ISTROKAPITAL SE ANNUAL REPORT AND CONSOLIDATED FINANCIAL ... · ANNUAL REPORT AND CONSOLIDATED...

ISTROKAPITAL SE

ANNUAL REPORT AND CONSOLIDATED

FINANCIAL STATEMENTS

For the year ended 31 December 2012

2

ISTROKAPITAL SE

ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS


Contents

Page

Chairman's statement

2 - 3

Basic information about the company

4

Shareholders information as at 31st December 2012

5

Officers and professional advisors

6

Corporate governance

7 – 10

Report of the Board of Directors

11 – 13

Business plan – Group strategy and targets

14

Consolidated statement of financial position

17

Consolidated statement of comprehensive income

18 – 19

Consolidated statement of changes in equity

20 – 21

Consolidated statement of cash flows

22

Notes to the consolidated financial statements

23 – 131

2

ISTROKAPITAL SE

CHAIRMAN'S STATEMENT

Dear shareholders, business partners and colleagues,

the European company ISTROKAPITAL SE is presenting to you the Annual Report of

ISTROKAPITAL SE Group for the year ended 31st December 2012, as its sixth year of the company’s

existence in the Republic of Cyprus. Annual report of ISTROKAPITAL SE Group contains the financial

statements for the financial year 2012, as audited by KPMG Limited Larnaca, Cyprus and as has been

presented to the Board of Directors of the company ISTROKAPITAL SE. The Board of Directors of

ISTROKAPITAL SE approved the Annual Report 2012 and advised the General Meeting of the

Company to adopt the Annual Report 2012 and financial statements for the year 2012 and General

Meeting of company ISTROKAPITAL SE approved them in whole extent.

The year 2012 was significant by continous debt crisis of the European countries. The economic and

market climate in 2012 was complicated, and there is no denying that conditions were extremely tough.

During the year 2012, the company ISTROKAPITAL SE and its subsidiaries continued their responsible

management and systematic development, as well as the implementation of structural and organizational

changes, mainly focused on continous development and stabilization of the companies within the Group

of ISTROKAPITAL SE by increasing of income and decreasing of costs. These actions are directed

towards stabilizing the position of ISTROKAPITAL SE in future years.

I am very pleased to announce that Poštová banka, a.s. and its shareholders sucesfully dealed with the

unfavorable situation regarding the debt crisis of the Hellenic Republic with the involvement of private

investors. Despite of this unfavorable situation in 2012 the Group of Poštová banka, a.s. continued in

growing in all business indicators – the scope of lended loans increased compared to year 2011 by

26,5% and the number of clients Poštová banka, a.s. approached almost the limit of 1 milion. Our effort

and has met with positive response from the professional comunnity as well. Poštová banka, a.s. was

again awarded by professionals, when Poštová banka, a.s. again won the award of financial products in

Slovakia of the “Zlatá minca 2012” as the best financial product in category of term deposits. The

financial results also confirmed, that Poštová banka, a.s. became the significant player in bank sector of

Slovak republic.

The subsidiary company PRVÁ PENZIJNÁ SPRÁVCOVSKÁ SPOLOČNOSŤ POŠTOVEJ BANKY,

správ. spol., a.s. which operates in the area of collective investment in year 2012 increased the amount of

assets in their funds to 378 million euros, representing a 24% increase and the company has stabilized its

market position. The real estate fund NÁŠ PRVÝ REALITNÝ was awarded with second place in the

competition “Zlatá minca” in category Real estate funds. The subsidiary company PRVÁ PENZIJNÁ

SPRÁVCOVSKÁ SPOLOČNOSŤ POŠTOVEJ BANKY, správ. spol., a.s. concluded the year 2012 with

profitably in amount of 2.6 million euro.

The income of the insurance company Poisťovňa Poštovej banky, a.s. remain compared to the year 2011

on the same level of 1.7 mil. and recorded the 30% increase of gross prescribed insurance payments. The

company was successful in particular life insurance, which achieved an increase in gross prescribed

insurance payments by more than 50%.

Results of the Bank and its subsidiaries during the year 2012 have confirmed the trend of dynamically

growing retail banking group. At a time when the banking sector is facing a negative trend, the group of

Poštová banka, a.s. manage to continue to grow in all significant indicators.

3

ISTROKAPITAL SE

CHAIRMAN'S STATEMENT (continued)

As we declare in past, the ISTROKAPITAL SE Group considers the pharmaceutical industry as the

space for future development of the Group’s activities. The subsidiary company AXON Neuroscience

SE is dedicated to the development of disease modifying immunotherapy and early diagnostics for

Alzheimer's disease. It has developed unique animal models that reproduce Alzheimer’s disease, which

allow for a swift and effective pre-clinical validation of efficacy of new therapeutics and pre-clinical

evaluation of diagnostic tools.

In 2012 the ISTROKAPITAL SE Group throught its subsidiary company ISTROKAPITAL CZ a.s.

reaffirmed its profitability in the Czech financial market by the payment of the bond yield for the year

2012 to all investors. The bonds were issued by the company ISTROKAPITAL CZ a.s. on the year 2009

and were listed on the official main market of the Prague Stock Exchange in the amount of EUR 150

million.

The Group has been constantly providing complex advisory and consultancy services through the

company ISTROKAPITÁL SLOVENSKO a.s. in the Slovak Republic market.

We are committed to creating value for all shareholders by fully leveraging the unique opportunities in

the market and to achieve the benefit for the Group and shareholders as well. It is a collective effort

whose success depends on the engagement not only of our employees but also of the people that we

cooperate with. We all believe that our vision about the future of ISTROKAPITAL SE Group is correct.

I would like to thank to our employees, clients and business partners for the trust they have placed in

ISTROKAPITAL SE Group and for their commitment and their contribution to the succes of our

business and we look forward to reporting further progress of the ISTROKAPITAL SE Group.

Mario Hoffmann

The Chairman of the Board of Directors

4

ISTROKAPITAL SE

BASIC INFORMATION ABOUT THE COMPANY

Business name ISTROKAPITAL SE

Legal form European company

Registered seat 41-43 Klimentos Street, Klimentos Tower, 1st Floor,

Flat 12, P.C. 1061 Nicosia, Cyprus

Registration number SE2

Subject of business Holding and Investment Company

Date of foundation 1st February 2007

Share capital 45,766,576.80 EUR, divided into 24,087,672 shares of

nominal value of 1.90 EUR per share

Email [email protected]

Web site www.istrokapital.eu

Phone/Fax +35722759555/+35722758877

mailto:[email protected]

http://www.istrokapital.eu/

5

ISTROKAPITAL SE

SHAREHOLDER INFORMATION AS AT 31st DECEMBER 2012

The structure of shareholders of ISTROKAPITAL SE as at 31

st December 2012 was a follows:

ISTRO Holding a.s 99.8061%

Other shareholders 0.1939 %

The structure of shareholders of ISTROKAPITAL SE as at the date of issue of this Annual report is as

follows:

Mario Hoffmann 99.8066%

Other shareholders 0.1934%

6

ISTROKAPITAL SE

OFFICERS AND PROFESSIONAL ADVISORS

Board of Directors Mario Hoffmann

Boris Kreheľ (resigned on 27 March 2013)

Jozef Salaj

Ľuboš Áč (resigned on 15 February 2013)

Daniel Legéň (resigned on 9 March 2011)

Ladislav Timuľák

Monika Stretavská

Tomáš Pivarči (resigned on 27 March 2013)

Angeliki Englezou (appointed on 9 March 2011 and resigned 7 December 2011)

Tatiana Franzenová (appointed on 27 March 2013)

Alena Madačova (appointed on 27 March 2013)

Secretary Cymanco Services Ltd

Independent Auditors KPMG Limited

Chartered Accountants and Registered Auditors

P.O.Box 40075

6300 Larnaca

Cyprus

Bankers Poštová banka, a.s.

J&T Banka, a.s.

Societe Generale Bank Cyprus Ltd

7

ISTROKAPITAL SE

CORPORATE GOVERNANCE

Information about the methods of corporate governance of the Company:

From the year 2009 the Company is a Guarantor of the repayment of the bonds' nominal value and the

payment of the yield of the bonds issued by the subsidiary company ISTROKAPITAL CZ a.s. as the

Issuer of bonds which were placed and accepted by the Prague Stock Exchange in the total nominal

value 150 mil. EUR. During the year 2012 the Company continued with the adoption and application of

the methods of the corporate governance code based on the OECD principles. The methods and the aims

of the Company's governance are followed from the policy of the Company and are directed towards the

improvement of the quality of the relations with business partners and the improvement of effectiveness

of its activities.

Information about the activity of the General Meeting, its powers, description of shareholders'

rights and the method of their keeping – activity of the General Meeting of the Company for the

year 2012

The highest-level government and controlling body of the Company is the General Meeting of the

Company which supervises the execution of the management of the Board of Directors and the

implementation of the business plan of the Company. The General Meeting of the Company consists of

all present shareholders on the meeting. The General Meeting of the Company appoints and removes the

members of the Board of Directors.

The supreme authority of the Company - the General Meeting of the Company carries out functions and

applies powers in accordance with the Law of the Republic of Cyprus and the Memorandum and

Articles of Association of the Company. The shareholders of the Company should freely dispose with

shares owned by them i.e. the shares should be purchased, sold or transferred without any restcictions.

The shareholders have the right to participate in the profit of the Company in extent of their size of their

investment as well. The right to participate on the profit of the Company and the right to dispose with

the shares, are the fundamental rights of the shareholders of the Comapny. The shareholders by the

arrangement of the corporate governance and by the increasing of the value of shares have certain

responsibility, obligations and duties. To fulfill the shareholders duties and obligation, they have the

right for information about the Company at their disposal, and the right to influence the Company

especially through their presence and their voting on the General Meeting of the Company. The

shareholder is able to execute his rights by proxy with instrument of proxy which is valid for one

General Meeting of the Company including its possible repeated call. The Company calls every year the

General Meeting of the Company. During the year 2012 the Company called several General meetings.

First General meeting of the year 2012 was called on 29th March 2012 and this General meeting should

approve the continous agenda from the last Extraordinary General meeting in the year 2011. There were

no shareholders present therefore the meeting was considered to be adjourned until further notice in

accordance with the provision of Article Company’s Articles of Association and the agenda of the

Extraordinary general meeting stays as continuous until the next general meeting. The General meeting

which aprroved the continous agenda of the Company ISTROKAPITAL SE was held on 11th July 2012

and the financial statements, consolidated financial statements and Annual report of ISTROKAPITAL

SE for the year 2010 were aprroved by shareholders. This situation was caused because Board of

Directors of the Company decided to postpone and not to proceed with the approval of the Consolidated

Financial statements of the Group for the year ended 31 December 2010 at that time due to unclear

situation on financial markets and pending information the outcome of which affected the disclosures of

the consolidated financial statements for the year 2010. The reappointment of the auditors KPMG

CYPRUS as the auditor of the Company for the year 2012 was approved on Extraordinary general

meeting held on 7th December 2011.

8

ISTROKAPITAL SE

CORPORATE GOVERNANCE (continued)

The individual financial statements, consolidated financial statements and Annual report of the Company

for the year 2011 were approved by the Extraordinary General Meeting held at Nicosia Cyprus on 2nd

October 2013.

The Annual General Meeting of the Company which will approve the individual financial statements,

consolidated financial statements and Annual report of ISTROKAPITAL SE and accounts for the year

ended 31st December 2012 shall be held on 10

th April 2014.

Information about the structure and activity of the Board of Directors and its committees –

activity of the Board of Directors for the year 2012:

The Board of Directors is the statutory organ which manages the activities of the Company, acting on

behalf of the Company, representing the Company in all matters towards the third parties, courts and

other authorities. The Board of Directors manages the activities and decides about all matters concerning

the Company to the extend that the law or the Memorandum and Articles of Association of the Company

do not allocate these matters to the activity of other organs of the Company. The Company has seven

members of the Board of the Directors:

Mario Hoffmann – Chairman Jozef Salaj – Member

Boris Kreheľ – Member Ľuboš Áč – Member

Ladislav Timuľák – Member Tomáš Pivarči - Member

Monika Stretavská – Member

The General Meeting of the Company appoints and removes the Chairman of the Board of Directors and

the Members of the Board of Directors. The meetings of the Board of Directors are to be held every

three months at least.

Activity of the Board of Directors:

The meetings of the Board of Directors have been held periodically pursuant to the Memorandum and

Articles of Association of the Company with the agenda consisting of dealing with the matters, such as:

business activities and development, and solving the matters concerning the Company and its activities

in accordance with the Memorandum and Articles of Association of the Company and the Cyprus Law

of Companies, Cap. 113. During the year 2011 the Board of Directors of the Company in accordance

with the provisions of the Cyprus Law of Companies, Cap. 113. During the year 2012 there were no

personal changes of the members of the Board of the Directors of the Company.

From its setting up in year 2008, the Audit Committed of the Company ISTROKAPITAL SE has been

executing its functions as the Audit Committee for the group of ISTROKAPITAL SE. The Audit

Committee consists of the members appointed by the Board of Directors, while one member of the Audit

Committee is independent, not property and personally interconnected with any company within the

Group of ISTROKAPITAL SE. The Audit Committee has four members. During the year 2011 there

were no personal assignment of the Audit Committee of the Company. The meetings of the Audit

Committee are held every three months at least.

The structure of the share capital including the data about the securities which were not admitted

on the dealing on regulated market in any member state or state of the European economic space

with the description of the securities, rights and obligations connected, and their percentage on the

total share capital:

9

ISTROKAPITAL SE


Share capital of the company ISTROKAPITAL SE:

Amount of the share capital: 45.776.576,80 EUR

Number of shares: 24.087.672

Issued registered non-bearer shares with nominal value of 1,90 EUR per share

Number of shareholders as at 31st December 2012: 329 shareholders

Without transmissibility restriction

Issued bonds by the subsidiary company ISTROKAPITAL CZ a.s. with the following specification

in Czech republic:

Issuer: ISTROKAPITAL CZ, a.s.

Registered seat: Sokolovská 394/17, Praha 8, PSČ 18600, Czech Republic

Registration Number: 28 963 156

ISIN: CZ0003501694

Name of bonds: DLHOPIS ISTROKAP.CZ10,00_16

Type and form: bearer bonds

Supposed Number of bonds: 300.000 pcs

Nominal value: 500 EUR per one bond

Description of rights: no option or exchange right

Date of issue: 10th December 2009

The maturity dateof the nominal value: 10th December 2016

The way of determination of yield : fixed 10% per year

The payment date of yield: every year to 10th December of common year

Guarantee: ISTROKAPITAL SE, 41-43 Klimentos street, Klimentos Tower, 1st Floor,

Flat 12, 1061 Nicosia, Cyprus, Reg. No.: SE2

Transmissibility of the securities described above is without any restriction.

Qualified share on the share capital of the company ISTROKAPITAL SE as at 31st December

2012:

Mario Hoffmann – 99,8061 %.

The Company ISTROKAPITAL SE does not keep files about any owners of securities with special

controlling rights. In relation to the way of controlling the system of employee shares the

Company ISTROKAPITAL SE did not issue any employee shares.

The Company ISTROKAPITAL SE declares that there are no restrictions of the voting rights.

The Company ISTROKAPITAL SE has no knowledge about the contracts and agreements

concluded between the shareholders leading to restriction of the security transmissibility or voting

rights.

In relation to regulations determining the appointment and removal of the members of the Board

of Directors of the company ISTROKAPITAL SE and the changes of the Memorandum and

Articles of Association of the company, the members of the Board of Directors are appointed and

removed by the General Meeting of the Company. The Memorandum and Articles of Association

of the Company and its changes approves the General Meeting of the Company. In accordance

with the Memorandum and Articles of Association of the company the Board of Directors is able

to appoint the new member of the Board of Directors with the validity till the next Annual General

Meeting of the Company.

10

ISTROKAPITAL SE


The Board of Directors of the Company ISTROKAPITAL SE disposes of the powers determined

by the Law of the Republic of Cyprus and the Memorandum and Articles of Association of the

Company, and there are no special powers to decide about the issue and redeem the shares of the

Company.

There are no contracts and agreements where the Company ISTROKAPITAL SE is the

contracting party and which became effective, which change or whose validity ends in

consequence of changes of its controlling affairs which would arise in relation to the offer for

takeover and its effects with the exception of the case when its revelation would cause damages to

it, and this exception shall not apply when the Company is obliged to publish this information

within the fulfillment of the obligations according to special rules.

The Company ISTROKAPITAL SE has no knowledge about the contracts and agreements

concluded between the Company and the members of its organs or employees on the basis of

which there shall be provided compensation to them if their function or working relation

terminates by giving up their function, by notice of employee, their removal, by notice of the

employer without stating the reason, or their function or working relation terminates in

consequence to the offer for takeover.

Information about acquiring of own securities, temporary securities, shares and securities,

temporary securities and shares of the mother accounting unit:

Information about acquiring of own securities, temporary securities, shares:

No significant acquisition of own securities, temporary securities and shares has been realized by the

Issuer.

Information about acquiring of own securities, temporary securities, shares of the mother accounting

unit:

There was no significant acquisition of own securities, temporary securities and shares of the mother

accounting unit. The acquistition of own securities was realized only among existing shareholders.

Information about the aims and methods of the governance of the risks in the accounting unit

together with the policy for security of main types of planned trades with using of security

derivates:

The Company did not use security derivates.

11

ISTROKAPITAL SE

REPORT OF THE BOARD OF DIRECTORS

The Board of Directors of the Company ISTROKAPITAL SE presents to the members their sixth annual

report together with the audited consolidated financial statements of the Company and its subsidiaries

for the year ended 31 December 2012, prepared in accordance with International Financial Reporting

Standards (IFRSs) as adopted by the European Union (EU) and the requirements of the Cyprus

Companies Law, Cap. 113.

The Board of Directors is responsible for ensuring that the entities of the Group keep accounting records,

which comply with local laws and regulations and also ISTROKAPITAL SE internal regulations and

enable it to prepare IFRS financial statements, which disclose fairly, in all material respects, its financial

position and results of operations and cash flows in accordance with IFRSs as adopted by the EU. The

Board of Directors also has a general responsibility for taking reasonable steps to safeguard the assets of

the Group and to prevent and detect fraud and other irregularities.

The Board of Directors considers that, in preparing the financial statements set out on page 17 to 131,

the Group has used appropriate accounting policies, consistently applied and supported by reasonable

and prudent judgments and estimates, and that appropriate IFRS as adopted by the EU have been

complied with.

INCORPORATION

The company ISTROKAPITAL SE was incorporated in the Republic of Cyprus on 1 February 2007 as a

European Public Limited Liability Company under the Companies Law, Cap. 113. It was the result of

the merger of ISTROKAPITÁL, a.s., a company registered in the Slovak Republic and Kangima

Investments Public Company Ltd, a company registered in Cyprus.

PRINCIPAL ACTIVITIES

During the period the group continued its principal activities which are primarily classified as:

Financing activities such as retail banking, corporate banking, financing, general and life insurance

services, advisory and asset management: and

Investing activities such as holding and trading of investments and acquisition of new ownership

interests and investments in real estate funds and pharmaceutical industry

FINANCIAL RESULTS

The Group’s financial results for the year ended 31 December 2012 are set out on page 18 and 19 of the

consolidated financial statements. The profit for the year attributable to the owners of the Company

amounted to € 46,333 thousand (2011: € (212,497) thousand loss).

EXAMINATION OF THE DEVELOPMENT, POSITION AND PERFORMANCE OF THE

ACTIVITIES OF THE GROUP

The current financial position as presented in the consolidated financial statements is considered

satisfactory. The Board of Directors expects to expand its activities by entering into new financial

markets, real estate area in other countries, especially in Central, Southern and Eastern Europe and in

pharmaceutical industry.

12

ISTROKAPITAL SE

REPORT OF THE BOARD OF DIRECTORS (continued)

DIVIDENDS

The Board of Directors does not recommend the payment of a dividend and the net profit for the year is

retained.

MAIN RISKS AND UNCERTAINTIES

The most significant risks faced by the group and the steps taken to manage these risks, are described in

note 5 of the consolidated financial statements.

FUTURE DEVELOPMENTS

The Group’s main goals, strategy and targets are set out on page 14 of the consolidated financial

statements.

SHARE CAPITAL

Authorized capital:

The total authorized share capital of the company ISTROKAPITAL SE as at 31 December 2012

amounts to EUR 45,766,577 comprising of 24,087,672 ordinary shares with nominal value of € 1.90

each.

Issued capital:

The total issued and fully paid share capital of the company ISTROKAPITAL SE as at 31 December

2012 amounts to EUR 45,766,577 comprising of 24,087,672 ordinary shares with nominal value of

€ 1.90 each.

BRANCHES

During the year ended 31 December 2012 the Group operated 42 branches (2011: 40 branches) (all

branches of Poštová banka, a.s.).

BOARD OF DIRECTORS

The members of the Board of Directors of the Company, ISTROKAPITAL SE as at 31 December 2012

and at the date of this report are shown on page 6. All of them were members of the Board of Directors

throughout the year ended 31 December 2012, except from Mr. Ľuboš Áč who resigned 15 February

2013. Furthermore, Mr. Boris Kreheľ and Mr. Tomáš Pivarči resigned on 27 March 2013 and on the

same date, Ms. Tatiana Franzenová and Ms. Alena Madačova were appointed as members of the Board

of Directors in their place.

In accordance with the Company’s Articles of Association all directors presently members of the Board

continue in office.

EVENTS AFTER THE REPORTING PERIOD

Any significant events that occurred after the end of the period are described in note 49 of the

consolidated financial statements.

13

ISTROKAPITAL SE

REPORT OF THE BOARD OF DIRECTORS (continued)

CORPORATE GOVERNANCE

During the period the Company continued the adoption and application of the corporate governance

code based on the OECD principles.

RELATED PARTY TRANSACTIONS

Disclosed in note 45 of the financial statements.

INDEPENDENT AUDITORS

The independent auditors, KPMG Limited, have expressed their willingness to continue in the office.

A resolution giving authority to the Board of Directors to fix their remuneration will be submitted at the

Annual General Meeting.

By order of the Board of Directors,

............................................ ...........................................

Ladislav Timuľák Monika Stretavská

Member of Board of Directors Member of Board of Directors

Nicosia, ......

14

ISTROKAPITAL SE

BUSINESS PLAN – GROUP STRATEGY AND TARGETS

In 2012 the Company ISTROKAPITAL SE and its Group continued on focusing on its strategic

objectives and achieving its goals predetermined in 2011. The year 2012 was for the Company the sixth

year as a European Company with registered seat at the Republic of Cyprus.

The Company achieved its important strategic target to strenghten position of Poštová banka, a.s. in the

market of Slovak republic. By the acquring of the shares of pension fund management company in 2011

the Group of Poštová banka continue in development and achieve the higher complexity of its financial

services for its clients in Slovak republic and became significant financial institution in slovak financial

market.

The year 2012 brought many changes and the Company ISTROKAPITAL SE considered these changes

as positive and giving stabilization to the Group for the future years. The stabilization of the position of

the Croup is considered as one of the most important goals to the future of the Group of

ISTROKAPITAL SE. The future will offer new challenges and opportunities, and we believe that the

Group will use them to improve further its activities and strategies, to achieve the stability, development

and growth of all members of the Group ISTROKAPITAL SE.

In the future the Company will continue providing its full support to all companies within

ISTROKAPITAL SE Group, in their efforts to promote growth and strengthening of competitive

positioning of the Group in present market and will support them to find new perspective markets for

future development of the Group.

Furthermore, in 2012, ISTROKAPITAL SE and its Group shall focus on the following areas:

Providing a wide portfolio of advisory and consultancy services for its business partners and clients

Stabilization of the position of ISTROKAPITAL SE Group

Stabilization of the position of Poštová banka, a.s. in the banking section of the Czech republic

Stabilization of the financial situation of the Company through increasing income and decreasing

costs

Supporting the business activities of subsidiary company AXON in the research and development

of new pharmaceutical products

Arrangement and realization of new business opportunities.

The main goals and strategies of the Group include:

To achieve sustainable profitability

To increase income and decrease costs

To maximize the profit of the companies within the Group

To increase income and assets of the Group over the long-term horizon

To ensure the Group’s long-term prosperity

To implement the growth and innovation policy.

15

INDEPENDENT AUDITORS' REPORT

TO THE MEMBERS OF

ISTROKAPITAL SE

16

INDEPENDENT AUDITORS' REPORT

TO THE MEMBERS OF

ISTROKAPITAL SE

17

ISTROKAPITAL SE

Consolidated statement of financial position

As at 31 December 2012 2012 2011

Notes € ‘000 € ‘000

Assets

Cash and cash equivalents 8 47,705 149,306

Trading assets 10 35,994 28,818

Loans and advances to banks 11 104,136 14,047

Loans and advances to customers 12 1,984,758 1,943,619

Investment securities 13 1,306,117 1,094,850

Investment property 14 2,428 2,428

Property and equipment 15 41,832 40,217

Intangible assets 16 32,067 27,258

Income tax receivable 25 9,102 14,849

Deferred tax asset 17 46,501 56,656

Other assets 18 203,405 226,485

Total assets 3,814,045 3,598,533

Liabilities

Trading liabilities 10 758 68

Deposits by banks 19 61,079 100,218

Customer accounts 20 2,829,500 2,664,962

Debt securities in issue 21 112,532 113,833

Loans received 22 258,225 142,947

Provisions for liabilities 23 52 64

Provisions for insurance contracts 24 5,747 4,854

Income tax liabilities 25 1,389 1,109

Other liabilities 26 469,711 383,050

Subordinated liabilities 27 8,013 13,413

Total liabilities 3,747,006 3,424,518

Share capital and reserves

Share capital 28 45,767 45,767

Foreign currency translation reserve 29 (2,566) (2,804)

Revaluation reserve 29 14,096 1,833

Merger reserve 29 15,301 15,301

Retained earnings 29 (23,223) 98,754

Total equity attributable to the equity holders of the Company 49,375 158,851

Non-controlling interest 17,664 15,164

Total equity 67,039 174,015

Total equity and liabilities 3,814,045 3,598,533

These consolidated financial statements, which include the notes on pages 23 to 131, were approved by the

Board of Directors on ....... 2014:

............................................ ........................................... Ladislav Timuľák Monika Stretavská

Member of Board of Directors Member of Board of Directors

The notes on pages 23 to 131 are an integral part of these consolidated financial statements.

