Vojvodjanska banka a.d., Novi Sad · VOJVODJANSKA BANKA A.D., NOVI SAD Translation of the...

Translation of the Auditors’ Report issued in the Serbian language

VOJVODJANSKA BANKA A.D., NOVI SAD Financial Statements For the Year Ended December 31, 2011 and Independent Auditors’ Report

VOJVODJANSKA BANKA A.D., NOVI SAD

Translation of the Auditors’ Report issued in the Serbian language

CONTENTS Page

Independent Auditors' Report 1 Financial Statements:

Income Statement 2 Balance Sheet 3 Statement of Changes in Equity 4 Cash Flow Statement 5

Notes to the Financial Statements 6 - 85

Translation of the auditors’ report issued in the Serbian language.

Translation of the Independent Auditors’ Report Issued in the Serbian language

INDEPENDENT AUDITORS’ REPORT To the Shareholders of Vojvodjanska banka a.d., Novi Sad

We have audited the accompanying financial statements of Vojvodjanska banka a.d., Novi Sad (the “Bank”), which comprise the balance sheet as of December 31, 2011 and the related income statement, statement of changes in equity and cash flow statement for the year than ended, and a summary of significant accounting policies and other explanatory notes. Management’s Responsibility for the Financial Statements Management is responsible for the preparation of these financial statements in accordance with the accounting regulations of the Republic of Serbia and regulations of the National Bank of Serbia governing financial reporting of banks, as well as for internal control relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing and the Law on Accounting and Auditing of the Republic of Serbia. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor‟s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity‟s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity‟s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements of Vojvodjanska banka a.d., Novi Sad for the year ended December 31, 2011 have been prepared, in all material respects, in accordance with the accounting regulations of the Republic of Serbia and regulations of the National Bank of Serbia governing financial reporting of banks. Belgrade, April 5, 2012

Nada Sudjić Certified Auditor


2 Translation of the Auditors’ Report issued in the Serbian language

INCOME STATEMENT Year Ended December 31, 2011 (Thousands of RSD)

Note 2011 2010

Interest income 4 6,238,450 5,507,543 Interest expense 4 (2,998,596) (2,697,610)

Net interest income

3,239,854 2,809,933

Fee and commission income 5 1,632,096 1,524,425 Fee and commission expense 5 (196,585) (196,031)

Net fee and commission income

1,435,511 1,328,394

Net gains on the sale of securities carried at fair value through profit and loss 6

558 1,339

Net gains on the sale of securities available for sale 7 70,132 - Net gains on the sale of equity investments (interests)

- 1,230

Net foreign exchange gains 8 331,947 952,843 Dividend and other income from equity investments 9 5,870 4,659 Other operating income 10 185,501 334,268 Net impairment losses and provisions 11 (467,346) (62,948) Staff costs 12 (3,084,943) (2,926,165) Depreciation and amortization 13 (559,577) (467,037) Operating and other expenses 14 (2,719,453) (2,954,773) Net gains/(losses) on the valuation of assets and liabilities 15 162,244 (121,951)

Losses from operations before taxation

(1,399,702) (1,100,208)

Income taxes 16а (5,145) (2,659) Gains on the generation of deferred tax assets and

decrease in deferred tax liabilities 16а

264,186 53,898 Loss on the decrease of deferred tax assets and

generation of deferred tax liabilities 16а

(31,986) (10,299)

Net loss

(1,172,647) (1,059,268)

The accompanying notes form an integral part

of these financial statements. These financial statements were approved by the Management of Vojvodjanska banka a.d., Novi Sad on February 27, 2012. Signed on behalf of Vojvodjanska banka a.d., Novi Sad by:

Marinos Vathis Efstratia Fountoukou Valentina Dragojlović

President of the Executive Board Member of the Executive Board

Assistant Director of Finance, Accounting and Tax Department



BALANCE SHEET As of December 31, 2011 (Thousands of RSD)

Note December 31,

2011 December 31,

2010

ASSETS Cash and cash equivalents 17 9,150,564 6,545,554 Revocable loans and deposits 18 21,575,211 22,235,813 Receivables arising from interest, fees and commissions,

trade, fair value adjustments of derivatives and other receivables 19 274,026 348,051

Loans and deposits to customers 20 51,247,164 51,725,496 Securities (excluding treasury shares) 21 1,880,602 2,184,691 Equity investments (interests) 22 53,503 502,723 Other placements 23 621,835 522,190 Intangible assets 24 367,935 466,946 Property, equipment and investment property 24 5,557,391 5,955,850 Assets held for sale and assets from discontinued operations 25 155,496 - Deferred tax assets 16(d) 455,287 234,025 Other assets 26 1,168,205 1,164,883

Total assets 92,507,219 91,886,222

LIABILITIES Transaction deposits 27 14,551,765 15,091,470

Other deposits 28 50,177,489 52,607,897 Borrowings 29 5,447,818 417,758 Liabilities from securities 316 322 Interest, fee and commission payables and

change in the value of derivatives 30 137,915 385,832 Provisions 31 530,466 493,863 Deferred tax liabilities 16(d) 124,594 135,532 Tax payables 44,617 11,725 Other liabilities 32 1,470,599 1,459,910

Total liabilities 72,485,579 70,604,309 EQUITY 33

Share and other capital 16,337,550 16,337,550 Reserves 3,188,768 3,188,768 Revaluation reserves 1,523,720 1,622,300 Unrealized losses on securities available for sale (54,712) - Retained earnings 198,961 1,192,563 Accumulated losses (1,172,647) (1,059,268)

Total Equity 20,021,640 21,281,913

Total liabilities and equity 92,507,219 91,886,222

OFF-BALANCE-SHEET ITEMS 34 213,529,315 200,154,784

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



STATEMENT OF CHANGES IN EQUITY Year Ended December 31, 2011 (Thousands of RSD)

Share

Capital Share

Premium Reserves Revaluation

Reserves Retained Earnings

Accumulated Losses

Unrealized Losses on Securities

Available for Sale

Total

Balance at January 1, 2010 16,337,430 120 3,188,768 1,721,756 1,093,969 -

-

22,342,043

Remeasurement of securities held for sale - - - (862) - - - (862) Decrease in revaluation reserves based on

the transfer of a portion of deprecation charge to retained earnings upon appraisal - - - (98,594) 98,594 -

-

- Loss for the year - - - - - (1,059,268) - (1,059,268)

Balance at December 31, 2010 16,337,430 120 3,188,768 1,622,300 1,192,563 (1,059,268)

-

21,281,913

Remeasurement of securities held for sale - - - (32,914) - -

-

(32,914)

Decrease based on the sale of securities available for sale (Note 21) - - - - - -

(54,712)

(54,712)

Decrease in revaluation reserves based on the transfer of a portion of deprecation charge to retained earnings upon appraisal - - - (65,666) 65,666

-

-

- Absorption of losses from prior years - - - - (1,059,268) 1,059,268 - - Loss for the year - - - - - (1,172,647) - (1,172,647)

Balance at December 31, 2011 16,337,430 120 3,188,768 1,523,720 198,961 (1,172,647) (54,712) 20,021,640




CASH FLOW STATEMENT Year Ended December 31, 2011 (Thousands of RSD)

2011 2010

CASH FLOWS FROM OPERATING ACTIVITIES Cash inflows/(outflows) from operating activities

Interest receipts 6,330,228 5,754,074 Fee and commission receipts 1,601,855 1,471,804 Receipts of other operating income 171,209 13,387 Receipts from dividends and profit distribution 6,013 4,698 Interest payments (3,002,476) (1,920,769) Fee and commission payments (235,313) (198,528) Payments to, and on behalf of, employees (2,935,612) (3,251,354) Taxes, contributions and other duties paid (746,222) (857,737) Payments of other operating expenses (2,176,455) (2,170,859)

Net cash used in operating activities prior to increases or decreases in placements and deposits (986,773) (1,155,284)

Decrease/(Increase) in placements and increase/(decrease) in deposits

Decrease in bank and customer deposits (3,077,855) (7,987,000) Decrease in loans and advances to banks and customers 580,149 5,513,459 Decrease in securities carried at fair value through profit and loss, trading placements and short-term securities held-to-maturity 769,910 1,883,871

Net cash used in operating activities before income taxes (2,714,569) (565,614) Income taxes paid - -

Net cash used in operating activities (2,714,569) (565,614)

CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from the sale of equity investments (interests) - 1,230

Proceeds from the sale of intangible assets, property and equipment 44,125 146,247 Proceeds from the sale of investment property 3,215 2,008 Proceeds from other investing activities 4,293 - Purchase of intangible and fixed assets (200,872) (668,965) Purchase of investment property - (18,182)

Net cash used in investing activities (149,239) (537,662)

CASH FLOWS FROM FINANCING ACTIVITIES Net cash provided by borrowings 5,136,874 -

Net cash used for borrowings - (2,144,143) Net cash used for securities (3) (1,351)

Net cash provided by/(used in) financing activities 5,136,871 (2,145,494)

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 2,273,063 (3,248,770) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,545,554 8,841,481 Foreign exchange gains on translation of cash, net 331,947 952,843

CASH AND CASH EQUIVALENTS, END OF YEAR 9,150,564 6,545,554


VOJVOĐANSKA BANKA A.D., NOVI SAD NOTES TO THE FINANCIAL STATEMENTS December 31, 2011 All amounts expressed in thousands of RSD, unless otherwise stated


1. FOUNDATION AND ACITIVITY

Vojvodjanska banka a.d., Novi Sad (the “Bank”) was established as of January 1, 1990 through the transformation of Vojvodjanska banka – Associated Bank, Novi Sad. At December 30, 2001, in accordance with its Articles of Incorporation and the Decision of the Bank‟s General Assembly, the Bank merged with Srpska razvojna banka a.d. Beograd and Uzicka banka a.d., Uzice.

In December 2006, in accordance with the terms of the Agreement on the Purchase and Sale of Share Capital, the National Bank of Greece became the major owner of the Bank‟s share capital, by acquiring an equity interest of 99.43%. The aforementioned acquisition was duly registered with the Central Securities Depository and Clearing House, at December 12, 2006. At October 25, 2007, the National Bank of Greece, Athens, conducted the mandatory purchase of the remaining 1,727 shares and became the sole owner of the Bank.

At December 7, 2007, Vojvodjanska banka a.d., Novi Sad was excluded from the Belex listings at its own request.

The Bank is registered in the Republic of Serbia a closed joint stock company to provide a wide range of banking services associated with payment transfers, credit and deposit activities performed in the country and abroad, and it operates in accordance with the Republic of Serbia‟s Law on Banks.

In accordance with the Decision enacted by the Bank‟s Assembly as of January 3, 2008, Vojvodjanska banka a.d., Novi Sad merged with the National Bank of Greece a.d. Beograd, with the merger effective as of December 31, 2007. The aforementioned status change of merger was inscribed in the Business Registry maintained by the Serbian Business Registers Agency at February 14, 2008 under the number BD 6190/2008 (removal of the business entity – the National Bank of Greece a.d., Beograd as the Acquiree) and the change in equity structure of Vojvodjanska banka a.d., Novi Sad was inscribed (Decision number BD 6210/2008). The National Bank of Greece a.d., Beograd was entirely in the ownership of the National Bank of Greece Athens, Greece. The Bank continued its operations under the name of Vojvodjanska banka a.d., Novi Sad.

The Bank‟s Head Office is located in Novi Sad, 7, Trg Slobode. As of December 31, 2011, the Bank operated through its Central Office located in Novi Sad, 60 braches, excluding the inactive braches in Pristina and Podgorica and 58 sub-branch offices (December 31, 2010: 67 braches, excluding the inactive braches in Pristina and Podgorica, 67 sub-branch offices and 8 counters).

As of December 31, 2011, the Bank had 1,786 employees (December 31, 2010: 2,238 employees).

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

As of December 31, 2011, the Bank had controlling interest in the following legal entities, which are not consolidated in the accompanying financial statements:

Subsidiary % Equity Share

Imos a.d. Šid 51.55%

2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS AND ACCOUNTING CONVENTION

2.1. Basis of Preparation and Presentation of Financial Statements

Pursuant to the Law on Accounting and Auditing (Official Gazette of the Republic of Serbia no. 46 of June 2, 2006 and no. 111 as of December 29, 2009), legal entities and entrepreneurs incorporated in Serbia are required to maintain their books of account, to recognize and value assets and liabilities, income and expenses, and to present, submit and disclose financial statements in conformity with the prevailing legislation and professional rules which include: the Framework for the Preparation and Presentation of Financial Statements (the “Framework”), International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS), as well as the related interpretations representing an integral part of these standards which were in effect as at December 31, 2002.



