquidity needs in different scenarios are deter-mined. The result is analysed and on this basis the bank’s liquidity reserve target is determined by the ALCO. The results of these stress tests are also used to determine liquidity standby lines pro-vided by ProCredit Holding AG to the bank if necessary.

2010 % 2009 % Banking groups 2,805,411 13.9% 5,819,259 58.9% OECD Banks 2,743,517 13.6% 4,313,017 43.6% non-OECD Banks 61,894 0.3% 1,506,242 15.2%Central Bank 17,452,088 86.1% 3,985,934 41.1% Mandatory reserves 7,419,064 36.4% 2,446,087 25.5% Other exposures to Central bank 10,033,024 49.7% 1,539,847 15.6% 20,257,499 100.0% 9,805,193 100.0%


Funding risk became a more prominent issue due to the financial crisis. However, in 2010 the bank experienced a period of continu-ous growth of loan portfolio which was exceeding growth of de-posit portfolio in spite of the fact that deposits continued to grow at a high and increasing rate. The bank regards the increase in the deposit base as evidence of customers’ confidence in ProCredit Bank. The bank still considers its liquidity risk to be low because of the steady growth of customer deposits and because the bank also continues to have access to funding from various international sources.In the interests of diversifying its funding sources, the bank seeks to minimise its dependency on the interbank market. The ProCredit group’s policies stipulate that the total amount of interbank liabili-ties may not exceed 40% and overnight funding may not exceed 4% of total liabilities. Violations of these limits need to be approved by Group ALCO.

Facts and figures concerning liquidity riskIn order to manage liquidity risk on a daily level, the bank works with a cash flow analysis tool. This tool is designed to provide a re-alistic picture of the future liquidity situation. It includes assump-tions about deposit and loan developments and helps to forecast highly liquid assets (as described below) in the future. In addition, liquidity risk is measured and limited, based on a for-ward-looking liquidity gap analysis showing the contractual matu-rity structure of the assets and liabilities. The following table shows the undiscounted cash flows of the fi-nancial assets and financial liabilities of the bank according to their remaining contractual maturities. The remaining contractual matu-rity is defined as the period between the balance sheet date and the contractually agreed due date of the asset or liability, or the due date of a partial payment under the contract for an asset or liability.

At 31 December 2010 Up to 1 1 – 3 3 – 12 1 – 2 2 – 5 More than Total month months months years years 5 yearsAssets Cash and balances with Central Bank 12,159,406 – – – – – 12,159,406Available-for-sale financial instruments 9,043,345 – – – – – 9,043,345Loans and/or advances to banks 2,805,410 – – – – – 2,805,410Loans and/or advances to customers 4,006,853 6,988,854 31,846,877 27,520,242 28,545,767 10,038,550 108,947,143Other financial assets 109,050 – – – – – 109,050Total financial assets 28,124,064 6,988,854 31,846,877 27,520,242 28,545,767 10,038,550 133,064,354

Liabilities Liabilities to banks – 14,769 966,873 – – – 981,642Borrowed funds – 2,152,856 3,053,320 9,161,275 31,820,601 – 46,188,052Liabilities to customers 16,066,677 2,818,673 15,643,746 666,481 5,519 – 35,141,096Liabilities to international financial institutions 176,538 146,200 7,195,278 10,750,846 15,191,349 – 33,460,211Provisions – – 190,739 – – 190,739Financial libilities 9,462 18,924 85,158 113,544 100,418 – 327,506Other financial liabilities 129,072 – – – – – 129,072Subordinated debts – 276,906 94,799 372,723 5,122,905 – 5,867,333Total financial liabilities 16,321,749 5,428,328 27,229,913 21,064,869 52,240,792 – 122,285,651

Financial guarantees 168 7,817 177,959 – – – –Net liquidity gap 11,802,147 1,552,709 4,439,005 6,455,373 (23,695,025) 10,038,550 –

A n n u a l R e p o r t 2 01072

However, as not all cash flows will occur in the future as specified within the contracts, the bank applies certain assumptions, espe-cially regarding deposit withdrawals. These assumptions are very conservative.

The core assumptions used for the purposes of calculating the li-quidity indicator are as follows:• 50% of interbank liabilities contractually due at sight will be

withdrawn in the next month, another 50% will be withdrawn within the following three months;

• 20% of customer deposits contractually due at sight will be withdrawn within the next month, 80% will be withdrawn later;

• 10% of exposures guaranteed by the bank will require a pay-ment within the next month;

• 30% of credit lines which the bank has committed to its cus-tomers, but which are currently undrawn, will be drawn within the next month;

• 20% of all term deposits, but at least all term deposits contrac-tually due within the next month, will be withdrawn within the next month.