18

ISTROKAPITAL SE

Consolidated statement of comprehensive income

Year ended 31 December 2012

2012 2011

Notes € ‘000 € ‘000

Interest income and similar income from debt securities 31 257,890 219,273

Interest expense 32 (83,827) (64,956)

Net interest income 174,063 154,317

Fee and commission income 33 46,043 37,018

Fee and commission expense 34 (26,628) (18,568)

Net fee and commission income 19,415 18,450

Dividends received 1,009 1,448

Net trading (expense)/income 35 (22,302) (91,196)

Net earned premiums 36 7,842 6,008

Net other income 37 (2,599) 3,369

Net non-interest (expense)/income 3,365 (61,921)

Operating income 177,428 92,396

Administrative expenses 38 (81,273) (60,307)

Depreciation and amortisation 39 (12,026) (7,595)

Claim costs 40 (1,799) (773)

Operating expenses (95,098) (68,675)

Operating profit before impairment

losses and provisions 82,330

23,721

Impairment losses on investment securities, net 13 (2,483) (274,773)

Impairment losses on loans and advances, net 12 (20,123) (20,758)

Impairment losses on property and equipment 15 (170) (1,166)

Impairment losses on intangibles assets 16 (455) -

Impairment losses on other assets, net 18 (197) (578)

Release of provisions for liabilities, net 23 12 4

Profit/(loss) from operations 58,914 (273,550)

Disposal of subsidiaries 7b 978 -

Profit/(loss) before tax 59,892

(273,550)

Income tax (expense)/credit 41 (9,203) 48,827

Profit/(loss) for the year 50,689 (224,723)

19

ISTROKAPITAL SE

Consolidated statement of comprehensive income (continued)

Year ended 31 December 2012 2012 2011

Notes € ‘000 € ‘000

Other comprehensive income

Foreign currency translation differences, net of tax 367 (693)

Compensation rights - 179,837

Net change in fair value of available-for-sale

financial assets after reclassifications to profit or loss, net

of tax 13,256 15,904

Other comprehensive income for the year,

net of income tax 13,623 195,048

Total comprehensive income for the year 64,312 (29,675)

Profit/(loss) attributable to:

Owners of the Company 46,333 (212,497)

Non-controlling interest 4,356 (12,226)

Profit/(loss) for the year 50,689

(224,723)

Total comprehensive income attributable to:

Owners of the Company 58,834 (27,459)

Non-controlling interest 5,478 (2,216)

Total comprehensive income for the year 64,312 (29,675)

Basic earnings per share (expressed in € per share) 42 1.92 (8.82)


ISTROKAPITAL SE

Consolidated statement of changes in equity


20

Share

capital FCTR

Revaluation

reserve

Merger

reserve

Retained

earnings

Total equity

attributable

to equity

holders of

the parent

Non-

controlling

interest

Total

equity

Note € ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000

At 1 January 2012 45,767 (2,804) 1,833 15,301 98,754 158,851 15,164 174,015

Total comprehensive income for the year

Profit for the year - - - - 46,333 46,333 4,356 50,689



financial assets, net of tax - - 12,263 - - 12,263 993 13,256

Foreign currency translation differences, net of tax - 238 - - - 238 129 367

Total comprehensive income for the year - 238 12,263 46,333 58,834 5,478 64,312

Transactions with owners of the Company

recognised directly in Equity

Compensation rights 13 - - - - (170,503) (170,503) (9,334) (179,837)

Changes in ownership interests in subsidiaries

Disposal of non-controlling interest without a

change in control - - - - 4,683 4,683 7,018 11,701

Acquisition of non-controlling interest without a

change in control 7 - - - - (2,490) (2,490) (662) (3,152)

Total changes in ownership interests in

Subsidiaries - - - - 2,193 2,193 6,356 8,549

Total contributions by and distributions

to owners of the Company (168,310) (168,310) (2,978) (171,288)

At 31 December 2012 45,767 (2,566) 14,096 15,301 (23,223) 49,375 17,664 67,039


ISTROKAPITAL SE

Consolidated statement of changes in equity (continued)


21

Share

capital FCTR

Revaluation

reserve

Merger

reserve

Retained

earnings

Total equity

attributable

to equity

holders of

the parent

Non-

controlling

interest

Total

equity

Note € ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000

At 1 January 2011 45,767 (2,285) (13,221) 15,301 132,325 177,887 10,148 188,035

Total comprehensive income for the year

Loss for the year - - - - (212,497) (212,497) (12,226) (224,723)



financial assets, net of tax - - 15,054 - - 15,054 850 15,904

Foreign currency translation differences, net of tax - (519) - - - (519) (174) (693)

Compensation rights - - - - 170,503 170,503 9,334 179,837

Total comprehensive income for the year - (519) 15,054 - (212,497) (197,962) (2,216) (29,675)

Changes in ownership interests in subsidiaries

Disposal of non-controlling interest without a

change in control - - - - 6,973 6,973 12,382 19,355

Acquisition of non-controlling interest without a

change in control 7 - - - - 1,450 1,450 (5,150) (3,700)

Total changes in ownership interests in

Subsidiaries - - - - 8,423 8,423 7,232 15,655

At 31 December 2011 45,767 (2,804) 1,833 15,301 98,754 158,851 15,164 174,015


ISTROKAPITAL SE



22

2012 2011

Notes € ‘000 € ‘000

Cash flows from operating activities

Cash flow from operations before changes in operating

assets and liabilities 43 95,487 35,759

Decrease in trading assets 6,468 21,081

Decrease in loans and advances to banks (90,089) 22,450

Increase in loans and advances to customers (61,262) (704,487)

Increase in other assets 22,882 (166,281)

(Decrease)/increase in trading liabilities 690 (607)

Increase in deposits by banks (39,139) 22,233

Increase in customer accounts (15,299) 614,069

Income tax paid 3,044 (23,756)

Increase in other liabilities 86,661 342,165

Net cash flow from operating activities 9,443 162,626

Cash flows from investing activities

Purchase of property and equipment (7,313) (19,850)

Proceeds from sale of property and equipment 570 775

Purchase of intangible assets 2,682 (2,722)

Proceeds from sale of intangible assets (25,530) -

Purchase of investment securities (197,550) (276,811)

Subordinated liabilities (5,400) 7,911

Change in non-controlling interest 3,887 17,242

Acquisition of subsidiary 7 (11,321) (14,500)

Disposal of subsidiaries 7 22,455 -

Change in ownership interest in subsidiary while remaining control 8,549 8,423

Net cash used in investing activities (208,971) (279,532)

Cash flows from financing activities

Repayment of bonds (1,301) (12,689)

Loans received 99,228 91,300

Net cash from financing activities 97,927 78,611

Net decrease in cash and cash equivalents (101,601) (38,295)

Cash and cash equivalents at 1 January 8 149,306 187,601

Cash and cash equivalents at 31 December 8 47,705 149,306


ISTROKAPITAL SE



23

Note Page Note Page

1. Reporting entity 24-27 26. Other liabilities 113

2. Basis of preparation 27-28 27. Subordinated liabilities 113

3. Significant accounting policies 28-43 28. Share capital 114

4. Use of estimates and judgements 44-50 29. Reserves 114

5. Financial risk management 51-86 30. Contingencies, commitments and

derivative financial instruments

115-116

6. Operating Segments 86-90 31. Interest income and similar

income from debt securities

116

7. Acquisition and disposal of

subsidiaries

90-91 32. Interest expense 117

8. Cash and cash equivalents 92 33. Fee and commission income 117

9. Cash and balances at the central bank 92 34. Fee and commission expense 117

10. Trading assets and liabilities 92-94 35. Net trading income 118

11. Loans and advances to banks 94 36. Net earned premiums 118

12. Loans and advances to customers 95-96 37. Net other income 118

13. Investment securities 96-103 38. Administrative expenses 119

14. Investment property 104 39. Depreciation and amortisation 119

15. Property and equipment 105-106 40. Claim costs 119

16. Intangible assets 107-108 41. Income tax 120-123

17. Deferred tax 109 42. Earnings per share 124

18. Other assets 110 43. Profit before changes in

operating assets and liabilities

124

19. Deposits by banks 110 44. Operating lease commitments 124

20. Customer accounts 111 45. Related party transactions 125-127

21. Debt securities in issue 111 46. Asset management and custodial

services

128

22. Loans received 111-112 47. Fair values 128-129

23. Provisions for liabilities 112 48. Contingent liabilities 129

24. Provisions for insurance contracts 112 49. Subsequent Events 129-131

25. Income tax refundable/(payable) 113

ISTROKAPITAL SE



24

1. REPORTING ENTITY

ISTROKAPITAL SE (“the Company”) with registered office at 41-43 Klimentos Street, Klimentos Tower,

1st Floor, Office 12, 1061 Nicosia, Cyprus, was registered on 1 February 2007 as a European Public

Limited Liability Company with a registration number SE 2.

At an extraordinary general assembly held on 15 December 2006, the shareholders approved the merger of

ISTROKAPITÁL, a.s. with KANGIMA INVESTMENT PUBLIC COMPANY LIMITED and the

establishment of an European company, ISTROKAPITAL SE, in accordance with Council Regulation (EC)

no. 2157/2001 of 8 October 2001 on the Statute for an European Company. Based on the merger conditions

approved by the general assembly, for accounting purposes, all operations effective from 1 January 2007

are considered to be operations of ISTROKAPITAL SE.

The consolidated financial statements for the year ended 31 December 2012 comprise of the Company and

its subsidiaries, together referred to as “the Group” and Group’s interest in associates.

Ownership structure

31 December 2012 ownership of share capital voting rights € '000 % %

ISTRO Holding a.s. 45,678 99.8061 99.8061

Other shareholders 89 0.1939 0.1939

45,767 100.00 100.00

Members of the Board of Directors

Mario Hoffman Chairman of the Board of Directors

Boris Kreheľ

Jozef Salaj

Ľuboš Áč (resigned on 15 February 2013)

Daniel Legéň (resigned on 9 March 2011)

Ladislav Timuľák

Monika Stretavská

Tomáš Pivarči (resigned on 27 March 2013)

Angeliki Englezou (appointed on 9 March 2011 and resigned

7 December 2011)

Tatiana Franzenová (appointed on 27 March 2013)

Alena Madačova (appointed on 27 March 2013)

ISTROKAPITAL SE



25

1. REPORTING ENTITY (continued)

Principal activities

The principal activities of the Group can be primarily classified as financing and investing activities

comprise of holding of investments in subsidiary companies, acquisition of new ownership interests,

financing, banking, advisory, asset management and provision of general and life insurance services.

As at 31 December 2012, the parent Company, ISTROKAPITAL SE, had the following subsidiaries:

Name Activity Residence Group

interest %

ABS Sprinter Limited Hiring aircraft Ireland 66.67

Omniofert GmbH (disposed on 29

October 2012)

* Austria -

Axon Neuroscience SE * Slovak Republic 100.00

DANUBE CLONE, spol. s r.o. (merged

with AXON Neuroscience SE as of

1 May 2012)

* Slovak Republic -

ISTROKAPITAL CYPRUS LIMITED Financing services Cyprus 100.00

ISTROKAPITÁL CZ a.s. Financing services Czech Republic 100.00

ISTROKAPITÁL SLOVENSKO, a.s. Trading, advisory Slovak Republic 100.00

Poštová banka, a.s. (“the Bank”) Bank Slovak Republic 92.51

Poisťovňa Poštovej banky, a.s. Insurance Slovak Republic 92.51

PRVÁ PENZIJNÁ SPRÁVCOVSKÁ

SPOLOČNOSŤ POŠTOVEJ BANKY,

správ. spol., a.s.

Asset management

Slovak Republic

92.51

PB PARTNER, a.s. Financial intermediary Slovak Republic 92.51

Dôchodková správcovská spoločnosť

Poštovej banky, d.s.s., a. s.

Management of pension

funds

Slovak Republic 92.51

POBA Servis, a. s.

Real estate

administration


PB Finančné služby, a.s. Financial and

operational leasing


* Discovery and development of disease modifying therapeutics for neurodegenerative disorders.

As at 31 December 2012, the parent Company, ISTROKAPITAL SE, held investments in the following

jointly controlled entities:

Name Activity Residence Group

interest %

SPPS, a.s. Payment services Slovak Republic 36.94

On 5 December 2011, at an Extraordinary General Meeting of the shareholders of Poštová banka, a.s., it

was agreed to increase the share capital of the Bank by €150,000,760, by the issuance of 178,360 ordinary

shares at nominal value of €841 each. The shareholder, ISTROKAPITAL SE, subscribed for 178,360

shares at nominal value, for a total consideration of €150,000,760.

The shareholder was required to pay 30% of the nominal value of the shares within the issuance period.

The balance of the shares should be paid within one year from registration of the share capital in the

Commercial register.

ISTROKAPITAL SE



26


Principal activities (continued)

As all the legal requirements were fulfilled, on 30 December 2011 the increase in share capital was

registered in the Commercial register as total share capital of €232,703 thousand and paid €132,703

thousand. An amount of €50,000,814 in connection with the share capital increase was paid by

ISTROKAPITAL SE on 12 December 2011.

On 5 December 2011 the Group increased share capital in Poštová banka, a.s., which increased the share of

the Group to 98.16 %. On 21 December 2011, shares of Poštová banka, a.s. were sold by the Group to J&T

FINANCE, a. s. and accordingly, J&T FINANCE, a. s. acquired 3.52 % share in Poštová banka, a.s.

On 11 January 2012, shares of Poštová banka, a.s. were sold by ISTROKAPITAL SE to J&T FINANCE,

a.s. and accordingly, J&T FINANCE, a.s. acquired an additional 2.13% share in the share capital of the

Bank, bringing its total holding to 5.65%.

The disposal of the majority share in Poštová banka, a.s. to J&T FINANCE, a.s. and J&T BANKA, a.s.

(both, subsidiaries of J&T FINANCE GROUP, a.s.) was approved by the Antimonopoly Office of the

Slovak Republic, on 26 April 2013 (refer to Note 49).

On 10 February 2012, Poštová banka, a.s. with a 40% share of equity and Slovenská pošta, a.s. with a 60%

shares of equity established SPPS, a.s. The company will provide modern payment services.

On 17 May 2012, ISTROKAPITAL SE (as seller) entered into a general contract on the purchase of shares

with J&T Finance, a.s. and J&T Banka, a.s. (as buyers; both being subsidiaries of “J&T FINANCE

GROUP, a.s.”) regarding the disposal of a combined ownership interest of 82.409% in its subsidiary

Poštová banka, a.s., which replaced in full the former general contract on the purchase of shares of Poštová

banka, a.s. concluded on 22 December 2011 between ISTROKAPITAL SE and J&T Finance, a.s.. In

relation to the acquisition of the total ownership interest of 84.536% disposed to J&T Finance, a.s. and J&T

Banka, a.s. in 2012, Istrokapital SE received an advanced payment of €338,645 thousand in December

2011. On 29 February 2012, ISTROKAPITAL SE called for payment of the second tranche of the purchase

price for the acquisition of the combined interest of 82.409%, amounting to €92 million (settlement

described below).

On 8 March 2012, J&T Finance a.s. assigned funds deposited in Poštová banka, a.s., totaling €275,280,274,

to ISTROKAPITAL SE. ISTROKAPITAL SE contributed these funds to the equity of Poštová banka a.s.,

contribution effective from 13 March 2012.

On 13 March 2012, ISTROKAPITAL SE and J&T Finance a.s. agreed to mutually offset the debts of

ISTROKAPITAL SE to J & T Finance a.s. arising by the assignment of the term deposits, against the debts

of J&T Finance a.s. to ISTROKAPITAL SE in respect of the following:

€92 million outstanding for the advance payment regarding the proposed disposal of a controlling

interest in Poštová banka, a.s.; and

Loan granted to J&T Finance a.s..

On 7 June 2012, the Extraordinary General Meeting of Poštová banka, a.s, held that the amount of

€99,999,946 due from Istrokapital SE in respect of the subscribed registered share capital of Poštová banka,

a.s. would be settled through the distribution of the Bank’s ‘Other Capital Funds’ to IstrokapitaL SE

On 17 July 2012, the Bank purchased the remaining 92.16% shares in Auto Leas a.s. and became 100%

shareholder of this company. The principal activity of the company renamed PB Finančné služby, a.s. is

financial and operational leasing. The value of the original 8.84 % shares booked as investment securities

together with the purchase price represents the total acquisition costs of € 11,321 thousand.

On 18 October 2007, the Group established Nadácia Poštovej banky, a charitable foundation. The primary

aim of the foundation is to assist children and young people from children homes and economically

deprived families to participate in social activities, particularly water sports.

ISTROKAPITAL SE



27


Principal activities (continued)

On 27 January 2009, the Group acquired 66.67% of the share capital of ABS Sprinter Limited. The

principal activity of the company is the hiring of aircraft.

On 18 September 2009, the Group subscribed for 100% of the share capital of ISTROKAPITAL CZ, a.s.

for a total consideration of € 377,858 (CZK 10,000 thousand). The principal activity of the company is the

provision of financing services.

On 22 October 2009 the Group subscribed for 100% of the share capital of ISTROKAPITAL CYPRUS

LIMITED for € 1,000. The principal activity of the company is the provision of financing services.

During 2010, the Group acquired a controlling holding in Omniofert GmbH (‘Omniofert’) (formerly Axon

Neuroscience Forschungs und Entwicklungs GmbH), which owns 100% of share capital of DANUBE

CLONE, spol. s r.o., in three steps, through its subsidiary ISTROKAPITAL CYPRUS LIMITED:

In February 2010 the Group acquired 47.74 % of the issued share capital of Omniofert, for a total

consideration of € 5,098 thousand.

In April 2010, the Group acquired 0.1 % of the issued share capital of Omniofert, for a total

consideration of € 16 thousand, thereby increasing its share to 47.84 %.

In September 2010, the Group increased its share in Omniofert to 83.38 % by subscribing for the

entire issue of new share capital in Axon, for a total consideration of € 21,400 thousand.

During 2011, the Group increased its share in Omniofert by 6% for a total consideration of € 3,700

thousand.

During 2011, the Group acquired 100% of the share capital of Axon Neuroscience Slovakia SE (formerly

Belavio, SE) for € 23,012 thousand.

On 17 May 2011, the Group acquired 100% of shares in the company ČSOB d.s.s. (new name of the

company: Dôchodková správcovská spoločnosť Poštovej banky, d.s.s., a. s.) for total acquisition costs of

€ 14,500 thousand and another € 2,021 thousand as present value of the contingent settlement taking into

account different uncertainties.

On 15 June 2011, the Group subscribed for 100% of shares in the company POBA servis, a.s. for € 55

thousand.

2. BASIS OF PREPARATION

(a) Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial

Reporting Standards (‘IFRSs’) as adopted by the European Union and the requirements of the Cyprus

Companies Law, Cap 113.

These consolidated financial statements have also been prepared in accordance with the requirements of

Section 22 of the Slovak Act on Accounting 431/2002, as amended.

(b) Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis except for the

following material items in the consolidated statement of financial position:

derivative financial instruments;

trading assets and trading liabilities;

available-for-sale financial assets;

ISTROKAPITAL SE



28

2. BASIS OF PREPARATION (continued)

(c) Going concern assumptions

The financial statements were prepared using the going concern assumptions that the Company will

continue in operation for the foreseeable future.

(d) Functional and presentation currency

The consolidated financial statements are presented in Euro (€). The Board of Directors has determined the

Euro to be the presentation currency since it is the functional and presentation currency of the Parent

Company.

Items included in the financial statements of each of the Group’s entities are measured using the currency

of the primary economic environment in which the entity operates (the functional currency).

Except as otherwise indicated, financial information presented in Euro (€) has been rounded to the nearest

thousand.

(e) Use of estimates and judgements

The preparation of financial statements requires management to make judgements, estimates and

assumptions that affect the application of accounting policies and reported amounts of assets, liabilities,

income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates

are recognised in the period in which the estimate is revised and in any future periods affected.

Information about significant areas of estimation uncertainty and critical judgements in applying

accounting policies that have the most significant effect on the amounts recognised in the financial

statements is provided in notes 3 and 4.

3. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all periods presented in these

consolidated financial statements, and have been applied consistently by Group entities.

(a) Basis for consolidation

The consolidated financial statements include the financial statements of the Company and those of its

subsidiaries (see note 1) prepared for the year ended 31 December 2012.

(i) Subsidiaries

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern

the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing

control, potential voting rights that currently are exercisable are taken into account. The financial

statements of subsidiaries are included in the consolidated financial statements from the date that control

commences until the date that control ceases. The accounting policies of subsidiaries have been changed

when necessary to align them with the policies adopted by the Group.

(ii) Investments in associates and jointly controlled entities

Associates are those entities in which the Group has significant influence, but not control, over the financial

and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50

percent of the voting power of another entity. Joint ventures are those entities over whose activities the

Group has joint control, established by contractual agreement and requiring unanimous consent for strategic

financial and operating decisions. Associates and jointly controlled entities are accounted for using the

equity method (equity accounted investees) and are initially recognised at cost. The Group’s investment

includes goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated

financial statements include the Group’s share of the income and expenses and equity movements of equity

accounted investees, after adjustments to align the accounting policies with those of the Group, from the

ISTROKAPITAL SE



29

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

(a) Basis for consolidation (continued)

date that significant influence or joint control commences until the date that significant influence or joint

control ceases. When the Group’s share of losses exceeds its interest in an equity accounted investee, the

carrying amount of that interest (including any long-term investments) is reduced to nil and the recognition

of further losses is discontinued except to the extent that the Group has an obligation or has made payments

on behalf of the investee.

(b) Foreign currency

(i) Foreign currency transactions

Transactions denominated in foreign currencies are translated into the respective functional currencies of

Group entities at the exchange rates ruling on the date of the transaction. Monetary assets and liabilities are

retranslated into the functional currency at the exchange rate prevailing on the reporting date. Non-

monetary assets and liabilities denominated in foreign currencies that are measured at fair value are

retranslated into the function currency at the exchange rate at the date that the fair value was determined.

All resulting gains and losses arising on retranslation are recognised in Net trading income in profit or loss.

(ii) Foreign operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on

acquisition, are translated to euro at exchange rates at the reporting date. The income and expenses of

foreign operations are translated to euro at exchange rates at the dates of the transactions.

Foreign currency differences are recognised directly in other comprehensive income. Such differences are

recognised in the foreign currency translation reserve (“FCTR”) within equity. When a foreign operation is

disposed of, in part or in full, the relevant amount in the FCTR is reclassified to the income statement when

the gain or loss on disposal is recognised.

Foreign exchange gains and losses arising from a monetary item receivable from or payable to a foreign

operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to

form part of a net investment in a foreign operation and are recognised in other comprehensive income in

the FCTR.

(c) Interest income and expense

Interest income and expense are recognised in profit or loss using the effective interest method. The

effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts

through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the

carrying amount of the financial asset or liability. The effective interest rate is established on initial

recognition of the financial asset and liability and is not revised subsequently.

The calculation of the effective interest rate includes all fees paid or received, transaction costs and

discounts or premiums that are an integral part of the effective interest rate. Transaction costs are

incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or

liability. Interest income and expense on trading assets and liabilities are presented as part of Interest

income and expense and changes in the fair values are presented in Net trading income.

Interest income and expense presented in the income statement include:

interest on financial assets and liabilities at amortised cost calculated on an effective interest basis,

interest on available-for-sale investment securities calculated on an effective interest basis.

ISTROKAPITAL SE



30


(d) Fee and commissions

Fee and commission income and expenses that are integral to the effective interest rate on a financial asset

or liability are included in the measurement of the effective interest rate.

Other fee and commission income, including account servicing fees, investment management fees, sales

commission, placement fees and syndication fees, are recognised as the related services are performed.

When a loan commitment is not expected to result in the draw-down of a loan, loan commitment fees are

recognised on a straight-line basis over the commitment period.

Other fee and commission expense relates mainly to transaction and service fees, which are expensed as the

services are received.

(e) Net trading income

Net trading income comprises gains less losses related to trading assets and liabilities, and includes all

realised and unrealised fair value changes and foreign exchange differences.

(f) Dividends

Dividend income is recognised when the right to receive income is established. Usually this is the ex-

dividend date for equity securities.

(g) Lease payments made

Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term

of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the

term of the lease.

Minimum lease payments made under finance leases are apportioned between the finance expense and the

reduction of the outstanding liability. The finance expense is allocated to each period during the lease term

so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent

lease payments are accounted for by revising the minimum lease payments over the remaining term of the

lease when the lease adjustment is confirmed.

(h) Income tax

Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit or loss

except to the extent that it relates to items recognised directly in other comprehensive income, in which

case it is also recognised in other comprehensive income.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or

substantively enacted at the end of reporting period, and any adjustment to tax payable in respect of

previous years. Deferred tax is provided using the statement of financial position method, providing for temporary

differences between the carrying amounts of assets and liabilities for financial reporting purposes and the

amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences:

the initial recognition of assets or liabilities in a transaction that is not a business combination and that

affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries

and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable

future. In addition, deferred tax is not recognised for taxable temporary differences arising on the initial

recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to the

temporary differences when they reverse, based on the laws that have been enacted or substantively enacted

by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to

offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on

ISTROKAPITAL SE



31


(h) Income tax (continued)

the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets

on a net basis or their tax assets and liabilities will be realised simultaneously.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be

available against which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and

are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Additional income taxes that arise from the distribution of dividends are recognised at the same time as the

liability to pay the related dividend is recognised.

(i) Financial assets and liabilities

(i) Recognition

The Group initially recognises loans and advances, deposits by banks, customer accounts, loans received

and debt securities in issue on the date that they are originated. All other financial assets and liabilities

(including trading assets and liabilities) are initially recognised on the trade date at which the Group

becomes a party to the contractual provisions of the instrument.

A financial asset and financial liability is measured initially at fair value, plus (for an item not at fair value

through profit or loss) transaction costs that are directly attributable to its acquisition or issue.

(ii) Derecognition

The Group derecognises a financial asset when the contractual rights to the cash flows from the asset

expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in

which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest

in transferred financial assets that is created or retained by the Group is recognised as a separate asset or

liability.

The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expired.

The Group enters into transactions under which it transfers assets recognised on its statement of financial

position but retains either all or a portion of the risks and rewards of the transferred assets. If all, or

substantially all, risks and rewards are retained, the transferred assets are not derecognised from the

statement of financial position. Transfers of assets with retention of all or substantially all risks and rewards

include, for example, securities lending and repurchase transactions.

The Group also derecognises certain assets when it writes off assets deemed to be uncollectible.

(iii) Offsetting

Financial assets and liabilities are set off and the net amount presented in the statement of financial position

when, and only when, the Group has a legal right to set off the amounts and intends either to settle on a net

basis or to realise the asset and settle the liability simultaneously.

Income and expenses are presented on a net basis only when permitted by the reporting standards, or for

gains and losses arising from a group of similar transactions such as in the Group’s trading activity.

(iv) Amortised cost measurement

The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is

measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation,

using the effective interest method, of any difference between the initial amount recognised and the

maturity amount, minus any reduction for impairment.

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(i) Financial assets and liabilities (continued)

(v) Fair value measurement

The determination of fair values of financial assets and financial liabilities is based on quoted market prices

or dealer price quotations for financial instruments traded in active markets. For all other financial

instruments, fair value is determined by using valuation techniques. Valuation techniques include the

discounted cash flow method, comparison to similar instruments for which market-observable prices exist

and valuation models. The Group uses widely recognised valuation models for determining the fair value of

the more common financial instruments like options and interest rate and currency swaps. For these

financial instruments, inputs into models are market observable.

(vi) Identification and measurement of impairment

At each reporting period, the Group assesses whether there is objective evidence that financial assets not

carried at fair value through profit or loss are impaired. Financial assets are impaired when objective

evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the

loss event has an impact on the future cash flows of the asset that can be reliably estimated.

The Group considers evidence of impairment at both a specific asset and collective level. All individually

significant financial assets are assessed for specific impairment. Assets that are not individually significant

are also collectively assessed for impairment by grouping together financial assets (carried at amortised

cost) with similar risk characteristics.

Objective evidence that financial assets (including investment securities) are impaired can include default

or delinquency by a borrower, restructuring of a loan or advance by the Group on terms that the Group

would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance

of an active market for a security, or other observable data relating to a group of assets such as a

deterioration in economic conditions or adverse changes in the payment status of borrowers or issuers in

that group.

In assessing collective impairment, the Group uses statistical modelling of historical trends of the

probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s

judgement as to whether current economic and credit conditions are such that the actual losses are likely to

be greater or less than suggested by historical modelling. Default rates, loss rates and the expected timing

of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain

appropriate.

Impairment losses on assets carried at amortised cost are measured as the difference between the carrying

amount of the financial asset and the present value of estimated future cash flows discounted at the asset’s

original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account

against loans and advances. Interest on the impaired asset continues to be recognised through the

unwinding of the discount.

When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed

through the profit or loss.

Impairment losses on available-for-sale investment securities are recognised by transferring the difference

between the amortised acquisition cost and current fair value that has been recognised in other

comprehensive income and presented in the fair value reserve in equity, to profit or loss. When a

subsequent event causes the amount of impairment loss on an available-for-sale debt security to decrease,

the impairment loss is reversed through the profit or loss. However, any subsequent recovery in the fair

value of an impaired available-for-sale equity security is recognised directly in other comprehensive

income. Changes in impairment losses attributable to time value are reflected as a component of Net

interest income.

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(j) Cash and cash equivalents

Cash and cash equivalents comprises cash, unrestricted balances held with the National Bank of Slovakia

and highly liquid financial assets with original maturities of less than three months which are subject to

insignificant risk of changes in their fair value and are used by the Group in the management of short-term

commitments. Cash and cash equivalents are carried at amortised cost in the statement of financial position.

(k) Trading assets and liabilities

Trading assets and liabilities are those assets and liabilities that the Group acquires or incurs principally for

the purpose of selling or repurchasing in the near term, or holds as part of a portfolio that is managed

together for short-term profit or position taking.

Trading assets and liabilities are initially recognised and subsequently measured at fair value in the

statement of financial position with transaction costs taken directly to profit or loss. All changes in fair

value are recognised as part of Net trading income in the income statements.

Trading assets and liabilities are not reclassified subsequent to their initial recognition, except for non-

derivative financial assets, other than those designated at fair value through profit or loss upon initial

recognition, which may be reclassified out of the fair value through profit or loss category if they are no

longer held for the purpose of being sold or repurchased in the near term and the following conditions are

met:

If the financial asset would have met the definition of loans and receivables, and it had not been

required to be classified as held for trading at initial recognition, then it may be reclassified if the entity

has the intention and ability to hold the financial asset for the foreseeable future or until maturity.

If the financial asset would not have met the definition of loans and receivables, then it may be

reclassified out of the trading category only in ‘rare circumstances’.

(l) Derivatives held for risk management purposes

Derivatives held for risk management purposes include all derivative assets and liabilities that are not

classified as trading assets or liabilities. Derivatives held for risk management purposes are measured at fair

value in the statement of financial position. The treatment of changes in their fair value depends on their

classification into the following categories:

(i) Fair value hedge

When a derivative is designated as a hedge of the change in fair value of a recognised asset or liability or a

firm commitment, changes in the fair value of the derivative are recognised immediately in profit or loss

together with changes in the fair value of the hedged item that are attributable to the hedged risk (in the

same income statement line item as the hedged item).