2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS AND ACCOUNTING CONVENTION (Continued)

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

The amendments to IAS, as well as the newly-issued IFRS and the related interpretations issued by the International Accounting Standards Board (“IASB”) and the International Financial Reporting Interpretations Committee (“IFRIC”), in the period between December 31, 2002 and January 1, 2009, were officially adopted pursuant to a Decision enacted by the Ministry of Finance of the Republic of Serbia (“Ministry”) and published in the Official Gazette of the Republic of Serbia number 77 of October 25, 2010. However, until the preparation date of the accompanying financial statements, not all amendments to IAS/IFRS and IFRIC in effect for annual periods beginning on or after January 1, 2009 had been translated. In addition, the accompanying financial statements are presented in the format prescribed under the “Guidelines on the Prescribed Form and Content of the Financial Statements of Banks and Other Financial Institutions” (Official Gazette of the Republic of Serbia nos. 74/2008, 3/2009 and 5/2010). Such statements represent the complete set of financial statements as defined under the law, which differ from those defined under the provisions of IAS 1, “Presentation of Financial Statements,” and differ in some respects, from the presentation of certain amounts as required under the aforementioned standard. Standards and interpretations in issue but not yet officially translated and adopted and standards and interpretations in issue but not yet in effect are disclosed in Notes 2.2 and 2.3. In accordance with the aforedescribed, and given the potentially material effects which the departures of accounting regulations of the Republic of Serbia from IAS and IFRS may have on the fairness presentations made in the financial statements, the accompanying financial statements cannot be treated as a set of financial statements prepared in accordance with IAS and IFRS. The financial statements were prepared at historical cost principle, unless otherwise stipulated in the accounting policies presented hereunder. In the preparation of the accompanying financial statements, the Bank adhered to the accounting policies described in Note 3. The Bank‟s financial statements are stated in thousands of dinars (RSD). The dinar is the official reporting currency in the Republic of Serbia

2.2. Standards and Interpretations in Issue, but not yet Translated and Adopted

As of the financial statements issuance date, the following standards, amendments were issued by the International Accounting Standards Board and Interpretations issued by the International Financial Reporting Interpretations Committee but were not officially adopted and translated in the Republic of Serbia for the annual accounting periods commencing on or after January 1, 2010:

Amendments to IFRS 7 “Financial Instruments: Disclosures” – Amendments improving fair value and liquidity risk disclosures (revised in March 2009, effective for annual periods beginning on or after January 1, 2009);

Amendments to IFRS 1 “First-time Adoption of IFRS” – Additional Exemptions for First-time Adopters. The amendments relate to assets in oil and gas industry and determining whether an arrangement contains a lease (revised in July 2009, effective for annual periods beginning on or after January 1, 2010);

Amendments to various standards and interpretations resulting from the Annual quality improvement project of IFRS published on April 16, 2009 (IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 36, IAS 39, IFRIC 16) primarily with a view to removing inconsistencies and clarifying wording, (amendments are to be applied for annual periods beginning on or after 1 January 2010, while the amendment to IFRIC is to become effective as of July 1, 2009);



2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS AND ACCOUNTING CONVENTION (Continued)

2.2. Standards and Interpretations in Issue, but not yet Translated and Adopted (Continued)

Amendments to IAS 38 “Intangible Assets” (revised in July 2009, effective for annual periods beginning on or after July 1, 2009);

Amendments to IFRS 2 “Share-based Payment”: Amendments resulting from the Annual quality improvement project of IFRS (revised in April 2009, effective for annual periods beginning on or after July 1, 2009) and amendments relating to group cash-settled share-based payment transactions (revised in June 2009, effective for annual periods beginning on or after January 1, 2010);

Amendments IFRIC 9 “Reassessment of Embedded Derivatives” effective for annual periods beginning on or after July 1, 2009 and IAS 39 “Financial Instruments: Recognition and Measurement” – Embedded Derivatives (effective for annual periods beginning on or after June 30, 2009);

IFRIC 18 “Transfers of Assets from Customers” (effective for annual periods beginning on or after July 1, 2009);

„Conceptual Framework for Financial Reporting 2010” being an amendments to “Framework for the Preparation and Presentation of Financial Statements” (effective for transfer of assets from customers received on or after September 2010);

Amendments to IFRS 1 “First-time Adoption of International Financial Reporting Standards” – Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters (effective for annual periods beginning on or after July 1, 2010);

Amendments to IAS 24 “Related Party Disclosures” – Simplifying the disclosure requirements for government-related entities and clarifying the definition of a related party (effective for annual periods beginning on or after January 1, 2011);

Amendments to IAS 32 “Financial Instruments: Presentation” – Accounting for rights issues (effective for annual periods beginning on or after February 1, 2010);

Amendments to various standards and interpretations “Improvements to IFRSs” resulting from the Annual quality improvement project of IFRS published on May 6, 2010 (IFRS 1, IFRS 3, IFRS 7, IAS 1, IAS 27, IAS 34, IFRIC 13) primarily with a view to removing inconsistencies and clarifying wording, (most amendments are to be applied for annual periods beginning on or after January 1, 2011);

Amendments to IFRIC 14 “IAS 19 – The Limit on a defined benefit Asset, Minimum Funding Requirements and their Interaction” – Prepayments of a Minimum Funding Requirement (effective for annual periods beginning on or after January 1, 2011);

IFRIC 19 “Extinguishing Financial Liabilities with Equity Instruments” (effective for annual periods beginning on or after July 1, 2010).

2.3. Standards and Interpretations in Issue not yet in Effect

At the date of issuance of these financial statements the following standards, revisions and interpretations were in issue but not yet effective:

IFRS 9 “Financial Instruments” (effective for annual periods beginning on or after January 1, 2015);

IFRS 10 “Consolidated Financial Statements” (effective for annual periods beginning on or after January 1, 2013);



2. BASIS OF PREPARATION AND PRESENTATION OF THE CONSOLIDATED FINANCIAL

STATEMENTS AND ACCOUNTING CONVENTION (Continued)

2.3. Standards and Interpretations in Issue not yet in Effect (Continued)

IFRS 11 “Joint Arrangements” (effective for annual periods beginning on or after January 1, 2013);

IFRS 12 “Disclosures of Involvement with Other Entities” (effective for annual periods beginning on or after January 1, 2013);

IFRS 13 “Fair Value Measurement” (effective for annual periods beginning on or after January 1, 2013);

IAS 27 (revised in 2011) “Separate Financial Statements” (effective for annual periods beginning on or after January 1, 2013);

IAS 28 (revised in 2011) “Investments in Associates and Joint Ventures” (effective for annual periods beginning on or after January 1, 2013);

Amendments to IFRS 1 “First-time Adoption of IFRS” – Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (effective for annual periods beginning on or after July 1, 2011);

Amendments to IFRS 7 “Financial Instruments: Disclosures” – Transfers of Financial Assets (effective for annual periods beginning on or after January 1, 2011);

Amendments to IFRS 7 “Financial Instruments: Disclosures” – Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after January 1, 2013);

Amendments to IFRS 9 “Financial Instruments” and IFRS 7 “Financial Instruments: Disclosures” – Mandatory Effective Date and Transition Disclosures;

Amendments to IAS 1 “Presentation of Financial Statements” – Presentation of Items of Other Comprehensive Income (effective for annual periods beginning on or after July 1, 2012);

Amendments to IAS 12 “Income Taxes” – Deferred Tax: Recovery of Underlying Assets (effective for annual periods beginning on or after January 1, 2012);

Amendments to IAS 19 “Employee Benefits” – Improvements to the Accounting for Post-employment Benefits (effective for annual periods beginning on or after January 1, 2013);

Amendments to IAS 32 “Financial Instruments: Presentation” – Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after January 1, 2014);

IFRIC 20 “Stripping Costs in the Production Phase of a Surface Mine” (effective for annual periods beginning on or after January 1, 2013).



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3.1. Interest Income and Expenses

Interest income and expense, including penalty interest and other income and other expenses from interest-bearing assets and liabilities are recognized on an accrual basis based on terms defined by contracts signed between the Bank and a customer.

Loan origination fees, included within the line item of interest income, are accrued and collected on a one-time basis and in advance, and are deferred on straight-line basis over the loan maturity period. The straight-line method is not materially different from the effective interest method.

The Bank suspends interest accrual by decreasing interest income via off-balance sheet items in cases where the Bank estimates that there are problems in collecting certain loans (“non-performing loans).

3.2. Fee and Commission Income and Expenses

Fee and commission income and expenses from providing or using banking services are recognized as per the matching principle of income and expenses, i.e. on an accrual basis and are determined for the period when such income or expense occur or when the service has been provided or used. Fees and commissions are mostly earned by rendering services of payment transaction services, issuance of guarantees, as well as other banking services. Corporate and retail loan origination fees are deferred over the life of the loan, and are recorded within interest income.

3.3. Foreign Currency Translation

Balance sheet and income statement items stated in the financial statements are valued by using currency of primary economic environment (functional currency). As disclosed in Note 2.1, the accompanying financial statements are stated in thousands of Dinars (RSD), which represents the functional and reporting currency of the Bank.

Transactions denominated in foreign currency are translated into Dinars at the official exchange rate determined on the Interbank Foreign Exchange Market, prevailing at the transaction date. Monetary assets and liabilities denominated in foreign currency are translated into Dinars at the official exchange rate determined on the Interbank Foreign Exchange Market, prevailing at the balance sheet date.

Foreign exchange gains or losses arising upon the translation of assets, liabilities and transactions are credited or debited as appropriate, to the income statement, as foreign exchange gains or losses.

Gain or losses arising upon the translation of financial assets and liabilities indexed to a currency clause are carried through profit and loss as gains/losses from changes in value of assets and liabilities, where it technically possible.

Commitments and contingent liabilities denominated in foreign currency are translated into dinars at the official median exchange rate of the National Bank of Serbia prevailing at the balance sheet date.



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.4. Financial Instruments

Financial assets and financial liabilities are initially measured at fair value as increased by transaction costs (other than financial assets and financial liabilities at fair value through profit or loss) that are directly attributable to the acquisition or issue of financial assets and financial liabilities.

Purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulations or conventions on the market, are recognized on the trade date or settlement date, i.e., on the date when the Bank commits to purchase or sell the assets or the date when the Bank commits to receive or transfer the assets.

Financial assets and financial liabilities are recognized in the Bank‟s balance sheet on the date upon which the Bank becomes counterparty to the contractual provisions of a specific financial instrument. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis.

“Day 1” Profit

When the transaction price in a non-active market is different from the fair value from other observable current market transaction in the same instrument or based on a valuation technique whose variables include data from observable markets, the Bank immediately recognizes the difference between the transaction price and fair value (“Day 1” profit) in the income statement.

Derecognition of Financial Assets and Financial Liabilities Financial assets cease to be recognized when the Bank loses control of the contractual rights governing such instruments; which occurs when the rights of use of such instruments have been realized, expired, abandoned, and/or ceded.

When the Bank has transferred its rights to receive cash flows from an asset or has entered into a transfer agreement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Bank‟s continuing involvement in the asset. Continuing involvement that takes the form of a “guarantee” over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to pay.

A financial liability is derecognized when the Bank‟s obligations are discharged, cancelled or have expired.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the income statement.

Reclassification of Financial Assets

The Bank may choose to reclassify a non-derivate financial asset held for trading from the held-for-trading category if the financial asset is no longer held for the purpose of selling or repurchasing it in the near-term. Financial assets, other than loans and receivables, are permitted to be reclassified out of the held for trading category only in rare circumstances.

Reclassifications are made at fair values as of the reclassification date. Fair value becomes the new cost or amortized cost as applicable, and no reversals of fair value gains or losses recorded before reclassification date are subsequently made.



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.4. Financial Instruments (Continued)

Classification of Financial Instruments

The Bank‟s management determines the classification of its investments at initial recognition. Classification of financial instruments upon initial recognition depends on the purposes for which financial instruments have been obtained and their characteristics.

The Bank classifies its financial assets in the following categories: financial assets carried at fair value through profit or loss, loans and receivables, held-to-maturity securities and available-for-sale securities.

Subsequent measurement of financial assets depends on their classification, as follows:

3.4.1. Financial Assets Carried at Fair Value through Profit or Loss

Securities and other placements carried at fair value through profit and loss comprise securities that have been primarily acquired for generating profit from short-term price fluctuations. Trading securities are stated in the balance sheet at fair value.