The goal is to always have sufficient liquidity in order to serve all expected liabilities within the next month. From a technical point of view this implies that the bank’s available assets should always exceed the expected liabilities, as calculated by applying the above assumptions.The sufficient liquidity indicator calculated for all currencies dur-ing 2010 was thoroughly monitored by Risk Management Depart-ment. Due to strict local liquidity regulation which prescribed to maintain the level of liquid assets not less than 20% of total as-sets, the sufficient liquidity indicator was always high above 1 during 2010, and therefore liquidity was always sufficient through-out the year. As of December 31, 2010 sufficient liquidity indicator was 4.8 for all currencies.In order to ensure that the bank has a sufficient level of funds in the event that its customers suddenly wish to withdraw their deposits, the bank monitors the relation of highly liquid assets to customer deposits. As a general rule the bank is always prepared to pay out

at least 20% of all customer deposits. These amounts are held in highly liquid assets, which can quickly be converted into cash. Highly liquid assets during 2010 were always well above the report-ing trigger of 20%. As of end of 2010 the indicator was at the level of 74% for all currencies.As mentioned above, the bank also performs stress test calcula-tions in order to safeguard the liquidity of the bank. The result is analysed and the bank’s liquidity reserve target is determined by the bank’s ALCO. The results of the individual stress tests are also used to determine liquidity standby lines provided by ProCredit Holding AG to the bank if necessary. As of December 31, 2010 the bank had a positive liquidity gap of USD 8.2 million for all curren-cies in the first time bucket according to the internal worst-case stress test calculation, but a negative gap for MDL in amount of USD 1.6 million This gap could be covered in case of realization of this scenario by decreasing Bank’s open currency position in hard cur-rencies Additionally Bank has approved liquidity standby line of EUR 5.0 Mio provided by ProCredit Holding. The bank aims to rely primarily on customer deposits for its fund-ing. This source is supplemented by funding received from interna-tional financial institutions (IFIs), such as EBRD, KfW, EFSE, IFC, Dexia Micro-Credit Fund (Sub Fund BlueOrchard Fund), which pro-vide earmarked funds under targeted financing programmes (e.g. for lending to SMEs). In order to further diversify its sources of funds, the bank also maintains relationships with other banks, es-pecially for short-term liquidity lines. In addition, ProCredit Hold-ing provides short- and long-term funding. In order to maintain a high level of diversification among its cus-tomer deposits, the bank has implemented a concentration trigger, which aims at ensuring that the ten largest customer deposits do not exceed 20% of total deposits. The concentration of the bank’s deposit base exceeded this reporting trigger in the beginning of 2010 because of relatively small deposit portfolio, which was dom-inated by several big institutional clients. However, owing to the fact that Bank has active position on the market as a promoter of saving culture among the population the structure of deposit base was constantly changing in favour of small depositors. This devel-opment led to reducing of share of ten largest depositors in total deposit portfolio to 13% by the end of the year.

At 31 December 2009 Up to 1 1 – 3 3 – 12 1 – 2 2 – 5 More than Total month months months years years 5 yearsAssets Cash and balances with Central Bank 5,344,296 – – – – – 5,344,296Available-for-sale financial instruments 1,463,212 – – – – – 1,463,212Loans and/or advances to banks 5,820,505 – – – – – 5,820,505Loans and/or advances to customers 1,717,409 3,239,627 14,030,536 11,487,822 11,286,976 575,371 42,337,741Other financial assets 72,910 – – – – – 72,910Total financial assets 14,418,432 3,239,627 14,030,536 11,487,822 11,286,976 575,371 55,038,664

Liabilities Liabilities to banks 1,501,292 – – – – – 1,501,292Borrowed funds – 156,698 2,092,604 2,108,183 8,515,342 – 12,872,827Liabilities to customers 7,105,284 1,911,160 11,059,561 434,616 – – 20,510,621Liabilities to international financial institutions 203,747 – 249,177 502,483 4,630,054 – 5,585,461Provisions 126,079 126,079Financial libilities 7,966 15,933 71,697 95,597 143,227 – 334,420Other financial liabilities 77,437 – – – – – 77,437Total financial liabilities 8,895,726 2,083,791 13,599,118 3,140,879 13,288,623 – 41,008,137 Financial guarantees 3,560 – 17,883 71,637 – – – Net liquidity gap 5,519,146 1,155,836 413,535 8,275,306 (2,001,647) 575,371 –


Due to strong growth of loan portfolio during the 2010 the develop-ment of the bank’s funding sources was mainly driven by PCH and customer funds. It shows that, as mentioned above, PCH funds are by far the largest source of funds, constituting 44% of total Bank’s liabilities. The second largest source of funding is customer funds (36% of to-tal Bank’s liabilities). The figures also reveal that the share of IFI’s funds significantly reduced during the 2010 from 50% to 20%. Overall the bank considers its funding sources to be sufficiently di-versified, especially given that the bulk of the bank’s funds are pro-vided by a large number of customer deposits.