If the derivative expires or is sold, terminated, or exercised, no longer meets the criteria for fair value hedge

accounting, or the designation is revoked, hedge accounting is discontinued. Any adjustment up to that

point to a hedged item for which the effective interest method is used is amortised to profit or loss as part of

the recalculated effective interest rate of the item over its remaining life.

(ii) Cash flow hedge

When a derivative is designated as a hedge of the variability in cash flows attributable to a particular risk

associated with a recognised asset or liability or a highly probable forecast transaction that could affect

income, the effective portion of changes in the fair value of the derivative is recognised directly in other

comprehensive income. The amount recognised in other comprehensive income is removed and included in

income in the same period as the hedged cash flows affect income under the same income statement line

item as the hedged item. Any ineffective portion of changes in the fair value of the derivative is recognised

immediately in profit or loss.

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(l) Derivatives held for risk management purposes (continued)

(ii) Cash flow hedge (continued)

If the derivative expires or is sold, terminated or exercised, or no longer meets the criteria for cash flow

hedge accounting, or the designation is revoked, then hedge accounting is discontinued and the amount

recognised in other comprehensive income and presented in the hedging reserve remains there until the

forecast transaction affects profit or loss. If the forecast transaction is no longer expected to occur, hedge

accounting is discontinued and the balance in other comprehensive income is recognised immediately in

profit or loss. (iii) Other non-trading derivatives

When a derivative is not held for trading and is not designated in a qualifying hedge relationship, all

changes in its fair value are recognised immediately in profit or loss as a component of net income on the

other financial instruments carried at fair value.

(iv) Embedded derivatives

Derivatives may be embedded in another contractual arrangement (a ‘host contract’). The Group accounts

for embedded derivatives separately from the host contract when the host contract is not itself carried at fair

value through profit or loss and the characteristics of the embedded derivative are not clearly and closely

related to the host contract. Separated embedded derivatives are accounted for depending on their

classification and are presented in the statement of financial position together with the host contract.

(m) Loans and advances

Loans and advances are non-derivative financial assets with fixed or determinable payments that are not

quoted in an active market and that the Group does not intend to sell immediately or in the near term.

When the Group is the lessor in a lease agreement that transfers substantially all of the risks and rewards

incidental to ownership of an asset to the lessee, the agreement is presented within loans and advances.

When the Group purchases a financial asset and simultaneously enters into an agreement to resell the asset

(or a substantially similar asset) at a fixed price on a future date (‘reverse repo or stock borrowing’), the

agreement is accounted for as a loan or advance, and the underlying asset is not recognised in the Group’s

financial statements.

Loans and advances are initially measured at fair value plus incremental direct transaction costs and

subsequently measured at their amortised cost using the effective interest method.

(n) Investment securities

Investment securities are initially measured at fair value plus incremental direct transaction costs and

subsequently accounted for depending on their classification as either held-to-maturity or available-for-sale.

(i) Held-to-maturity

Held-to-maturity investments are non-derivative assets with fixed or determinable payments and fixed

maturity that the Group has the positive intent and ability to hold to maturity and which are not designated

at fair value through profit and loss or available-for-sale.

Held-to-maturity investments are carried at amortised cost using the effective interest method. Any sale or

reclassification of a significant amount of held-to-maturity investments not close to their maturity would

result in the reclassification of all held-to-maturity investments as available-for-sale and prevent the Group

from classifying investments securities as held-to-maturity for the current and the following two financial

years.

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(n) Investment securities (continued)

(ii) Available-for-sale

Available-for-sale investments are non-derivative investments that are not designated as another category

of financial assets. Unquoted equity securities whose fair value cannot be reliably measured are carried at

cost. All other available-for-sale investments are carried at fair value.

Interest income is recognised in profit or loss using the effective interest method. Dividend income is

recognised in profit or loss when the Group becomes entitled to the dividend. Foreign exchange gains or

losses on available-for-sale debt security investments are recognised in profit or loss.

Other fair value changes are recognised directly in other comprehensive income and presented in the fair

value reserve in equity until the investment is sold or impaired and the cumulative gain or loss is then

recognised in profit or loss.

(o) Investment property

Investment property, principally comprising land and buildings, is held for long-term rental yields and/or

for capital appreciation and is not occupied by the Company. is held for long-term rental yields and/or for

capital appreciation and is not occupied by the Company. Investment property is treated as a non-current

asset and is stated at historical cost less depreciation. Depreciation is recognised in profit or loss on the

straight-line method over the useful lives of each item.

An investment property is derecognised upon disposal or when the investment property is permanently

withdrawn from use and no future economic benefits are expected from the continued use of the asset. Any

gain or loss arising on derecognition of the property (calculated as the difference between the net disposal

proceeds and the carrying amount of the asset) is included in profit or loss in the period in which the

property is derecognised.

(p) Property and equipment

(i) Recognition and measurement

Items of property and equipment are measured at cost less accumulated depreciation and impairment losses.

Cost includes expenditures that are directly attributable to the acquisition of the asset. Purchased software

that is integral to the functionality of the related equipment is capitalised as part of that equipment.

When parts of an item of property or equipment have different useful lives, they are accounted for as

separate items (major components) of property and equipment.

(ii) Subsequent costs

The cost of replacing part of an item of property or equipment is recognised in the carrying amount of the

item if it is probable that the future economic benefits embodied within the part will flow to the Group and

its cost can be reliably measured. The costs of the day-to-day servicing of property and equipment are

recognised in profit or loss as incurred.

(iii) Depreciation

Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each

part of an item of property and equipment. Leased assets are depreciated over the shorter of the lease term

and their useful lives. Land is not depreciated.

The estimated useful lives for the current and comparative periods are as follows:

Buildings 40 years, straight line

Furniture, fittings and equipment 4 to 15 years, straight line

Motor vehicles 4 years, straight line

Softtware 4 years, straight line

Depreciation commences when the asset is put into use.

Depreciation methods, useful lives and residual values are reassessed at the reporting date.

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(q) Intangible assets

Software

Software is stated at cost less accumulated amortisation and impairment losses. Amortisation is recognised

on a straight line basis over the 4–year estimated useful life of the software.

Goodwill

Goodwill arising on a business combination is measured as the excess of the cost of the acquisition of the

subsidiary over the interest in the net fair value of the identifiable assets, liabilities and contingent

liabilities. Goodwill is recognised in the statement of financial position in Intangible assets.

Goodwill is stated at cost less accumulated impairment losses. Amortisation is not charged. Instead,

goodwill is reviewed at each reporting date for impairment and an impairment loss is recognised in profit or

loss when the carrying amount of goodwill exceeds its recoverable value.

(r) Leased assets

Leases under which the Group assumes substantially all the risks and rewards of ownership, are classified

as finance leases. On initial recognition, the leased asset is measured at an amount equal to the lower of its

fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset

is accounted for in accordance with the accounting policy applicable to that asset.

All other leases are operating leases and the assets are not recognised on the Group’s statement of financial

position.

(s) Impairment of non-financial assets

The carrying amounts of the Group’s non-financial assets, other than deferred tax assets, are reviewed at

each reporting date to determine whether there is any indication of impairment. If any such indication exists

then the asset’s recoverable amount is estimated.

An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its

recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash

flows that largely are independent from other assets and groups.

Impairment losses are recognised directly in profit or loss. Impairment losses recognised in respect of cash-

generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and

then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair

value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their

present value using a pre-tax discount rate that reflects current market assessments of the time value of

money and the risk specific to the asset.

Impairment losses recognised in prior periods are assessed at each reporting date for any indications that

the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the

estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that

the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of

depreciation or amortisation, if no impairment loss had been recognised.

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(t) Deposits, customer accounts, debt securities in issue, loans received and subordinated debt

Deposits, customer accounts, debt securities in issue, loans received and subordinated debt are the Group’s

sources of debt funding.

Deposits, customer accounts, debt securities in issue, loans received and subordinated debt are initially

measured at fair value plus transaction costs, and subsequently measured at their amortised cost, including

accrued interest, using the effective interest method.

When the Group sells a financial asset and simultaneously enters into a ‘repo’ or ‘stock lending’ agreement

to repurchase the asset (or a similar asset) at a fixed price on a future date, the arrangement is accounted for

as a deposit, and the underlying asset continues to be recognised in the Group’s financial statements.

(u) Provisions

A provision is recognised if, as a result of a past event, the Group has a present legal or constructive

obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be

required to settle the obligation. Provisions are determined by discounting the expected future cash flows at

a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate,

the risks specific to the liability.

A provision for onerous contracts is recognised when the expected benefits to be derived by the Group

from a contract are lower than the unavoidable cost of meeting the obligations under the contract. The

provision is measured at the present value of the lower of the expected cost of terminating the contract and

the expected net cost of continuing with the contract. Before a provision is established, the Group

recognises any impairment loss on the assets associated with that contract.

(v) Employee benefits

(i) Defined contribution plans

Obligations for contributions to defined contribution pension plans are recognised as an expense in the

income statements when they are due.

(ii) Termination benefits

Termination benefits are recognised as an expense when the Group is demonstrably committed, without

realistic possibility of withdrawal, to a formal detailed plan to terminate employment before the normal

retirement date.

(iii) Short-term benefits

Short-term employee benefits obligations are measured on an undiscounted basis and are expensed as the

related service is provided.

A provision is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing

plans if the Group has a present legal or constructive obligation to pay this amount as a result of past

service provided by the employee, and the obligation can be reliably estimated.

(w) Insurance and investment contracts

Insurance contracts in non-life insurance

Revenue (premiums)

Gross premiums written comprises the amounts of premiums arising from insurance contracts due in the

accounting period regardless of whether these amounts relate fully or partially to future periods (unearned

premiums). Premiums written include estimates for premiums from insurance contracts with the beginning

of insurance coverage in the accounting period, which may not be delivered at the end of reporting period,

and adjustments to estimates of premiums written in previous years. Written premiums are recognised net

of bonuses and similar discounts offered on contract conclusion or renewal.

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Insurance contracts in non-life insurance (continued)

Revenue (premiums) (continued) Premiums from coinsurance are the proportional part of total premiums from the co-insurance contracts due

to the Group and are recognised as revenue.

The earned proportion of premiums is recognised as revenue. Premiums are earned from the date of

attachment of risk, over the coverage period, based on the pattern of the risks underwritten.

Unearned premiums provision

The provision for unearned premiums (“UPR”) comprises the portion of gross premiums written which is

estimated to be earned in the following or subsequent financial years, computed separately for each

insurance contract using the daily pro rata method, adjusted, if necessary, to reflect any variation in the

incidence of risk during the period covered by the contract.

Claims

Claims incurred comprise the settlement and handling costs of paid and outstanding claims arising from

events occurring during the financial year together with adjustments to prior and current year claims

provisions.

Claim costs are decreased by the amount of recourses.

Claim provisions

Claims outstanding comprise provisions for the estimate of the ultimate cost of settling all claims incurred

but unpaid at the end of reporting period whether reported or not, and related internal and external claims

handling expenses and an appropriate prudential margin. Claims outstanding are assessed by reviewing

individual claims and making allowance for claims reported but not yet settled (“RBNS”) and claims

incurred but not yet reported (“INBR”), taking into account the effect of both internal and external

foreseeable events, such as changes in claims handling procedures, inflation, judicial trends, legislative

changes and past experience and trends. When the claim payments are made in form of annuities, the

provision is determined using actuarial methods.

Provisions for claims outstanding (excluding annuities) are not discounted. Unexpired risk provision

Provision is made for unexpired risks arising from non-life insurance contracts where the expected value of

claims and expenses attributable to the unexpired periods of contracts in force at the end of reporting period

exceeds the unearned premiums provision in relation to such policies after the deduction of any deferred

acquisition costs. The provision for unexpired risks is calculated by reference to classes of business which

are managed together, after taking into account the future investment return on investments held to back the

unearned premiums and unexpired claims provisions. The unexpired risk provision is a result of a liability

adequacy test in non-life insurance.

Insurance contracts in life insurance and investment contracts

Revenue (premiums)

Gross premiums written comprise premiums due in the accounting period, estimates for premiums and

adjustments to estimates of premiums written in previous years. The earned portion of premiums is

recognised as revenue. Premiums are earned from the date of attachment of risk, over the coverage period,

based on the pattern of the risks underwritten.

Unearned premiums provision

The provision for unearned premiums comprises the portion of gross premiums written which is estimated

to be earned in the following or subsequent financial years, computed separately for each insurance contract

using the daily pro rata method, adjusted, if necessary, to reflect any variation in the incidence of risk

during the period covered by the contract.

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(w) Insurance and investment contracts (continued)

Claims

Claims include maturities, annuities, surrenders and death claims, policyholder bonuses allocated in

anticipation of a bonus declaration and claim payments from riders. Maturity and annuity claims are

recognised as an expense when due for payment. Surrender claims are recognised when paid together with

release of claim provision. Death claims and claims from riders are recognised when notified by creation of

RBNS.

Claim provisions

Claims outstanding comprise provisions for the estimate of the ultimate cost of settling all claims incurred

but unpaid at the end of reporting period, whether reported or not, and related internal and external claims

handling expenses. These represent the claim payments from contracts classified as insurance contracts or

investment contracts with discretionary participation feature (“DPF”) and claim payments from related

riders. Claims outstanding are assessed by reviewing individual claims and making allowance for RBNS

and INBR, taking into account the effect of both internal and external foreseeable events, such as changes

in claims handling procedures, inflation, judicial trends, legislative changes and past experience and trends.

When the claim payments are made in the form of annuities, the provision is determined using actuarial

methods.

Provisions for claims outstanding (excluding annuities) are not discounted.

Life assurance provision

The life assurance provision represents the actuarial estimate of the Group's liabilities from traditional life

insurance contracts. Life assurance provisions are calculated for each individual policy separately using the

prospective zillmer method, taking into account all guaranteed future benefits, already allocated profit-

sharing and future zillmer premium paid by policyholders. Provision is calculated using the same

assumptions as used for the calculation of premiums. Changes in the life assurance provision are recognised

in the period the change occurs.

Provision for insufficient insurance

The liability adequacy test is performed for the date of the reporting period. The test uses actuarial

assumptions (appropriately adjusted for risk premium) at the time of the test and the discounted cash flow

methodology. If such test indicates that originally intended provision for life insurance was insufficient in

comparison with the result of the liability adequacy test, additional provision for insufficient insurance is

created as an expense in the current period.

(x) Pension saving funds

Contracts that are concluded in accordance with the Act on pension saving funds are classified as service

contracts under IAS 18 (pension saving funds). These are pension saving funds (hereinafter "PSF"), that are

concluded by the subsidiary DSS Poštová banka, a.s. with its clients. The method of accounting for revenue

from PSF contracts is described below.

Deferred acquisition costs of acquisition of PSF contracts

Transaction costs related to acquisition of PSF contracts are deferred for by the subsidiary. Transaction

costs are represented by commissions paid to intermediaries and organizers of the network of PSF brokers.

Direct transaction costs are deferred up to the amount of their expected returns from future revenues

associated with these contracts.

Commissions paid are recognized as deferred transaction costs. If this expense does not meet the

requirements in accordance with IAS 38 (the likelihood that it will bring economic benefit in the future is

low, or it is not directly attributable to a particular PSF contract), it is accounted for as costs in its full

amount when it occurs.

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(x) Pension saving funds (continued)

Deferred acquisition costs of acquisition of PSF contracts (continued)

Deferred transaction costs recognized in the financial statements, are the part of the brokerage commissions

for PSF contracts paid that are deferred to future periods. Deferred costs of acquisition of PSF contracts are

amortized using the straight-line basis over the expected life of the contract. At the termination of the

contract one-time write-off is made. Subsidiary tests the deferred transaction costs for impairment on

regular basis (as at the date of the financial statements).

(y) Adoption of new and revised International Financial Reporting Standards and Interpretations

As from 1 January 2012, the Company adopted all of the International Financial Reporting Standards

(IFRSs) and International Accounting Standards (IAS), which are relevant to its operations. This adoption

did not have a material effect on the accounting policies of the Company.

The following Standards, Amendments to Standards and Interpretations had been issued but are not yet

effective for the year ended 31 December 2012:

(i) Standards and Interpretations adopted by the EU

The following Standards, Amendments to Standards and Interpretations had been issued but are not yet

effective for the year ended 31 December 2012:

IFRS 7 (Amendments) ''Financial Instruments'' Disclosures ''Offsetting Financial Assets and Financial

Liabilities'' (effective for annual periods beginning on or after 1 January 2013)

The required disclosures are expected to assist investors and other users of financial statements to better

evaluate the impact or the potential consequences that relate to the offsetting of financial assets and liabilities

in the statement of financial position of the entity. New disclosures should be applied to all recognised

financial instruments that are used for the offsetting in the statement of financial position. Loans to and

deposits from customers in the same organization and financial instruments that are subjected to only one

guarantee agreement, do not come under the framework of disclosures, unless they are offset in the statement

of financial position. The Group is currently evaluating the impact of the standard on its financial statements.

IFRS 10 ''Consolidated Financial Statements'' (effective for annual periods beginning on or after 1

January 2013)

IFRS 10 replaces the guidelines as a whole regarding control and consolidation that are provided in IAS 27

and in Interpretation 12. The new standard alters the definition of control as a determining factor under which

a financial entity should be consolidated. This standard provides extensive clarifications that dictate the

different ways in which a financial entity (investor) may control another entity (investment). The revised

definition of control focuses on the need of the right (or capability to direct operations that affect the returns

significantly) and the variable returns (positive, negative or both) in order to presume control. The new

standard also provides clarifications regarding the participating and protective rights as also the relationships

between factoring and factoree. The Group is currently evaluating the impact of the standard on its financial

statements.

IFRS 11 ''Joint Arrangements'' (effective for annual periods beginning on or after 1 January 2013)

IFRS 11 provides a more realistic treatment of joint arrangements by focusing on the rights and obligations,

instead of their legal form. The types of joint arrangements are limited to two: either joint operations or joint

ventures. The method of proportional consolidation is no longer acceptable. It is compulsory for the

participants in joint ventures to apply the equity method. The financial entities that participate in joint

operations apply the same accounting treatment as the current participants apply in joint controlled assets or in

joint controlled activities. The standard also provides clarifications in relation to the participants in joint

arrangements without the existence of joint control. The Group is currently evaluating the impact of the

standard on its financial statements.

IFRS 12 ''Disclosure of Interests in Other Entities'' (effective for annual periods beginning on or after 1

January 2013)

IFRS 12 addresses the required disclosures of a financial entity, including those of significant judgements and

assumptions, which allow the readers of financial statements to evaluate the nature, the risks and the financial

consequences that relate to the interest of a financial entity to subsidiaries, associates, joint arrangements and

structured entities. A financial entity has the capability to apply some or all of the above disclosures without

being obliged to apply IFRS 12 as a whole, or IFRS 10 or 11 or the amended IAS 27 or 28. The Group is

currently evaluating the impact of the standard on its financial statements.

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(continued)

(i) Standards and Interpretations adopted by the EU (continued)

IFRS 13 ''Fair Value Measurement'' (effective for annual periods beginning on or after 1 January

2013)

IFRS 13 provides new guidelines related to fair value measurement and the required disclosures. The

standard’s requirements do not extend the use of fair values but provide clarifications on their application in

case their use is compulsorily imposed by other standards. IFRS 13 provides an accurate definition of fair

value, as well as guidelines relating to the measurement of fair value and the required disclosures regardless

of the standard in which fair values are used. Additionally, the required disclosures have been expanded and

cover not only the financial but all assets and liabilities that are measured in fair value. The Group is currently

evaluating the impact of the standard on its financial statements.

IAS 1 (Amendments) ''Presentation of items of other Comprehensive Income'' (effective for annual

periods beginning on or after 1 July 2012)

This amendment requires financial entities to separate other total income into two groups, based on whether in

the future may be transferred to profits and losses of the period or not. The Group is currently evaluating the

impact of the standard on its financial statements.

IAS 19 (Amendments) ''Employee Benefits'' (effective for annual periods beginning on or after 1

January 2013)

This amendment introduces important changes to the recognition and measurement of defined benefit plans

and post retirement benefits (elimination of the corridor method) as also to the disclosures of all employees’

benefits. The basic changes relate to the recognition of actuarial profits and losses, the recognition of the

service cost/curtailments to the measurement of pensions, the required disclosures for the treatment of

expenses and taxes which relate to defined benefit plans and distinction between short and long term benefits.

The Group is currently evaluating the impact of the standard on its financial statements.

IAS 27 (Revised) ''Separate Financial Statements'' (effective for annual periods beginning on or after 1

January 2013)

This standard was published at the same time with IFRS 10 and in combination, those two standards replace

IAS 27 “Consolidated and Separate Financial Statements’’. The amended IAS 27 addresses the accounting

treatment and the required disclosures relating to the interest in subsidiaries, joint ventures and associates

when a financial entity prepares separate financial statements. At the same time, the Board transferred to IAS

27 the conditions of IAS 28 “Investment in associates” and of IAS 31 “Investments in Joint Ventures” which

relate to separate financial statements. The Group is currently evaluating the impact of the standard on its


IAS 28 (Revised) ''Investments in Associates and Joint ventures'' (effective for annual periods

beginning on or after 1 January 2013)

The amended IAS 28 “Investments in associates and Joint Ventures” replaces IAS 28 “Investments in

Associates”. The aim of this accounting standard is to define the accounting treatment relating to investments

in associates and to quote the requirements for the application of net equity method according to the

accounting of investments in associates and joint ventures, resulting from the publication of IFRS 11. The

Group is currently evaluating the impact of the standard on its financial statements.

IAS 32 (Amendments) ''Offsetting Financial Assets and Financial Liabilities'' (effective for annual

periods beginning on or after 1 January 2014)

IAS 32 amendments clarify, in the possibility of offsetting financial assets and liabilities, the meaning of ‘‘for

the time being there is a legal executable right of offsetting’’ and that certain gross settlement systems may be

regarded as equal to net settlement. The Group is currently evaluating the impact of the standard on its


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(continued)

(i) Standards and Interpretations adopted by the EU (continued)

Transitional Guidance - Amendments to IFRS 10, 11 and 12 (effective for annual periods beginning on

or after 1st January 2013).

The International Accounting Standards Board adopted an amendment to the transition provisions of these

standards. The amendment clarified that the "date of initial application'' is the beginning of the annual period

in which first applied IFRS 10. If the conclusion regarding the consolidation or not of the Group at the date of

initial application is different than the one imposed by the provisions of IAS 27 and IFRIC 12, there's only

obligation for retroactive adjustment of the previous comparative period. The presentation retrospectively of

custom information for prior periods is optional. A similar exception for presenting restated information of

comparative periods is supplied to modified transition provisions of IFRS 11 and 12. Moreover, the

disclosures relating to non-consolidated companies dedicated structure (structured entities) are not mandatory

for any comparative periods prior to the first application of IFRS 12. The Group is considering the

implications of the adoption of this amendment on the financial statements.

Investment Entities - Amendments to IFRS 10, 12 and IAS 27 (effective for annual periods beginning on

or after 1st January 2014).

The International Accounting Standards adopted this amendment which establishes the concept of

"Investment Companies" and an exemption to the requirement to consolidate companies they control.

Specifically, an investment Company will not consolidate its subsidiaries, nor will apply the provisions of

IFRS 3 when it obtains control of another entity, but will measure its investment in subsidiaries at fair value

through profit or loss in accordance with IFRS 9. An exception to this rule is the subsidiaries that are not held

for the purpose of profiting from the investment, but to provide services related to the business of an

investment Company. It is clarified, however, that the parent Company, not considered itself an investment

Company, will consolidate all entities that it controls, including those controlled by the investment Company.

The Group is considering the implications of the adoption of this amendment on the financial statements.

Improvements to IFRSs 2009-2011 (effective for annual periods beginning on or after 1st January

2013).

The improvements concern the second group of amendments to IFRSs that were issued by the IASB in May

2010 as part of the annual work improvements, under which modifications were made to various standards

that are necessary, but not urgent and not part of another main work of the Council. Improvements had no

significant effect on the Group’s financial statements.


(continued)

(ii) Standards and Interpretations not adopted by the EU

IFRS 7 (Amendments) ''Financial Instruments: Disclosures'' – ''Disclosures on transition to IFRS 9''

(effective for annual periods beginning on or after 1st January 2015).

This amendment sets out disclosure requirements for transferred financial assets that are not derecognized

entirely as well as on transferred financial assets derecognized entirely but for which the entity has continuing

involvement. It also provides guidance on the application of the required disclosures. The Group is currently

evaluating the impact of the standard on its financial statements.

IFRS 9 ''Financial Instruments'' (effective for annual periods beginning on or after 1 January 2015)

On 12 November 2009, the International Accounting Standards Board publishes the first phase of IFRS 9

which, upon completion, will replace IAS 39. The first phase of IFRS 9 requires the classification of financial

assets based on how an entity manages these instruments and the contractual cash flow characteristics of the

financial assets. The four categories of financial instruments are abolished and the financial assets are

classified under one out of the two measurement categories available: amortized cost and fair value through

profit or loss. The Group is currently evaluating the impact of the standard on its financial statements.

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(continued)

(ii) Standards and Interpretations not adopted by the EU (continued)

IFRS 14 Regulatory Deferral Accounts (effective for annual periods beginning on or after 1 January 2016).

The Group is currently evaluating the impact of the standard on its financial statements.

IFRIC 21 ''Levies'' (effective the latest as from the commencement date of its first annual period beginning on

or after 1 January 2014). The Group is currently evaluating the impact of the standard on its financial

statements.

Annual Improvements to IFRSs 2010–2012 Cycle (issued on 12 December 2013) (effective for annual periods

beginning on or after 1 July 2014). The Group is currently evaluating the impact of the standard on its


Annual Improvements to IFRSs 2011–2013 Cycle (issued on 12 December 2013) (effective for annual periods

beginning on or after 1 July 2014). The Group is currently evaluating the impact of the standard on its


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4. USE OF ESTIMATES AND JUDGEMENTS

These disclosures supplement the commentary on financial risk management.

Key sources of estimation uncertainty

Allowances for impairment

Assets accounted for at amortised cost are evaluated for impairment on the basis described in accounting

policy 3(i) section (vi).

The specific counterparty component of the total allowances for impairment applies to claims evaluated

individually for impairment and is based on management’s best estimate of the present value of the cash

flows that are expected to be received. In estimating these cash flows, management makes judgements

about counterparty’s financial situation and the net realisable value of any underlying collateral. Each

impaired asset is assessed on its merits and the workout strategy and estimate of cash flows considered

recoverable. The Head of the Risk Management Division of the Bank is responsible for assessing the level

of impairment of individually assessed receivables and for determining the amount of any impairment loss.

Collectively assessed impairment allowances cover credit losses inherent in portfolios of claims with

similar economic characteristics when there is objective evidence to suggest that they contain impaired

claims, but the individual impaired items cannot yet be identified. In assessing the need for collective loan

loss allowances, management considers factors such as credit quality, portfolio size, concentrations and

economic factors. In order to estimate the required allowance, assumptions are made to define the way

inherent losses are modelled and to determine the required input parameters based on historical experience

and current economic conditions. The accuracy of the allowances depends on how well these estimate

future cash flows for specific counterparty allowances and parameters used in determining collective

allowances.

The Group creates the collective impairment losses based on the probability of default (‘PD’) and loss

given default (‘LGD’). In relation to the decrease of the parameter LGD by 5% or 10%, the impairment loss

allowances will increase by 6.3% and 12.6%, respectively.

Insurance provisions

The Group also uses estimates, assumptions and judgments when determining technical provisions (in

particular IBNR reserves and technical reserves for life insurance), fair values of financial instruments,

impairment losses on receivables, periods of depreciation and residual values of tangible and intangible

assets and provisions for employee benefits.

A set of assumptions is used when estimating future cash flows arising from the existence of insurance

contracts and investment contracts with discretionary participation features (“DPF”). It cannot be

guaranteed that real development will not significantly differ from the development predicted based on

assumptions. All assumptions are estimated based on the Group's own experience.

All provision arising from insurance contracts and investment contracts with DPF is subject to the

adequacy of reserves test, in which the value of technical provisions and liabilities is compared to the

present value of future cash flows arising from these contracts. The present value of future liabilities is

evaluated using the best estimates at the time of the test.

When it is not possible to obtain fair value of financial instruments from active markets, fair value is

determined using various valuation techniques, including the use of mathematical models. Where possible,

inputs for these models are taken from established markets, but in cases where it is not possible determining

fair value requires a certain degree of estimation. Estimates represent an evaluation of liquidity and model

inputs.