Securities at fair value through profit and loss include shares of banks and enterprises, as well as other securities issued by banks and corporate entities.

Changes in the market value of securities at fair value through profit and loss are credited or debited as appropriate, to the income statement, as gains/losses on the valuation of assets and liabilities.

3.4.2. Loans and Receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. All loans and advances are recognized when cash is transferred to borrowers. Loans and receivables are initially recognized at fair value.

At the balance sheet date, loans and advances originated by the Bank are stated at the amount of principal outstanding, less allowance for impairment, which are based on the evaluation of specifically-identified exposures and also cover losses that are inherent in the Bank‟s loan portfolio.

The effects of non-application of effective interest rate in accordance with IAS 39, “Financial Instruments: Recognition and Measurement,” requiring that loans be measured at amortized cost by applying the effective interest rate method, in the management‟s opinion, are not material for loans and advances to customers and the financial statements on the whole, as the Bank approves loans at variable interest rates, while the one-off fees collected in advance are deferred throughout the loan repayment period.

Loans, which are disbursed in Dinars and index-linked to the EUR exchange rate or to the retail price growth, are revalued in accordance with the provisions stated under the individual loan agreements. The difference between the carrying amount of loan and the amount calculated applying the foreign currency clause is disclosed within loans and advances. Gains and losses resulting from the application of foreign currency clause are recorded in the income statement, as gains/losses from changes in value of assets and liabilities.



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.4. Financial Instruments (Continued) 3.4.2. Loans and Receivables (Continued)

Impairment of Financial Assets and Provision for Risks

In accordance with its internal policy, the Bank assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired.

A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred “loss event“) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.

Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulties, defaults or delinquencies in interest or principal payments, probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

In accordance with the internal methodology, if there is objective evidence that a financial asset has been impaired, the Bank calculates the difference between the carrying amount and the present value of the future cash flows as discounted at the effective interest rate in accordance with the requirements of IAS 39 “Financial Instruments: Recognition and Measurement”, for the corporate customers which meet the criteria prescribed by the internal methodology, whereas, for all other placements, the allowance for impairment is estimated on portfolio basis. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from collateral foreclosure. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the original effective interest rate determined under the contract.

For the purpose of a collective evaluation of impairment, financial assets are grouped based on internal grading system that takes into account credit risk characteristics such as asset type, delinquency in servicing interest or principal, industry, geographical location, collateral type, past-due status and other relevant factors. Future cash flows from a group of financial assets that are collectively assessed for impairment are estimated on the basis of historical experiences of losses on the assets with similar credit risk characteristics. Historical data on incurring loss for the purposes of assessing impairment on portfolio basis are adjusted based on the currently available data reflecting the effects of past circumstances which influenced the period from which the forgoing experience with losses dates, with the aim to remove the effects which are non-existent in the current period. The Bank regularly verifies and reconsiders the methodology and assumptions used to decrease the differences between the estimated losses and actual losses incurred

The carrying amount of the loan is reduced through the use of an allowance account and the amount of the impairment loss arising from impairment of loans and receivables, as well as other financial assets measured at amortized cost, is recognized in the income statement as impairment losses on financial assets. Loans together with the associated allowance for impairment are written off when there is no realistic prospect of future recovery and when collateral has been realized or has been transferred to the Bank. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in the income statement.

In 2011 the Bank formed the Committee for Write-Off of Receivables. Write-off of uncollectable receivables is performed in accordance with the Bank's Write-Off Policy.



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.4. Financial Instruments (Continued) 3.4.3. Rescheduled Loans

Where possible, the Bank seeks to restructure loans rather than activate collaterals. This may involve

extending the repayment period, as well as changes in the crediting terms. Once the terms have been renegotiated, the loan is no longer considered past due. The management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to be received. The loans continue to be subject to an individual or collective impairment assessment, using the original effective interest rate.

3.4.4. Securities Held to Maturity

Held-to-maturity securities are financial assets with fixed or determinable payments and fixed maturities that the Bank‟s management has the positive intention and ability to hold to maturity.

Securities held-to-maturity include discounted bills of exchange initially recorded at cost.

Securities held-to-maturity are subsequently measured at amortized cost using the effective interest rate method, less any allowance for impairment. Amortized cost is calculated by taking into account any discounts or premiums on acquisition, over the period to maturity.

The Bank performs individual assessment in order to determine whether there is objective evidence on impairment of the investment into securities held-to-maturity. If there are objective evidence that such securities have been impaired, the amount of impairment loss for investments held to maturity is calculated as the difference between the investments‟ carrying amount and the present value of expected future cash flows discounted at the investment's original effective interest rate, and it is charged to the income statement as expense arising from write-off of placements.

If, in a subsequent year, the amount of the estimated impairment loss decreases as a consequence of an event occurring after the impairment was recognized, the previously recognized impairment loss is reduced and effects are credited to the income statement.

3.4.5. Securities Available for Sale

Securities intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices are classified as “securities available for sale”.

Available-for-sale securities include other legal entities‟ equity instruments and debt securities.

Equity investments comprise equity investments in other legal entities, related parties, shares of companies and banks denominated in Dinars and foreign currencies.

During 2011, the Bank reclassified quoted securities classified as equity investments to securities available for sale.

Subsequent to the initial measurement, available-for-sale securities for which there is an active market are measured at fair value. The fair values of securities quoted in active markets are based on current bid prices. Unrealized gains and losses are recognized directly in equity on the line item of reserves from available-for-sale securities. When a security available for sale is impaired, the cumulative gain or loss previously recognized in equity is recognized in the income statement.

Equity instruments in other legal entities that do not have a quoted market price in an active market and for which other methods of reasonably estimating fair value are inappropriate, are exempt from fair value assessment. These instruments are measured at cost, less any allowance for impairment.



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.4. Financial Instruments (Continued)

3.4.5. Securities Available-for-Sale (Continued)

Dividends earned whilst holding available-for-sale financial assets are recognized in the income statement as dividend income when the right to receive dividend is established. Gains and losses arising from the sale of these securities are credited or debited as appropriate, to the income statement, as gains/losses from sale of available-for-sale securities. In addition, impairment losses on securities available-for-sale, which cannot be deemed to be temporary, are recognized in the income statement.

3.4.6. Issued Financial Instruments and Other Financial Liabilities

Issued financial instruments or their components are classified as liabilities where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares.

The subsequent measurement of financial liabilities depends on their classification as follows:

Deposits from Other Banks and Customers

All deposits from other banks and customers and interest-bearing borrowings are initially recognized at the fair value of the consideration received net of transaction costs, except for financial liabilities through profit and loss. After initial recognition, interest-bearing deposits and borrowings are measured at amortized cost.

Borrowings

Borrowings are recognized initially at fair value net of transaction costs incurred. Borrowings are subsequently stated at amortized cost. Borrowings are classified as current liabilities, unless the Bank has the unconditional right to postpone the settlement of obligations for at least 12 months after the balance sheet date.

Accounts Payable

Accounts payable and other short-term liabilities are measured at amortized cost, which approximates their nominal value due to their short-term maturities.

3.5. Offsetting Financial Assets and Liabilities

Financial assets and financial liabilities are offset and the net amount reported in the balance sheet if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously.

3.6. Financial Derivatives

The Bank uses financial instruments such as currency forward contracts, swop and spot contracts as hedging instruments against foreign currency risk. The Bank has chosen to apply trade date accounting to these transactions.

Upon closing forward contracts, the Bank records spot transactions from the contract when they have occurred, recognizing concurrently financial assets and liabilities arising from forward transactions which will be realized in the ensuing period. At the balance sheet date, the Bank measures unrealized forward transactions of forward contracts by crediting/debiting them to prepayments/accruals and the income statement.

In the course of 2011, the most common financial derivatives in the Bank included currency swaps used to bridge short-term gaps in the Bank‟s currency positions and to provide the necessary currency structure on the accounts held abroad. Except for currency swaps relating to intercompany transactions, the Bank did not participate in forward transactions at customers‟ request.



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.7. Special Reserves for Potential Losses on the Balance Sheet Assets and Off-Balance Sheet Items

Special reserves against potential losses on balance sheet assets and off-balance sheet items are calculated in accordance with the National Bank of Serbia‟s Decision on the Classification of Bank Balance Sheet Assets and Off-Balance Sheet Items (Official Gazette of the Republic of Serbia no. 94/2011).

Total receivables from a single debtor (balance sheet and off-balance exposures) are classified into the categories from A to D, in accordance with the evaluation of their collectability. The collectability of receivables from one debtor is estimated based on the debtor‟s diligence in servicing its debt, as well as based on its financial position, number of days in default against interest and principal liabilities, as well as the quality of the collateral provided for the debt. Through its internal enactments, the Bank has defined the criteria and methodology for determining special provisions against potential losses within percentages prescribed in the National Bank of Serbia Decision based on customer default, financial position and analysis of a debtor‟s business performance, adequacy of cash flows and quality and value of collateral.

In accordance with the classification of receivables and pursuant to the aforementioned Decision of the National Bank of Serbia, the amount of the special reserves against potential losses is calculated by applying the following percentages on placements: A - 0%, B - 5%, V - 25%, G - 50% and D – 100%.

Required special reserve for potential losses is to be determined as the sum of positive differences between the reserve for potential losses calculated in accordance with the Decision on the Classification of Bank Balance Sheet Assets and Off-balance Sheet Items and the amount of allowance for impairment of balance sheet assets and provisions for losses on off-balance sheet items calculated in accordance with the Bank‟s internal methodology on the level of individual debtors.

If the amount of special reserve for potential losses calculated in accordance with the National Bank of Serbia Decision exceeds the amount of allowance for impairment of balance sheet assets and provisions for off-balance sheet items as per individual debtors, the Bank is obligated to form a reserve for potential losses charged to retained earnings in the total of positive differences determined, pursuant to the Decision adopted by the Bank‟s Assembly.

3.8. Cash and Cash Equivalents

For purposes of the cash flow statement, cash and cash equivalents include cash on hand, cheques in the course of collection, balances on current accounts held with other banks, gyro account balances and other cash equivalents.

3.9. Repurchase Agreements (“Repo transactions”)

Securities bought under agreements to repurchase at a specified future date („repos‟) are recognized in the balance sheet. Cash paid, including accrued interest is recognized in the balance sheet. The difference between the sale and repurchase prices is treated as interest income maturing over the life of the agreement.

Securities purchased from the National Bank of Serbia under agreements to resell, pursuant to the provisions of the General Agreement on the Sale of Securities with an Obligation to Repurchase, are stated at amortized cost at the balance sheet date.




3.10. Equity Investments in Subsidiaries

Subsidiary is a legal entity in which the Bank possesses a stake of more than 50 percent, or otherwise holds more than half of voting rights, or the right to manage the financial (business) policy of the subsidiary.

Equity investments in subsidiaries are stated at cost, less allowance for impairment.

3.11. Property, Equipment and Intangible Assets

The Bank‟s property and equipment mostly comprise buildings, equipment and leasehold improvements.

As of December 31, 2011, buildings are stated at their revalued cost, as determined in an independent valuation performed in 2005, less subsequently accumulated depreciation and impairment losses, if any. The appraisal of buildings was performed by an independent appraiser based on the respective asset‟s market value.

The frequency of revaluations depends upon the changes in fair values of the items of building being revalued. If an asset‟s carrying value is increased as a result of a revaluation, the increase is to be credited directly to equity under the heading of revaluation surplus. If an asset‟s carrying value is decreased as a result of an appraisal, the decrease is recognized in the income statement as an expense, under losses on the valuation of assets and liabilities.

Buildings acquired in the period from 2006 to 2010 are stated at cost, less accumulated depreciation.

Equipment is stated at cost less accumulated depreciation. Cost represents the price billed by suppliers together with all costs incurred in bringing the asset to the location and condition necessary for its intended use.

Subsequent costs are included in the asset‟s carrying amount or are recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to income statement of the financial period in which they are incurred.

Assets under construction are stated at cost.

Intangible assets consist of licenses, software and similar rights, as well as leasehold improvements in business premises under long-term lease. Intangible assets also include capitalized salaries of employees involved in project development. Costs associated with maintaining computer software programs are recognized as an expense as incurred.

Intangible assets are measured at cost, less accumulated amortization and impairment losses, if any.