(d) Currency Risk

Conceptual risk management frameworkAssets and liabilities of ProCredit Bank are denominated in more than one currency. If the assets and liabilities in one currency do not match, the bank has an open currency position (OCP) and is ex-posed to potentially unfavourable changes in exchange rates.Loans in foreign currency available at (nominally) lower interest rates and with longer maturities still play an important role in the financing of many businesses. As a result, foreign currencies play a major role for the bank.Currency risk management is guided by the Group Foreign Currency Risk Management Policy. This policy was first implemented at the bank in 2009. Its adherence to this policy is constantly monitored by a market risk unit at group level, and amendments as well as exceptions to this policy are decided by the Group Risk Manage-ment Committee and by the Group ALCO.

The bank’s treasury department is responsible for continuously monitoring the developments of exchange rates and foreign cur-rency markets. The treasury department also determines the cur-rency positions of the bank on a daily basis. As a general principle, all currency positions should be closed at end-of-day; long or short positions for speculative purposes are not permitted. According to group-wide policy, derivatives may only be used for hedging purposes to close positions of the bank (though they are sometimes provided as a service for customers and used for liquid-ity purposes). Approved FX derivatives are currency forwards (in-cluding non-deliverable forwards) and currency swaps. The treas-ury department’s activities are monitored by the bank’s back office and risk management functions.Developments in the foreign exchange markets and the currency po-sitions are regularly reported to the bank’s ALCO, which is author-ised to take strategic decisions with regard to treasury activities. In cases where exceptions to group policy may be needed or viola-tions to group limits may have occurred, the bank’s risk manage-ment department reports to the Group Risk Management Commit-tee and proposes appropriate measures. For the purpose of currency risk management the bank has estab-lished three levels of control: The first level states that in general all currency positions shall be closed, but that a small short or long position of 0.5% of regulatory capital would be considered accept-able. The next level defines reporting triggers which imply that the Group ALCO must be notified in cases where the positions cannot be brought back below 3% of the regulatory capital for a single cur-rency, or 7.5% for the aggregate of all currencies. Finally, the third level defines limits, and requires that the bank must be neither short nor long by more than 5% of regulatory capi-tal for a single currency, and by more than 10% for the aggregate of all currencies. Exemptions from these limits are subject to approval by the Group Risk Management Committee or by the Group ALCO. (e) Market Price Risk

Foreign exchange risk

As at 31 December 2010 EUR USD MDLAssets Cash and balances with Central Bank 2,429,853 4,215,252 5,426,215Loans and advances to banks 1,005,586 1,764,880 34,944Available-for-sale financial instruments - - 9,043,345Loans and advances to customers 16,515,391 38,527,271 29,442,297Available-for-sale financial assets 155,419 98,734Other financial assets 38,090 69,575 1,386Total financial assets 19,988,920 44,732,397 44,046,921

Liabilities Liabilities to banks - - 963,056Borrowed funds 8,906,607 26,809,672 2,647,819Liabilities to customers 10,785,946 3,056,111 20,427,219Liabilities to international financial institutions - 9,177,877 7,823,307Financial liabilities 316,705Other financial liabilities 59,832 33,586 35,655Subordinated debts - 4,285,458 -Total financial liabilities 19,752,385 43,362,704 32,213,761 Net position 236,535 1,369,693 11,833,158 Credit commitments 409,929 493,923 662,140

A n n u a l R e p o r t 2 01074

Indexed loans and deposits are treated as foreign currency items. Overall, in 2010, foreign currency risk was limited as the Bank man-aged its currency positions very closely and kept them as closed as possible. The long EUR/USD position incurred in the first half of 2010 was in order to protect the capital against a depreciation of the local currency. The table below shows the impact on Bank’s profit of possible changes in foreign exchange rates against local currency, assuming that all other market variables remain constant:

31 December 2010Estimated change of exchange rates, (%) Currency Impact, Profit/(Loss), USD’000+10 USD (55) EUR 242–10 USD 55 EUR (242)+20 USD (110) EUR 484–20 USD 110 EUR (484)

31 December 2009Estimated change of exchange rates, (%) Currency Impact, Profit/(Loss), USD’000+10 USD 25 EUR 22–10 USD (25) EUR (22)+20 USD 49 EUR 44–20 USD (49) EUR (44)