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4. USE OF ESTIMATES AND JUDGEMENTS (continued)

Key sources of estimation uncertainty (continued)

Determining fair values

The determination of fair value for financial assets and liabilities for which there is no observable market

price requires the use of valuation techniques as described in accounting policy 3 (i)(v). For financial

instruments that trade infrequently and have little price transparency, fair value is less objective and

requires varying degrees of judgment depending on liquidity, concentration, uncertainty of market factors,

pricing assumptions and other risks affecting the specific instrument.

Critical accounting judgements in applying the Group’s accounting policies

Critical accounting judgements made in applying the Group`s accounting policies include:

Classification of insurance contracts

Contracts are classified as insurance contracts, if significant insurance risk is transferred from the

policyholder to the Group. For some contracts, the Group assesses whether the extent of insurance risk

transferred is significant. This is mostly the case when contract also includes a savings component.

Significance of insurance risk is assessed according to whether there may be situations in which the Group

was required to pay significant additional benefits compared to comparable savings product.

In assessing whether a scenario exists under which these additional benefits would be payable and

significant, the whole duration of the contract is taken into account and all insurance risks, which the

contract transfers, including negotiated riders. A contract that classifies as an insurance contract remains an

insurance contract until it expires.

Contracts are classified at the level of homogeneous portfolios of contracts of individual products. If such a

wide portfolio consists typically of the contracts that transfer insurance risk, the Group does not examine

each contract, to identify such an insignificant group, which transfer only insignificant insurance risk.

Some contracts include the right to a profit share. The Group assesses whether additional benefits under

this right are likely to be a significant portion of the total contractual benefits and whether the amount and

timing of allocation are at the discretion of the Group, and thus whether they are considered to be contracts

with DPF. Such an assessment is made at the time of the inception of the contract.

Financial asset and liability classification

The Group’s accounting policies provide scope for assets and liabilities to be designated on inception into

different accounting categories in certain circumstances:

In classifying financial assets or liabilities as ‘at fair value through profit or loss’, management has

determined that the Group meets the description of trading assets and liabilities set out in accounting

policy 3 (k).

In classifying financial assets as held-to-maturity, management has determined that the Group has both

the positive intention and ability to hold the assets until their maturity date as required by accounting

policy, note 3 (n)(i).

Impairment of investments in equity securities

Investments in equity securities are evaluated for impairment on the basis described in accounting policy

3(i)(vi).

For an investment in an equity security, a significant or prolonged decline in its fair value below its cost is

objective evidence of impairment. In this respect, the Group regards a decline in fair value in excess of 20

percent to be “significant” and a decline in a quoted market price that persist for six months on longer to be

prolonged.

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Valuation of financial instruments

The Group’s accounting policies and methods on fair value measurements is discussed under note 3(i)(v).

The Group measures fair values using the following hierarchy of methods:

Quoted market price in an active market for an identical instrument (Level 1).

Valuation techniques based on observable inputs. This category includes instruments valued using:

quoted market prices in active markets for similar instruments; quoted prices for similar instruments in

markets that are considered less than active; or other valuation techniques where all significant inputs

are directly or indirectly observable from market data (Level 2).

Valuation techniques using significant unobservable inputs.

This category includes all instruments where the valuation technique includes inputs not based on

observable data and the unobservable inputs could have a significant effect on the instrument’s

valuation. This category includes instruments that are valued based on quoted prices for similar

instruments where significant unobservable adjustments or assumptions are required to reflect

differences between the instruments (Level 3).

Fair values of financial assets and financial liabilities that are traded in active markets are based on quoted

market prices or dealer price quotations. For all other financial instruments the Group determines fair

values using valuation techniques.

Valuation techniques include net present value and discounted cash flow models, comparison to similar

instruments for which market observable prices exist and other valuation models. Assumptions and inputs

used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other premia

used in estimating discount rates, bond and equity prices, foreign currency exchange rates, equity and

equity index prices and expected price volatilities and correlations. The objective of valuation techniques is

to arrive at a fair value determination that reflects the price of the financial instrument at the reporting date,

that would have been determined by market participants acting at arm’s length.

The Group uses widely recognised valuation models for determining the fair value of common and more

simple financial instruments, like interest rate and currency swaps that use only observable market data and

require little management judgement and estimation. Observable prices and model inputs are usually

available in the market for listed debt and equity securities, exchange-traded derivatives and simple over-

the-counter derivatives like interest rate swaps. The availability of observable market prices and model

inputs reduces the need for management judgement and estimation and also reduces the uncertainty

associated with determination of fair values. The availability of observable market prices and inputs varies

depending on the products and markets and is prone to changes based on specific events and general

conditions in the financial markets.

For more complex instruments, the Group uses proprietary valuation models, which usually are developed

from recognised valuation models. Some or all of the significant inputs into these models may not be

observable in the market, and are derived from market prices or rates or are estimated based on

assumptions. Example of instruments involving significant unobservable inputs include certain over-the-

counter structured derivatives, and certain loans and securities for which there is no active market.

Valuation models that employ significant unobservable inputs require a higher degree of management

judgement and estimation in determination of fair value. Management judgement and estimation are usually

required for selection of the appropriate valuation model to be used, determination of expected future cash

flows on the financial instrument being valued, determination of the probability of counterparty default and

prepayments and selection of appropriate discount rates.

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Valuation of financial instruments (continued)

The Group has an established control framework with respect to the measurement of fair values. This

framework includes a Product Control function performed by employees of the Central Risks Department,

which is independent of front office management. Specific controls include: verification of observable

pricing inputs and reperformance of model valuations; a review and approval process for new models and

changes to models; calibration and back-testing of models against observed market transactions; analysis

and investigation of significant daily valuation movements; and review of significant unobservable inputs

and valuation adjustments.

The reported amounts of financial instruments stated at fair value, analysed by the valuation methodology

applied, were as follows:

Note

Quoted

market prices

in active

markets

Valuation

techniques -

observable

inputs

Valuation

techniques-

unobservable

inputs

Total

31 December 2012 € ‘000 € ‘000 € ‘000 € ‘000

Assets

Trading assets

10

25,131 10,644 219 35,994

Investment

securities 13

266,480 4,760 213,759 484,999

291,611 15,404 213,978 520,993

Liabilities

Trading liabilities

10

- 758 - 758

Note

Quoted

market prices

in active

markets

Valuation

techniques -

observable

inputs

Valuation

techniques-

unobservable

inputs

Total

31 December 2011

€ ‘000 € ‘000 € ‘000 € ‘000

Assets

Trading assets

10

27,983 622 213 28,818

Investment

securities

13

186,538 98,623 736 285,897

214,521

99,245

949 314,715

Liabilities

Trading liabilities

10

- 68 - 68

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The following table shows a reconciliation from the beginning balances to the ending balances in 2012 for

fair value measurements in the category:

Valuation techniques: unobservable inputs of the fair value

Trading

assets

Investment

securities Total

2012 € ‘000 € ‘000 € ‘000

At 1 January 213 736 949

Total gains or losses:

in profit or loss - - -

in other comprehensive income 6 - 6

Settlements

Transfers into the category - 213,572 213,572

Transfers from the category - (549) (549)

At 31 December 219 213,759 213,978

Trading

assets

Investment

securities Total

2011 € ‘000 € ‘000 € ‘000

At 1 January 221 29,156 29,377

Total gains or losses:

in profit or loss (6) 2,910 2,904

in other comprehensive income - (58) (58)

Settlements (2) (650) (652)

Transfers into the category - 232 232

Transfers from the category - (30,854) (30,854)

At 31 December 213 736 949

The Group implemented the valuation techniques using the observable data from the market and therefore

transferred some securities of € 30,854 thousand out of the category ‘Valuation techniques - unobservable

inputs of the fair value’.

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Total gains or losses included in profit or loss for the period in the above table are presented in net

trading income in the income statement as follows:

Trading

assets

Investment

securities

Total

31 December 2012 € ‘000 € ‘000 € ‘000

Total gains or losses included in profit or loss for the

year 6 - 6

Total gains or losses for the year included in profit or

loss for assets and liabilities held at the end of the

reporting year 6 - 6

Trading

assets

Investment

securities

Total

31 December 2011 € ‘000 € ‘000 € ‘000

Total gains or losses included in profit or loss for the

year (6) 2,910 2,904

Total gains or losses for the year included in profit or

loss for assets and liabilities held at the end of the

reporting year (6) 2,910

2,904


Although the Group considers that its estimates of fair value are appropriate, the use of different

methodologies or assumptions could lead to different measurements of fair value. For recognised fair

values measured using significant unobservable inputs, changing one or more of the assumptions used

would have the following effects:

Effect on profit or loss Effect on other comprehensive

income

31 December 2012

Favourable

€ ‘000

(Unfavourable)

€ ‘000

Favourable

€ ‘000

(Unfavourable)

€ ‘000

Investment securities 66 (66) 33,196 (15,976)

66 (66) 33,196 (15,976)

Effect on profit or loss Effect on other comprehensive

income

31 December 2011

Favourable

€ ‘000

(Unfavourable)

€ ‘000

Favourable

€ ‘000

(Unfavourable)

€ ‘000

Investment securities 64 (64) 6 (6)

64 (64) 6 (6)

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Favourable and unfavourable effects on investment securities were calculated by changing the estimated

cash flows used for the calculation of fair values by +/- 30%. In 2011, the decrease in the estimated cash

flows would have an unfavourable effect on recognised fair value amounting to € 6 thousand and increase

in the estimated cash flows would have a favourable effect amounting to € 6 thousand.


Favourable and unfavourable effects for financial assets were calculated using the changes in expected

future cash flows used in the fair value calculation by +/- 30% and changes in discounted interest rate by

+200bp/ - 200bp. As at 31 December 2012, the change of these parameters would have an unfavourable

effect on recognised fair value amounting to € 66 thousand. In the case of an opposite movement, the

favourable effect would be € 66 thousand.

In regards to the fair value assessment of debt financial tools, the bank has simulated changes of credit risk

premiums by +/- 200bp against their current value. As at 31 December 2012, the change of these

parameters would have an unfavourable effect on recognised fair value amounting to € 15,976 thousand. In

the case of an opposite movement, the favourable effect would be € 33,196 thousand.

The following table shows information regarding the investment movements between all the groups of

valuation methods.

Quoted

market prices

in active

markets

Valuation

techniques:

observable

inputs

Valuation

techniques:

unobservable

inputs

Investments € ‘000 € ‘000 € ‘000

Transfers into group - 4,760 213,572

Transfers from the group (4,760) (213,572) -

Transfers from the group – other reason - - (549)

(4,760) (208,812) 213,023

Securities in the overall amount of € 4,760 thousand were transferred from level 1 to level 2 as a result of

weaker activity of a market during 2012. However, there was sufficient information on the market based on

the observable inputs for their fair value assessment.

Securities in the overall amount of € 213,572 thousand were transferred from level 2 to level 3 as a result of

no active market for these securities while almost whole total results from the transfer of securities.

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5. FINANCIAL RISK MANAGEMENT

(a) Introduction

The Group has exposure to the following main risks:

credit risk

liquidity risk

market risk

operational risk

insurance risk

The Board of Directors of each company in the Group is responsible for financial risk management. In the

case of the unit fund, Náš prvý realitný, š.p.f., which was a member of the Group up to December 2009, the

administrator, is PRVÁ PENZIJNÁ SPRÁVCOVSKÁ SPOLOČNOSŤ POŠTOVEJ BANKY, správ. spol.,

a. s. Information on the exposure to each of the above risks; the objectives, policies and processes for

measuring and managing risk; and on the management of the Bank’s capital is set out below.

The financial risk management framework, policies, procedures, bodies, committees and structures set out

below refers to those of the Bank.

Risk management framework

The Board of Directors meeting as the Asset and Liability Management Committee (“ALCO”) is the

highest body responsible for risk management in the Bank. The Board of Directors has overall

responsibility for the establishment and oversight of the Bank’s risk management framework. Some

responsibilities are delegated to special advisory bodies – Risk Management Committees, ALCO,

Operational Risk Management Committee and Credit Committee.

The Bank’s risk management policies are based on the Risk Management Strategy, which is the primary

document for risk management. The Strategy has been approved by the Board of Directors, and is regularly

reassessed and updated. The risk management process is a dynamic and constant process of identification,

measurement, monitoring, control and reporting of risks within the Bank. The process involves establishing

limits and processes to monitor risks and adherence to those limits. Risk management policies and systems

are reviewed and amended regularly to reflect changes in legislation, market conditions, products and

services offered. The Bank, through its training and management standards and procedures, aims to develop

a disciplined and constructive control environment, in which all employees understand their roles and

obligations.

The Audit Committee is responsible for monitoring the effectiveness of the internal control and risk

management systems. The Audit Committee is assisted in these functions by Internal Audit. Internal Audit

undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of

which are reported to the Audit Committee, the Supervisory Board and the Board of Directors.

(b) Credit risk

Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument

fails to meet its contractual obligations, and arises principally from the Bank’s loans and advances to

customers the provisions of guarantees, the issuance of documentary credits, loans and advances to other

banks and the purchase of investment securities. For risk management reporting purposes, the Bank

considers and consolidates all elements of credit risk exposure (such as individual obligor default risk,

management failure, country, sector and concentration risk).

Credit risk management within the Bank is the responsibility of three independent departments within the

Risk Management Division. The Board of Directors has delegated responsibility for the oversight of credit

risk to its Credit Committee in compliance with a formal order establishing authorities and responsibilities.

Credit risk management includes:

examination of clients’ creditworthiness,

assessing limits for clients, economically connected parties including monitoring portfolio

concentration,

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5. FINANCIAL RISK MANAGEMENT (continued)

(b) Credit risk (continued)

assessing limits for counterparties, industries, countries, banks and regions,

mitigation of risk by various forms of collateral,

continuous monitoring of the loan portfolio development and prompt decision-making to minimise

possible losses.

Several methods of credit risk measurement, monitoring and mitigation are used in the Bank:

Country rating – principles for determining the maximum amount and maximum maturity period of funds

provided for individual countries in order to mitigate the credit risk of the relevant country. This allows an

assessment of the available limit for deals with parties from these countries, or with parties whose majority

of income used to repay the active bank deals (ABD) comes from these countries. This also moderates the

risk. The rating granted to specific country states the country’s credit risk. Assessment of the country risk

consists of international political and economical integration of the country and current evaluation of the

credit risk of the country through mid-values of 5 year credit default swaps. In relation to the political and

economical integration the Bank classifies countries into three categories, where Euro zone countries bare

the lowest risk.

Bank rating – principles for determining the maximum amount and maximum maturity period of funds

provided to individual banks. The banks are rated in the range A – D; the lowest risk corresponds to grade

A and grade D to the highest risk.

Sector rating – principles for evaluating individual sectors based on their performance. There are graded

from A to E, with grade E corresponding to the lowest rating.

Region rating – principles for assessing individual regions based on their economic performance. These are

graded from A to E, with grade E corresponding to the lowest rating.

Client and deal rating – assesses the risk of active banking deals (ABD) and companies. The rating has two

parts: a client rating and a banking business rating. Each client is graded into one of nine rating classes for

both elements of the rating, with the ninth representing clients that should not be financed. The evaluation

is based on external and internal sources of information about the subject, and an emphasis is placed on

quantitative (objective) indicators.

Project assessment tool – assesses the suitability of the project readiness (project means construction of

flats, family houses, logistical centre, industrial park, hotel, entertainment centre, etc.) for the co financing

of the Bank. Result of the assessment is the project rating whose value helps to identify the project’s phase

in which the Bank stepped in to finance it as well as the risk evaluation of the successful completion and

debt repayment. The evaluation is based on external information about the project and is one of the main

assumptions for the Bank’s decision about the financing of the project.

Scoring for retail loans – a scoring is implemented and is a part of an automated workflow for central

approval of consumer loans. A loan applicant is assessed using several scoring cards, prepared based on

various sources of information, and these are then assessed. Application scoring assesses family,

demographic and financial information about the applicant, the credit bureau scoring focuses on the history

of loan repayment in the bank loans register and the behaviour scoring supplements the assessment of the

applicant by using existing information on the client. Setting values and the effectiveness of the scoring

cards in the identification of credit risk are regularly monitored and modified if necessary. If a result is

positive, the workflow system automatically continues with other activities, for example verifying data in

internal and external databases, the Register of credits, Sociálna poisťovňa, or EOS KSI Slovensko

(collection agency) contacting the applicant or his employer. After granting a loan, the system monitors the

payment discipline and implements procedures for early and late for recovery of receivables.

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Limit system

Credit risk limits are generally determined based on an economic analysis of clients, industries, regions,

banks or countries.

Limits for asset concentration on one client or one group of economically connected entities are restricted

by the maximum asset concentration set by legislation, or by the regulator, which is determined based on

the Bank’s equity and is summarised as follows:

Equity:

2 % maximum exposure to an individual or individual, which is the Bank’s related party

10 % maximum exposure to the Bank’s related party

20 % maximum exposure to the parent company and its subsidiaries, and subsidiaries of the Bank

40% maximum exposure to all related parties

25 % maximum exposure for clients, or an economically connected group

The Bank maintains and regularly updates the register of economically connected clients, which enables the

Bank to evaluate compliance within the maximum limits when granting new loans and during the existence

of the loan relationship.

The proposal of limits and their evaluation is the responsibility of the Risk management division. Limits are

approved by the respective approval body (ALCO committee, Credit committee or the Board of Directors).

The procedure for determining the individual limits is part of the internal regulations of the Bank.

To mitigate credit risk, the Bank uses the following types of limits:

(i) Financial involvement limits of client or economically connected entities (clients)

The maximum exposure to client or group of clients is defined by legislation. The calculation is based on

exposure which is the sum of existing active banking businesses for a client or economically connected

entities.

(ii) Country limits

Country limits are based on available internal and external sources of information about a particular

country and the Bank’s rating. When assigning a rating, the Bank considers mainly ratings given by

reputable international rating agencies. The rating is set to estimate the level of probability that a country or

an entity in a particular country will not be able, or willing to fulfil its agreed obligations. Without an

approved limit for a country, the Bank does not agree any deals with any counterparty from that country.

(iii) Limits on banks

Limits on banks are based on available internal and external sources of information about a particular bank

and the Bank’s rating set in advance. When assigning a rating, the Bank considers mainly ratings given by

reputable international rating agencies. The rating is set to reduce the risk of non-fulfilment of agreed

obligations. Without an approved limit, the Bank does not agree any transactions.

(iv) Industry limits

The Bank has set limits for the following industries:

agriculture, hunting and fishing, forestry and logging

mining mineral resources

industrial production

production of electricity, gas and water

construction

trading, repair of consumer goods and motor vehicles

hotels and restaurants

infrastructure, storage, post and telecommunications

finance and insurance

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real estates

public sector

education sector

health sector

other industries

individuals

These limits are derived from internal ratings of the industry.

When determining the rating of an industry, the Bank uses data from the statistical year-book of the

Statistical Bureau of the Slovak Republic including the following:

Gross national product

Gross production

Profit

Revenues from own outputs and goods

Direct foreign investments

New-established companies

Average loss on principal (according to internal data)

(v) Limit for regions

Limits for regions are set based on the internal ratings of the regions. The ratings are determined based on

data from the statistical year-book of the Statistical Bureau of the Slovak Republic.

From the statistical year-book, the following data is used:

Gross national product

Average monthly wage

Balance of primary income per person

Balance of disposable income per person

Unemployment rate

The proposal to monitor a new limit is made by the Risk Management Division or ALCO. All limits are

approved by ALCO and adherence is regularly monitored by the Risk Management Division. The internal

regulation of the Bank defines the method of calculation, procedures for update, excess and reporting of all

limits.

The Bank has a system of reports for the monitoring of credit risk. The reports focus mainly on the

monitoring of delinquencies and losses from individual products, the evaluation of effectiveness of

receivables recoveries, the monitoring of covenants (selected indicators) of selected clients during the loan

relationship and the monitoring of the development of unauthorised debit balances etc.

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Loans and advances were made to customers in the following sectors:

2012 2011

€ ‘000 € ‘000

Other services (property investment activities,

accommodation services) 668,563 813,299

Individuals 540,209 441,367

Financial services 122,958 302,207

Trading 461,411 270,374

Manufacturing 216,486 114,530

Transport and telecommunication 9,801 19,517

Real estate construction 24,759 31,792

Health care and public services 863 1,082

Agriculture 25 10

2,045,075 1,994,178

Loans and advances were made to customers in the following countries:

2012 2011

€ ‘000 € ‘000

Other EU member countries 814,823 998,658

Slovak Republic 1,180,418 953,911

British Virgin Islands - 41,609

Turks and Caicos 49,834 -

2,045,075 1,994,178

Classification of receivables

Individually significant receivables are classified into five categories (standard, special mentioned

receivables, non-standard, doubtful and loss receivables), which for purposes of monitoring and reporting

are further classified into following categories:

- non-impaired,

- impaired – impairment no more than 20%,

impairment more than 20%, but not more than 50%,

impairment more than 50%, but not more than 95%,

impairment more than 95%,

of which defaulted.

Receivables that are not individually significant, which are assessed on a portfolio basis, are classified

based on the number of overdue days, as follows:

Non-impaired – overdue 0 days

Impaired – overdue 1 – 90 days

Default – overdue more than 90 days

The Bank sets the level of significance at € 166 thousand. The loans and advances with value equal or

higher than € 166 thousand are assessed individually.

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The gross amounts of individually impaired loans and advances to customers, banks and investment debt

securities by risk grade are as follows:

Loans and advances to

customers Loans and advances to

banks Investment debt

securities

2012 2011 2012 2011 2012 2011

€ ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000

Individually assessed

Not impaired 1,366,962 1,448,691 104,136 14,047 1,308,600 852,628

Out of which, past

due but not

impaired 655 - - - - -

Impaired 136,203 97,596 - - - 420,487

Out of which, loans

with renegotiated

terms 31,873 10,983 - -

-

-

Defaulted 45,395 14,317 - - - -*

Book value 1,503,165 1,546,287 104,136 14,047 1,308,600 1,273,105

Allowance for

impairment (10,382) (11,238) - - (2,483) (274,757)

Net book value 1,492,783 1,535,049 104,136 14,047 1,306,117 998,348

Collectively assessed

Significant - - - - - -

Not significant 541,910 447,891 - - - -

Book value 541,910 447,891 - - -

Allowance for

impairment (49,935) (39,321) - - - -

Net book value 491,975 408,570 - - - -

Total net book value 1,984,758 1,943,619 104,136 14,047 1,306,117 998,348

*The Greek Government Bonds were impaired as at the balance sheet date and were in default at the

application of the collective action clauses (‘CAC’) on 7 March 2012.

The decrease of the impairment loss allowances to individually assessed loans and advances is due to the

sale of the portion of the loans and receivables in default.

Individually assessed loans and advances

The Group uses the internal rating system at providing and monitoring of loans and advances granted to

corporate clients. The rating is given based on the assessment of the economical health, prospectus and the

client market share. The client is rated at the specific risk margin by matching with the respective rating

type.

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The Group has not set up principles for more detail reporting on loans and advances not reporting triggers

of impairment. The receivables have been reported as not impaired if they do not present any of the

following triggers of impairment:

a) significant financial difficulties of issuer or debtor,

b) breach of contract, e.g. default or delay of repayment of principal or interests,

c) lender granting to a borrower a concession that the lender would not otherwise consider,

d) borrower will enter bankruptcy or other financial reorganisation.

Impaired loans and securities

Impaired loans and securities are loans and securities for which the Group determines that it is probable

that it will be unable to collect all principal and interest due according to the contractual terms of the

loan/securities agreement(s).

Past due but not impaired loans

Loans and securities where contractual interest or principal payments are past due but the Group believes

that impairment is not appropriate on the basis of the level of security/collateral available and/or the stage

of collection of amounts owed to the Bank.

Loans with renegotiated terms

Loans with renegotiated terms are loans that have been restructured due to deterioration in the borrower’s

financial position and where the Group has made concessions that it would not otherwise consider. Once

the loan is restructured it remains in this category independent of satisfactory performance after

restructuring.

Allowances for impairment

The Bank establishes an allowance for impairment losses that represents its estimate of incurred losses in

its loan portfolio. The main components of this allowance are a specific loss component that relates to

individually significant exposures, and a collective loan loss allowance established for groups of

homogeneous assets in respect of losses that have been incurred but have not been identified on loans that

are considered to be individually significant as well as individually significant loans that were subject to

individual assessment but were not found to be impaired.

Provisions

In accordance with the International Accounting Standard IAS 37 the Group creates provisions for off

balance sheet liabilities (valid credit lines, bank guarantees and letters of credit) if it expects credit risk. The

Group creates provisions in accordance with materiality levels separately for individual and portfolio

exposures.

Write-off policy

The loan/security balance (and any related allowances for impairment losses) is written off when the Group

determines that the loans/securities are uncollectible. This determination is reached after considering

information such as the occurrence of significant changes in the borrower/issuer’s financial position such

that the borrower/issuer can no longer pay the obligation, or that proceeds from collateral will not be

sufficient to pay back the entire exposure. For smaller balance standardised loans, charge-off decisions

generally are based on a product-specific, past-due status.

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Set out below is an analysis of the gross and net amounts of individually impaired loans and advances to

customers by risk grade.

Loans and advances to customers

Gross Net

€ ‘000 € ‘000

2012

Impaired receivables:

Impaired not more than 20% 90,802 89,658

Impaired and defaulted:

Impairment more than 20 %, but not more than 50% 31,865 30,994

Impairment more than 50 %, but not more than 95% - -

Impairment more than 95 % 13,531 5,169

136,198 125,821

2011

Impaired receivables:

Impaired not more than 20% 83,286 75,398

Impaired and defaulted:

Impairment more than 20 %, but not more than 50% 9,064 8,205

Impairment more than 50 %, but not more than 95% - -

Impairment more than 95 % 5,246 2,755

97,596 86,358

Collateral

The Group holds collateral against loans and advances to customers in the form of mortgage interests over

property, and other registered securities over assets and guarantees. Estimates of fair values are based on

the value of collateral assessed at the time before executing the deal, and are reassessed in compliance with

the internal methodology of the Group. Generally, collateral is not held on loans and advances to banks,

except when securities are held as part of reverse repurchase and securities borrowing activity.

The Group's assessment of the net realisable value of the collateral is based on independent expert

appraisals revised by the Bank’s specialists, or internal evaluations prepared by the Bank. The net realisable

value of collateral is derived from this value using a correction coefficient to reflect the Group’s ability to

realise the collateral when needed. The Group regularly, at least annually, updates the value of the collateral

and the correction coefficients used.

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An estimate of the fair value of collateral and other security held against financial assets is shown below:

Loans and advances to customers 2012 2011

€ ‘000 € ‘000

Against individually not impaired

Real estate 320,372 363,537

Equity securities 457,045 231,688

Debt securities 21,194 58,762

Movables 48,516 39,895

Bank guarantee 8 12

Other 18,376 25,469

865,511 719,363

Against individually impaired

Real estate 79,392 53,586

Debt securities 523 15,473

Equity movables 15,492 2,876

Bank guarantee 647 698

Other 962 1,895

97,016 74,528

Against collectively assessed

Real estate 11,905 3,935

Movables 315 311

Other 160 89

12,380 4,335

Total 974,907 798,226

As noted above, to mitigate credit risk before providing loans to corporate clients, the Bank generally

requires collateral. The following collateral types are accepted:

Cash

State guarantees

Securities

First-class receivables

Bank guarantees

Guarantees issued by a reputable third party

Real estate

Machinery and equipment

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The exposure to the various business segments according to main product types is as follows:

2012 2011

Gross

amount

Allowances

for

impairment

Carrying

amount Gross

amount

Allowances

for

impairment

Carrying

amount

€ ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000

Retail clients:

Quick loans 230,406 31,767 198,639 208,668 26,850 181,818

Loans on housing 269,792 13,226 256,566 199,088 6,356 192,732

Personal debits 26,725 1,974 24,751 29,242 3,386 25,856

Large consumer loans 127 - 127 341 - 341

Other consumer loans 337 68 269 705 120 585

Clever reserve 1,538 71 1,467 423 94 329

Other receivables 278 63 215 988 35 953

Assigned receivables 12,277 5 12,272 111 73 38

Sold receivables - - - 5,570 - 5,570

Practical mortgage 9,113 - 9,113 2,771 - 2,771

550,593 47,174 503,419 447,907 36,914 410,993

Corporate clients:

Large clients 839,061 7,486 831,575 1,004,749 7,902 996,847

Foreign currency loans 149,284 - 149,284 100,737 - 100,737

Repo deals 268,295 - 268,295 126,927 - 126,927

Overdrafts 117,183 2,481 114,702 152,817 1,756 151,061

Small clients - - - 136,762 821 135,941

Credit accounts 92,188 1,567 90,621 2,289 622 1,667

Other receivables 2,343 1,163 1,180 98 33 65

Assigned receivables 101 31 70 1,339 933 406

Sold receivables 6,305 - 6,305 20,553 1,578 18,975

Leasing 19,722 415 19,307 - - -

1,494,482 13,143 1,481,339 1,546,271 13,645 1,532,626

Total 2,045,075 60,317 1,984,758 1,994,178 50,559 1,943,619

Recovery of delinquent receivables

Receivables whose repayment is threatened are administrated by the Legal and Compliance Division. The

legal department takes the necessary legal steps to obtain the maximum recovery from default receivables,

including realisation of collateral, and acts the Bank’s representative in creditor committees when the

debtor is in bankruptcy.