Depreciation and amortization of property, equipment and intangible assets are provided on a straight-line basis in order to fully write off the cost/revalued amount of the assets over their estimated useful lives. The principal annual depreciation/amortization rates in use for classes of property, equipment and intangible assets are as listed below:

Buildings 2.0% Computer equipment 20.0% Leasehold improvements 20.0% - 50.0% Furniture and other equipment 6.7% - 14.3% Vehicles 14.3% - 15.5% Other equipment 6.7% -20.0% Licenses 20.0% Other intangible assets 20.0%




3.11. Property, Equipment and Intangible Assets (Continued)

Calculation of depreciation and amortization of property and equipment commences at the beginning of month following the month when an asset is put into use. Assets under construction are not depreciated. Depreciation charge is recorded as an expense during the period in which it is incurred. Leasehold improvements are depreciated over the lease term.

The useful lives of the assets are reviewed periodically, and adjusted if necessary at each reporting date. Change in the expected useful life of an asset is considered as a change in an accounting estimate.

Gains from the disposal of property and equipment are credited directly to other operating income, whereas any losses arising on the disposal of property and equipment are charged to other operating expenses.

The calculation of the depreciation and amortization for tax purposes is determined by the Law on Corporate Income Tax (Official Gazette of the Republic of Serbia no. 25/2001, 80/2002, 43/2003, 84/2004 and 18/2010) and the Rules on the Manner of Fixed Assets Classification in Groups and Depreciation for Tax Purposes (Official Gazette of the Republic of Serbia no. 116/2004 and 99/2010). Different depreciation methods used for the financial reporting purposes and the tax purposes give raise to deferred taxes.

3.12. Investment Property

The Bank‟s investment property is property held to earn rental income and/or for capital appreciation.

Subsequent to initial recognition, investment property is stated at cost less accumulated depreciation.

Depreciation of investment property is calculated using the straight-line method in order to fully write off the cost of these assets over their estimated useful lives, by applying the annual depreciation rate of 2%.

3.13. Assets Held for Sale

In 2011, the Bank reclassified a portion of buildings classified as property and equipment to assets held for sale sue to the management's intention to sell these assets within a year. Non-current assets held for sale are recognized at the lower of their carrying and fair values less costs to sell and are not depreciated.

In order to be reclassified from a fixed asset to an asset held for sale, the asset needs to be eligible for sale in the current condition and the transactional recoverability of its carrying value must fulfill the following criteria:

an appropriate management level must commit to the sale of the asset;

an active program of search for buyers and realization of the sale must be initiated;

an asset must be actively present in the market at a reasonable price as compared to its present fair value;

the completion of the sale is to be expected within 12 months from the reclassification date;

activities undertaken to carry out the sales plan are to suggest that significant changes to the sales plan are not likely to occur and that the plan is not likely to be given up.

3.14. Impairment of Non-Financial Assets

In accordance with adopted accounting policy, at each reporting date, the Bank‟s management reviews the carrying amounts of the Bank‟s intangible assets, property, equipment and investment property. If there is any indication that such assets have been impaired, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying value, the carrying amount of the asset is reduced to its recoverable amount, being the higher of an asset‟s fair value less costs to sell and value in use. Impairment losses, representing a difference between the carrying amount and the recoverable amount of tangible and intangible assets, are recognized in the income statement as required by IAS 36 “Impairment of Assets”.




3.14. Impairment of Non-Financial Assets (Continued)

Non-financial assets (other than goodwill) that suffered impairment are re-examined for possible reversal of impairment loss at each reporting date.

3.15. Foreclosed Collaterals

Collaterals (land and buildings) are foreclosed in order to collect defaulting loans and such assets are presented within other assets. Foreclosed assets are held on temporary basis, intended for sale, and are measured at the lower of carrying amount and fair value less costs to sell.

3.16. Leases

Determining whether an arrangement contains a lease, or contains lease elements, is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and whether the arrangement conveys a right to use the assets.

(a) Finance Lease – the Bank as Lessee

Finance leases, which transfer to the Bank substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments and included in property and equipment with the corresponding liability to the lessor included in other liabilities.

Capitalized leased assets are depreciated over the shorter of the estimated useful life of the assets and the lease term, if there is no reasonable certainty that the Bank will obtain ownership by the end of the lease term.

Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are charged directly to the income statement as interest expense.

(b) Operating Lease – the Bank as a Lessee A lease is classified as an operating lease if it does not transfer to the Bank substantially all the risks and rewards incidental to ownership.

Total payments made under operating leases are charged to other operating expenses in the income statement on a straight-line basis over the lease term.

3.17. Provisions, Contingent Liabilities and Contingent Assets

Provisions are recognized when the Bank has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

Provisions are maintained according to the best possible estimates that are considered, determined and, if necessary, adjusted at each balance sheet date.

When the outflow of the economic benefits is no longer probable in order to settle legal or constructive liabilities, provisions are derecognized in income. Provisions are taken into account in accordance with their type and they can be used only for the expenses they were recognized initially for. Provisions are not recognized for future operating losses.

Contingent liabilities are not recognized in the financial statements. They are disclosed in the financial statements, unless the possibility of an outflow of resources embodying economic benefits is remote.

Contingent assets are not recognized in the financial statements unless an inflow of economic benefits is probable.



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.18. Equity

Equity consists of share capital (common shares), share premium, reserve from profit, revaluation reserves and retained earnings or accumulated losses for the year.

Building appraisal surplus is recorded within revaluation reserves and is transferred to retained earnings in the amount representing the difference between depreciation calculated on the value of buildings before and after the valuation, while, in case of sale and disposal, the remaining amount of the positive effects of valuation contained in revaluation reserves is transferred completely to the retained earnings.

Gains and losses arising from fair value adjustments of securities available-for-sale are also recorded within revaluation reserves.

3.19. Financial Guarantees

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

3.20. Employee Benefits

(а) Employee Taxes and Contributions for Social Security

In accordance with the regulations prevailing in the Republic of Serbia, the Bank has an obligation to pay taxes and contributions to various state social security funds. These obligations involve the payment of contributions on behalf of the employee, by the employer in an amount calculated by applying the specific, legally-prescribed rates.

The Bank is also legally obligated to withhold contributions from gross salaries to employees, and on their behalf to transfer the withheld portions directly to the appropriate government funds. The Bank has no legal obligation to pay further employee benefits being the liabilities of the Pension Fund of the Republic of Serbia.

These taxes and contributions payable on behalf of the employee and employer are charged to expenses in the period in which they arise.

b) Other Employee Benefits – Retirement Benefits

In accordance with the Labor Law, the Bank is obligated to pay retirement benefits to its employees equal to 3 average monthly salaries earned in the Republic of Serbia in the month prior to the month of retirement or equal to 3 average salaries in the Bank, i.e., 3 average salaries of an employee earned in the month prior to retirement or to payment – depending on what is most favorable for the retiring employee.

The Bank recognized long-term provisions for retirement benefits based on an actuarial report in the amount of the present value of expected future payments.




3.20. Employee Benefits (Continued)

(b) Other Employee Benefits – Retirement Benefits (Continued)

As of December 31, 2011, the Bank made provisions for retirement benefits (as adjusted by the amount of severance pays to employees who accepted early retirement pursuant to the restructuring program), under the following assumptions:

Average salary growth rate for the period 6.5 % annually Discount rate 6 % annually Long-term retail price growth index 5 % annually

((c) Short-Term Compensated Absences

Accumulating compensated absences may be carried forward and used in future periods if the current period‟s entitlement has not been fully used. In the instance of non-accumulating compensated absences, no liability or expense is recognized until the time of the absence. d) Pension Funds

The Bank does not have defined benefit plans or share-based remuneration options, and therefore there are no identified liabilities with respect to these matters as of December 31, 2011.

3.21. Taxes and Contributions

(a) Income Taxes

Current Income Tax

Current income tax is calculated and paid in accordance with the effective Law on Corporate Income Tax (Official Gazette of the Republic of Serbia, no. 25/2001, 80/2002, 43/2003, 84/2004 and 18/2010) and by-laws. Income tax is payable at the rate of 10% on the tax base reported in the annual corporate income tax return, and can be reduced by any applicable tax credits. The tax base includes the taxable profit, determined by adjusting the taxpayer‟s result reported in the income statement, in the manner prescribed by this Law.

The Corporate Income Tax Law of the Republic of Serbia allows 20% tax credit for the capital expenditures, whereas such tax credits cannot exceed 50% of the assessed tax in the year in which the expenditures occurred. The unused portion of tax credit is available for carryforward and used against future accounting periods but only for the duration of no longer than ten years in succession. In each year, current year tax credits for capital expenditures are used and then up to the 50% limit of total income taxed payable for the year; tax credits carried forward are used following the order in which credits for capital expenditures are earned.

The tax regulations in the Republic of Serbia do not envisage that any tax losses of the current period be used to recover taxes paid within a specific carryback period. However, any current year losses may be used to reduce or eliminate taxes to be paid in future periods, but only for duration of no longer than five years in succession (in accordance with the amendments to the Law in 2010).

Deferred Income Tax

Deferred income taxes are provided on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The currently-enacted tax rates or the substantively-enacted rates at the balance sheet date are used to determine the deferred income tax amount.




3.21. Taxes and Contributions (Continued)

(a) Income Taxes (Continued)

Deferred Income Tax (Continued) Deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized for all deductible temporary differences, carryforwards of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and unused tax credits and unused tax losses carry forward can be utilized.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized.

Current and deferred taxes are recognized as income or expense and are included in net profit for the period. Deferred income taxes related to items that are recorded directly in equity are also recognized in equity.

(b) Indirect Taxes and Contributions

Indirect taxes and contributions include property taxes, value added taxes, contributions to salaries charged to employer and various other taxes and contributions paid, pursuant to effective republic and local tax regulations. These taxes and contributions are included within operating and other operating expenses.

3.22. Managed Funds

The funds that the Bank manages on behalf of, and for the account of third parties for a fee, are disclosed within off-balance sheet items. The Bank bears no risk in respect of repayment of these placements.

3.23. Summary of Significant Accounting Estimates and Assumptions

The presentation of the financial statements requires the Bank‟s management to make best estimates and reasonable assumptions that influence the assets and liabilities amounts, as well as the disclosure of contingent liabilities and receivables as of the date of preparation of the financial statements, and the income and expenses arising during the accounting period.

These estimations and assumptions are based on information available, as of the date of preparation of the financial statements. Actual results may vary from these estimates. Estimates and assumptions are subject to constant review and when adjustments become necessary they are stated within the income statement for periods in which they became known.

What follows are the key estimates and assumptions which represent a risk from material adjustments to the amounts of balance sheet items in the following fiscal year.



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.23. Summary of Significant Accounting Estimates and Assumptions (Continued)

(a) Impairment of Financial Assets

The Bank assesses at each reporting date whether there is objective evidence that the value of a financial assets or group of financial assets has suffered impairment. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a „loss event‟) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. With regards to the assessment of impairment losses on loans, the Bank reviews the credit portfolio at least quarterly for the purpose of calculating the impairment in their value. In the process of determining whether an impairment loss needs to be accounted for within the income statement, the Bank assesses whether there is reliable evidence showing a measurable decrease in the estimated future cash flows from the credit portfolio before the impairment, which can be identified within individual loans comprised in the portfolio. Such evidence may include available data indicative of unfavorable changes in debtor‟s settling its liabilities towards the Bank or in the national or local circumstances having adverse influences on the Bank‟s assets. The Bank‟s management makes assessment based on its experience with losses incurred on loans from prior periods for all assets susceptible to credit risk and showing evidence of impairment similar to the one that existed in the credit portfolio at the time of planning future cash flows. The methodology and assumptions used in the assessment of amounts and time of future cash flows are subject to regular reviews with the aim to decrease differences between the estimated and realized losses.

(b) Fair Value of Financial Instruments

The fair value of financial instruments traded on an active market at the balance sheet date are based on the quoted market bid and ask prices, before the decrease by transaction costs.

The fair value of financial instruments which are not listed on an active market is determined using adequate measurement techniques including techniques of net present value, comparison with similar instruments for which there are market prices and other relevant models.

When market inputs are unavailable, these are determined through assessments that include a certain degree of judgments in the fair value assessment.

Models of estimates reflect the current market situation at the date of assessment and do not have to correspond to the market terms before or after the date of measuring. Hence, measurement techniques are revised periodically so they would best reflect current market conditions.

(c) Impairment of Equity Investments

The bank considers an equity investment impaired when there is objective and documented (market information) or assessed impairment of fair value of such an asset below its cost.