(f) Interest Rate Risk

Conceptual risk management frameworkInterest rate risk arises from structural differences between the maturities of assets and those of liabilities, e.g. if a four-year fixed interest rate loan is funded with a six-month term deposit. This would expose the bank to the risk that the funding costs will in-crease before the maturity date of the loan, thus reducing the bank’s margin on the loan. The biggest share of loan portfolio is at fixed interest rate. The aver-age maturity of loans typically exceeds that of customer deposits, thus exposing the bank to interest rate risk as described above. Given that financial instruments to mitigate interest rate risks (hedges) are only available for hard currencies such as EUR and USD, this requires the bank to closely monitor the interest rate risks. The bank’s approach to measuring and managing interest rate risk is guided by the Group Interest Rate Risk Policy. The main indicator for managing interest rate risk measures the po-tential impact on the economic value of all assets and liabilities. The indicator analyses the potential loss that the bank would incur in the event of very unfavourable movements (shocks) of the inter-est rates on assets and liabilities. For EUR or USD, a parallel shift of the interest rate curve by +/- 200 bps is assumed. For the local cur-rency, the definition of a shock is derived from historic interest rate volatilities over the last five years. The potential economic impact on the bank’s balance sheet must not exceed 10% of its regulatory capital per currency. A reporting trigger is set at 5%, providing an early warning signal. In order to further analyse the bank’s sensitiv-ity to interest rate risk, an additional stress scenario is calculated by increasing the interest shock by 50% in all currencies. Also regularly analysed is the potential impact of interest rate risk on the bank’s expected earnings over the next three and six months. This measure indicates how profit and loss may be influ-enced by interest rate risk under a short-term perspective.Deviations from the Group Interest Rate Risk Policy and violations of interest rate limits are subject to approval by the Group Risk Management Committee.Interest rate risk is regularly discussed by the bank’s General and Operational Risk Management Committee. The indicators are also reported to the Group Risk Management Committee.Beyond monitoring and limiting interest rate risk in the sense of re-pricing risk, the bank also aims to align the maturities of its balance sheet items which generate interest earnings and interest expens-es. This is done by increasingly offering variable interest rate loans.

As at 31 December 2009 EUR USD MDLAssets Cash and balances with Central Bank 1,697,949 1,557,029 2,089,318Loans and advances to banks 3,042,273 1,281,021 1,496,380Available-for-sale financial instruments – – 1,460,812Loans and advances to customers 5,485,112 13,773,652 13,243,553Other financial assets 40,233 32,677 –Total financial assets 10,265,567 16,644,379 18,290,063

Liabilities Liabilities to banks – – 1,500,417Borrowed funds 2,203,079 8,579,298 –Liabilities to customers 7,586,816 1,953,019 10,138,927Liabilities to international financial institutions – 4,056,299 –Financial liabilities – – 334,420Other financial liabilities 55,975 19,617 1,845Total financial liabilities 9,845,870 14,608,233 11,975,609 Net position 419,697 2,036,146 6,314,454 Credit commitments – 570,000 267,470


Facts and figures concerning interest rate riskThe ProCredit group’s main interest rate risk indicator measures the impact of interest rate changes on all interest rate-sensitive on- and off-balance sheet items. The indicator quantifies the loss in value of the bank given certain changes of interest rates. As de-scribed above, the calculation of the economic value impact indica-tor is based on different parallel shifts of the interest rate curves. For EUR and USD a shift of +/- 200 bps is applied; for the local cur-rency the shift is defined in terms of a historical worst case (+/- 1100 bps). The development of the economic value impact indicator during 2010 is displayed in the graph below. It can be seen that the bank’s interest rate risk was above the limit of 10% for local currency. The limit has been exceeded since March till August 2010 due to the fact that the average maturity of local currency funding is much shorter than the average maturity demanded by the bank’s loan customers. Another reason is that MDL funding is at variable inter-est rates, while loan portfolio in local currency – at fixed interest rates. In order to reduce the interest rate risk below the limit, a deci-sion was taken to disburse loans with variable interest rates with re-pricing period of 6 months. The existing variable loan portfolio has been further increased during 2010 and is expected to even grow stronger in 2011 not only in local currency, but also in foreign currency Economic value impact for local currency improved a lot in December 2010, decreasing up to 0.4%, mainly due to receiving a MDL facility from PCH at a fixed interest rate and with a maturity of 2 years, which balances with the long-term fixed rate LP.In addition to the long-term analysis of the economic value impact indicator, the bank analyses the short-term interest rate risk. The measure shown in the table below quantifies the potential decline of interest rate earnings within the next three months. A reporting trigger has been set for this measure which assumes that the inter-est earnings impact within the next three months should not ex-ceed 1% of the bank’s regulatory capital. Short-term interest rate risk exceeded the reporting trigger for MDL in December 2010. This was because all floating interest rate loan portfolio will be re-priced in the next month and there is a big gap between assets and liabilities that have to be re-priced in the next 30 days. The interest earning impact captures the fact that once the current-ly outstanding assets and liabilities will be repriced (either be-cause they fall due and are replaced at the new interest rate or be-cause they have variable interest rates) their interest rates will increase/decrease by the size of the interest rate shock. It uses the assumption that exactly the same balance sheet structure is main-tained, i.e. that every cash flow is renewed in the same amount, only with the post-shock interest rates. The described scenario analysis shows the following impact from fluctuation in interest rates on Bank’s profit as at December 2010, following an interest rate shock of +/- 200 bps on EUR/USD and rea-sonably possible shift for local currency of +/-1100 bps:

2010 Parallel shift of Impact on in ’000 USD yield curve profit and lossLocal Currency (MDL) 11.19% 464 –11.19% (464)EUR 2% (44) –2% 44USD 2% (133) –2% 133

2009 Parallel shift of Impact on in ’000 USD yield curve profit and lossLocal Currency (MDL) 8.8% 264 –8.8% (264)EUR 2% (25) –2% 25USD 2% (28) –2% 28

Overall, the bank’s interest rate risk can be considered to be medium.

(g) Country risk

Conceptual risk management frameworkCountry risk is defined as the risk that the bank may not be able to enforce rights over certain assets in a foreign country (expropria-tion risk) or that a counterparty in a foreign country is unable to perform an obligation because of specific political, economic or so-cial risks prevailing in that foreign country which have an adverse effect on credit exposures (transfer and convertibility risk). Given the nature of the bank’s business and the countries in which the ProCredit group operates, the group defines country risk more broadly to refer to the possible adverse impact that significant country-specific external macroeconomic, socio-political or regu-latory factors can have on the banks’ earnings, capital or liquidity. In particular, it includes the risk of direct or indirect government intervention in the business operations of the bank in the form of nationalisation or seizure of assets, or significant market or regula-tory intervention.The bank’s business strategy is to focus on meeting the demand for credit exhibited by very small and small businesses in the local market. Therefore, it does not normally enter into cross-border transactions or incur country risks. However, as stated above, for the purpose of financial risk management the bank may need to en-ter into cross-border transactions, e.g. for the purpose of investing excess liquidity in bond exposures to highly rated international or multinational institutions. It is also sometimes advantageous to enter into cross-border transactions with other members of the Pro-Credit group in connection with the exchange of currencies.Broader country risk issues are addressed by, and inherent in the bank’s policies and methodologies for the management of credit, market, liquidity, counterparty/issuer and operational risk. As cross-border exposures are strictly controlled by the bank’s and the ProCredit group’s risk management functions, the bank is ex-posed to country risk only to a limited degree.

Facts and figures concerning country riskAs stated above, the bank may need to enter into cross-border transactions for the purpose of financial risk management. As of December 31, 2010 the bank’s total cross-border exposure amount-ed to USD 2.77 million, distributed across the following countries: Germany – USD 1.58 Mio (57% of total cross border exposure), USA – USD 1.15 Mio (41%), Russia – USD 0.028 Mio (1%) and Bulgaria –USD 5,000 (0.2%).The figures mentioned above include outstanding balances on Nos-tro accounts only. The total cross-border exposure is very limited and 98% of total amount is concentrated in highly rated banks such as Deutche Bank Group, COMMERZBANK AG, CITIBANK N.A. The largest exposure is with Deutche Bank Group because this bank be-longs to core counterparties of ProCredit Group.

(h) Operational Risk

Operational risk is recognised as an important risk factor for the ProCredit Bank, given that the Bank relies on a high degree of de-

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centralised processing and decision-making. In line with Basle II, we define operational risks as the risk of loss resulting from inade-quate or failed internal processes, people and systems and/or ex-ternal events. This category includes all “risk events” in the areas of personnel, processes, and information technology. To further expand the processes for managing operational risks, a new Opera-tional Risk Policy was implemented in the bank in 2009; this policy was updated in 2010The principles outlined in this document have been designed to effectively manage the operational risk expo-sure, and they are in compliance with the Basle II requirements for the “standard approach” (as outlined in Section 276 of the German Ordinance on Solvency (SolvV). The overall framework to manage operational risks is as a comple-mentary and balanced system with its key components Corporate Culture, Governance Framework, Policies and Procedures, Risk As-sessments, New Risk Approvals (NRAs), and the Risk Event Data-base. While of the Corporate Culture, the Governance Framework, and Policies and Procedures are installed to set the basic organisa-tional requirements, Risk Assessments, New Risk Approvals (NRAs), Key Risk Indicators and the are the key instruments to execute the risk management process.The overall objectives of the ProCredit Bank’s approach to the man-agement of operational risks are: • to understand the drivers of the Bank’s operational risks;• to be able to identify critical issues as early as possible;• to avoid losses caused by operational risks; and• to ensure efficient use of the Bank’s capital.