Risk Management Division, Department of Retail Loans Collection (DRLC) is responsible for collection of

retail loans. In the retail segment, the recovery process for overdue receivables is defined and centrally

operated by workflow systems, which initiate activities for early recovery by the Risk Management

Division and DRLC. The Bank also uses the outsourcing services of collection companies. The Risk

Management Division is responsible for defining the procedures for recovery and measurement, as well as

the measurement of their effectiveness.

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Settlement risk

The Bank’s activities may give rise to risk at the time of settlement of transactions and trades. Settlement

risk is the risk of loss due to the failure of a company to honour its obligations to deliver cash, securities or

other assets as contractually agreed.

For certain types of transactions, the Bank mitigates this risk by conducting settlements through a

settlement/ clearing agent to ensure that a trade is settled only when both parties have fulfilled their

contractual obligations.

Settlement limits form part of the credit approval/limit monitoring process. Acceptance of settlement risk

on free settlement trades requires transaction-specific or counterparty-specific approval from the Risk

Management Department.

Credit risk for the asset management company is defined as non-fulfilment of an issuer’s or a

counterparty’s debt. The potential impact of credit risk on the value of assets is considered to be moderate.

Unit funds minimise credit risk through trading with securities mainly by making deals with the units

fund’s assets in compliance with the law, so that the principle “delivery against payment’’ in terms usual on

the organised market is used. Risk management consists of verifying the credibility of the issuer or

counterparty, setting the limit for the issuer or counterparty in terms of elimination and distribution of risks,

inputting this limit to the information system of PRVÁ PENZIJNÁ SPRÁVCOVSKÁ SPOLOČNOSŤ

POŠTOVEJ BANKY, správ. spol., a.s. and its subsequent recalculation.

(c) Liquidity risk

Liquidity risk arises from the type of financing of the Bank’s activities and the management of its positions.

It includes financing the Bank’s assets with instruments of appropriate maturity and the Bank’s ability to

dispose of its assets for acceptable prices within acceptable time periods.

The Bank promotes a conservative and prudent approach to liquidity risk management.

The Bank has a system of limits and indicators for:

The volume of liquid assets and treasury bills and treasury bills of the National Bank of Slovakia; the

ratio of liquid assets to short-term liabilities (show above-average values).

Long-term liquidity risk management is based on a model of core deposits using the Value at Risk

method.

Short-term liquidity management is performed by the Bank’s Dealing Department by monitoring the

liabilities and receivables due, and fulfilling the compulsory minimum reserves.

Long-term liquidity management is performed using Gap Analysis method (the classification of assets

and liabilities based on their maturity into different maturity ranges) and evaluation of indicators of the

net statement of financial position in Slovak crowns.

Management of liquidity risk

The Bank’s approach to managing liquidity is to ensure, as far as possible, that it will always have

sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without

incurring unacceptable losses or risking damage to the Bank’s reputation.

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(c) Liquidity risk (continued)

Exposure to liquidity risk

The key measures used by the Bank for managing liquidity risk are: the liquidity ratio of fixed and illiquid

assets, the ratio of liquid assets to deposits from customers, the Bank’s liquidity ratio for a period of seven

days, the ratio of most liquid assets to total assets and the value ratio of cumulative gap within the time

frame of 12 months.

Details of the reported Bank’s liquidity ratio at the reporting date and during the reporting period were:

The liquidity ratio of fixed and illiquid assets

31 December 31 December

2012 2011

yearly yearly

End of period 0.56 0.53

Average for the period 0.50 0.49

Maximum for the period 0.54 0.60

Minimum for the period 0.44 0.33

Ratio of liquid assets to total assets

31 December 31 December

2012 2011

yearly yearly

End of period 1.47 1.28

Average for the period 1.43 1.55

Maximum for the period 1.64 1.83

Minimum for the period 1.27 1.09

The liquidity ratio of fixed and non-liquid assets is a ratio of the sum of fixed assets and non-liquid assets to

the selected liabilities. The value of the ratio cannot exceed 1.

The ratio of liquid assets is a ratio of the sum of liquid assets to the sum of volatile liabilities. The value of

the ration cannot decrease below 1.

The ratios are defined in the provision of the National Bank Slovakia. The framework for the two indicators

is defined in the slope of the National Bank of Slovakia No. 18/2008 on liquidity of banks.

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The remaining period to maturity of financial assets and liabilities at 31 December 2012 are set out in the

following table, which shows the undiscounted cash flows on the basis of their earliest contractual maturity.

The Bank’s expected cash flows may vary significantly from this analysis. For example, customer account

liabilities are expected to maintain a stable or increasing balance.

31 December 2012 Total

carrying

amount

Within

1 year

1 - 5

years

More

than

5 years

Not

specified

Gross

nominal

cash flows

€ ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000

Assets

Cash and cash

equivalents 47,705

47,705 - - - 47,705

Trading assets 35,994 169,471 - - 35,942 205,413

Loans and advances

to banks 104,136

104,136 - - - 104,136

Loans and advances

to customers 1,984,758

990,555 1,239,729 343,428 - 2,573,712

Investment

securities 1,306,117

263,241 623,181 640,833 112,910 1,640,165

Income tax

receivable 9,102

9,102 - - - 9,102

Deferred tax asset 46,501 487 45,876 - 138 46,501

Other assets 203,405 202,884 439 82 - 203,405

3,737,718 1,787,581 1,909,225 984,343 148,990 4,830,139

Liabilities

Trading liabilities 758 169,810 - - - 169,810

Deposits by banks 61,079 61,079 - - - 61,079

Customer

accounts 2,829,500

2,409,803 455,992 361 5,471 2,871,627

Provisions 52 - - - 52 52

Provisions for

insurance

contracts 5,747

1,025 2,045 2,676 - 5,746

Debt securities in

issue 112,532

834 111,698 - - 112,532

Loans received 258,225 232,928 25,203 - - 258,131

Income tax

liabilities 1,389

1,389 - - - 1,389

Subordinated

liabilities 8,013

427 1,705 10,024 - 12,156

Other liabilities 469,711 460,372 9,339 - - 469,711

3,747,006 3,337,667 605,982 13,061 5,523 3,962,233

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The remaining period to maturity of financial assets and liabilities at 31 December 2011 was as follows:

31 December 2011 Total

carrying

amount

Within

1 year

1 - 5

years

More

than

5 years

Not

specified

Gross

nominal

cash flows

€ ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000

Assets

Cash and cash

equivalents 149,306

149,306 - - - 149,306

Trading assets 28,818 108,300 - - 28,196 136,496

Loans and advances

to banks 14,047

3,008 2,336 14,425 - 19,769

Loans and advances

to customers 1,943,619

984,195 1,213,259 283,936 2,437 2,483,827

Investment

securities 1,094,850

540,680 754,671 226,776 96,502 1,618,629

Investment property 2,428 - - - 2,428 2,428

Income tax

receivable 14,849

14,849 - - - 14,849

Deferred tax asset 56,656 35,625 20,920 12 99 56,656

Other assets 226,485 219,213 495 6,764 13 226,485

3,531,058 2,055,176 1,991,681 531,913 129,675 4,708,445

Liabilities

Trading liabilities 68

68 - - - 68

Deposits by banks 100,218 100,218 - - - 100,218

Customer

accounts 2,664,962

2,256,010 408,602 350 - 2,664,962

Debt securities in

issue 113,833

835 112,998 - - 113,833

Loans received 142,947 80,583 62,364 - - 142,947

Provisions 64 - - - 64 64

Provisions for

insurance

contracts 4,854

1,267 1,816 1,771 - 4,854

Income tax

liabilities 1,109

1,109 - - - 1,109

Other liabilities 383,050 39,544 340,619 2,887 - 383,050

Subordinated

liabilities 13,413

5,789 1,705 5,919 - 13,413

3,424,518 2,485,423 928,104 10,927 64 3,424,518

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The remaining period to maturity on commitments and contingencies items at 31 December 2012 was as

follows:

Within

1 year

1-5

years

More than

5 years

Not

specified

Total

€ ‘000 € ‘000 € ‘000 € ‘000 € ‘000

Commitments and

contingencies

Guarantees to clients 373,004 46,443 25 - 419,472

Confirmed credit lines 168,214 - - - 168,214

541,218 46,443 25 - 587,686

Notional amount

of derivatives

Currency swaps 160,351 - - - 160,351

Currency forward 9,074 - - - 9,074

169,425 - - - 169,425

The remaining period to maturity on commitments and contingencies items at 31 December 2011 was as

follows:

Within

1 year

1-5

years

More than

5 years

Not

specified

Total

€ ‘000 € ‘000 € ‘000 € ‘000 € ‘000

Commitments and

contingencies

Guarantees to clients 123,168 111,792 - - 234,960

Confirmed letters of

credit 6,433 - - - 6,433

Confirmed credit lines 158,305 - - - 158,305

287,906 111,792 - - 399,698

Notional amount

of derivatives

Currency swaps 107,684 - - - 107,684

107,684 - - - 107,684

Trading derivative liabilities forming part of the Bank’s proprietary trading operations are expected to be

closed out prior to contractual maturity. In respect of these derivative liabilities the maturity analysis in the

previous table reflects the nominal values at the date of the statement of financial position since contractual

maturities are not reflective of the liquidity risk exposure arising from these positions. These nominal

values are disclosed in the less than three months column. In addition, trading derivative liabilities

comprise also derivatives that are entered into by the Bank with its customers. In respect of these liabilities,

which are usually not closed out prior to contractual maturity, the maturity analysis in the previous table

reflects the contractual undiscounted cash flows as the Bank believes that contractual maturities are

essential for understanding the timing of cash flows associated with these derivative positions.

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To manage the liquidity risk arising from financial liabilities, the Bank holds liquid assets comprising cash

and cash equivalents for which there is an active and liquid market. These assets can be readily sold to meet

liquidity requirements.

(d) Market risk

Market risk is the risk that changes in market prices, such as interest rate, equity prices, foreign exchange

rates and credit spreads (not relating to changes in the obligor’s/issuer’s credit standing) will affect the

Bank’s income or the value of its holdings of financial instruments. The objective of market risk

management is to manage and control market risk exposures within acceptable parameters, while

optimising the return on risk.

Management of market risks

The Bank separates its exposure to market risk between trading and non-trading portfolios. Trading

portfolios include proprietary position taking, together with financial assets and liabilities that are managed

on a fair value basis.

Overall authority for market risk is vested in the ALCO. Market Risk Management is responsible for the

development of detailed risk management policies and decisions.

The principal tool used to measure and control market risk exposure within the Bank’s trading portfolios is

Value at Risk (VaR). The VaR of a trading portfolio is the estimated loss that will arise on the portfolio

over a specified period of time (holding period) from an adverse market movement with a specified

probability (confidence level). The VaR model used by the Bank is based upon a 99 percent confidence

level and assumes different holding period based on the type of the risk. The Bank applies daily VaR on the

foreign exchange and equity risk monthly VaR has been used on the interest rate risk. The VaR model used

is based mainly on historical simulation. Taking account of market data from previous years, and observed

relationships between different markets and prices, the model generates a wide range of plausible future

scenarios for market price movements.

Although VaR is an important tool for measuring market risk, the assumptions on which the model is based

do give rise to some limitations, including the following:

A holding period assumes that it is possible to hedge or dispose of positions within that period. This is

considered to be a realistic assumption in almost all cases but may not be the case in situations in which

there is severe market illiquidity for a prolonged period.

A 99% confidence level does not reflect losses that may occur beyond this level. Even within the

model used there is a one percent probability that losses could exceed the VaR.

VaR is calculated on an end-of-day basis and does not reflect exposures that may arise on positions

during the trading day.

The use of historical data as a basis for determining the possible range of future outcomes may not

always cover all possible scenarios, especially those of an exceptional nature.

The VaR measure is dependent upon the Bank’s position and the volatility of market prices. The VaR

of an unchanged position reduces if the market price volatility declines and vice versa.

The Bank uses VaR limits for total market risk and specific foreign exchange, interest rate, and equity and

other price risks. The overall structure of VaR limits is subject to review and approval by ALCO. VaR

limits are allocated to trading portfolios and are measured at least daily and more regularly for more

actively traded portfolios. Daily reports of utilisation of VaR limits are submitted to Market Risk

Management and regular summaries are submitted to ALCO.

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(d) Market risk (continued)

A summary of the VaR position of the Bank’s trading portfolios at 31 December 2012 and

31 December 2011 are as follows:

At 31 December 2012 Average Maximum Minimum

€ '000 € '000 € '000 € '000

31 December 2012

Foreign currency risk 2 4 182 1

Interest rate risk 2,675 1,750 2,931 466

Equity risk 275 299 387 242

At 31 December 2011 Average Maximum Minimum

€ '000 € '000 € '000 € '000

31 December 2011

Foreign currency risk 2 3 46 1

Interest rate risk 1,306 4,223 15,167 269

Equity risk 382 285 679 91

The limitations of the VaR methodology are recognised by supplementing VaR limits with other position

and sensitivity limit structures, including limits to address potential concentration risks within each trading

portfolio. In addition, the Bank uses a wide range of stress tests to model the financial impact of a variety of

exceptional market scenarios on individual trading portfolios and the Bank’s overall position.

Interest rate risk

The main source of the Bank’s interest rate risk results from revaluation risk, which is due to timing

differences in maturity dates (fixed rate positions) and in revaluation (variable rate positions) of banking

assets and liabilities and off-balance sheet positions.

Other sources of interest rate risk are:

Yield curve risk - changes of interest rates on the inter-bank market will occur to different extents at

different periods of time for the same financial instrument.

Different interest base risk - reference rates, to which active and passive transactions are attached, are

different and do not move simultaneously.

Risk of impairment losses results from decrease of interest sensitive exposure in increasing volume of

impairment losses. Reducing of exposure affects Bank’s interest sensitivity.

On the assets side of the statement of financial position, the Bank manages interest rate risk mainly by

providing a majority of loans with variable rates and by managing its investment securities portfolio using

fixed rates.

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The priorities of the Bank for interest rate risk management of liabilities comprise:

Stability of deposits, especially over longer time periods

Fast and flexible reactions to significant changes in inter-bank interest rates through adjustments to

interest rates on deposit products

Continuously evaluating interest rate levels offered to clients compared to competitors and actual and

expected development of interest rates on the local market

Adjusting the structure of liabilities to the expected development of money market rates in order to

optimise interest revenues and minimise interest rate risk.

The Bank’s methods of measuring interest rate risk consist of:

Standard methods of interest rate risk measurement based on quantification of changes in the Bank’s

revenues due to changes in the interest rate (Gap analysis)

Net interest income sensitivity change due to different changes of interest rates,

Sensitivity change of the economic value of the Bank,

Basis Point Value analysis,

Value at Risk.

Part of the Bank’s revenue is generated through planned differences between interest-sensitive assets and

liabilities.

Management of interest rate risk

Limits, indicators and methods of interest rate risk management are defined in accordance with principles

described in the Market Risk Management Strategy.

The Bank identifies, monitors and reports interest rate risk through the following methods:

Stress and back testing,

Interest income sensitivity,

Sensitivity of the business value of the Bank,

Gap analysis,

VaR calculation,

Duration analysis,

Basis Point Value analysis.

The Bank’s interest rate risk management uses the following limits and indicators:

Gap limits and indicators for selected time zones,

Sensitivity indicators of price changes to changes in the yield to maturity (duration analysis),

Sensitivity indicators of the net present value of bonds to changes in interest.

Limit for the change in the business value of the Bank,

Limit for the change of net interest income.

The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the

future cash flows or fair values of financial instruments because of a change in market interest rates.

Interest rate risk is managed principally through monitoring interest rate gaps and by having pre-approved

limits for repricing bands. The ALCO is the monitoring body for compliance with these limits and is

assisted by Risk Management in its day-to-day monitoring activities.

ALCO is responsible for setting interest rates for the Bank’s products.

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The management of interest rate risk against interest rate gap limits is supplemented by monitoring the

sensitivity of the Bank’s financial assets and liabilities to various standard and non-standard interest rate

scenarios. Standard scenarios that are considered on a monthly basis include a 50 or a 200 basis point (bp)

parallel fall or rise in yield curves with maturity up to one year. An analysis of the Bank’s sensitivity to an

increase or decrease in market interest rates (assuming no asymmetrical movement in yield curves and a

constant statement of financial position) is as follows:

Sensitivity of projected net interest income

200 bp 200 bp 50 bp 50 bp

parallel parallel parallel parallel

increase decrease increase decrease

€ '000 € '000 € '000 € '000

31 December 2012

At 31 December 5,854 (2,066) 1,463 (517)

Average for the period 5,384 (3,770) 1,346 (942)

Maximum for the period 9,321 (7,242) 2,330 (1,811)

Minimum for the period 3,546 (1,978) 887 (494)

31 December 2011

At 31 December 5,925 (6,042) 1,481 (1,510)

Average for the period 5,487 (5,689) 1,372 (1,422)

Maximum for the period 7,089 (7,701) 1,772 (1,925)

Minimum for the period 3,682 (4,004) 921 (1,001)

Sensitivity of reported equity to interest rate:

200 bp 200 bp 50 bp 50 bp

parallel parallel parallel parallel

increase decrease increase decrease

€ ‘000 € ‘000 € ‘000 € ‘000

31 December 2012

At 31 December (21,464) 21,464 (5,366) 5,366

Average for the period (15,233) 15,233 (3,808) 3,808

Maximum for the period (22,406) 22,406 (5,601) 5,601

Minimum for the period (4,631) 4,631 (1,158) 1,158

31 December 2011

At 31 December (3,344) 3,344 (836) 836

Average for the period (8,403) 8,403 (2,101) 2,101

Maximum for the period (10,881) 10,881 (2,720) 2,720

Minimum for the period (3,344) 3,344 (836) 836

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Interest rate movements affect reported equity in the following ways:

retained earnings arising from increases or decreases in net interest income and the fair value changes

reported in profit or loss

fair value reserves arising from increases or decreases in fair values of available-for-sale financial

instruments reported directly in equity.

hedging reserves arising from increases or decreases in fair values of hedging instruments designated

in qualifying cash flow hedge relationships.

Overall non-trading interest rate risk positions are managed by Treasury Division, which uses investment

securities, advances to banks, deposits from banks and derivative instruments to manage the overall

position arising from the Bank’s non-trading activities.

Share price risk

Share price risk is the risk of movements in the prices of equity instruments held in the Bank’s portfolio

and financial derivatives derived from these instruments. The main source of the Bank’s share price risk is

speculative positions held in shares and positions held for strategic reasons.

When investing in shares, the Bank:

follows an investment strategy which is updated on a regular basis,

has a preference for publicly traded stocks,

focuses mainly on liquid capital markets with a sufficient amount of information about issuers of the

securities,

monitors limits to minimise share price risk (stop loss limits, asset concentration and equity VAR

indicators)

performs a risk analysis, which usually includes forecasts of the development of the share price,

various models and scenarios for the development of external and internal factors with an impact on the

profit and loss account, asset concentration and the adequacy of own resources.

Limits, indicators and methods of share price risk management are defined in accordance with principles

described in the Market Risk Management Strategy.

The Bank uses the following limits and indicators in the management of share price risk:

credit risk limits relating to share price risk (limits for industries, limits for countries, limits for banks,

limits for the issuer),

stop loss limits for shares,

portfolio limits,

limits for shares as defined by the Act on Banks.

VaR indicator

The Bank identifies monitors and reports share price risk using the following methods:

Overview of the current share positions of the Bank,

equity VAR calculation (historical simulation method),

Stress and back testing.

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Foreign exchange risk

The main source of foreign exchange risk is a difference between assets and liabilities denominated in

different currencies. This difference arises mainly from transactions in the trading book, which are of a

speculative nature. The main source of foreign exchange risk in the banking book is from loans provided in

foreign currency, while the Bank obtains the necessary resources from currency derivatives on the inter-

bank market. The Bank aims to hedge these positions in the banking book to the maximum extent possible

through hedging instruments (for example currency derivatives), and thereby to minimise the foreign

exchange risk. The Bank reduces its foreign exchange risk through limits on unsecured foreign exchange

positions and maintains on acceptable level for its size and business activities. The main currencies in

which the Bank holds positions are Czech crowns and US dollars.

Limits, indicators and methods of foreign exchange risk management are defined in accordance with

principles described in the Market Risk Management Strategy.

The Bank uses the following limits and indicators in currency risk management:

internal limits for unsecured foreign exchange positions,

limit in the maximum monthly loss of the Dealing Department from foreign exchange transactions,

foreign currency VaR limit and indicators,


The Bank identifies monitors and reports the Bank’s foreign exchange risk using the following methods:

Report on unsecured foreign exchange positions of the Bank,

An overview of the current foreign exchange positions,

Monitoring the structure of foreign currency assets and liabilities by particular currencies,

Foreign currency VaR model,


The Bank performs daily stress testing and back testing of foreign exchange risk in VaR models. In specific

cases the Bank prepares development scenarios for selected parameters for significant open transactions.

For liquidity risk management, the Bank has defined basic and alternative scenarios which reflect the

development of external and internal factors. The verification and subsequent reassessment is performed

annually.

The Bank regularly performs stress testing of foreign exchange and share price risk by applying internally

defined stress scenarios for individual types of risks. The Bank subsequently verifies the impact of the

results of stress testing on the Bank’s capital.

The results of stress testing are taken into consideration when setting procedures and limits for risk

exposure.

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The Group had the following assets and liabilities denominated in foreign currencies at

31 December 2012:

Czech crown US dollar Other Total

€ ‘000 € ‘000 € ‘000 € ‘000

Assets

Cash and cash equivalents 34,285 1,213 4,760 40,258

Trading assets 25,748 - - 25,748


banks 102 - - 102


customers 218,799

49,940 1 268,740

Investment securities 23,663 4,760 -

28,423

Deferred tax asset 24 - 24

Other assets 87 5,755 22 5,864

302,708 61,669 4,783 369,159

Liabilities

Deposits by banks 19,563 16 - 19,579

Customer accounts 108,632 9,797 3,294 121,723

Loans received 11,099 5,557 - 16,656

Deferred tax liability 320 - - 320

Other liabilities 378 11 26 415

139,992 15,381 3,320 158,693

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The Group had the following assets and liabilities denominated in foreign currencies at 31 December 2011:

Czech crown US dollar Other Total

€ ‘000 € ‘000 € ‘000 € ‘000

Assets


Trading assets 14,788 - - 14,788


banks 11,790 - - 11,790


customers 172,647 46,204 - 218,851

Investment securities 66,174 4,634 - 70,808

Other assets 129 3,864 19 4,012

325,863 56,133 1,723 383,719

Liabilities

Deposits by banks 100,201 17 - 100,218

Customer accounts 86,491 3,517 1,468 91,476

Loans received 9,933 - - 9,933

Tax liabilities 4 - - 4

Other liabilities 1,518 115 26 1,659

198,147 3,649 1,494 203,290

(e) Operational risk

Operational risk is the risk of loss including the damage caused by the Bank’s processes, to the Bank by

other reasons resulting from inappropriate or incorrect procedures, human factor failure, failure of used

systems and from external factors other than credit, market and liquidity risks. A part of the operational risk

is legal risk arising from unenforceable contracted liabilities, threat of unsuccessful legal cases or verdicts

with negative impact on the Bank. Operational risk arises from all of the Bank’s operations and is faced by

all business entities.

The primary goals of the Bank’s operational risk management are the mitigation or reduction of losses

caused by operational risk and to reduce the negative impact of operational risk on the profit or loss and

equity of the Bank.

The Bank has chosen the basic indicator approach to operational risk management.

In the short-term within one year period the Bank will improve: implemented process of operational risk

identification, usage of KRI indicators, self-evaluation procedures, planning of unforeseeable events and

business continuity of the Bank. The Bank will implement operational risk management on a consolidated

basis.

In the long-term, the Bank will continue the improvement of self-evaluation and mitigation of operational

risk, with the aim to introduce more advanced methods for operational risk management. The Bank is

entitled to implement additional methods of identification, estimation, monitoring and mitigation of

operational risk.

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(e) Operational risk (continued)

The primary responsibility for the development and implementation of controls to address operational risk

is assigned to senior management in each division. This responsibility is supported by the development of

overall standards for the management of operational risk in the following areas:

requirements for the reconciliation and monitoring of transactions

compliance with regulatory and other legal requirements

documentation of controls and procedures

requirements for the periodic assessment of operational risks faced, and the adequacy of controls and

procedures to address the risks identified

requirements for the reporting of operational losses and proposed remedial action

development of contingency plans

training and professional development

ethical and business standards

risk mitigation, including insurance where this is effective.

Compliance with Bank’s standards is supported by a program of periodic reviews undertaken by Internal

Audit. The results of Internal Audit reviews are discussed with the relevant managers, with summaries

submitted to the Supervisory Board, the Board of Directors and the Audit Committee.

Legal risk

Legal risk forms part of operational risk and is the loss arising from unenforceable contracts, threats of

unsuccessful legal cases or verdicts with negative impact on the Bank. In the environment of the Bank, the

risk of sanctions from regulators may be connected with reputational risk.

Legal risk management is performed by the Legal and Compliance Division. Currently, the Bank’s legal

risk management is focused on:

Legal services in preparation of new contract documentation for business relationships or modification

of the existing documentation.

Legal services in creation of new products and modification of the existing products.

Elimination of negative consequences of legal proceedings, arbitration, administrative procedures or

other not finished procedures.

Consolidation of internal regulations including template agreements and legal documentation which the

Bank uses when providing services for customers.,

Legal services for the Bank’s branch network by means of legal help line, direction of branch

procedures for elimination of incorrect procedures which could cause a loss for the Bank.

Updating and harmonising of general conditions in accordance with legislation, regulatory

requirements and change in the Bank’s strategy.

System of warning signals for management (new legislation or prepared legislation, identification of

events which could cause a loss for the Bank.

Risk management of legalization of profit from illegal activity and terrorism financing arising from

client’s risk approach, type of business, business relationship as well as client’s considering and

monitoring and businesses from illegal activity and terrorism financing.

Harmonisation of legal documents and procedures of the Bank with legal requirements of the regulator.

Four eyes principle in the process of comments to the contracts, internal guidelines and other legal

documents as well as in the process of providing of legal opinions.

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The insurance company’s legal risk management is performed by the Legal Division of the insurance

company, which is focused on:

performing legislative monitoring and impact analysis prepared or approved changes in the legal

environment,

legal advice on the creation and updating of insurance products, insurance companies, including the

preparation and updating of the terms,

preparation of comments on the contract documents,

providing the methodology and activities in the prevention of money laundering activities and

protection against terrorist financing

management and update of the list of reports and other non-financial notification to the National Bank

of Slovakia and other authorities,

publishing of information about the activities of insurance to the extent required by generally binding

legal regulations,

solving the claims arising from business of insurance company, including representation in litigation

and administrative procedures,

coordinate system of internal regulations,

managing and updating the list of persons with special relation to insurance company,

methodological guidance to achieve compliance with generally binding legal regulations.

The Asset Management Company’s legal risk management is performed by the Legal Division of Asset

Management Company:

Legal risk management of Asset Management Company provides legal department and from a methodical

and systematic approach, also a division of legal services and compliance of its parent company – Poštová

banka, a.s. Currently, the Asset Management Company in legal risk management is focused on:

legal services (creation of new or changes to existing contractual relationships, creating new products

and modification of existing products, consolidation of internal rules, updating of terms and conditions

in response to changes in legislation),

system of warning signals to management containing information about legislation, acts and identified

events that may give rise to damages,

ensuring compliance of corporate agendas and agenda related to the management of mutual funds,

including all mandatory data published in accordance with applicable legislation.

Management of legal risk of a finance mediation company:

Legal risk management is performed by the Legal and Compliance Division. Currently, the Bank’s legal

risk management is focused on:

Legal services in preparation of new contract documentation for business relationships or modification

of the existing documentation.

Legal services for the providing the financial intermediation in terms of compliance with current

legislation, particularly the law on financial intermediation and agreements of cooperation with

financial institutions

Legal services in creation of new products and modification of the existing products.

Elimination of negative consequences of legal proceedings, arbitration, administrative procedures or

other not finished procedures.

Consolidation of internal regulations including template agreements and legal documentation which the

Bank uses when providing services for customers.,

Legal services for the Bank’s branch network by means of legal help line, direction of branch

procedures for elimination of incorrect procedures which could cause a loss for the Bank.