(d) Useful Life of Intangible Assets, Property and Equipment

Determining the useful life of intangible assets, property and equipment is based on historical experience with similar assets, as well as the anticipated technical development and changes affected by numerous economic and industrial factors.

Adequacy of useful life is reexamined annually or whenever there are indications of significant changes in factors underlying the estimate of useful lives.



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.23. Summary of Significant Accounting Estimates and Assumptions (Continued)

(e) Impairment of Non-Financial Assets

At each balance sheet date, the Bank‟s management reviews the carrying amounts of the Bank‟s intangible assets, property and equipment. If there is any indication that such assets have been impaired, the recoverable amount of an asset is estimated in order to determine the extent of the impairment loss.

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

Impairment assessment requires management to make subjective judgments in respect to cash flows, growth rates and discounting rates for units generating cash subject to assessment.

(f) Provisions for Litigations

The Bank is involved in a number of lawsuits arising in the everyday business operations in respect to commercial and contractual issues, as well as labor issues, which are resolved or considered in the regular course of business. The Bank estimates the probability of negative outcome of these issues, as well as amounts of likely or reasonable loss assessments.

Reasonable assessment encompass judgments made by management upon consideration of information provided in reports, settlements, assessment made by legal department, facts available, identification of potentially responsible parties and their ability to contribute to the resolution of the matter, as well as historical experience.

Provisions for litigation are recognized when the Bank has an obligation whose reliable estimate can be made by way of a careful analysis. The amount of provisions is subject to changes contingent on new events or new information coming to light.

The matters that either constitute a contingent liability or do not meet the criteria for provisioning are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote.

(g) Deferred Tax Assets

Deferred tax assets are recognized for all unused tax losses and/or tax credits to the extent that it is probable that taxable profit will be available, against which the deductible temporary differences and the tax loss/credits of the carryforwards can be utilized.

The Bank‟s management needs to make prudent assessments of deferred tax assets that should be recognized, based on the period when these arise and the amount of future taxable income and tax policy planning strategy.

(h) Retirement Benefits and Other Post-Employment Benefits

The costs of defined post-employment benefits to employees and/or retirement benefits are determined in an actuarial assessment. An actuarial assessment includes the assessment of a discount rate, future movements in salaries, mortality rates and employee turnover. Due to a long-term nature of these plans, significant uncertainties influence these assessments. Additional information is disclosed in Note 3.20 b to the financial statements.

Had a discount rate been 7%, instead of 6%, provisions for retirement benefits would have been 11% lower, and had the average salary growth been 6% instead of 6.5% annually, provisions for retirement benefits would have decreased by 5.7%.



4. INTEREST INCOME AND EXPENSE

Year Ended December 31, 2011 2010

Interest income - Banks 632,493 612,167 - Enterprises 1,796,722 1,586,943 - Entrepreneurs 89,174 97,634 - Public sector 742,574 444,694 - Retail customers 2,935,521 2,712,920 - Foreign entities 23,893 2,968 - Agricultural producers 2,526 759 - Other customers 15,547 49,458

6,238,450 5,507,543

Interest expenses - Banks 110,746 112,969 - Enterprises 773,835 570,158 - Entrepreneurs 4,690 2,037 - Public sector 35,048 31,999 - Retail customers 1,589,583 1,561,182 - Foreign entities 285,883 303,804 - Agricultural producers 17,103 8,364 - Other customers 181,708 107,097

2,998,596 2,697,610

Net interest income 3,239,854 2,809,933

Interest income and expense by types of financial instruments are presented below:

Year Ended December 31,

2011 2010

Interest income from: - Loans in Dinars 4,877,575 4,316,100 - Deposits in Dinars 17,923 7,545 - Securities in Dinars 212,240 148,778 - Other placements in Dinars 630,814 705,783 - Loans in foreign currency 484,783 327,925 - Deposits in foreign currency 12,104 810 - Other placements in foreign currency 3,011 602

6,238,450 5,507,543

Interest expense from:

- Borrowings in Dinars 13,188 24,094 - Deposits in Dinars 926,161 763,910 - Other liabilities 4,721 4,310 - Borrowings in foreign currency 89,108 2,998 - Deposits in foreign currency 1,965,418 1,902,298

2,998,596 2,697,610




5. FEE AND COMMISSION INCOME AND EXPENSE


Fee and commission income - Domestic and international payment

transaction services 565,234 793,666 - Loan origination and administration fees 119,128 141,951 - Safe keeping charges 24,018 17,555 - Fees for other banking services 562,033 246,590 - Debit and credit cards operations 174,915 153,933 - Fees for issued guarantees and other sureties 52,397 50,882 - Broker-dealer services 39,368 20,859 - Other fees and commissions 95,003 98,989

1,632,096 1,524,425

Fee and commission expenses - Domestic payment transaction services 70,661 77,882 - International payment transaction services 37,523 29,514 - Cheques transactions 11,025 11,227 - Foreign exchange transactions 2,349 38,020 - Other fees and commissions 75,027 39,388

196,585 196,031


6. NET GAINS/(LOSSES) ON THE SALE OF SECURITIES CARRIED AT FAIR VALUE THROUGH PROFIT AND LOSS


Gains on the sale of:

- Old foreign currency savings bonds 739 1,698

739 1,698

Losses on the sale of: - Old foreign currency savings bonds (181) (359)

(181) (359)

Net gains 558 1,339

7. NET GAINS ON THE SALE OF SECURITIES AVAILABLE FOR SALE Year Ended December 31,

2011 2010

Gains on the sale of:

- VISA International 70,132 -

70,132 -

In 2011, the Bank realized gains on the sale of 10,787 shares of VISA International in the amount of RSD 70,132 thousand. The cost of the shares sold was USD 1.08 per share, while they were sold at USD 90.57 or RSD 6,502 at the transaction date.



8. NET FOREIGN EXCHANGE GAINS/(LOSSES) Year Ended December 31,

2011 2010

Foreign exchange gains 39,975,453 34,114,972 Foreign exchange losses (39,643,506) (33,162,129)

Foreign exchange gains, net 331,947 952,843

9. DIVIDEND AND OTHER INCOME FROM EQUITY INVESTMENTS Year Ended December 31,

2011 2010

Dividend and other income from equity investments 5,870 4,659

5,870 4,659

In 2011, the Bank collected the total of RSD 5,870 thousand as monetary dividend income, most of which relates to the dividends received from AIK Banka a.d., Niš – in the amount of RSD 4,229 thousand, Globos osiguranje a.d., Beograd – in the amount of RSD 922 thousand and VISA International – in the amount of RSD thousand.

10. OTHER OPERATING INCOME Year Ended December 31,

2011 2010

Collection of receivables previously written off 26,840 5,005 Gains on the sale of property, equipment and intangible assets

(Note 24) 20,997 91,964 Other income from operating activities 48,060 58,008 Write-off of liabilities 41,835 173,401 Surpluses 6,694 889 Other income 41,075 5,001

185,501 334,268



11. NET (LOSSES)/GAINS ON IMPAIRMENT LOSSES AND PROVISIONS

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


Impairment losses and provisions: Impairment losses on and provisions against balance sheet

positions: - Interest, fee and commission receivables (50,417) (432,362) - Loans and deposits (1,159,444) (2,076,537) - Securities and equity investments (2,374) (59,058) - Other placements and other assets (254,564) (1,204,707)

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

Provisions for: - Off-balance sheet items (35,105) (9,062) - Retirement benefits (56,063) (49,997)

(91,168) (59,059)

Total impairment losses and provisions (Note 11b) (1,557,967) (3,831,723)

Reversal of impairment losses and provisions Reversal of impairment losses on balance sheet items: - Interest, fee and commission receivables 48,125 273,549 - Loans and deposits 884,717 2,101,265 - Securities and equity investments 4,286 798 - Other placements and other assets 55,644 1,195,794

992,772 3,571,406

Release of provisions for: - Off-balance sheet assets 10,841 27,832 - Litigations 11 29,635 - Other liabilities - 83,213

10,852 140,680

Income from reversal of impairment losses and release of provisions (Note 11b) 1,003,624 3,712,086

Income from collected interest previously suspended 86,997 56,689

1,090,621 3,768,775

Net losses on impairment and provisions (467,346) (62,948)



11. NET (LOSSES)/GAINS ON IMPAIRMENT LOSSES AND PROVISIONS (Continued)

(b) Movements on the Accounts of Allowance for Impairment of Financial Placements and

Provisions against Risk-Weighted Off-Balance Sheet Items and Other Liabilities

The movements in the allowance for impairment of balance sheet assets and provisions during the year were as follows:

Interest, Fee and

Commission Receivables

(Note 19)

Loans and Deposits (Note 20)

Securities and Equity

Investments (Notes 21

and 22

Cash, Other Placements

and Other Assets

(Notes 19, 23 and 25)

Provisions (Note 30) Total

Balance as of January 1, 2010 740,247 12,573,330 945,702 1,748,798 792,026 16,800,103 Charge for the year (Note 11a) 432,362 2,076,537 59,058 1,204,707 59,059 3,831,723 Reversal of impairment losses (Note 11a) (273,549) (2,101,265) (798) (1,195,794) (140,680) (3,712,086) Foreign exchange differences (47,971) 1,384,217 29,923 (112,253) - 1,253,916 Fair value adjustments - - 2,098 - - 2,098

Unfavorable outcome of litigations - - - - (61,226) (61,226) Other movements (189,037) (2,133,946) (397,181) (626,548) (155,316) (3,502,028)

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

Charge for the year (Note 11a) 50,417 1,159,444 2,374 254,564 91,168 1,557,967 Reversal of impairment losses (Note 11a) (48,125) (884,717) (4,286) (55,644) (10,852) (1,003,624) Foreign exchange differences 4,192 (258,838) 2,211 13,407 - (239,028)

Unfavorable outcome of litigations - - - - (10,331) (10,331) Other movements (43,742) (3,345,065) (116,287) (84,097) (33,382) (3,622,573)

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

Other movements on the accounts of allowance for impairment of balance sheet items in 2011 mostly relate to derecognition of receivables and relevant allowances for impairment based on decisions of the Bank‟s relevant bodies, for the following customers: Pionir d.d. – in bankruptcy, Subotica in the amount of RSD 1,500,117 thousand, Brodogradilište Sava, a.d. – in bankruptcy, Mačvanska Mitrovica in the amount of RSD 823,508 thousand, Chemos a.d., Palić in the amount of RSD 329,607 thousand, Zeleni Koridor d.о.о. – in bankruptcy, Zrenjanin in the amount of RSD 159,411 thousand, STR d.о.о. – in bankruptcy, Crvenka in the amount of RSD 82,034 thousand, Ţeljezničar a.d., Subotica in the amount of RSD 76,741 thousand, PIK Bečej Pivara a.d. – in bankruptcy, Bečej in the amount of RSD 74,924 thousand, Udarnik fabrika čarapa a.d., Zrenjanin in the amount of RSD 69,013 thousand and Fadiп a.d. – in bankruptcy, Bečej in the amount of RSD 64,174 thousand.



11. NET (LOSSES)/GAINS ON IMPAIRMENT AND PROVISIONS (Continued)

(c) Special Reserves for Potential Losses

In accordance with the National Bank of Serbia Decision on the Classification of Balance Sheet and Off-Balance Sheet Exposures, the sum of positive differences between the amount of special reserve for potential losses calculated in accordance with the National Bank of Serbia requirements, and the amount of allowance for impairment and provision for contingent liabilities estimated in accordance with the internally adopted methodology, is presented as reserve for potential losses within equity. If the amount of allowance for impairment of balance sheet assets and provisions for off-balance sheet items exceeds the amount of the provisions against potential losses calculated for individual debtors, the Bank is under no obligation to calculate required provisions against potential losses per balance sheet assets and off-balance items. The amount of special reserve for potential losses on balance sheet assets and off-balance sheet items is allocated from retained earnings based on the Decision of the Bank‟s Assembly on capital adequacy.


Special reserve for potential losses determined as per the NBS Decision with respect to:

- balance sheet exposures 19,438,252 22,390,676 - off-balance sheet exposures 163,450 424,230

19,601,702 22,814,906

Allowances for impairment and provisions determined in accordance with the internally adopted methodology (IAS 39):

- allowance for impairment of balance sheet assets* (10,718,098) (14,096,055) - provision for off-balance sheet items (35,105) (10,841)

(10,753,203) (14,106,896)

Difference between provisions determined in accordance with the

NBS Decision and allowances for impairment in accordance with the internally adopted methodology (IAS 39) 8,848,499 8,708,010

Provisions determined in accordance with IAS 39 exceeding the amount of provision as per the NBS Decision 48,813 102,005

Total required special reserve for potential losses

8,897,312 8,810,015

Allowance for impairment and provisions calculated in accordance with the internally adopted methodology in these financial statements include allowance of impairment of classified items only.