To deliver on these goals the following tools and processes have been implemented in detail, being part of the framework compo-nents as depicted above. They are presented as they are used with-in the process to manage operational risks. These processes are subdivided into the phases of identification, evaluation, treatment, monitoring, documentation & communication, and follow up.

Identification• Annual Operational Risk Assessments;• Detailed Process Reviews as appropriate;• New Risk Approval (NRA) process;• Risk identification and documentation in Risk Event Database

(RED);• Ad hoc identification of potential risks.

Evaluation/Quantification• Agreed standards to quantify risks.

Mitigation and Treatment• Implementation of measures to avoid, reduce or mitigate the

risks depending on priorities, efficiency considerations and regulations;

• Transfer of risk to an insurance or other party.

Monitoring & Control• Process owners responsibility to monitor risks;• Operational risk reports, risk bearing capacity calculation and

monitoring.

Communication, Escalation, Documentation• Escalation levels to management bodies, regular reporting,

risk committees;• RED, Management summary documents for risk events.

Issue Tracking/Follow up tables for material action plans• Follow up tools used in banks.

To constantly enhance the professional standards of the bank, it has continued in 2010 to make use of local training facilities, and

also regional academies and the international ProCredit Academy in Fürth, Germany. Training programmes for candidates for management positions in-clude various sessions focusing explicitly on risk management, and these elements of the curriculum have been expanded during 2010. Risk awareness training is being delivered annually to all staff as well as to all newly hired employees.

The following categories of operational risk are looked at specifi-cally:

(a) People Risks• The Bank seeks to avoid key person dependencies and enforc-

es a two-weeks consecutive leave policy;• Staff training has a very high priority in the Bank and ensures

continuous development of staff members’ personal attitude and commitment and their professional skills.

(b) IT Risks• Business continuity plans are in place;• Information Security standards are in place.

(c) Legal Risks• Suitable legal resources are employed to deal with legal mat-

ters (internal legal staff and/or external legal counsel);• The legal function is involved whenever required and appropri-

ate (e. g. NRA process, all legal issues).

(d) Compliance and Regulatory Risk• The Bank ensures the identification of new regulations or up-

dates on the interpretation of regulations and covenants agreed with financing institutions in a timely manner. This function is hosted in legal/compliance department.

(e) AML Risk• Based on the Group AML Policy the bank has introduced a new

AML policy in 2010. (f) Fraud risk• The bank manages fraud risk as part of the operational risk

area. Risk assessments for operational risk and fraud risk based on German standards have been executed in 2010.

(g) Reputational risk• Any extraordinary mentions (whether positive or negative) are

reported to the management board and to the risk manage-ment department to decide on possible responses.

(h) External Risk Factors• The likelihood and impact of external risk events such as a

natural disaster that damages a firm’s physical assets as well as electrical or telecommunications failures that disrupt busi-ness are considered by risk managers within the described framework.

As at 31 December 2010 (31 December 2009), no significant legal proceedings were pending.

30.3 Organisation of the risk management function

Responsibility for risk management at the bank lies with the Man-agement Board.

The risk management function comprises various organisational units, including the credit risk department and risk management department, responsible for financial, operational and informa-tion security risks. Risk management department reports to the


Management Board of the bank, to the bank’s General and Opera-tional Risk Management Committee, which meets monthly, and the Assets and Liabilities Committee (ALCO), which meets weekly. At the bank, risk management is implemented and developed, in operational terms, by a risk management department which is an autonomous department within the bank’s organisation and which is not involved in any way with the bank’s customer service opera-tions (credit or deposit business) or trading operations. The risk departments report regularly to the corresponding risk depart-ments at ProCredit Holding. The bank’s risk policies address all risk categories and set stand-ards that enable risks to be identified early and to be managed ap-propriately.

The risk management department carries out regular monitoring to ensure that the total volume of all risks incurred does not exceed the limits agreed, i.e., that the risk bearing capacity of the bank is not exceeded, so that sufficient capital is available to cover even unlikely potential losses. The respective risk positions of the individual banks are described in a standard General Risk Report which is generated on at least quarterly basis. This risk report is provided to the local risk commit-tees and to ProCredit Holding AG.