Updating and harmonising general conditions in accordance with legislation, regulatory requirements

and change in the Bank’s strategy.

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System of warning signals for management new legislation or prepared legislation, identification of

events which could cause a loss for the Bank.

Risk management of legalization of profit from illegal activity and terrorism financing arising from

client’s risk approach, type of business, business relationship as well as client’s considering and

monitoring and businesses from illegal activity and terrorism financing.

Harmonisation of legal documents and procedures of the Bank with legal requirements of the regulator.

Risk related to outsourcing

Outsourcing activities provide a separate group of operational risks. Outsourcing involves the long-term

performance of activities by a third party, which support the Bank’s activities and are carried out on a

contractual basis.

The Bank’s risk management relating to outsourcing is part of the overall risk management, and is the

responsibility of the Board of Directors, and includes:

The strategy for risk management in relation to outsourcing is approved by the Board of Directors.

Internal regulations relating to outsourcing, security crisis plans for individual outsourced activities and

plans for termination of the outsourcing.

The members of the Board of Directors, members of the relevant division or the employee of the Bank

(who approves internal Bank regulations relating to outsourcing), or persons related to them (according

to the Civil Code) should have no direct influence on the contractual party providing the outsourcing

services.

Detailed and systematic analysis of risks of outsourcing.

Examination of the service quality of the provider before and during the outsourcing.

Regular inspections of performance of outsourcing activities by the Internal Control Division and

Internal Audit of the Bank.

Performing the necessary steps to ensure the security of confidential information concerning the Bank

and its clients.

Minimising the risk of outsourcing when extraordinary events occur.

A specific risk of an asset management company results from the internal character of the investment,

which implies mostly insolvency of the issuer. When evaluating this risk, it is necessary to take into

account all publicly available information about:

Management risk

Operational risk

Financial risk

Risk of early repurchase

Risk of conversion

(f) Insurance risk

The insurance company is exposed to insurance risk and to underwriting risk arising from the life and non-

life insurance products. Internal guidelines are used to manage the risk relating to the development and

valuation of products, determination of technical provisions, reinsurance determination and also to establish

the rules for underwriting insurance.

The life insurance is exposed to insurance risk of morbidity, mortality, longevity and risk of concentration

in case of epidemics and disasters. To eliminate these risks is used medical and financial underwriting or

reinsurance (change in credit risk of the reinsurer). In non-life insurance company is exposed to particularly

the risk of the adequacy of future premiums (due to the unexpected development of future claims,

administrative costs, increased rates of cancellation, etc.), risk of extreme events (catastrophic risk) is also

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5. FINANCIAL RISK MANAGEMENT (continued) (g) Insurance risk (continued)

the risk and the sufficiency of reserves for claims (due to unexpected development already incurred claims,

lawsuits, etc.).

Claims development

Claims development information is provided in the following tables in order to illustrate the risk arising

from insurance contracts. The tables compare the development of the estimated ultimate loss on an

accident-year basis. The first part of the table provides a review of current estimates of cumulative claims

and demonstrates how the estimated claims have changed at subsequent accounting year-ends. The estimate

is increased or decreased as losses are paid and more information becomes known about the frequency and

severity of unpaid claims. The second part of the table shows the amount of claims paid according to year

of the insured event.

Various factors may influence the re-estimated provisions and the cumulative excess or deficit presented in

each table. These include inadequate information when reporting an insured event and problems with

settlement. The information in the table provides a historical perspective on the adequacy of unpaid claims estimates,

and may not be a reliable base for extrapolating surpluses or deficits of past provisions to current unpaid

loss balances. The Group assumes that the expectation of unpaid claims at the year end 2011 is appropriate.

Because of the uncertainty of the future development there is not possible to assume that the estimate is

appropriate.

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(f) Insurance risk (continued)

The information in the table provides a historical perspective on the adequacy of unpaid claims estimates, and may not be a reliable base for extrapolating surpluses or deficits of

past provisions to current unpaid loss balances. The Group assumes that the expectation of unpaid claims at the year end is appropriate. Because of the uncertainty of the future

development there is not possible to assume that the estimate is appropriate.

Analysis of claims development – gross of reinsurance

< 2003 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total

€ ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000

€ ‘000 € ‘000

Estimate of cumulative claims

At the year-end when the claim occurred 632 820 1,634 2,922 1,333 546 181 246 141

140

one year later 635 1,065 2,506 3,035 1,030 403 118 74 62

two years later 636 1,070 2,562 2,899 975 397 115 68 -

three years later 637 1,073 2,744 2,986 975 397 115 - -

four years later 634 1,060 2,961 2,920 978 391 - - -

five years later 634 1,076 2,985 2,920 976 - - - -

six years later 634 1,078 3,049 2,920 - - - - -

seven years later 672 1,075 3,064 - - - - - -

eight years later 680 1,065 - - - - - - -

nine years later 643 - - - - - - - -

Estimate of cumulative claims 643 1,065 3,064 2,920 976 391 115 68 62

140 9,444

Cumulative payments to balance sheet

date 634 1,065 2,731 2,920 976 391 115 68 61

52 9,013

Cumulative claims provision

(RBNS+IBNR) as at 31 December 2012 294 9 - 334 - - - - - -

88 725

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Analysis of claims development –net of reinsurance

<2003 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total

€ ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000

€ ‘000

€ ‘000

Estimate of cumulative claims

At the year-end when the claim occurred 324 410 969 2,052 671 293 104 144 73

81

one year later 318 531 1,829 2,331 550 225 72 56 45

-

two years later 318 539 1,876 2,268 522 222 69 53 -

-

three years later 318 542 1,903 2,311 641 223 68 - -

-

four years later 317 539 2,003 2,260 524 219 - - -

-

five years later 317 546 1,913 2,252 523 - - - -

-

six years later 317 641 2,043 2,252 - - - - -

-

seven years later 317 546 2,050 - - - - - -

-

eight years later 335 541 - - - - - - -

-

nine years later 322 - - - - - - - -

-

Estimate of cumulative claims 322 541 2,050 2,252 523 219 68 53 45

81

6,155

Cumulative payments to balance sheet

Date 317 541 1,917 2,252 523 219 68 53 45

41

5,977

Cumulative claims provision

(RBNS+IBNR) as at 31 December 2012 118 5 - 133 - - - - - -

40

296

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Risks arising from life insurance contracts

Summary of life insurance contract liabilities

31 December 2012

Life

insurance

contracts

Investment

contracts

with DPF

Total

€ ‘000 € ‘000 € ‘000

Before/Gross of reinsurance 4,477 290 4,767

After/Net of reinsurance 4,477 290 4,767

31 December 2011

Life

insurance

contracts

Investment

contracts

with DPF

Total

€ ‘000 € ‘000 € ‘000

Before/Gross of reinsurance 3,528 285 3,813

After/Net of reinsurance 3,508 285 3,793

Other risks

Other risks associated with insurance contracts with discretionary participation features (‘DPF’) are

persistency risk, market risk and expense inflation.

Market risk is the risk of loss in fair value resulting from adverse fluctuations in interest and foreign

currency exchange rates and equity prices, and the consequent effect that this has on the value of charges

earned by the company and on any guarantees in the contracts.

Persistency risk is the risk that the client cancels the contract or stops paying new premiums into the

contract, thereby exposing the insurance company to a loss resulting from an adverse movement in the actual

experience compared to that expected in the product pricing. The insurance company manages this risk by

making appropriate charges for early surrender where possible and by maintaining high levels of customer

care. The insurance company is exposed to diminishing investment management revenues in line with a

decline in asset values.

The risk of exposure inflation is the risk that the actual costs will be higher than cost calculation of the

products in relation to the expected sale of contracts, long term development of all insurance contracts in the

portfolio, price levels, etc.

Financial risk

The insurance company is exposed to financial risk through its life insurance contracts, financial assets,

financial liabilities (including investment contracts with DPF) and reinsurers’ share on insurance provisions

arising from insurance contracts. As stated above, the goal of the insurance company is to invest assets

relating to liabilities from insurance and investment contracts with DPF into assets, which face to equal or

similar risks. This principle ensures that the insurance company can meet its contractual liabilities when they

become due.

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The insurance company is exposed to residual financial risk mainly due to the following:

It is not possible to perfectly match financial assets to liabilities from insurance. This relates mainly to

non-life insurance, traditional and general life insurance contracts and to pension life insurance

contracts. Additional risks relate to guarantees and options embedded in insurance and investment

contracts with DPF.

The insurance company invests part of the capital into financial assets, which is not matched to

liabilities from insurance and financial liabilities from investment contracts with DPF.

Existing credit risk relating to reinsurers’ share on provisions resulting from insurance contracts.

In the short term management of the insurance company expect fluctuation in market prices of assets used

to cover technical provisions as well as fluctuation in the carrying value of liabilities arising from insurance

and investment contracts with DPF. In the short term there is also some uncertainty regarding the impact of

financial crisis, including, for example number of newly concluded contracts and the amount of premiums

received from policyholders. Since the insurance company offers insurance of bank loans (e.g. for loss of

employment) may be undertaking in the short and medium term affected by the economic recession (lower

number of loans granted and the increased number of unemployed).

Many insurance contracts sold by insurance companies are medium to long term. Based on this analysis

management of insurance company does not suppose significant impact of adverse developments in

international financial and capital markets to insurance activity in the long term.

Solvency

Based on Article 34 of Act No. 8/2008 Coll. (Act on Insurance) as amended, the insurance company has an

obligation to continuously maintain a minimum required solvency margin. The method of calculation and

presenting the solvency margin was set out by the NBS in Decree No. 25/2008 Coll. During the year, the

insurance company maintained the required margin.

The actual solvency margin in 2012 was € 13,425 thousand (2011: € 11,667 thousand) while the required

solvency amount was € 7,000 thousand. The required solvency amount as at 31 December 2012 was equal to

the amount of the guarantee fund at that date.

(g) Regulatory requirements of the asset management company

The management of the Company is obliged to comply with regulatory requirements primarily by the

National Bank of Slovakia, which are set out under Act No. 594/2003 Z.z. on the collective investment.

These include limits and restrictions on capital adequacy. These requirements apply to all asset management

companies in Slovakia and their compliance is determined on the basis of reports submitted by the

management company under statutory accounting rules.

The summary of these requirements is as follows:

Initial capital of the Company is at least € 1,000 thousand.

The asset management company is obliged to observe the adequacy of own funds. Own funds of the

management company are appropriate under this Act, unless they are below:

a) € 1,000 thousand plus 0,02% of the value of the assets in the funds managed by the Company

exceeding € 250,000 thousand, this amount is not increased when it reach € 10,000 thousand,

b) One quarter of average general operating costs of the management company for the previous

calendar year, if the management company was less than one year, a quarter of value of general

operating costs referred to in its business plan,

c) Company must not acquire to its property or property in the open-ended unit trust, which manages,

more than 10% of the total nominal value of shares with voting rights issued by one issuer,

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(g) Regulatory requirements of the management company (continued)

d) Company may not acquire to its property or assets in the open-ended unit trust, which manages,

shares with voting rights which would enable the management company a significant impact on the

management of the issuer located in the territory of the Slovak republic, or in a non EU State.

e) The asset management company is required to comply with restrictions on the acquisition of

significant influence in the management of the issuer is established in a Member State, provided the

law of that Member State, taking into account the property in the open-ended unit trust, which

manages.

f) An asset management company must not invest in equity securities, money market instruments and

financial derivatives and in the sale of securities, money market instruments and financial

derivatives on its own assets to prioritize their interests over the interests of the shareholders of

mutual funds it manages.

g) An asset management company must manage the property in the proportion of the Fund in

accordance with the focus investment strategy and risk profile identified in the Statute of the

mutual fund, to prevent the risk of financial loss, to analyze the economic advantage of available

business information

(h) Regulatory requirements of the pension funds management company

The pension funds management company in the administration and the creation of pension funds are obliged

to comply with regulatory requirements of the National Bank of Slovakia, as stated in Act No. 43/2004 Z. on

pension saving funds (hereinafter "Act on PSF"). These requirements apply to all pension funds management

companies in Slovakia.

Among the important requirements of the Act on PSF are included:

The share capital of the pension funds management company is at least € 9,950 thousand.

The pension funds management company shall maintain capital requirements. Equity is adequate when:

a) it is not less than 25% of general operating expenses for the previous year, if the pension funds

management company is operating less than one year, 25% of the value of general operating

expenses stated in its commercial and financial plan and

b) the ratio of the difference between liquid assets and liabilities and assets to the value of assets in all

pension funds under management is not less than 0.005.

The management of assets in the pension fund is obliged to act with due care and diligence in the best

interests of savers and pensioners and the interest of their protection in compliance with generally

binding legal regulations, the statutes of the pension fund rules and the decisions of the National Bank of

Slovakia.

The pension funds management company can buy and sell property, which may be subject to investment

only if it does not conflict with the interests of savers and pensioners. The pension funds management

company may not put its interest over the interest of savers and pensioners.

The pension funds management company’s property or assets in the pension funds under management,

may not acquire more than 5% of the total nominal value of shares issued by one issuer.

The pension funds management company to own assets or assets in the pension funds under

management, may not acquire shares with voting rights which would enable the management company

to exercise a significant influence over the management of the issuer.

(i) Capital management

The Bank’s regulator, the National Bank of Slovakia (‘NBS’), sets and monitors capital requirements.

In implementing current capital requirements, the NBS requires the Bank to maintain a prescribed ratio of

total capital to total risk-weighted assets.

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(i) Capital management (continued)

With effect from 1 January 2008, the Bank is required to comply with the provisions of the Basel II

framework in respect of regulatory capital. The Bank uses the standardised approach to credit, and the basic

indicator approach to operational risk management.

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

Tier 1 capital includes ordinary share capital, share premium, revaluation reserves and reserve funds and

other funds created from profit after deducting losses of the current period, intangible assets and other

specified deductible items.

Tier 2 capital includes items such as additional own funds of high quality, (e.g. revaluation reserves not

included in Tier 1) equity funds transferred to additional own funds, revaluation funds, perpetual debt

securities, excess reserves and specific additional own funds of higher quality and additional own funds

of lower quality, (e.g. subordinated debt and other specific additional own funds of lower quality after

deducting of items specified in the NBS regulation).

Tier 3 capital includes subordinated liabilities, which are not included in Tier 2.

Banking operations are categorised as either trading book or banking book, and risk-weighted assets are

determined according to specified requirements that seek to reflect the varying levels of risk attached to

assets and exposures not recognized in the statements of financial position.

The Bank’s policy is to maintain a strong capital base so as to maintain shareholder, creditor and market

confidence and to sustain future development of the business. The impact of the level of capital on

shareholders’ return is taken into account as the Bank recognises the need to maintain a balance between the

higher returns that might be possible with greater gearing and the advantages and security afforded by a

sound capital position.

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There have been no material changes in the Bank’s management of capital during the period. The Bank’s

consolidated regulatory capital position was as follows:

2012 2011

€ ‘000 € ‘000

Regulatory capital

Tier 1 capital

Ordinary share capital and share premium 233,498 233,622

Unpaid share capital - (100,000)

Reserve funds and other funds created from profit 17,497 16,647

Other capital funds 73,467 179,837

Loss for the year - (216,606)

Retained earnings, excluding current year profit 256 115,899

Accumulated profit from current year 18,939 -

Less: intangible assets (27,145) (16,726)

excess of expected losses over adjustments (29,096) -

negative revaluation differences (397) (2,377)

Total tier 1 287,019 210,296

Tier 2 capital

Subordinated debt 8,000 8,000

Positive revaluation differences 14,801 2,672

Total tier 2 22,801 10,672

Tier 3 capital

Subordinated debt - -

Total tier 3 - -

Regulatory capital total 309,820 220,968

Capital Resources Requirements 2012 2011

€ ‘000 € ‘000

Capital required to cover:

Credit risk 170,681 130,010

Business partner risk 77 -

Risks from debt financial instruments, capital instruments,

foreign exchange and commodities. 7,002

5,389

Operating risk 25,669 21,433

Total capital requirement 203,429 156,832

Capital ratios

Regulatory capital 12.18% 11.27%

Tier 1 capital 11.29% 10.73%

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The allocation of capital between specific operations and activities is, to a large extent, driven by

optimisation of the return achieved on the capital allocated. The amount of capital allocated to each

operation or activity is based primarily upon the regulatory capital, but in some cases the regulatory

requirements do not reflect fully the varying degree of risk associated with different activities. In such cases

the capital requirements may be flexed to reflect differing risk profiles, subject to the overall level of capital

to support a particular operation or activity not falling below the minimum required for regulatory purposes.

The process of allocating capital to specific operations and activities is undertaken independently of those

responsible for the management of the bank risk and interest rate risk, and is subject to review by the Credit

Committee or ALCO as appropriate.

Although maximisation of the return on risk-adjusted capital is the principal basis used in determining how

capital is allocated within the Group to particular operations or activities, it is not the sole basis used for

decision-making. Account is also taken of synergies with other operations and activities, the availability of

management and other resources, and the fit of the activity with the Group’s longer term strategic objectives.

The Group’s policies in respect of capital management and allocation are reviewed regularly by the Board of

Directors.

On 16 January 2012 Financial Market Supervision of NBS issued the Recommendation No 1/2012 about the

support of stability of banking sector („Recommendation“). This Recommendation was issued in line with

the requirements of European Banking Authority from the end of the year 2011. Based on this

Recommendation, the Bank has decided to maintain its capital adequacy requirements on the levels not

lower than 9% at least during the period till the reasons why the Recommendation was issued by NBS will

last.

Due to the increase in share capital of the Bank at the end of the year 2011and the retained earnings the level

of this ratio stood at 11.27% as at 31 December 2011. Under normal circumstances the Bank does not expect

this ratio to be below 10.3%. In the case of worsening circumstances on the market the majority shareholder

of the Bank committed to increase the share capital on the capital requirements level in order to protect the

Bank from very negative but still relevant threats arising from credit crises as well as from the risk from

sovereign exposures.

The Bank constantly evaluates normal as well as negative scenarios in the capital requirements development

and subsequently adjusts its risk appetite in providing active bank trades.

(j) Risk management and the financial and economic crisis

The global financial and economic crisis increased risk for the banking sector. In responding to the crisis, the

Bank introduced and has maintained the following enhancements to risk management:

Credit risk of corporate clients

daily intensive monitoring of clients` executions,

legal audit of hedging instruments,

review of the conversion ratios for the acceptance of collateral,

introduction of new measurements on collateral.

Credit risk of retail clients

monitoring of companies making redundancies,

innovations of new products for individuals, with more favourable repayment terms, loans

consolidation, etc.,

optimisation and new tools in the process of recovery,

introduction of new decision rules for granting loans.

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(j) Risk management and the financial and economic crisis (continued)

Liquidity risk

reassessment of liquidity ratios and implementation of new ratios,

use of own liquidity stress scenarios which exceed the regulatory requirements.

Market risk

reassessment of limits and stress scenarios with equity and foreign currency risks,

closed speculative positions with equity risk and foreign currency risks,

closed foreign currency positions in all significant currencies.

Insurance risk

in the short term the management of the insurance company expects continued fluctuations in the

market prices of assets held for the purpose of covering technical provisions and also fluctuations in

the book value of liabilities arising from insurance and investment contracts with DPF. There is

also short-term uncertainty regarding the number of new contracts and the level of insurance fees to

be earned. As the company also provides insurance on loans from banks (e.g. in the event of loss of

employment), there may be short and medium term adverse effects.

as many insurance contracts sold by the company are medium or long term, management does not

expect the crisis to impact significantly on the long-term development of its business.

6. OPERATING SEGMENTS

Segment reporting is presented in respect of the Group’s business activities.

Measurement of segment assets and liabilities and segment revenues and results is based on the accounting

policies set out in accounting policy notes.

Transactions between segments are conducted at arm’s length.

Segment revenues, results, assets and liabilities include items directly attributable to a segment as well as

those that can be allocated on a reasonable basis.

Business segments:

a) Financing

Financing activities include retail banking corporate banking and other financing.

b) Investing

Investing activities include holding and trading of investments and acquisition of new ownership interests.

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6. OPERATING SEGMENTS (continued)

2012 Financing Investing Total

€ '000 € '000 € '000

Interest income and similar income from debt securities 187,320 70,570 257,890

Interest expense (83,827) - (83,827)

Net interest income 103,493 70,570 174,063

Fee and commission income 46,043 - 46,043

Fee and commission expense (26,628) - (26,628)

Net fee and commission income 19,415 - 19,415

Dividend received - 1,009 1,009

Net trading income/(expense) 1,513 (23,815) (22,302)

Net earned premiums 7,842 - 7,842

Net other income 4,454 (7,053) (2,599)

Net non-interest income/(expense) 33,224 (29,859) 3,365

Operating income 136,717 40,711 177,428

Administrative expenses (53,049) (28,224) (81,273)

Depreciation and amortisation (8,724) (3,302) (12,026)

Claims costs (1,799) - (1,799)

Operating expenses (63,572) (31,526) (95,098)


losses and provisions 73,145 9,185 82,330

Investment losses on investment securities, net - (2,483) (2,483)

Impairment losses on loans and advances, net (20,123) - (20,123)

Impairment losses on property and equipment (170) - (170)

Impairment losses on intangible assets (455) - (455)

Impairment losses on other assets, net (197) - (197)

Release of provisions for liabilities, net 12 - 12

Profit/(loss) from operations 52,212 6,702 58,914

Disposal of subsidiaries 978 - 978

Profit/(loss) before taxation 53,190 6,702 59,892

Income tax income (9,203)

Loss for the year 50,689

Non-controlling interest 4,356

Profit attributable to owners of the Company 46,333

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Financing Investing Total

€ '000 € '000 € '000

Other information:

Assets 2,505,500 1,308,545 3,814,045

Liabilities 3,747,006 - 3,747,006

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2011 Financing Investing Total

€ '000 € '000 € '000

Interest income and similar income from debt securities 143,130 76,143 219,273

Interest expense (64,956) - (64,956)

Net interest income 78,174 76,143 154,317

Fee and commission income 37,018 - 37,018

Fee and commission expense (18,568) - (18,568)

Net fee and commission income 18,450 - 18,450

Dividend received - 1,448 1,448

Net trading income/(expense)

2,845 (94,041) (91,196)

Net earned premiums 6,008 - 6,008

Net other income 4,563 (1,194) 3,369

Net non-interest income/(expense) 31,866 (93,787) (61,921)

Operating income

110,040 (17,644) 92,396

Administrative expenses (39,942) (20,365) (60,307)

Depreciation and amortisation (5,134) (2,461) (7,595)

Claims costs (773) - (773)

Operating expenses (45,849) (22,826) (68,675)


losses and provisions 64,191 (40,470) 23,721

Investment losses on investment securities, net - (274,773) (274,773)

Impairment losses on loans and advances, net (20,758) - (20,758)

Impairment losses on property and equipment (1,166) - (1,166)

Impairment losses on other assets, net (578) - (578)

Release of provisions for liabilities, net 4 - 4

Profit/(loss) from operations 41,693 (315,243) (273,550)

Profit/(loss) before taxation 41,693 (315,243) (273,550)

Income tax income 48,827

Loss for the year (224,723)

Non-controlling interest (12,226)

Loss attributable to owners of the Company (212,497)

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Financing Investing Total

€ '000 € '000 € '000

Other information:

Assets 2,538,175 1,060,358 3,598,533

Liabilities 3,424,518 - 3,424,518

7. ACQUISITION AND DISPOSAL OF SUBSIDIARIES

(a) Acquisition of subsidiaries

On 17 July 2012, the Group purchased the remaining 92.16% shares in Auto Leas a.s. and became 100%

shareholder of this company. The total acquisition costs were € 11,321 thousand.

As at 17 July 2012 Book value

€’000 Fair value

€’000

Assets

Cash and cash equivalents 14 14

Receivables from banks 43 43

Financial assets 14,196 13,644

Intangible assets 107 107

Tax receivable 12,957 12,957

Other assets 2,806 2,806

Total assets 30,123 29,571

Liabilities

Loans received 16,050 16,050

Deferred tax liability 1,284 1,284

Other liabilities 925 925

Total liabilities 18,259 18,259

Equity

Share capital 6,805 6,805

Share premium 278 278

Revaluation difference (227) (227)

Retained losses 5,291 5,291

Current year loss (283) (835)

Total equity 11,864 11,312

Total equity and liabilities 30,123 29,571

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7. ACQUISITION AND DISPOSAL OF SUBSIDIARIES (continued)

(a) Acquisition of subsidiaries (continued)

Acquisition price and goodwill of the company are as follows:

€’000

Acquisition price of the company 11,321

Fair value of identifiable assets 29,571

Fair value of identifiable liabilities and contingent liabilities (18,259)

Fair value of assets of the acquired company 11,312

Goodwill 9

(b) Disposal of subsidiaries

In 2012, the Group acquired the remaining 10.618% interest of Omniofert GmbH for a total consideration of

€3,152 thousand, increasing its ownership interest from 89.382% to 100%. The carrying amount of

Omniofert GmbH net assets in the Groups financial statements in the date of the acquisition was €6,233

thousand. The Group recognised a decrease in non-controlling interest of €662 thousand and a decrease in

retained earnings of €2,490 thousand.

On 29 October 2012, the Group disposed of its entire holding of 100% in Omniofert GmbH for a total

consideration of €22,583 thousand to INVEST-KAPITAL SERVICES Česká republika, s.r.o., incurring a

profit on disposal of € 978 thousand.

The fair value of the assets and liabilities disposed were as follows:

€ '000

Contribution received 22,583

Less: Fair value of net assets disposed

Cash and cash equivalents 128

Other receivables 10,701

Other liabilities (900)

(9,929)

Goodwill 11,676

Profit on disposal 978

The net cash inflows of the disposal were as follows:

€’000

Cash contribution received 22,583

Cash disposed (128)

Net cash inflow 22,455

(c) Disposal of non-controlling interest while retaining control

On 11 January 2012, shares of Poštová banka, a.s. were sold by the Group to J&T FINANCE, a.s. for

€ 11,701 thousand, decreasing its ownership from 94.64% to 92.51%. The Group recognized and increase in

non-controlling interest of € 7,018 thousand and increase in retained earnings of € 4,683 thousand.

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8. CASH AND CASH EQUIVALENTS

2012 2011

€ ‘000 € ‘000

Cash and balances at the central bank (note 9) 39,235 143,014

Loans and advances to banks with original contractual maturity

up to 3 months (note 11) 8,470 6,292

47,705 149,306

9. CASH AND BALANCES AT THE CENTRAL BANK

2012 2011

€ ‘000 € ‘000

Balances with the Central Banks:

Compulsory minimum reserve 102,208 770

Term deposit 13,717 120,420

Other 3,538 1,962

Cash in hand 21,980 20,632

Less compulsory minimum reserves (note 11) (102,208) (770)

39,235 143,014

The compulsory minimum reserves balance is maintained in accordance with the requirements of the Central

Banks and is not available for day-to-day use.

10. TRADING ASSETS AND LIABILITIES

2012 2011

€ ‘000 € ‘000

Trading assets

Securities (a) 35,548 28,196

Derivative instruments (b) 446 622

35,994 28,818

Trading liabilities

Derivative instruments (b) 758 68

2012 2011

€ ‘000 € ‘000

(a) Securities

Equity securities 35,548 28,196

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10. TRADING ASSETS AND LIABILITIES (continued)

Reclassification of financial assets out of trading portfolio (continued)

In 2008, following the issue of Reclassification of Financial Assets, the amendments to IAS 39 and IFRS 7,

the Group reclassified certain trading assets to available-for-sale investment securities. The Group identified

financial assets eligible under the amendments, for which it had changed its intent so that it no longer held

these financial assets for the purpose of selling in the short term. For the trading assets identified for

reclassification, the Group determined that the deterioration of the financial markets during 2008 constituted

‘rare circumstances’ that permitted reclassification out of the trading category.

Under IAS 39 as amended, the reclassifications were made with effect from 1 July 2008 at fair value as at

that date. The financial assets reclassified and their carrying and fair values were as follows:

2012 2012 2011 2011 2010 2010

Carrying

value

Fair value

Carrying

value

Fair value

Carrying

value

Fair

value

€ ‘000

€ ‘000 € ‘000

€ ‘000 € ‘000 € ‘000

Trading assets reclassified

to available-for sale

investment securities 5,218 5,218 11,848 11,848 18,611 18,611

5,218 5,218 11,848 11,848 18,611 18,611

There were no reclassifications of trading assets during 2012, 2011, 2010 and 2009.