12. STAFF COSTS


Salaries and benefits 1,995,480 2,008,591 Taxes and contributions on salaries and benefits 779,810 778,722 Other staff costs 309,653 138,852

3,084,943 2,926,165

The amount of RSD 235,453 thousand in 2010 was reclassified from Staff costs to Other operating expenses for the purpose of data comparability. The Redundancy Plan was launched in June and December 2011, which led to the decrease in number of employees by 418. The total amount paid to the employees who terminated their employment with the Bank due to redundancy or retirement totaled RSD 322,923 thousand, whereas the amount charged to the income statement as expense of the Mandatory and Voluntary Schemes was RSD 289,541 thousand.



13. DEPRECIATION AND AMORTIZATION Year Ended December 31,

2011 2010

Accumulated depreciation and amortization of: - property and equipment (Note 24) 471,089 427,839 - intangible assets (Note 24) 88,488 39,198

559,577 467,037

14. OPERATING AND OTHER EXPENSES Year Ended December 31,

2011 2010

Material 161,353 177,943 Transportation services 55,174 56,393 Telecommunications and leased lines 181,891 202,378 Maintenance costs 239,284 263,299 Rentals 400,080 471,565 Marketing campaigns, sponsorships and donations 9,436 10,018 Advertising 101,915 119,724 Other production services 260,327 273,979 Insurance of property and equipment 11,056 11,483 Insurance of deposits 200,210 192,588 Entertainment 14,364 15,943 Employee transportation to and from work 59,744 63,266 Business trip costs and per diems 33,450 49,420 Lawyer services 13,900 15,292 Security services 138,642 160,411 Taxes 302,039 351,119 Contributions 481,847 486,591 Write-off of bad debts 1,994 7,196 Losses incurred on the sale of property, equipment and

intangible assets 20,080 4,321 Other expenses 32,667 21,844

2,719,453 2,954,773



15. GAINS AND LOSSES ON THE VALUATION OF ASSETS AND LIABILTIES


Gains on the valuation of placements and receivables 50,970 175,540 Gains on the valuation of derivatives 431,949 195,998 Gains on the valuation of securities - 30,810 Gains on the valuation of liabilities 112 1,265

483,031 403,613

In 2010, the Bank reclassified gains on the valuation of assets and liabilities to foreign exchange gains in the total amount of RSD 1,281,793 thousand for the purpose of direct data comparability.

Year Ended December 31,

2011 2010

Losses on the valuation of placements and receivables 66,461 87,373 Losses on the valuation of derivatives 252,067 413,421 Losses on the valuation of securities - 5,902 Losses on the valuation of liabilities 1,037 18,868 Losses on the valuation of property, equipment,

investment property and intangible assets 1,222 -

320,787 525,564

162,244 (121,951)

In 2010, the Bank reclassified losses on the valuation of assets and liabilities to foreign exchange losses in the total amount of RSD 163,573 thousand for the purpose of direct data comparability.

16. INCOME TAXES

(a) Components of Income Taxes

Total tax benefit comprises the following tax items:


Current income tax (5,145) (2,659) Gains on created deferred tax assets and decrease in deferred

tax liabilities 264,186 53,898 Loss on decrease of deferred tax assets and created deferred tax liabilities (31,986) (10,299)

Total income taxes 227,055 40,940



16. INCOME TAXES (continued)

(b) Numerical Reconciliation of Income Tax and (Loss)/Profit Before Tax Multiplied by the

Statutory Income Tax Rate

2011 2010

Loss before taxation (1,399,702) (1,100,208)

Capital gains 102,904 53,172 Income tax at the statutory tax rate of 10% 10,290 5,317

Effects of tax credits recognized based on capital expenditures (5,145) (2,658)

Current income tax (5,145) (2,659)

Effects of temporary differences - Gains on created deferred tax assets and decrease in deferred tax liabilities 232,200 43,599

Total taxable income reported in the income statement 227,055 40,940

Effective tax rate 0% 0%

(c) Components of Deferred Tax Assets/(Liabilities)

2011 2010

Deferred tax assets Temporary differences between the net book value

of property, equipment and intangible assets calculated for book and tax purposes 66,004 82,273

Temporary differences for tax liabilities outstanding 856 564 Recognized tax credits for capital expenditures 145,535 151,188 Recognized tax losses from prior years 242,892 -

455,287 234,025

Deferred tax liabilities Temporary differences between the net book value

of property, equipment and intangible assets calculated for book and tax purposes (123,494) (130,061)

Temporary differences based on securities available for sale (1,100) (5,471)

(124,594) (135,532)

Deferred tax assets, net 330,693 98,493

The Bank recognized deferred tax assets referring to the tax losses from the prior and current years. The Bank‟s long-term business plan provides reasonable certainty as to the availability of sufficient future taxable income against which deferred tax assets could be utilized. (d) Movements in Deferred Tax Assets/(Liabilities)

The movements in deferred tax assets during the year were as follows:

2011 2010

Balance as of January 1 234,025 206,796 Effects of temporary differences credited

to the income statement 221,262 27,229

Balance as of December 31 455,287 234,025



16. INCOME TAXES (Continued)

(d) Movements in Deferred Tax Assets/(Liabilities) (Continued)

The movements in deferred tax liabilities during the year were as follows:

2011 2010

Balance as of January 1 (135,532) (151,903) Effects of temporary differences credited/

(charged) to the income statement 10,938 16,371

Balance as of December 31 (124,594) (135,532)

(e) Unrecognized Deferred Tax Assets

As of December 31, 2011, the Bank did not recognize deferred tax assets totaling RSD 472,164 thousand (December 31, 2010: RSD 576,699 thousand). Tax losses avalable for carryforward, presented in the amount of unrecognized deferred tax assets, expire in the following years:

Utilization Years

Tax Loss

Carryforwards 2011

Total 2011

Tax Loss Carryforwards

2010 Total 2010

2014 472,164 472,164 472,164 472,164 2015 - - 104,535 104,535

472,164 472,164 576,699 576,699

17. CASH AND CASH EQUIVALENTS

December 31,

2011 December 31,

2010

In Dinars

Gyro account 3,029,382 1,925,474 Cash on hand 1,302,026 1,882,152 Other cash funds - 2,004

Total 4,331,408 3,809,630

In foreign currency Current accounts with banks 3,048,862 1,071,877 Cash on hand 1,715,011 1,593,351 Other cash funds 48,671 65,136

Total 4,812,544 2,730,364

Gold and other precious metals 15,613 14,624

Gross balance as of December 31

9,159,565 6,554,618

Less: Allowance for impairment (Note 11b) (9,001) (9,064)

Balance as of December 31 9,150,564 6,545,554

The obligatory reserve in local currency – Dinars (RSD), represents the minimal reserve allocated in line with the National Bank of Serbia‟s Decision on Banks‟ Required Reserves with the National Bank of Serbia (Official Gazette of the Republic of Serbia, no. 3/2011).



17. CASH AND CASH EQUIVALENTS (Continued)

The Bank calculates required reserves against liabilities in respect of dinar deposits, credits and securities, as well as other dinar liabilities, excluding dinar deposits received under transactions performed by the Bank on behalf and for the account of third parties that are not in excess of the amount of investment made from such deposits. As an exception to the above, the Bank does not calculate required reserves against the following items: liabilities due to the National Bank of Serbia; liabilities due to banks allocating required reserves with the National Bank of Serbia; subordinated liabilities recognized by the National Bank of Serbia as eligible for inclusion into the bank‟s supplementary capital; dinar liabilities in respect of funds received by banks from international financial institutions, governments and financial institutions founded by foreign states, through the intermediation of the government as the main debtor and/or owner of these funds or received directly; dinar and foreign currency liabilities in respect of deposits, credits and other funds received from abroad from October 1, 2008 to March 31, 2010, until the originally established maturity of such liabilities, but not later than December 31, 2013; term dinar savings deposits accumulated from October 31 to November 8, 2010 - until the end of their term, provided they are not foreign currency clause-indexed.

The Bank is under obligation to calculate the required Dinar reserve based on the average daily balance of the liabilities in RSD during the preceding calendar month at the rate of 5% (2010: 5%) on the portion of the base comprised of liabilities maturing over 2 years. The calculated Dinar reserve comprises the sum of calculated required Dinar reserve based on the average daily balance of liabilities in RSD during the preceding calendar month, 15% of the RSD counter value of the Euro required reserve calculated at the rate of 30% on the portion of the foreign currency base comprised of liabilities maturing up to 2 years and 10% of the RSD counter value of the Euro required reserve calculated at the rate of 25% on the portion of the foreign currency base comprised of liabilities maturing over 2 years.

The Bank is required to allocate the obligatory reserves in Dinars to its gyro account held with the National Bank of Serbia. During the maintenance period, the Bank is obliged to keep the average daily balance of allocated dinar required reserves at the level of calculated dinar reserve requirements. The calculated obligatory reserve in Dinars for December 2011 amounted to RSD 2,875,538 thousand (December 2010: RSD 3,950,164 thousand) in compliance with the aforecited NBS Dcesion.

The average interest rate on the balance of the obligatory reserve in Dinars equalled 2.5% annually (2010: 2.5% annually). As of December 31, 2011, foreign currency accounts amounting to RSD 3,048,862 thousand mostly relate to current accounts held with the following foreign banks: Deutsche bank AG, Frankfurt, Deutsche Bank Trust Company Americas New York and Commerzbank AG, Frankfurt.

18. REVOCABLE DEPOSITS AND LOANS

December 31,

2011 December 31,

2010

Obligatory reserve with the National Bank of Serbia 16,875,211 17,235,813 Receivables from repo transactions with the

National Bank of Serbia 4,700,000

5,000,000


Receivables from repo transactions amounting to RSD 4,700,000 thousand as of December 31, 2011 relate to placements into 'reverse' purchases of treasury bills from the National Bank of Serbia with the maturity period of 2 weeks, bearing an interest at the rate of 9.75% annually.



18. REVOCABLE DEPOSITS AND LOANS (Continued)

In 2011, interest rates on repo transactions with treasury bills of the National Bank of Serbia ranged from 9.75% to 12.5% annually. Pursuant to the National Bank of Serbia‟s decision on Required Reserves of Banks held with the National Bank of Serbia (Official Gazette of the Republic of Serbia, no. 3/2011), the Bank is obliged to calculate and allocate required reserves based on liabilities on foreign currency deposits, loans and securities and other foreign currency liabilities as well as deposits, loans and other foreign currency funds received from abroad under transactions performed by the Bank on behalf and for the account of third parties. As an exception to the above, the Bank does not calculate required reserves against the following items: liabilities due to the National Bank of Serbia; liabilities due to banks allocating required reserves with the National Bank of Serbia; subordinated liabilities recognized by the National Bank of Serbia as eligible for inclusion into the bank‟s supplementary capital; foreign currency liabilities in respect of funds received by banks from international financial institutions, governments and financial institutions founded by foreign states, through the intermediation of the government as the main debtor and/or owner of these funds or received directly; foreign currency balances held by leasing companies in a special purpose account opened with a bank; foreign currency liabilities based on deposits, credits and other funds received from abroad from October 1, 2008 to March 31, 2010, until the originally established maturity of such liabilities, but not later than December 31, 2013.

The foreign currency base for calculation of the required reserve is comprised of the average daily balances of foreign currency liabilities during the preceding calendar month and average daily balances of RSD liabilities with foreign currency index clause during the preceding calendar month. The Bank is under obligation to calculate foreign currency reserve at the rate of 30% (2010: 25%) on the portion of foreign currency base liabilities with maturities up to 2 years and at the rate of 25% (2010: 25%) on the portion of foreign currency base liabilities with maturities over 2 years. The obligatory reserve is decreased by 25% of the yield on loans approved in accordance with the program of measures for mitigation of the adverse effects of global economic crisis in the Republic of Serbia in 2011 adopted by the Government. Yield on loans is provided as the positive difference between the balances of the loans as at the last date of the calendar month for which the base for calculation of the required reserve is calculated and the balances of the loans as at January 13, 2011 whereby the calculation of the yield does not include foreighn exchange effects. Starting from the accounting period from August 18 to September 17, 2011, the calculation of the yield on loans includes only loans approved from June 30, 2011 onward and only up to their orginally contracted maturities.