32. Fair value of financial instruments

The following table gives an overview of the carrying amounts and fair values of the financial assets and liabilities according to the classes of financial instruments, defined in accordance with the business of the Bank:

For the calculation of fair value level 2 was applied – Valuation tech-nique using observable current market rates.The fair value of claims and term deposits at variable rates of inter-est is identical to their carrying amounts. The fair value of claims and liabilities at fixed rates of interest was determined using the discounted cash flow method, using money market interest rates for financial instruments with similar default risks and similar re-maining terms to maturity.The estimated fair value of the receivables corresponds to the dis-counted amount of the estimated expected future cash flows, i.e. net of allowance for impairment. The expected cash flows are discount-ed to fair value at the current market interest rates of the respective markets.

During 2009 Bank placed in a local bank (Victoriabank) a deposit in amount of MDL 1,495,728 against a currency deposit in the same bank in amount of USD 1,500,000.The assets were pledged against funds obtained specifically for the purpose of on-lending.

2010 2009 Carrying value Fair value Carrying value Fair value Financial assets Cash and balances with Central Bank 12,071,321 12,071,321 5,344,296 5,344,296Available for sale debt instruments 9,043,345 9,043,345 1,460,812 1,460,812Available for sale equity instruments 254,153 254,153 – –Loans and advances to banks 2,805,410 2,805,410 5,819,674 5,819,674Loans and advances to customers 82,907,073 85,370,435 31,827,285 31,714,469Total 107,081,302 109,544,664 44,452,067 44,339,251 Financial liabilities Liabilities to banks 963,057 963,057 1,500,417 1,500,417Borrowed funds 38,364,099 33,108,659 10,782,377 10,379,396Liabilities to customers 34,269,276 34,329,241 19,678,762 18,881,845Liabilities to international financial institutions 16,747,161 17,743,120 4,056,299 3,818,054Financial liabilities 316,705 316,704 334,420 334,420Subordinated debts 4,285,458 5,867,332 – –Total 94,945,756 92,328,113 36,352,275 34,914,132

2010 2009 Pledged Related Net Pledged Related Net assets liabilities Exposure assets liabilities ExposureLoans and advances to banks – – – 1,495,728 1,500,000 (4,272)Total – – – 1,495,728 1,500,000 (4,272)

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33. Contingent liabilities and commitments

2010 2009Guarantees 185,943 93,081Commitments to extend credit: Original term to maturity of one year or less 247,004 744,389 Original term to maturity of more than one year 1,199,297 –Total 1,632,244 837,470

The above table discloses the nominal principal amounts of contin-gent liabilities, commitments and guarantees, i.e. the amounts at risk, should contracts be fully drawn upon and clients default. We expect that a significant portion of guarantees and commitments will expire without being drawn upon; therefore the total of the contrac-tual amounts is not representative of future liquidity requirements. An estimate of amount and timing of outflow is not practicable.

2010 2009Non-cancellable operating lease commitments No later than 1 year 1,861,399 1,194,030Later than 1 year and no later than 5 years 3,047,430 1,452,523Later than 5 years 1,495,158 914,169Total 6,403,987 3,560,722

At the moment the Bank doesn’t have any legal proceedings with its customers, any other legal entities or other private individuals.

34. Related party transactions

The ultimate parent company of the Bank is ProCredit Holding AG. The Bank’s related parties include the parent, other ProCredit Group companies, and key management personnel, close family members of key management personnel and entities which are controlled or significantly influenced by key management personnel or their close family members.

Transactions of Bank with Group companiesAccording to the group’s strategy, the holding company acts as an additional provider of funds (including subordinated debts) for its subsidiaries. All transactions with group companies are performed substantially on the same terms, including interest rates and security, as for trans-actions of a similar nature with third party counterparts.

The table above discloses all income and expenses items derived from transactions with ProCredit Bank’s group companies, as well as other related parties like Quipu GmbH, Germany, being the group’s IT provider and being with ProCredit Holding AG under common control of the chairman of the holding’s supervisory board, and KFW, being the second Bank’s shareholder. A part of expenses are related to the fees paid for staff training in the ProCredit Academy in Furth (Ger-many) in the amount of USD 131,009. The incomes from other related party transactions includes mainly: the income from ProCredit SA in amount of USD 1,050,305 (2009: USD 1,461,057).The expenses to other related party transactions includes mainly: the expenses to ProCredit SA in amount of USD 50,763 (2009: Pro-Credit SA USD 224,278; ProCredit Academy GmbH USD 131,010; JSC ProCredit Bank USD 81,369

2010 2009 Procredit Holding Other Procredit Holding Other Income – 1,051,363 731 1,464,496Expense 1,460,245 71,809 771,472 620,867Net income/loss (1,460,245) 979,554 (770,741) 843,629