The table below sets out the amounts recognised in profit or loss and equity in 2012 and 2011 in respect of

financial assets reclassified out of trading assets:

Reclassifications in 2008

Profit or loss

2009

Other

comprehensive

income 2009

Profit or loss

2008

Other

comprehensive

income 2008

€ ‘000 € ‘000 € ‘000 € ‘000

Period before reclassification:

Trading assets reclassified to

available-for sale investment

securities

Net trading loss - - (6,686) -

Reclassifications in 2008

Profit or loss

2012

Other

comprehensive

income 2012

Profit or loss

2011

Other

comprehensive

income 2011

€ ‘000 € ‘000 € ‘000 € ‘000

Period after reclassification:

Trading assets reclassified to

available-for sale investment

securities

Dividend income 583 - 559 -

Net change in fair value - (674) - (1,905)

Impairment loss (2,483) 2.483

- -

Sale of security - - 1,731 -

Foreign exchange gain (120) - 1,201 -

(2,020) 1,809 3,491 (1,905)

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10. TRADING ASSETS AND LIABILITIES (continued)

Reclassification of financial assets out of trading portfolio (continued)

The table below sets out amounts that would have been recognized in the period following reclassification

during 2012 and 2011 if the reclassification had not been made:

Reclassification in 2008

Profit or loss Profit or loss

2012 2011

€ ‘000 € ‘000

Trading assets reclassified to available-for-sale securities:

Dividend income 583 559

Net change in fair value (674) (1,905)

Foreign exchange profit (120) 1,201

Net trading (loss)/profit (211) (145)

(b) Derivative instruments

2012 2011

Contract/

notional

amount

Fair value Contract/

notional

amount

Fair value

Assets Liabilities Assets Liabilities

€ ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000

Currency derivatives

Currency swaps 160,351 52 407 107,684 622 68

Options 9,074 394 351 - - -

169,425 446 758 107,684 622 68

11. LOANS AND ADVANCES TO BANKS

2012 2011

€ ‘000 € ‘000

Repayable on demand 5,485 4,110

Other loans and advances to banks by contractual maturity:

- 3 months or less 2,900 2,182

- 1 year or less but over 3 months 354 1,518

- over 5 years 1.574 11,759

Compulsory minimum reserves (note 9) 102,208 770

112,521 20,339

Less amounts with original contractual maturity

up to 3 months (note 8) (8,385) (6,292)

104,136 14,047

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12. LOANS AND ADVANCES TO CUSTOMERS

2012 2011

€ ‘000 € ‘000


Other loans and advances to customers by contractual maturity:

- 1 year or less but over 3 months 603,055 462,144

- 5 years or less but over 1 year 395,065 704,319

- over 5 years 813.876 611,131

2,045,075 1,994,178

Allowances for impairment (60,317) (50,559)

1,984,758 1,943,619

The Group has assigned receivables to a recovery agency. The conditions of the assignment do not allow the

derecognition of receivables as the Group has retained substantially all the risks and rewards of ownership of

the transferred assets through maintaining the right to receive most of the recoveries after the assignment.

As at 31 December 2011 the Group recognised the transferred asset to the extent of its continuing

involvement. These receivables, before allowances for impairment, amounted to € 1,450 thousand. An

impairment loss of € 1,006 thousand was recognised for these receivables which is included in allowances

for impairment. During 2012, the Group transferred these receivables with a value of € 1,446 to a third party

and therefore the receivables fulfilled the criteria for derecognition.

Impairment losses on loans and advances

The movements on impairment losses on loans and advances to customers were as follows:

Individual allowances for impairment:

2012 2011

€ ‘000 € ‘000

At 1 January 11,238 14,819

Acquisition of subsidiary 397 -

Net change profit or loss 96 6,936

Release of impairment losses on loans written-off (1,354) (10,517)

At 31 December 10,377 11,238

Collective allowances for impairment:

2012 2010

€ ‘000 € ‘000

At 1 January 39,321 25,546

Net charge to profit or loss 20,032 13,822

Release of impairment losses on loans written-off (9,413) (47)

At 31 December 49,940 39,321

60,317 50,559

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12. LOANS AND ADVANCES TO CUSTOMERS (continued)

Receivables from clients according to type of collateral 2012 2011

€ ‘000 € ‘000

Securities 457,045 233,618

Real estate – non-residential premises 219,270 158,796

Land – building purposes 130,278 119,663

Accepted bills of exchange 36,685 73,350

Real estate – residential premises 40,846 56,296

Agricultural land 21,275 53,941

Movables 46,559 35,216

Receivables 17,592 24,287

Inventories 2,919 2,868

Cash deposits in the Bank 160 464

Notarial deeds - -

Other collateral 2,277 39,725

974,906 798,224

Receivables without collateral 1,070,169 1,195,954

2,045,075 1,994,178

13. INVESTMENT SECURITIES

2012 2011

€ ‘000 € ‘000

Securities held to maturity (a) 821,118 808,953

Securities available for sale (b) 484,999 285,897

1,306,117 1,094,850

(a) Securities held to maturity

2012 2011

€ ‘000 € ‘000

Slovak government bonds 503,355 382,545

Government bonds of EU member countries 317,763 701,165

Out of which: Greece 42,863 372,805

Hungary 168,880 213,916

Ireland 57,734 57,109

Cyprus 48,051 46,743

Austria 233 -

Romania 10,592

Other 2 -

821,118 1,083,710

Allowances for impairment - (274,757)

821,118 808,953

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13. INVESTMENT SECURITIES (continued)

(a) Securities held to maturity

Impairment allowance to securities held-to-maturity

2012 2011

€ ‘000 € ‘000

At 1 January 274,757 -

Creation of impairment allowance on Greek bonds - 274,757

Use of impairment allowance against Greek bonds (274,757) -

At 31 December - 274,757

At 31 December 2012, the Group pledged securities with a carrying value of € 394,766 thousand (2011:

€ 520,794 thousand) out of which held-to maturity amounted to € 325,544 thousand (2011: € 510,756

thousand) and available-for-sale to € 69,222 thousand (2011: € 10,038 thousand) as security for payables to

other banks in respect of settlement payables and interbank trades.

The market price of securities held to maturity as at 31 December 2012 amounted to € 797,941 thousand

(2011: € 789,823 thousand). The market price of securities held-to-maturity excluding the Greek

Government bonds as at 31 December 2011 amounted to € 757,776 thousand (2011: € 674,007 thousand).

At 31 December 2012, held-to-maturity investment securities with a carrying value of € 699,468 thousand

are expected to be recovered after more than twelve months as at the reporting date (2011: € 735,422

thousand).

(i) Greek Government Bonds

In December 2011, the Group entered into negotiations with minority shareholder, the company J&T

Finance, a.s. (“J&T Finance”), on the assignment of a portion of receivables relating to the Greek

government bonds. During that period the Group entered into various agreements with minority shareholder

J&T Finance.

Further, on 23 December 2011 the Bank entered into two term deposit agreements where J&T Finance

placed deposits with a value of € 180,000 thousand, bearing interest at market rates, at the Group. In

accordance with these agreements, in event of the Credit Event, the term deposits will be applied to the

amount to be paid by J&T Finance in exchange for assignment of the Group’s remaining rights related to

these bonds.

The Group recorded, in accordance with IAS 37, compensation right of € 179,837 thousand and a

corresponding credit to other comprehensive income.

In February 2012, the Group continued with the negotiations with J&T Finance regarding the Credit Event

related to the Greek Government bonds and the value of the involvement of the company J&T Finance in the

assignment of a portion of receivables relating to the Greek government bonds, with a nominal value of €

374,000 thousand and accrued interest of € 22,744 thousand. In the event of the Credit Event the price to be

paid by J&T Finance increased to a maximum amount equal to 75% of the nominal value and accrued

interest.

On the same date the Group entered into a term deposit agreement with J&T Finance, a.s. where J&T placed

further term deposits with a value of € 92,000 thousand, bearing interest at market rates, at the Group on

7 March 2012. In accordance with this agreement, in the event of the Credit Event, the term deposits will be

applied to the amount to be paid by J&T Finance in exchange for assignment of the Group’s remaining

rights related to these bonds.

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(a) Securities held to maturity (continued)

(i) Greek Government Bonds (continued)

Similarly, as described above, the Group recorded, in accordance with IAS 37, a compensation right of

€ 92,000 thousand and a corresponding credit to other comprehensive income on 7 March 2012.

On 24 February 2012, the Government of Greece announced the key terms for private sector involvement

(‘PSI’) in the restructuring of Greek Government bonds. Following the announcement the Greek

Government invited holders of certain bonds issued by, or guaranteed by, the Greek Government to

exchange their holding for new securities and to submit their applications to do so by 8 March 2012. On

7 March 2012, the Group announced that it would not take part in the exchange program and voted against

applicability of the Collective Action Clauses (‘CAC’). The exchange of the old Greek Government bonds

governed by Greek law was completed on 12 March 2012. The Greek Government used the CAC to compel

all holders of eligible old Greek Government bonds governed by Greek law to take part in the exchange. The

CAC allowed the issuer of the bonds to amend certain key terms of the bond with agreement of a specified

majority of the bondholders. The amendment is then binding on the remaining bondholders. Consequently,

the Group’s bonds were converted to new securities.

The package of new Greek bonds consisted of 20 series (ISIN) with a nominal value of 31.5% of the

nominal value of the original Greek bonds with a maturity from 2023 until 2042; the so-called GDP-linked

bond, the EFSF (European Financial Stability Facility) short-term securities of 15% of the nominal value of

the original Greek bonds and EFSF short-term securities with a maturity of 6 months in the amount of

accrued coupon of the original Greek bonds. The coupon on the new Greek bonds from 2012 to 2015 will be

2% and in the following years between 3% and 4.3%.

Each owner of the original Greek bonds received within the exchange also a separable, so called GDP-linked

bond (mentioned above) amounting to the nominal value of the new Greek bonds. The owner of this bond

will be paid from 2015 onwards payments of 1% of the nominal value of bonds in case that specific

conditions agreed within the exchange of Greek bonds are met (conditions are bound to the fulfillment of the

Greece's gross domestic product).

The total fair value of the new Greek bonds received on 12 March 2012 amounted to the value of € 23

(+ accrued coupon) for every € 100 of the nominal value of the old Greek bonds. On the day of the exchange

the old Greek bonds are derecognized from the balance sheet and the new Greek bonds have been

recognized at their initial fair value. The difference between the book value of the original and the new

Greek bonds was booked on the date of exchange of the bonds in to profit and loss.

On 12 March 2012, the account of the Group was credited by the new issues of Greek and EFSF bonds with

a nominal value of € 246,548 thousand and so called GDP-linked (the derivative tool that was booked into

the trading portfolio at its fair value). New Greek Government Bonds were booked at fair value in the

amount of € 127,319 thousand.

The new Greek Government Bonds’ coupons were repaid in full in February 2013.

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The tables below summarizes the Group’s exposure in Greek Government Bonds:

31 December 2012

Nominal

value

Book

value

Impairment

loss

Fair

value

Securities portfolio € ‘000 € ‘000 € ‘000 € ‘000

Trading securities 1,905 873 - 873

Held-to-maturity securities 37,925 42,863 - 40,165

Available for sale securities 87,489 - - -

127,319 42,736 - 41,038

EFSF bonds (the European Financial Stability Facility) guaranteed by the European Monetary Union have

been sold on the secondary market for € 87,603 thousand in April 2012.

31 December 2011

Nominal

value

Book

value

Impairment

loss

Fair

value


Held-to-maturity securities 374,000 98,048 274,757 98,048

Available for sale securities 130,000 47,682 21,020 47,682

504,000 145,730 295,777 145,730

At 31 December 2011, in accordance with IAS 39.59, the Group impaired the Greek government bonds and

therefore recorded an impairment allowance for held-to-maturity securities in the amount of € 274,757

thousand. This amount represents the difference between book value and the net present value of expected

future cash flows. Expected futures cash flows, based on the above mentioned facts are estimated at 25%.

Effective interest rate calculated on initial recognition or at reclassification of the securities was used for

discounting of the future cash flows.

The table below summarizes the Group’s exposure to Greek Government Bonds as at 30 June 2013:

Securities portfolio First

booked

value

Book

Value

Fair

Value

€ ‘000 € ‘000 € ‘000

Trading securities 1,905 1,603 1,603

Held-to-maturity securities 37,925 42,775 69,083

Available-for-sale securities* 87,489 - -

127,319

44,378

70,686

*EFSF bonds (the European Financial Stability Facility) guaranteed by the European Monetary Union were

sold in the secondary market for € 87,603 thousand in April 2012.

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As the economical and political situation in Greece remains uncertain, as stated above, the Group evaluates

this situation according to IAS 39 and considers, whether there is objective evidence of impairment of the

financial asset taking into account cash flows and risk management (refer to Note 5).

Regarding high subjectivity and uncertainty in assessment of whether there is objective evidence of

impairment of Greek Government Bonds, the Group did not create any allowances for impairment of new

Greek Government Bonds as at 31 December 2012.

During the negotiations between the Group and company J&T Finance, a.s. the parties entered into various

agreements, which were replaced by the final agreement dated on 8 March 2012. Following the results of the

negotiations between the Group and the company J&T Finance, funds deposited by the company J&T

Finance under the term deposit agreements on 23 December 2011 and 15 February 2012 totaling € 275,280

thousand, were assigned by J&T Finance to the Group and subsequently these funds were contributed to the

equity of the Bank (refer to Note 49).

On 11 January 2012, shares of Poštová banka, a.s. were sold by ISTROKAPITAL SE to J&T Finance and

accordingly, J&T Finance acquired an additional 2.13% share in the share capital of the Bank, bringing its

total holding to 5.65%. The disposal of the majority share in Poštová banka, a.s. to J&T FINANCE, a.s. and

J&T BANKA, a.s. (both subsidiaries of J&T FINANCE GROUP, a.s.) was approved by the Antimonopoly

Office of the Slovak Republic, on the day of 26 April 2013 (refer to Note 49).

(ii) Hungarian Government Bonds

As at 31 December 2012, the Bank held securities issued by Hungarian government with a nominal value of

€ 163,588 thousand (2011: € 210,761 thousand). Net book value including accrued interest amounted to €

168,880 thousand (2011: € 213,916 thousand). Following the change in the rating of Hungary to speculative

level in 2011 the Group continuously evaluated the possible impairment of Hungarian Government bonds

during the year 2012. During the reporting period no loss event took place that would have a negative impact

on the expected future cash flows in accordance with IAS 39.59. The Group expects that the bonds will be

repaid on time and in the full amount. The due amount of € 47,226 thousand was paid in November 2012. In

February 2013, repayment of a Hungarian Government Bond in the amount of € 39,710 thousand was

received.

(ii) Hungarian Government Bonds (continued)

The table below summarizes the Group’s exposure to Hungarian Government Bonds as at 31 December

2012:

Nominal

value

Book

value

Fair

value

Impairment

loss


Held-to-maturity securities 163,588 168,880 163,587 -

The table below summarizes the Group’s holding in these bonds as at 31 December 2011:

Nominal

value

Book

value

Fair

value

Impairment

loss


Held-to-maturity securities 210,761 213,916 202,740 -

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(ii) Hungarian Government Bonds (continued)

The Group’s exposure to Hungarian Government bonds based on maturity as of 31 December 2012 is as

follows:

Book value

2012 2011

Maturity (year) € ‘000 € ‘000

2012 - 45,404

2013 39,494 39,169

2015 129,386 129,343

168,880 213,916

As at 30 June 2013, the Group held securities issued by Hungarian government with a nominal value of €

125,588 thousand. Net book value including accrued interest amounted to € 133,051 thousand. Following

the change in the rating of Hungary to speculative level in 2011 the Group continuously evaluated the

possible impairment of Hungarian Government bonds during the year 2012. An amount due of € 47,226

thousand was repaid in November 2012 and amount due of € 39,710 thousand was repaid in February 2013.

As at 30 June 2013 the Group did not recognize any impairment.

The table below summarizes the Group’s holding of Hungarian Government Bonds at 30 June 2013:

Securities portfolio Nominal

Value

Book

Value

Impairment

loss

Fair

Value

€ ‘000 € ‘000 € ‘000 € ‘000


The following table analyses the Group’s exposure to Hungarian Government Bonds based on maturity as of

30 June 2013:

Maturity (year) Book value

€ ‘000

2014 133,051

133,051

(iii) Cypriot Government Bonds

As at 31 December 2012, the Group held securities issued by the Cyprus Government with a nominal value

of € 51,965 thousand and book value of € 49,963 thousand (2011: nominal value of € 51,965 thousand and

book value of € 46,743 thousand). Cypriot Government Bond coupons of € 1,949 thousand were paid in

November 2012.

The following table analyses the Group’s exposure to Cypriot Government Bonds based on maturity as of 31

December 2012:

Book value

Maturity (year) 2012 2011

€ ‘000 € ‘000

2015 48,051 46,743

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(iii) Cypriot Government Bonds (continued)

As at 31 December 2012, the Group’s exposure to Cypriot Government Bonds is summarized as follows:

Nominal

value

Book

value

Impairment

loss

Fair

value



As at 30 June 2013, the Group’s holding of Cypriot Government Bonds is summarized as follows:

Nominal

value

Book

value

Impairment

loss

Fair

value



The following table analyses the Group’s exposure to Cypriot Government Bonds based on maturity as of 30

June 2013:

Maturity (year) Book value

€ ‘000

2015 49,693

Events relating to economic environment in Cyprus and the Eurogroup agreement of 25 March 2013

regarding the financial assistance provided to Cyprus are disclosed in Note 49 to the consolidated financial

statements.

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(b) Securities available for sale

2012 2011

€ ‘000 € ‘000

Debt securities:

Slovak government bonds 72,656 8,292

Government bonds of EU member countries 69,653 64,855

Out of which: Greece - 47,682

Ireland 10,432 10,038

Lithuania 5,215 1,032

Latvia - 5,749

Poland 53,959 354

Corporate bonds 124,123 60,599

Bills of exchange 103,131 55,649

369,563 189,395

Equity securities:

Corporate equity securities 115,270 95,951

Others 2,649 567

117,919 96,518

Allowances for impairment (2,483) (16)

115,436 96,502

484,999 285,897

Impairment losses on available-for-sale investment securities are reclassified from other comprehensive

income and recognised in profit or loss for the period.

Impairment losses of investment securities:

The movements on impairment losses on investment securities were as follows:

2012 2011

€ ‘000 € ‘000

At 1 January 274,773 324

Net change to profit or loss 2,483 274,773

Use of impairment allowances on securities written off (16) (324)

Use of impairment allowances against Greek Government Bonds (274,757) -

At 31 December 2,483 274,773

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14. INVESTMENT PROPERTY

Land

Buildings

Total

€ ‘000 € ‘000 € ‘000

At 1 January 2011 2,400 28 2,428

Change in 2011 - - -

At 31 December 2011 2,400

28

2,428

At 1 January 2012 2,400 28 2,428

Change in 2012 - - -

At 31 December 2012 2,400

28

2,428

Revenues from investment property were as follows:

2012 2011

€ ‘000 € ‘000

Rental income - -

Investment property comprises land and one building. Land is held for long-term capital appreciation.

The fair value of the investment property as determined by independent and qualified valuators amounts to

€4,560 thousand (2011: € 4,560 thousand). The fair values were calculated by comparing to sales of similar

property in the same locations.

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15. PROPERTY AND EQUIPMENT

Land and

buildings

Furniture

fittings and

equipment

Motor

vehicles

Assets not

yet in use Total

€ ‘000 € ‘000 € ‘000 € ‘000 € ‘000

Cost

At 1 January 2012 18,382 22,023 21,488 9,663 71,556

Acquisition of subsidiary 476 77 2,787 - 3,340

Additions - 1,527 - 5,786 7,313

Transfers 8,534 4,085 346 (12,965) -

Disposals (142) (4,197) (859) (600 (5,798)

At 31 December 2012 27,250 23,515 23,762 1,884 76,411

Depreciation and

impairment losses

At 1 January 2012 9,043 13,025 9,241 30 31,339

Acquisition of subsidiary 45 29 1,382 - 1,456

Charge for the year 1,344 4,283 1,215 - 6,842

Impairment loss - - 170 - 170

Disposals (142) (4,197) (859) (30) (5,228)

At 31 December 2012 10,290 13,140 11,149 - 34,579

Net book value

At 31 December 2012 16,960 10,375 12,613 1,884 41,832

The Group created an impairment loss of € 170 thousand (2010: € 1,163 thousand) which relates to

impairment losses on aircraft, following a decision by management.

Property is insured against natural disaster, malicious damage, theft and robbery. Motor vehicles are insured

against damage caused during operation or in a crash.

The Group’s land and buildings are not pledged.

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15. PROPERTY AND EQUIPMENT (continued)

Land and

buildings

Furniture

fittings and

equipment

Motor

vehicles

Assets not

yet in use Total

€ ‘000 € ‘000 € ‘000 € ‘000 € ‘000

Cost

At 1 January 2011 25,261 18,892 21,568 825 66,546

Additions - 1,881 269 17,700 19,850

Transfers 4,329 3,539 265 (8,133) -

Disposals (11,208) (2,289) (614) (729) (14,840)

At 31 December 2011 18,382 22,023 21,488 9,663 71,556

Depreciation and

impairment losses

At 1 January 2011 12,336 12,945 7,554 27 32,862

Charge for the year 1,023 2,242 963 - 4,228

Impairment loss - - 1,163 3 1,166

Disposals (4,316) (2,162) (439) - (6,917)

At 31 December 2011 9,043 13,025 9,241 30 31,339

Net book value

At 31 December 2011 9,339 8,998 12,247 9,633 40,217

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16. INTANGIBLE ASSETS AND GOODWILL

Goodwill Software

Valuable

rights

VOBA DAC

Assets

not yet in

use Total

€ ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000

Cost

At 1 January 2012 19,170 24,091 - 5,195 321 955 49,732

Acquisition of

subsidiaries (note 7) - 30 -

- - - 30

Additions - 211 10,283 - 8,502 6,534 25,530

Transfers - 4,082 - - - (4,082) -

Disposal of subsidiary (11,676) - - - - - (11,676)

Disposals - (33) - (2,021) (661) - (2,715)

At 31 December 2012 7,494 28,381 10,283 3,174 8,162 3,407 60,901

Amortisation and

impairment losses

At 1 January 2012 2,548 19,605 - - 1,072 - 23,225

Acquisition of

subsidiaries - 3 -

- - - 3

Charge for the year - 2,446 1,446 612 528 152 5,184

Impairment allowance - - - - 455 - 455

Disposals - (33) - - - - (33)

At 31 December 2012 2,548 22,021 1,446

612 2,055 152 28,834

Net book value

At 31 December 2012 4,946 6,360 8,837 2,562 6,107 3,255 32,067

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16. INTANGIBLE ASSETS AND GOODWILL (continued)

Goodwill Software VOBA

Assets not

yet in use Total

€ ‘000 € ‘000 € ‘000 € ‘000 € ‘000

Cost

At 1 January 2011 19,170 19,235 - 2,444 40,849

Acquisition of subsidiaries (Note

7) - 946 5,195 - 6,141

Additions - 303 - 2,419 2,722

Transfers - 3,908 - (3,908) -

Disposals - (301) - - (301)

At 31 December 2011 19,170 24,091 5,195 955 49,411

Amortisation and impairment

losses

At 1 January 2011 2,548 15,652 - - 18,200

Acquisition of subsidiaries - 887 887

Charge for the year - 3,367 - - 3,367

Disposals - (301) - - (301)

At 31 December 2011 2,548 19,605 - - 22,153

Net book value

At 31 December 2011 16,622 4,486 5,195 955 27,258

In 2012, deferred acquisition costs (DAC) related to life, non-life and retirement savings are reported in

intangible assets. In 2011, DAC in amount € 321 thousand were presented in other assets, prepayments.

The value of business acquired (VOBA), relates to the acquisition of the subsidiary in 2011.

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17. DEFERRED TAX

Recognised deferred tax asset

Deferred tax asset and liability are attributable to the following:

Assets/ Assets/

(Liabilities) (Liabilities)

2012

€ ‘000

2011

€ ‘000

Impairment losses on loans and advances 4,966 3,529

Bonuses 665 475

Discount on assigned receivables 137 220

Discount on rental 78 150

Investment securities available for sale (4,104) (184)

Property and equipment (142) 257

Provisions arising from legal cases - 3

Impairment losses on investment securities - 52,204

Loss carried forward 44,807 -

Other 94 2

46,501 56,656

Deferred tax asset and liability have been calculated using a corporate income tax rate of 23%

(2011: 19 %).

Movements on deferred tax:

2012

€ ‘000

2011

€ ‘000

At 1 January 56,656 7,409

Credited to profit or loss (Note 41) (6,218) 52,967

(Charged)/credited to other comprehensive income (3,937) (3,720)

At 31 December 46,501 56,656

Compensation rights (see notes 13 and 18) are not subject to deferred tax.

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18. OTHER ASSETS

2012 2011

€ ‘000 € ‘000

Compensation rights - 179,837

Prepayments 13,186 22,674

Items in the course of clearing from post offices 16,442 6,764

Other debtors 171,351 15,669

Receivables from funds 918 493

Assets from reinsurance 572 600

Accrued income 355 496

Insurance receivables 818 660

Inventories 238 155

Real estate agencies receivables 321 -

Other 282 1,080

204,483 228,428

Allowances for impairment (1,078) (1,943)

203,405 226,485

Compensation rights in the amount of € 179,837 thousand at 31 December 2011 related to the Greek

government bonds (see note 13).

Items in the course of clearing from post offices comprise deposits and other transactions of the Group’s

customers which have been made in post offices and not received by the Group at the end of reporting

period. Generally, items clear within three days.

The movements of allowances for impairment were as follows:

2012 2011

€ ‘000 € ‘000

At 1 January 1,941 641

Acquisition of subsidiaries - 724

(Release)/creation 197 578

Movement in DAC (1,060)

At 31 December 1,078 1,943

19. DEPOSITS BY BANKS

2012 2011

€ ‘000 € ‘000


Other deposits by banks with contractual maturity:

- up to 3 months 50,522 88,634

- 3 months to 1 year -

- over 1 year up to 5 years -

61,079 100,218

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20. CUSTOMER ACCOUNTS

2012 2011

€ ‘000 € ‘000


Other deposits with contractual maturity dates or

periods of notice, by agreed maturity:

- up to 3 months 822,841 631,910

- 3 months to 1 year 447,425 483,727

- 1 year to 5 years 630,459 627,338

- more than 5 years 519

2,829,500 2,664,962

21. DEBT SECURITIES IN ISSUE

2012 2011

€ ‘000 € ‘000

Debt securities issued at amortised cost 112,532 113,833

On 10 December 2009, the Group issued debt securities with a nominal value of € 150,000,000, fixed

interest rate of 10% per annum and maturity date in 2016, ISIN: CZ0003501694. Administrator`s activities

related with yield payments and bond repayment are provided by J & T BANKA, a.s.. In connection with

these bonds the issuer prepared a prospectus which also includes issuance conditions. The prospectus was

approved by the Czech National Bank decision no. 2009/9598/570 on 3 December 2009, which came into

effect on 4 December 2010, and was published in accordance with relevant legislation. As at 31 December

2012, 300 thousand pieces (2011: 300 thousand pieces) of bonds with a nominal value of € 500 per bond

were subscribed. The total value amounted to € 150 million (2011: € 150 million).

22. LOANS RECEIVED

2012 2011

€ ‘000 € ‘000

PENTA INVESTMENTS LIMITED - 70,518

WEYLIN INVESTMENT, LLC - 50,358

J & T BANKA, a.s., branch of the foreign bank 26,859 10,140

LCE Co. Limited - 1,866

Weylin Enterprises Ltd 50,805 -

J&T Private Investments B.V 82,451 -

Omniofert GmbH 23,016 -

Other 75,094 10,065

258,225 142,947

The loan payable to PENTA INVESTMENTS LIMITED was repaid in 2012 and carried interest at the rate

of 10% per annum. The fair value of the loan as at 31 December 2011 amounted to € 70,518 thousand.

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22. LOANS RECEIVED (continued)

The loan payable to WEYLIN INVESTMENT LLC is repayable on 31 December 2013 and bears interest at

the rate of 1% per annum. In 2012, the loan was assigned to WEYLIN ENTERPRISES LIMITED; the fair

value of this loan, if it is adjusted at the European Central Bank interest rate of 1% p.a., which was

applicable as at 31 December 2012, amounts to € 50,805 thousand (2011: at interest rate of 1 % : € 50,358

thousand).

The loan payable to J&T BANKA, a.s., branch of the foreign bank is repayable in 2016 and bears interest 12

M EURIBOR +7% (minimum 10% per annum). The fair value of the loan as at 31 December 2012 amounts

to €26,859 thousand (2011: € 10,140 thousand).

The loans payable to J&T Private Investments B.V. are repayable in 2013 and bear interest at the rate of

10% p.a.. The fair value of the loans as at 31 December 2012 amounts to € 82,451thousand.

Loans received of € 75,094 thousand represent a REPO operation with a client which matures on 1 March

2013, bearing interest at 0.5% p.a. and is secured by government bonds 202 and 218.