The calculated foreign currency reserve is the sum of 85% of the reserve calculated based on the liabilities with maturities up to 2 years and 90% of the reserve calculated based on the liabilities with maturities over 2 years. The Bank is required to allocate the obligatory reserves in foreign currency to its account held with the National Bank of Serbia. During the maintenance period, the Bank is obliged to keep the average daily balances of allocated foreign currency required reserves at the level of calculated foreign currency reserve requirements. The National Bank of Serbia does not pay interest on required reserves in foreign currency.

The Bank has to allocate the calculated leasing required reserves to foreign currency accounts of the National Bank of Serbia in Euros, and, exceptionally, if allocation of leasing required reserves causes the Bank‟s foreign exchange risk ratio to deviate from the ratio prescribed by the National Bank of Serbia‟s decision on risk management, the Bank may allocate such reserves in US dollars.



19. RECEIVABLES ARISING FROM INTEREST, FEES AND COMMISSIONS, TRADE, FAIR VALUE

ADJUSTMENTS OF DERIVATIVES AND OTHER RECEIVABLES

December 31, 2011

December 31, 2010

In Dinars Interest, fee and commission receivables: - Banks 6,859 8,044 - Enterprises 318,504 319,003 - Entrepreneurs 24,901 25,906 - Public sector 21,638 15,220 - Retail customers 100,446 107,823 - Foreign entities 165 226 - Agricultural producers 2,930 2,857 - Other customers 1,684 1,839

477,127 480,918 Trade receivables 3,097 21,327 Receivables from fair value adjustment of derivatives 59,216 116,304

539,440 618,549

In foreign currency Interest, fee and commission receivables: - Enterprises 357,189 374,454 - Entrepreneurs 1,317 616 - Foreign entities 585 358 - Other customers 289 291

359,380 375,719 Trade receivables - 15,835

359,380 391,554

Gross receivables 898,820 1,010,103

Less: Allowance for impairment (Note 11b) (624,794) (662,052)


20. LOANS AND DEPOSITS TO CUSTOMERS

(a) Summary per Type of Loans and Deposits

December 31,

2011 December 31,

2010

Loans up to one year: - in Dinars 17,439,084 18,855,379 - in foreign currency 5,852,481 8,035,824

23,291,565 26,891,203

Loans over one year: - in Dinars 28,187,556 28,371,588 - in foreign currency 6,866,829 8,261,463

35,054,385 36,633,051

Deposits: - in Dinars 115 115 - in foreign currency 1,370,796 -

1,370,911 115 Gross loans and deposits 59,716,861 63,524,369 Less: Allowance for impairment (Note 11b) (8,469,697) (11,798,873)




20. LOANS AND DEPOSITS TO CUSTOMERS (Continued)

(a) Summary per Type of Loans and Deposits (Continued)

The structure of loans and deposits per their purpose is as follows:

December 31,

2011 December 31,

2010

Loans and deposits in Dinars: - Loans per transaction accounts 1,645,354 1,478,953 - Consumer loans 723,274 1,153,259 - Loans for working capital 16,698,556 17,724,893 - Export loans 7,325 14,792 - Investment loans 3,006,777 3,123,853 - Housing loans 11,552,675 10,461,227 - Other loans 11,992,794 13,270,105

45,626,755 47,227,082

Loans and deposits in foreign currency: - Loans for payment of imported goods and services 810,194 845,868 - Overnights 345,315 - - Other loans 11,563,801 15,451,419 Deposits made 1,370,796 -

14,090,106 16,297,287

Gross loans and deposits 59,716,861 63,524,369 Less: Allowance for impairment (Note 11b) - in Dinars (4,072,034) (5,029,990) - in foreign currency (4,397,663) (6,768,883)

(8,469,697) (11,798,873)


As of December 31, 2011, loans to enterprises were primarily granted for the purposes of financing daily liquidity requirements, the acquisition of current assets, import, investments, agricultural production, processing industry, export-oriented schemes and rescheduling of previously-approved loans. Loans with up to one year maturity were approved to legal entities for the period ranging from 30 days to one year, whereas loans with over one year maturity were approved for periods from 1 to 30 years. Interest rates on short-term loans in foreign currency ranged from 3% to 12% annually. Short-term loans in Dinars accrued interest at rates ranging from 11% to 22% annually. Interest rates on long-term loans with contracted foreign currency clause ranged from 1% to 11% annually, whereas long-term loans in foreign currency accrued interest at rates ranging from 3% do 11% annually. Dinar loans were approved to a greater extent due to the clients‟ large interest in subsidized loans. As of December 31, 2011, loans and advances to retail customers were mostly granted as cash loans, overdraft loans, loans based on the use of credit cards, car loans and housing loans. Cash loans with maturities over one year were approved at annual interest rates ranging from 12.7% to 22.9%. Overdrafts on retail client current accounts were approved at annual interest rates ranging from 18% to 25% and the usage of VISA credit cards at the rate of 26% annually. Long-term housing loans have been granted at interest rates ranging from 4% + 3M EURIBOR to 5.3% + 3M EURIBOR annually.



20. LOANS AND DEPOSITS TO CUSTOMERS (Continued)

(b) Maturity Structure of Loans and Deposits

The maturities of gross loan and deposit portfolio, based on the remaining period as of the balance sheet date to the contractual maturity date, as of December 31, 2011 and 2010, were as follows:

December 31, 2011

December 31, 2010

Receivables past due 11,967,713 15,108,622 Up to 30 days 2,021,447 652,405 From 31 to 90 days 2,650,440 4,735,927 From 91 to 365 days 8,022,876 6,394,364 From 1 to 5 years 18,375,222 20,370,600 Over 5 years 16,679,163 16,262,451

59,716,861 63,524,369

The maturity structure of receivables past due is presented in the table below:

December 31,

2011 December 31,

2010

Up to 90 days 503,097 340,960 From 91 to 180 days 85,237 329,500 From 181 to 365 days 376,173 907,987 Over 1 year 11,003,206 13,530,175

11,967,713 15,108,622

(c) Industry Concentration of Loans and Deposits

As of December 31, 2011 and 2010, the gross loan portfolio is concentrated on the following sectors:

December 31, 2011

December 31, 2010

Mining, processing industry and water supply 8,597,465 11,926,773 Energy, gas, steam and air-conditioning providers 425,407 445,034 Trade 8,603,477 8,847,782 Agriculture, hunting, fishing and forestry 1,646,593 1,844,075 Civil engineering 2,162,662 2,324,874 Banks 777,810 741,039 State administration and other public institutions 5,453,773 6,417,858 Traffic, storage, accommodation and catering services and

information and communication services 2,292,007 2,019,454 Retail customers 25,617,357 26,056,781 Agricultural producers 33,278 31,653 Entrepreneurs 948,269 1,195,478 Foreign entities 2,466,726 755,338 Other 692,037 918,230

59,716,861 63,524,369



21. SECURITIES (EXCLUDING TREASURY SHARES)

December 31, 2011

December 31, 2010

In Dinars Shares of banks: - AIK banka a.d., Niš 69,811 125,953 - Agrobanka a.d., Beograd 1,269 2,773 - JUBMES banka a.d., Beograd 32,510 39,670 - Metals banka a.d., Novi Sad 344 33 - Komercijalna banka a.d., Beograd 850 1,302 - Banka Poštanska štedionica a.d., Beograd 1,208 - - OTP banka Srbija a.d. Nоvi Sad 118,157 - Shares of enterprises 311,240 11,343

Total shares (Note 36.11) 535,389 181,074

Treasury bills of the Republic of Serbia 1,281,609 1,945,576 Corporate bills of exchange 101,621 100,822

1,918,619 2,227,472

In foreign currency Foreign currency savings bonds of the Republic of Serbia 19,944 19,532 Other securities 429 363

20,373 19,895

Gross securities 1,938,992 2,247,367

Less: Allowance for impairment (58,390) (62,676)


The Bank reclassified equity investments in the amount of RSD 435,674 thousand to securities available for sale. The Bank also reclassified the amount of RSD 1,920 thousand from securities available for sale to equity investments.

As of December 31, 2011, the Bank stated loss incurred on the changes in fair value securities available for sale in the amount of RSD 54,712 thousand.

22. EQUITY INVESTMENTS (INTERESTS)

December 31, 2011

December 31, 2010

In Dinars - subsidiaries - 37,541 - associates - 21,953 - other companies 196,480 535,882 - other banks and financial institutions 35,549 200,066

232,029 795,442

In foreign currency - subsidiaries 10,441 10,527 - foreign banks and financial institutions 275,457 272,880

285,898 283,407 Gross equity investments 517,927 1,078,849 Less: Allowance for impairment (464,424) (576,126)


As of December 31, 2011, the Bank reclassified equity investment in Imos a.d. Šid in the amount of RSD 37,215 thousand (51.55% equity share) quoted in the Belgrade Stock Exchange, to securities available for sale.

As of December 31, 2011, the Bank had gross equity investments in (the former) subsidiary Novobanis, Thessaloniki in the amount of RSD 10,441 thousand (68% equity share) restated so that the net value equaled 0. The aforementioned legal entity has been stricken from the Register of Legal Entities so that the Bank will write the equity investment in full in 2012.



23. OTHER PLACEMENTS

December 31, 2011

December 31, 2010

Placements arising from payments for guarantees in Dinars or in foreign currencies 751,412 601,248

Other placements in foreign currency 745,218 737,206 Other placements in Dinars 18,169 19,369

Gross other placements 1,514,799 1,357,823

Less: Allowance for impairment (892,964) (835,633)


As of December 31, 2011, allowances for impairment of other placements mostly relate to receivables for guarantees, sureties and acceptances paid by the Bank on behalf of the following customers: ZZ Sopoćani in the amount of RSD 89,481 thousand, Vulin Comerc d.о.о., Ruma in the amount of RSD 64,884 thousand, Iнтeрпaк d.о.о., Ruma in the amount of RSD 64,446 thousand, MD d.о.о., Bogatić in the amount of RSD 44,510 thousand, ITF Communications d.о.о., Kraljevo in the amount of RSD 36,327 thousand, Istra a.d., Kula in the amount of RSD 28,258 thousand, DM Kostić Mlekara d.о.о., Šumice in the amoun tof RSD 13,133 thousand and Union Inţenjering d.о.о., InĎija in the amount of RSD 10,992 thousand.

In addition, allowances for impairment of long-term overdue placements in foreign currency relate to the following customers: Woksal a.d., Uţice in the amount of RSD 80,263 thousand, Prvi Partizan Gama a.d., Uţice in the amount of RSD 5,275 thousand and Jedinstvo ZZ Latvice in the amount of RSD 4,733 thousand. A portion of allowance for impairment amounting to RSD 250,996 thousand as of December 31, 2011 relates to the placements with the following domestic banks in bankruptcy: Jugobanka a.d. in bankruptcy, Belgrade in the amount of RSD 134,972 thousand, Beogradska banka a.d. in bankruptcy, Belgrade in the amount of RSD 59,991 thousand and Jugoslovenska izvozna i kreditna banka a.d. bankruptcy, Belgrade in the amount of RSD 49,066 thousand.