2010 2009 Procredit Holding Other Procredit Holding Other Assets Loans and advances to banks – 5,742 – 10,278Loans and advances to customers – 902,678 – –Other assets 1,462 18,219 1,580 – Liabilities Liabilities to banks – – – –Borrowed funds 41,130,995 – 7,743,877 –Liabilities to customers – 1,213,920 – 1,640,490Other liabilities – 319,456 – 344,723 Off–balance sheet positions Guarantees – 66,252 – 71,637


The loan and advances to other related party include the loans grant-ed to ProCredit SA in amount of USD 902,678. The liabilities to cus-tomers to other related party include deposits and accrued interest of ProCredit SA in foreign currency in amount of USD 1,213,920 (2009: USD 1,640,900). Other liabilities include mainly liabilities re-lated to finance lease with ProCredit SA in amount of USD 316,705 (2009: USD 334,420).Outstanding balances of the Bank with key management personnel, their close family members and entities which are controlled by them as at year end constitute USD 150 (2009: USD 17,937), which refers to the category “Liabilities to customers”. The transactions leading to the above balances were made in the ordinary course of business and on substantially the same terms as for comparable transactions with entities or persons of a similar standing or, where applicable, with other employees. The transactions did not involve more than the normal risk of repayment nor did they comprise other unfavorable features.

Transactions with entities which have an interest in the Bank that gives significant influence over the BankProCredit Bank is controlled by its major shareholder ProCredit Hold-ing AG. (PCH). The balances with PCH are included above.

35. Management compensation

During the reporting period, total compensation paid to the manage-ment of the Bank was USD 206,104 (2009: USD 48,197).

The members of the Supervisory Board do not receive any compensa-tion from ProCredit Bank.

36. Subsequent events

No significant subsequent events took place after the reporting date.

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Contact Addresses

Head Office

65, Stefan cel Mare Ave., office 901ChisinauTel. (373 22) 83 65 55Fax: (373 22) 27 34 88www.procreditbank.md [email protected]

Branches in Chisinau

Centru 112, Renasterii Nationale Ave.Tel.: (373 22) 20 44 84 Fax: (373 22) 20 44 96

Centru 265, Stefan cel Mare Ave.Tel.: (373 22) 83 65 80Fax: (373 22) 83 65 81

Centru 39, Cosmonautilor St.Tel.: (373 22) 24 40 88Fax: (373 22) 24 17 85

Botanica 21, Sarmizegetusa St.Tel.: (373 22) 55 65 46Fax: (373 22) 53 27 47

Botanica 33, Iurii Gagarin Ave.Tel.: (373 22) 54 56 34Fax: (373 22) 54 57 25

Ciocana5, Mircea cel Batran Ave.Tel.: (373 22) 44 39 25Fax: (373 22) 49 98 12

Rascani 215/4, Moscova Ave.Tel.: (373 22) 31 12 10Fax: (373 22) 31 06 97

Posta Veche2/6, Ceucari St.Tel.: (373 22) 43 70 06Fax: (373 22) 43 66 65

Sculeni5, Calea Iesilor St.Tel.: (373 22) 59 28 20Fax: (373 22) 74 84 18

Branches in the Regions

Balti 137, Stefan cel Mare St.Tel.: (373 231) 6 34 75Fax: (373 231) 6 29 75

Balti 26/1, Stefan cel Mare St.Tel.: (373 231) 4 26 02Fax: (373 231) 4 52 08

Cahul19, Stefan cel Mare St.Tel.: (373 299) 3 23 40Fax: (373 299) 3 23 41

Comrat75, Pobedi St.Tel.: (373 298) 2 72 36Fax: (373 298) 2 49 00

Drochia33, 31 August St.Tel.: (373 252) 2 05 95Fax: (373 252) 2 05 94

Edinet76, Independentei St.Tel.: (373 246) 2 49 00Fax: (373 246) 2 25 40

Floresti59, Vasile Lupu St.Tel.: (373 250) 2 60 92Fax: (373 250) 2 60 93

Hancesti2A, Chisinaului St.Tel.: (373 269) 2 58 98Fax: (373 269) 2 58 96

Ocnita116, 50 Ani ai Biruintei St.Tel.: (373 271) 2 19 93Fax: (373 271) 2 19 96

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Orhei34, Vasile Lupu St.Tel.: (373 235) 2 26 82Fax: (373 235) 2 49 38

Soroca33, Stefan cel Mare St.Tel.: (373 230) 3 01 75Fax: (373 230) 3 01 74

Straseni33, Eminescu St.Tel.: (373 237) 2 82 55Fax: (373 237) 2 25 15

Ungheni27, Nationala St.Tel.: (373 236) 2 22 95Fax: (373 236) 2 00 96

C o n ta c t A d d r e s s e s 8383

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