23. PROVISIONS FOR LIABILITIES

The movements on provisions:

2012 2011

€ ‘000 € ‘000

At 1 January 64 68

Release (12) (4)

At 31 December 52 64

Provisions relate to litigations which are being defended by the Group.

24. PROVISIONS FOR INSURANCE CONTRACTS

2012 2011

€ ‘000 € ‘000

Provision for insurance accruals 334 287

Provision for insurance payments 1,063 1,087

Provision for life insurance 4,350 3,480

5,747 4,854

The movements on provisions for insurance contracts were as follows:

2012 2010

€ ‘000 € ‘000

At 1 January 4,854 5,020

Release of provisions:

Unearned premiums (note 36) 47 79

Life insurance 870 (113)

Claim costs (24) (132)

At 31 December 5,747 4,854

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25. INCOME TAX REFUNDABLE / (PAYABLE)

2012 2011

€ ‘000 € ‘000

Income tax refundable 9,102 14,849

Income tax payable (1,389) (1,109)

26. OTHER LIABILITIES

2012 2011

€ ‘000 € ‘000

Liabilities from leasing 120 14,189

Other creditors 12,228 10,073

Accruals 13,360 9,926

Financial liabilities from transfer of financial assets 1,047 2,021

VAT, payroll and other tax liabilities 2,113 1,923

Withholding tax payable 1,987 1,773

Liabilities to employees 959 1,746

Deferred income 769 -

Insurance and reinsurance liabilities 420 415

Items for clearing with post offices - 5

Other liabilities 436,708 340,979

469,711 383,050

Other liabilities include advanced payments of € 422,236 thousand (2011: € 338,645 thousand) received by

ISTROKAPITAL SE (refer to note 49).

27. SUBORDINATED LIABILITIES

2012 2011

€ ‘000 € ‘000

Issued subordinated bonds 8,000 13,400

Other 13 13

8,013 13,413

The subordinated bonds in amount of € 5,400 matured on 13 December 2012 and bore interest at the rate of

4.5% p. a..

The Group entered into a subordinated loan agreement with J&T BANKA, a.s. on 21 September 2011 for

€ 8,000 thousand. This loan matures in 2021 and bears interest of 5.34% p.a. The liability will, in the event

of bankruptcy or liquidation of the Group, be subordinated to the claims of all other creditors of the Group.

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114

28. SHARE CAPITAL

Number of

shares

€ `000

Number of

shares

€ `000

Authorised, issued and fully paid 2012 2012 2011 2011

Balance at 31 December 24,087,672 45,767 24,087,672 45,767

ISTROKAPITAL SE was incorporated as a result of the merger of ISTROKAPITAL a.s. and Kangima

Investments Public Company Ltd, where during the merger, the shares of ISTROKAPITAL, a.s. consisting

of 1,826 ordinary shares of SKK 1,000 thousand each and 5,135,672 ordinary shares of SKK 100 each were

withdrawn and at the same time 24,087,672 ordinary shares of € 1.90 each were issued.

29. RESERVES

FCTR Revaluation

reserve

Merger

reserve

Retained

earnings Total

€ ‘000 € ‘000 € ‘000 € ‘000 € ‘000

At 1 January 2011 (2,285) (13,221) 15,301 132,325 132,120

Foreign currency translation

differences (519) - - - (519)

Revaluation difference on

securities available-for-sale, net - 15,054 - - 15,054

Acquisitions of non-controlling

interest without a change in

control - - - 1,450 1,450

Disposal of non-controlling


control (note 7) - - - 6,973 6,973

Compensation rights (note 13) - - - 170,503 170,503

Loss for the year - - - (212,497) (212,497)

At 31 December 2011 (2,804) 1,833 15,301 98,754 113,084

At 1 January 2012 (2,804) 1,833 15,301 98,754 113,084

Foreign currency translation

differences 238 - - 238

Revaluation difference on

securities available-for-sale, net - 12,263 - 12,263

Acquisitions of non-controlling


control - - - 4,683 4,683

Disposal of non-controlling


control (note 7) - - - (2,490) (2,490)

Compensation rights - - - (170,503) (170,503)

Profit for the year - 46,333 46,333

At 31 December 2012 (2,566) 14,096 15,301 (23,223) 3,608

Revaluation reserve

The revaluation reserve represents the cumulative net change in the fair value of available-for-sale

investment securities including deferred tax.

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115

30. CONTINGENCIES, COMMITMENTS AND DERIVATIVE FINANCIAL

INSTRUMENTS

2012 2011

€ ‘000 € ‘000

Contingent liabilities:

Guarantees to clients 419,472 234,960

Commitments:

Definitive letter of credit - 6,433

Confirmed credit lines 168,214 158,305

Derivative financial instruments (note 10) 169,425 107,684

757,111 507,382

Contingencies and commitments were made to customers as at 31 December 2012 in the following countries:

2012 2012

2012

2011 2011

2011

Guarantees

to clients

Letters of

credit

Confirmed

credit lines

Guarantee

s to clients

Letters of

credit

Confirmed

credit lines

€ ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000

Slovak Republic 287,347 - 155,868 221,741 - 147,646

Czech Republic - - 11,596 - - 9,995

Italy - - 743 - - 651

Netherland 132,125 - - 5,041 - -

Poland - - - - - -

Cyprus - - - - - -

USA - - - - 403 -

China - - - - 6,030 -

Venezuela - - 2 - - -

Other EU countires - - 5 8,178 - 13

Total 419,472 - 168,214 234,960 6,433 158,305

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116

30. CONTINGENCIES, COMMITMENTS AND DERIVATIVE FINANCIAL

INSTRUMENTS (continued)

Contingencies and commitments were made to customers as at 31 December 2012 in the following sectors:

2012 2012 2012 2011 2011 2011

Guarantees

to clients

Letters of

credit

Confirmed

credit lines

Guarantees

to clients

Letters of

credit

Confirmed

credit lines

€ ‘000 € ‘000 € ‘000 € ‘000 € ‘000 € ‘000

Central Bank 178,808

Energy 122,508 - - 162,946 - -

Telecomunications 34,851 - - 55,266 - -

Wholesale - - 22,527 350 403 3,785

Retail - - 3,916 216 - 2,066

Manufacturing 15,000 - 7,979 - 6,030 99

Construction 700 - 4,274 - - 4,202

Services and good sale 68,405 - 24,841 - - 42,275

Rent - - 536 16,182 - 3,954

Households - - 104,141 - - 101,924

419,472 - 168,214 234,960 6,433 158,305

31. INTEREST INCOME AND SIMILAR INCOME FROM DEBT SECURITIES

2012 2011

€ ‘000 € ‘000

Loans and advances to customers 189,176 142,171

Debt securities 66,975 74,364

Loans and advances to banks 2,016 2,464

Other (277) 274

257,890 219,273

Included in the various categories of interest income for the year ended 31 December 2012 is interest income

of €6,837 thousand accrued on impaired financial assets (2011: € 7,359 thousand).

Interest income from investment securities for the year ended 31 December 2012 includes € 43,057 thousand

(2011: € 53,712 thousand) relating to held-to-maturity investment securities; and interest income from

available-for-sale investment securities of €23,918 thousand (2011: € 20,289 thousand) and nil interest

income from securities for trading (2011: € 363 thousand). Interest income comprises of the amount of

interest related to revenues from Greek bonds in the amount of € 4,991 thousand (2011: € 29,747 thousand).

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117

32. INTEREST EXPENSE

2012 2011

€ ‘000 € ‘000

Customer accounts (67,521) (46,191)

Debt securities issued (14,986) (15,426)

Finance leases (429) (1,049)

Deposits by banks (891) (2,291)

(83,827) (64,956)

33. FEE AND COMMISSION INCOME

2012 2011

€ ‘000 € ‘000

Customers:

Retail banking fees 22,353 26,154

Corporate banking fees 8,594 1,965

Asset management fees 1,657 580

32.604 28,699

Banks 1,739 1,123

Other processing fees 11,700 6,337

Fees for management of Pension management company funds - 859

46,043 37,018

34. FEE AND COMMISSION EXPENSE

2012 2011

€ ‘000 € ‘000

Banks (1,964) (1,797)

Other processing fees (15,254) (12,721)

Customers (2,128) (4,050)

Special fee for banking institutions (7,282) -

(26,628) (18,568)

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35. NET TRADING (EXPENSE)/INCOME

2012 2011

€ ‘000 € ‘000

Financial assets held for trading (24,528) 1,095

Financial assets for sale 713 (95,136)

Foreign currency transactions 3,010 1,309

Other (1,497) 1,536

(22,302) (91,196)

36. NET EARNED PREMIUMS

2012 2011

€ ‘000 € ‘000

Gross premiums written 8,297 6,412

Change in unearned premium provision (‘UPR’) (note 24) (47) (79)

Written premiums ceded (430) (361)

Reinsurers’ share in the change in UPR 22 36

7,842 6,008

37. NET OTHER INCOME

2012 2011

€ ‘000 € ‘000

Net profit from assigned receivables (3,465) 7,089

Rental income 184 226

Reimbursements received 188 61

Investment securities - (16)

Shortages and damages (120) (274)

Net loss on disposals of property and equipment (1,088) (7,148)

Other (1,702) 3,431

(2,599) 3,369

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38. ADMINISTRATIVE EXPENSES

2012 2011

€ ‘000 € ‘000

Wages and salaries (including bonuses) (33,153) (26,375)

Social expenses (9,711) (8,430)

Personnel costs (42,864) (34,805)

Services (15,027) (4,247)

Operating expenses (1,262) (3,524)

Marketing expenses (6,541) (6,422)

Rent (4,170) (4,190)

Consumables (1,794) (2,651)

Material costs (2,454) (2,405)

Other services (2,053) (1,306)

Other administrative expenses (5,108) (758)

(81,273) (60,307)

The average number of employees for the period 1,283 1,125

of which, management 129 105

39. DEPRECIATION AND AMORTISATION

2012 2011

€ ‘000 € ‘000

Property and equipment (note 15) (6,842) (4,228)

Intangible assets (note 16) (5,184) (3,367)

(12,026) (7,595)

40. CLAIM COSTS

2012 2011

€ ‘000 € ‘000

Claims paid (936) (1,085)

Claims paid ceded 34 59

Change in claim provisions 24 132

Change in claim provisions ceded (53) 8

Change in life assurance provision (870) 113

Other 2 -

(1,799) (773)

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41. INCOME TAX

2012 2011

€ ‘000 € ‘000

Current tax expense (2,985) (4,062)

Adjustment in respect of previous year - (75)

Withholding tax on foreign interest income - (3)

Deferred tax (note 17) (6,218) 52,967

(9,203) 48,827

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121

41. INCOME TAX (continued)

The reconciliation of the Group’s accounting profit to the taxable profit:

Reconciliation of the effective tax rate:

Income Tax

for the year ended 31 December 2011

Tax base

2012

€ ‘000

Tax

2012

€ ‘000

Tax @ 19%

2012

€ ‘000

Tax @ 10%

2012

€ ‘000

Profit before taxation 59,892 12,496 12,910 (416)

Non-taxable income:

Dividend income (3,871) (735) (735) -

Difference between tax and accounting

depreciation (289) (55) (55) -

Fees for loans and advances to clients

taxed in previous periods (4) (1) (1) -

Unrealised exchange profit (929) (93) - (93)

Other (100,685) (18,615) (18,043) (572)

(105,778) (19,499) (18,834) (665)

Tax non-deductible expenses:

Impairment losses on loans and

advances to customers 29,317 5,570 5,570 -

Bonuses and provisions for liabilities 3,419 650 650 -

Unrealised exchange loss 1,976 198 - 198

Deemed interest on back-to-back loans 24 2 - 2

Interest on investments 4,021 402 - 402

Expenses directly attributable to

investing activities 31 3 - 3

Other 20,406 3,128 2,296 832

59,194 9,953 8,516 1,437

Income tax expense 2,985 2,592 393

Deferred tax (note 17) 6,218 6,218 -

Total income tax expense 9,203 8,810 393

Effective tax rate 15,37%

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Income Tax

for the year ended 31 December 2011

Tax base

2011

€ ‘000

Tax

2011

€ ‘000

Tax @ 19%

2011

€ ‘000

Tax @ 10%

2011

€ ‘000

Loss before taxation (273,538) (51,840) (51,694) (146)

Non-taxable income:

Dividend income (1,448) (275) (275) -

Difference between tax and accounting

depreciation (46) (9) (9) -

Fees for loans and advances to clients

taxed in previous periods (5) (1) (1) -

Unrealised exchange profit (1,607) (161) - (161)

Gain on disposal of investments - - - -

Other (6,501) (1,235) (1,235) -

(9,607) (1,682) (1,520) (161)

Tax non-deductible expenses:


advances to clients 274,757 52,204 52,204 -


advances to customers 9,813 1,864 1,864 -

Bonuses and provisions for liabilities 3,502 665 665 -

Unrealised exchange loss 218 22 - 22

Deemed interest on back-to-back loans - - - -

Interest on investments - - - -

Expenses directly attributable to

investing activities - - - -

Loss on assignment of receivables - - - -

Other 17,297 2,832 2,327 505

305,587 57,500 57,060 527

Income tax expense 4,065 3,846 220

Adjustment in respect of previous year 75 - 75

Deferred tax (note 17) (52,967) (52,967) -

Total income tax credit (48,827) (49,121) 295

Effective tax rate 17.85%

Cypriot holding company and Cypriot subsidiary

Taxation is charged on taxable profit for the year at the rate of 10%.

Under certain conditions interest income may be subject to defence contribution at the rate of 15% (10% to

30 August 2011). In such cases this interest will be exempt from corporation tax. In certain cases, dividends

received from abroad may be subject to defence contribution at the rate of 20% for the tax years 2012 and

2013 and 17% for 2014 and thereafter (up to 30 August 2011 the rate was 15% and was increased to 17% for

the period thereafter to 31 December 2011).

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The Cyprus House of Representatives voted on 18 April 2013 legislation regarding the increase of the

corporate income tax rate from 10% to 12,5% with effect from 1 January 2013. It also voted the increase in

the rate of Special Contribution for Defence on interest income for companies and individuals from 15% to

30% in relation to interest income which does not originate from or is not closely related to the ordinary

activities of a company.

Slovak subsidiaries

Companies that are registered in the Slovak Republic and receive income from a source in the Slovak

Republic, are liable to taxation in the Slovak Republic at the rate of 19%.

Austrian subsidiary Companies that are registered in Austria and receive income from a source in Austria, are liable to taxation

in Austria at the rate of 25%.

42. EARNINGS PER SHARE

Basic

Basic earnings per share is calculated by dividing the net profit attributable to the shareholders by the

weighted average number of ordinary shares in issue during the period, excluding the average number of any

ordinary shares purchased by the Bank and held as treasury shares.

2012 2011

€ ‘000 € ‘000

Profit/(loss)/profit attributable to to the owners of the Company (€ ‘000) 46,333 (212,497)

Weighted average number of ordinary shares in issue 24,087,672 24,087,672

Basic earnings/(losses) per share (expressed in € per share) 1.92 (8.82)

Diluted

There were no dilutive factors during either period.

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43. PROFIT BEFORE CHANGES IN OPERATING ASSETS AND LIABILITIES

2012 2011

€ ‘000 € ‘000

Profit/(loss) for the year 50,689 (224,723)

Adjustments for non-cash items: 12,026

Depreciation and amortisation 238 7,595

Unrealised foreign exchange losses 20,123 (519)

Impairment losses on loans and advances to customers 197 20,758

Impairment losses on other assets - 578

Loss on disposed property and equipment 2,483 7,148

Impairment losses on investment securities (978) 274,773

Profit on disposal of subsidiaries 893 -

Provisions for insurance contracts 170 (166)

Impairment loss on property and equipment 455 1,166

Impairment loss on intangible assets (12)

Provisions for liabilities 2,985 (3)

Current income tax 6,218 4,140

Deferred tax - (52,967)

Contingent settlement (2,021)

95,487 35,759

2012 2011

€ ‘000 € ‘000

Net cash flow from operating activities includes the following cash flows:

Interest received 274,111 169,650

Interest paid (75,925) (37,464)

198,186 132,186

44. OPERATING LEASE COMMITMENTS

2012 20110

€ ‘000 € ‘000

Non-cancellable commitments under operating leases:

- up to 1 year or less 3,342 2,803

- up to 5 years but over 1 year 159 270

3,501 3,073

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45. RELATED PARTY TRANSACTIONS

ABS Sprinter Limited ISTROKAPITÁL SLOVENSKO, a.s.

Omniofert GmbH (disposed on 29 October 2012) ISTROKAPITAL CZ a.s.

Axon Neuroscience SE Dôchodková správcovská spoločnosť Poštovej

banky, d.s.s., a. s.

DANUBE CLONE, spol. s r.o. (merged) Poštová banka, a.s. (“the Bank”)

ISTROKAPITAL CYPRUS LIMITED Poisťovňa Poštovej banky, a.s.

PRVÁ PENZIJNÁ SPRÁVCOVSKÁ

SPOLOČNOSŤ POŠTOVEJ BANKY, správ. Spol., a.s.

PB PARTNER, a.s.

POBA Servis, a. s.

PB Finančné služby, a.s.

Jointly controlled entities

SPPS, a.s.

(a) Persons with controlling influence

2012 2011

€ ‘000 € ‘000

ISTRO Holding, a.s.

Loans granted

Interest income - -

- -

WEYLIN INVESTMENT, LLC

Loans received - (50,358)

Interest expense and similar expense (165) (498)

Other liabilities (44) (103)

Parties with control over the Group

Mario Hoffmann (ultimate controlling party)

ISTRO Holding, a.s. (parent company – 99.8061%)

WEYLIN INVESTMENT LLC (parent company until 31/5/2012)

WEYLIN ENTERPRISES LTD (common ultimate controlling party)

Key management

Board of Directors (see note 1)

Supervisory Board

Management

Enterprises controlled by the Company

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45. RELATED PARTY TRANSACTIONS (continued)

(b) Other entities

2012 2011

€ ‘000 € ‘000

WEYLIN ENTERPRISES LIMITED


Interest income and other similar income 114 113

Loans received (50,805) -

Interest expense (334) -

Salt Cay Estates Ltd.


Interest income 3,950 3,515

HARBOR MANAGEMENT DEVELOPMENT LIMITED

Loans and advances to customers 102 104

Interest income - -

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45. RELATED PARTY TRANSACTIONS (continued)

(c) Amounts due from/(to) Directors, Supervisory Board members, management of the bank and

their close relatives, or companies where they have significant influence

2012 2011

€ ‘000 € ‘000

Board of Directors

Assets 152 -

Liabilities (587) (679)

Revenues 3 -

Expenses (14) (11)

Supervisory Board


Revenues 4 3

Expenses (8) (12)

Management

Assets 282 -


Revenues 17 -

Expenses (3) (1)

Others

Investments 5,953 -

Loans and advances to customers 5,149 -


Revenues 273 63

Expenses (10) -

(d) Remuneration 2012 2011

€ ‘000 € ‘000

Board of Directors 5,038 6,716

Supervisory Board 248 208

Management 1,679 1,686

6,965 8,610

In addition to salaries, the Group also provides non-cash benefits to Directors of the Bank and executive

officers.

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46. ASSET MANAGEMENT AND CUSTODIAL SERVICES

The Group administers assets received into its custody from customers totalling € 563,314 thousand (2011:

€ 468,626 thousand). The assets comprise securities and other valuables.

47. FAIR VALUES

Fair value is the amount at which an asset could be exchanged, or a liability settled, between knowledgeable,

willing parties in an arm’s length transaction. The estimated fair values of the Group’s financial assets and

liabilities at period end were as follows:

Carrying

value Fair

value Carrying

value Fair

value

2012 2012 2011 2011

€ ‘000 € ‘000 € ‘000 € ‘000

Financial assets


Trading assets 35,994 35,994 28,818 28,818

Loans and advances to banks 104,136 104,136 14,047 14,047

Loans and advances to customers 1,984,758 2,078,634 1,943,619 1,989,915

Investment securities 1,306,117 1,283,584 1,094,850 1,075,720

Investment property 2,428 4,560 2,428 4,560

Financial liabilities

Trading liabilities 758 758 68 68

Deposits by banks 61,079 61,079 100,218 100,218

Customer accounts 2,829,500 2,842,328 2,667,530 2,662,394

Debt securities in issue 112,532 112,532 113,833 113,833

Loans received 258,225 258,225 142,947 142,947

Subordinated liabilities 8,013 8,013 13,413 13,413

The following methods and assumptions were used in estimating the fair values of the Group’s financial

assets and liabilities:

Trading assets The fair values of trading assets are stated using quoted market prices or theoretical prices determined by

discounting future cash flows by reference to the relevant interest rate for the term of the instrument.

Loans and advances to banks

The fair value of current accounts with other banks approximates to book value. For amounts with a

remaining maturity of less than three months, it is also reasonable to use book value as an approximation of

fair value. The fair values of other loans and advances to banks are calculated by discounting the future cash

flows using current interbank rates.

Loans and advances to customers

Loans and advances are stated net of allowances for impairment. For loans and advances to customers with a

remaining maturity of less than three months, it is reasonable to use book value as an approximation of fair

value. The fair values of other loans and advances to customers are calculated by discounting the future cash

flows using current market rates and an estimate of current risk margins.

Investment securities

Available-for-sale investment securities are recognised at fair value. The fair values of held-to-maturity

investment securities were obtained using quoted market prices.

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47. FAIR VALUES (continued)

Investment property

Fair value of investment property was determined by an independent and qualified valuators and calculated

by comparing to sales of similar properties in the same location.

Trading liabilities Trading liabilities were valued using quoted market prices or theoretical prices determined by discounting

future cash flows by reference to the relevant interest rate for the maturity period.

Deposits by banks

The fair value of current accounts with other banks approximates to book value. For other amounts owed to

banks with a remaining maturity of less than three months, it is also reasonable to use book value as an

approximation of fair value. The fair values of other deposits by banks are calculated by discounting the

future cash flows using current interbank rates.

Customer accounts

The fair values of current accounts and term deposits with a remaining maturity of less than three months

approximate their carrying amounts. The fair values of other customer accounts are calculated by

discounting the future cash flows using current deposit rates.

Debt securities in issue

The fair values of debt securities in issue are calculated by discounting the future cash flows using current

interbank rates.

Loans received

The fair values of loans received are calculated by discounting the future cash flows using current interbank

rates.

Subordinated liabilities

The fair values of subordinated liabilities are calculated by discounting the future cash flows using current

market rates and an estimate of current risk margins.

48. CONTINGENT LIABILITIES

The Group, through the parent company ISTROKAPITAL SE, provided the following guarantees as of 31

December 2012:

The Company is the guarantor for the company ISTROKAPITAL CZ a.s. for the repayment of the

bonds issued by ISTROKAPITAL CZ a.s. with nominal value €150,000,000 (2011: €150,000,000).

49. SUBSEQUENT EVENTS

Agreement to dispose of controlling interest in Poštová banka, a.s.

On 17 May 2012, ISTROKAPITAL SE (as seller) entered into a general contract on the purchase of

shares with J&T Finance, a.s. and J&T Banka, a.s. (as buyers; both being subsidiaries of “J&T

FINANCE GROUP, a.s.”) regarding the disposal of a combined ownership interest of 82.409% in its

subsidiary Poštová banka, a.s., which replaced in full the former general contract on the purchase of

shares of Poštová banka, a.s. concluded on 22 December 2011 between ISTROKAPITAL SE and J&T

Finance, a.s.. In relation to the acquisition of the total ownership interest of 84.536% disposed to J&T

Finance, a.s. and J&T Banka, a.s. in 2012, ISTROKAPITAL SE received an advanced payment of €

338,645 thousand in December 2011 (refer to Note 26). On 29 February 2012, Istrokapital SE called for

payment of the second tranche of the purchase price for the acquisition of the combined interest of

82.409%, amounting to € 92 million.

The disposal of the controlling interest of 82.409% in Poštová banka, a.s. was approved by the National

Bank of Slovakia in September 2012 and was approved by the Antimonopoly Office of the Slovak

Republic, on 26 April 2013. The transfer of shares to J&T Finance, a.s. and J&T Banka, a.s. is effective

from 1 July 2013.

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49. SUBSEQUENT EVENTS (continued)

Disposal of other subsidiaries

On 19 November 2013, the Company disposed in full its holding in subsidiary company

ISTROKAPITÁL SLOVENSKO a.s. to WEYLIN ENTERPRISES LIMITED, for a consideration of

€20.

On 16 December 2013, the Company acquired 86,6% of the share capital of AXON Neuroscience SE

from ISTROKAPITAL CYPRUS LIMITED, for a consideration of € 23,836 thousand.

On 20 December 2013, ISTROKAPITAL SE disposed in full its 100% holding in ISTROKAPITAL

CYPRUS LIMITED to WEYLIN ENTERPRISES LIMITED, a company incorporated in Cyprus, for a

consideration of €1 thousand.

Other

On 17 September 2013, ISTROKAPITAL CYPRUS LIMITED contributed €4,512 thousand to the share

capital of its subsidiary, AXON Neuroscience SE, thereby increasing the total share capital of the

subsidiary to €27,512 thousand.

On 23 October 2013, ISTROKAPITAL SE purchased 31.200 bonds issued by ISTROKAPITAL CZ a.s.,

from ISTROKAPITAL CYPRUS LIMITED, of nominal value of €15.600.000 for a consideration of

€16,341 thousand.

Investment Securities

Please refer to Note 13.

Contingent Liabilities

Please refer to Note 48.

Economic Environment in Cyprus

The Cyprus economy has been adversely affected over the last few years by the international credit crisis

and the instability in the financial markets. During 2012 there was a considerable tightening of financing

availability from Cypriot financial institutions, mainly resulting from financial instability in relation to

the Greek sovereign debt crisis, including the impairment of Greek Government Bonds, and its impact on

the Cyprus economy. In addition, following its credit downgrades, the ability of the Republic of Cyprus

to borrow from international markets has been significantly affected. The Cyprus government entered

into negotiations with the European Commission, the European Central Bank and the International

Monetary Fund, in order to obtain financial support.

Cyprus and the Eurogroup (together with the International Monetary Fund) reached an agreement on 25

March 2013 on the key elements necessary for a future macroeconomic adjustment programme which

includes the provision of financial assistance to the Republic of Cyprus of up to €10 billion. The

programme aims to address the exceptional economic challenges that Cyprus is facing and to restore the

viability of the financial sector, with the view of restoring sustainable economic growth and sound public

finances over the coming years.

The Eurogroup decision on Cyprus includes plans for the restructuring of the financial sector and

safeguards deposits below €100.000 in accordance with European Union legislation. In addition, the

Cypriot authorities have reaffirmed their commitment to step up efforts in the areas of fiscal

consolidation, structural reforms and privatizations. Following the Eurogroup request the Cypriot

authorities and the European Commission, in liaison with the European Central Bank, and the

International Monetary Fund, finalised the relevant Memorandum of Understanding in April 2013 which

was then be followed by the formal approval of the Board of Directors of the European Stability

Mechanism as well as by the ratification by Eurozone member states through national parliamentary (or

equivalent) approval.

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49. SUBSEQUENT EVENTS (continued)

Economic Environment in Cyprus (continued)

On 22 March 2013 the House of Representatives voted legislation relating to capital controls affecting

transactions executed through banking institutions operating in Cyprus. The extent and duration of the

capital controls is decided by the Minister of Finance and the Governor of the Central Bank of Cyprus

and were enforced on 28 March 2013. The Company's management is monitoring the developments in

relation to these capital controls and is assessing the implications on the Company’s operations.

On 12 April 2013 the Eurogroup welcomed the agreement that has been reached between Cyprus and the

Troika institutions regarding the macroeconomic adjustment programme for Cyprus and stated that the

necessary elements were in place to launch the relevant national procedures required for the formal

approval of the European Stability Mechanism financial assistance facility agreement.

The Cyprus House of Representatives voted on 18 April 2013 legislation regarding the increase of the

corporate income tax rate from 10% to 12,5% with effect from 1 January 2013. It also voted the increase

in the rate of Special Contribution for Defence on interest income for companies and individuals from 15%

to 30% in relation to interest income which does not originate from or is not closely related to the

ordinary activities of a company.

The Company's management has assessed whether any impairment provisions are deemed necessary for

the Company's financial assets carried at amortised cost by considering the economic situation and

outlook at the end of the reporting period. The Company's management is unable to predict all

developments which could have an impact on the Cyprus economy and consequently, what effect, if any,

they could have on the future financial performance, cash flows and financial position of the Company.

On the basis of the evaluation performed, the Company's management has concluded that no provisions

or impairment charges are necessary.

The Company's management believes that it is taking all the necessary measures to maintain the viability

of the Company and the development of its business in the current business and economic environment.

On ...... the Board of Directors of ISTROKAPITAL SE authorised these financial statements for issue.

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