24. PROPERTY, EQUIPMENT, INVESTMENT PROPERTY AND INTANGIBLE ASSETS

Land Buildings Investment

Property Equipment

Leasehold

Improve-ments

Assets under

Construction

Total Property and

Equipment

Licenses and

Software

Intangible Assets under Development

Total Intangible

Assets

COST or REVALUED COST Balance as of January 1, 2010 517 6,927,401 268,366 1,987,010 1,123,657 312,817 10,619,768 327,147 250,568 577,715

Additions - 92,764 - 5,759 64,009 346,173 508,705 2,906 216,838 219,744 Transfer from assets under construction - 100,492 - 125,930 90,924 (226,422) 90,924 2,900 (93,824) (90,924) Reclassification - increase - 4,731 24,391 13,607 17,210 256,034 315,973 - 13,210 13,210 Reclassification - decrease - (25,390) - (23,909) - (272,154) (321,453) - (7,730) (7,730) Reclassification from foreclosed collaterals - - 2,185 - - - 2,185 - - - Transfer to small tools and fixtures - - - (2,926) - (26) (2,952) - - - Sales - (112,648) (10,818) (827) - - (124,293) - - - Surpluses - 704 - - - - 704 - - - Other movements - - - - - (14,609) (14,609) - - - Shortage and disposals - - - (314,939) (37,041) - (351,980) - (1,048) (1,048)

Balance as of December 31, 2010 517 6,988,054 284,124 1,789,705 1,258,759 401,813 10,722,972 332,953 378,014 710,967

Additions - 20,721 - 27,345 26,570 117,851 192,487 663 23,735 24,398 Transfer from assets under construction - 24,199 - 431,514 39,063 (494,810) (34) 348,856 (348,822) 34 Reclassification - increase - 19,820 6,732 22,598 1,438 281,705 332,293 - 34,031 34,031 Reclassification - decrease - (22,795) - (5,194) - (269,102) (297,091) - (46,598) (46,598) Reclassification from foreclosed collaterals - 16,214 24,947 - - - 41,161 - - - Reclassification to buildings held for sale (Note 25) - (201,236) - - - - (201,236) - - - Transfer to small tools and fixtures - - - (3,375) - - (3,375) - - - Sales - (19,123) (2,153) - - - (21,276) - - - Other movements - (295) - (22,769) 7,441 (919) (16,542) - (22,385) (22,385) Shortage and disposals - - (30,224) (145,446) (334,702) (7,869) (518,241) - - -

Balance as of December 31, 2011 517 6,825,559 283,426 2,094,378 998,569 28,669 10,231,118 682,472 17,973 700,445



24. PROPERTY, EQUIPMENT, INVESTMENT PROPERTY AND INTANGIBLE ASSETS (Continued)

Land Buildings Investment

Property Equipment

Leasehold

Improve-ments

Assets under

Construction

Total Property and

Equipment

Licenses and

Software

Intangible Assets under Development

Total Intangible

Assets

ACCUMULATED DEPRECIATION AND AMORTIZATION Balance as of January 1, 2010 - 2,532,603 101,448 1,438,366 691,144 - 4,763,561 204,824 - 204,824 Charge for the year (Note 13) - 98,164 3,657 168,511 157,507 - 427,839 39,198 - 39,198 Reclassification - increase - 2 7,456 11,470 9,164 - 28,092 - - - Reclassification - decrease - (7,458) - (20,634) - - (28,092) - - - Sales - (63,474) (7,873) (827) - - (72,174) - - - Transfer to small tools and fixtures - - - (2,713) - - (2,713) - - - Shortage and disposals - - - (314,193) (35,198) - (349,391) - - -

Balance as of December 31, 2010 - 2,559,837 104,688 1,279,980 822,617 - 4,767,122 244,022 - 244,022

Charge for the year (Note 13) - 99,043 4,453 213,871 153,722 - 471,089 88,488 - 88,488 Reclassification - increase - 7,574 155 21,675 1,440 - 30,844 4,726 - 4,726 Reclassification - decrease - (155) - (26,842) - - (26,997) (4,726) - (4,726) Sales - (53,274) - - - - (53,274) - - - Transfer to small tools and fixtures - (8,001) (1,078) - - - (9,079) - - - Charge for the year (Note 13) - - - (3,093) - - (3,093) - - - Other movements - (3,866) - - - - (3,866) - - - Shortage and disposals - - (30,224) (143,369) (325,426) - (499,019) - - -

Balance as of December 31, 2011 - 2,601,158 77,994 1,342,222 652,353 - 4,673,727 332,510 - 332,510

Net book value: - as of December 31, 2011 517 4,224,401 205,432 752,156 346,216 28,669 5,557,391 349,962 17,974 367,935

- as of December 31, 2010 517 4,428,217 179,436 509,725 436,142 401,813 5,955,850 88,931 378,015 466,946



24. PROPERTY, EQUIPMENT, INVESTMENT PROPERTY AND INTANGIBLE ASSETS (Continued)

Decrease in the net book value of buildings refers to the sales of business premises located in: Kosjerić (business premises of the net book value of RSD 1,371 thousand and an area of 105 square meters), Bačko Petrovo Selo (business premises of the net book value of RSD 921 thousand and an area of 40 square meters), Zrenanin (business premises of the net book value of RSD 1,688 thousand and an area of 59 square meters) and Uţice (business premises of the net book value of RSD 7,162 thousand and an area 66 square meters).

Decrease in the net book value of investment property refers to the sales of business premises located in Novo Selo as follows: business premises of the net book value of RSD 926 thousand and an area of 42 square meters, business premises – container of the net book value of RSD 106 thousand and business premises – container of the net book value of RSD 43 thousand. As of December 31, 2011, the Bank realized gains on the aforedescribed sales of RSD 20,997 thousand (Note 10).

None of the Bank's buildings has been assigned under mortgage to collateralize the settlement of the Bank's liabilities arising from borrowings.

Due to incomplete Cadaster books the Bank did not have title deeds for buildings with the net book value of RSD 266,248 thousand as of December 31, 2011 (December 31, 2010: RSD 449,870 thousand). The Bank‟s management is taking the necessary measures in order to obtain title deeds.

As of December 31, 2011, the net book value of the equipment (vehicles) under finance lease arrangements amounted to RSD 52,613 thousand (December 31, 2010: RSD 35,481 thousand).

Investment property is comprised of buildings leased out for rental income.

The Bank‟s management concluded that there were no indications of impairment in property, equipment, investment property and intangible assets as of December 31, 2011.

25. ASSETS HELD FOR SALE

Item Address Area (m

2)

Transfer Date

Net Book Value

December 31, 2011

Building Podgorica, Cetinjski put bb/24 946

Sep-19-2011

70,646

Building Senta, Jovana Djordjevića 1 727

Sep-19-2011

15,441 Building Kula, Maršala Tita 262 127

Sep-19-2011

11,524

Building Sremska Mitrovica, Svetog Dimitrija 1 283

Sep-19-2011

7,068

Other property held for sale 2,036

50,817

4,119

155,496

From 2011, the Bank commenced classification of property as property held for sale.

During 2011, the Bank reclassified 27 buildings of the net book value of RSD 147,962 thousand (Note 24) from property and equipment and 3 buildings of the net book value of RSD 9,641thousand (Note 26) from foreclosed collaterals to assets held for sale. During the year 3 buildings were sold of the net book value of RSD 2,107 thousand. Other property held for sale is comprised of 23 facilities, mostly buildings, business premises and garages.



26. OTHER ASSETS

December 31, 2011

December 31, 2010

Advances, deposits and retainers: - in Dinars 35,526 63,579 - in foreign currency 16,403 18,372 Receivables for overpaid taxes and contributions 245,304 250,148 Receivables from employees: - in Dinars 32,190 10,413 - in foreign currency 1,526 1,080 Other receivables from operations: - in Dinars 258,954 376,979 - in foreign currency 65,414 61,002 Suspense and temporary accounts 114,584 (3,187) Receivables in settlement: - in Dinars 1,745 243 - in foreign currency 816 843 Foreclosed collaterals 98,223 136,366 Inventories of small tools and office supplies 32,998 31,551 Accrued interest income: - in Dinars 297,208 260,703 - in foreign currency 22,398 21,827 Deferred interest expense in foreign currency 60,818 - Deferred other expenses 118,224 56,137 Other prepayments 11,049 53,040

Gross other assets 1,413,380 1,339,096 Less: Allowance for impairment (245,175) (174,213)

Balance as of December 31

1,168,205 1,164,883

As of December 31, 2011, assets obtained through foreclosure include commercial buildings, residential buildings and land and equipment. The most significant amounts are presented in the table below:

Item Address Client

Agreement

Area (m2)

Date of Acquisition

Net Book Value

Business premises

Nоvi Sad, Bulevar oslobоĎenja 5

Vobex d.о.о., Nоvi Sad

03.1-14/2002 dated July 17, 2002

399

July 22, 2010

43,000

House with a garage

Beograd, Čika Miše Djurića 49

Drvopak d.о.о., Beograd

200-170/04 dated June 28, 2004

173

August 4, 2011

7,522

Commercial building

Smederevska Palanka, Palanačke čete 27/6 ĐurĎevdan 229

61/95 dated June 30, 1995

148

October 16, 2002

3,693

Commercial building

Kosjerići, Selo Makovište Company Dudić

1200/1 dated December 1,1994

523

September 28, 2001

3,375

Other assets acquired through foreclosure of collaterals

148,214

35,736

149,457

93,326

Other assets acquired through foreclosure of collaterals mostly comprise agricultural and industrial land, meadows, fields and pastures of the total area of 107,567 square meters and the total net book value of RSD 3,549 thousand, orchards of the total area of 16,453 square meters and the total net book value of RSD 1,493 thousand and forests of the total area of 15,749 square meters and the total net book value of RSD 1,158 thousand. In the course of 2011, the Bank reclassified 11 facilities of the net book value of RSD 41,161 thousand (Note 24) from foreclosed collaterals to property, equipment and investment property, while 3 facilities of the net book value of RSD 9,641 thousand (Note 25) were reclassified to assets held for sale.



27. TRANSACTION DEPOSITS

2011 2010

In RSD In foreign Currency Total In RSD

In foreign Currency Total

Banks and financial sector 767,581 61,450 829,031 557,089 30,317 587,406

Enterprises 4,728,265 2,584,490 7,312,755 5,414,778 3,625,036 9,039,814 Public sector 528 63,557 64,085 173 32,995 33,168 Entrepreneurs 888,367 97,666 986,033 844,934 94,931 939,865 Retail customers 2,527,788 504,393 3,032,181 2,016,235 513,001 2,529,236 Agricultural producers 307,640 400 308,040 208,044 1,022 209,066 Foreign entities 69,493 179,920 249,413 36,365 198,185 234,550 Other customers 1,398,362 371,865 1,770,227 1,292,175 226,190 1,518,365

Balance as of December 31 10,688,024 3,863,741 14,551,765 10,369,793 4,721,677 15,091,470

Demand deposits in Dinars mostly consist of balances on current accounts of enterprises, entrepreneurs and retail customers held with the Bank. Demand deposits of enterprises and entrepreneurs (excluding banks) in Dinars and in foreign currency are mostly non-interest bearing, except for the special arrangements defined by individual contracts with very important customers. In most cases, when contracting special arrangements, the Bank links the interest rates to the NBS reference interest rate. Exceptions include deposits in Dinars of the Republic of Serbia‟s budget beneficiaries, organizations of mandatory social security and local authorities, bearing interest at the rate which cannot go below the National Bank of Serbia current discount rate, and demand deposits of the clients within competence of the Republic of Serbia Privatization Agency, whereto the Bank paid interest at the annual rates ranging from 8.7% to 11.25% depending on the NBS reference interest rate. Retail customers‟ current accounts in Dinars are non-interest bearing while the foreign currency current accounts accrued interest ranging from 0.1% to 0.75% annually up to July 28, 2011, when the Bank ceased to pay interest on foreign currency current accounts Sight deposits of retail customers in foreign currency earned interest at rates generally ranging from 0.5% to 3% annually, depending on the currency. Subsequently, interest was calculated at rates ranging from 0.0% to 0.8% annually.

As of December 31, 2011, the major corporate depositors of the Bank were Telekom Srbija a.d., Belgrade, Bailo d.o.o., Novi Sad, Sokoj - the music authors‟ organization, АMS Osiguranje a.d., Beograd and Elektrovојvоdina d.о.о., Nоvi Sad, representing in total 18.18% of transaction deposits at the balance sheet date.



28. OTHER DEPOSITS

The structure of other deposits per maturities oustanding is presented in the table below:

2011 2010

Short-Term Long-Term Total Short-Term Long-Term Total

In Dinars Savings deposits 826,596 828 827,424 499,211 5,075 504,286 Specific purpose

deposits 244,067 1,977 246,044 199,647 455 200,102 Other deposits 4,583,360 25,968 4,609,328 4,377,661 22,617 4,400,278

5,654,023 28,773 5,682,796 5,076,519 28,147 5,104,666

In foreign currency Savings deposits 38,623,152 15,505 38,638,657 32,369,776 33,832 32,403,608 Specific purpose

deposits 628,461 38,778 667,239 670,380 19,931 690,311 Other deposits 4,098,267 1,090,530 5,188,797 12,564,388 1,844,924 14,409,312

43,349,880 1,144,813 44,494,693 45,604,544 1,898,687 47,503,231

Balance as of December 31 49,003,903 1,173,586 50,177,489 50,681,063 1,926,834 52,607,897

Short-term deposits from domestic banks in Dinars were deposited for the period up to three months at interest rates mostly ranging from 8% to 15% annually.

General purpose time deposits of enterprises and entrepreneurs in Dinars earned interest at rates depending on periods and the amounts of deposited funds. Upon the initiative of the Bank's Financial Market Department, interest rates on general purpose Dinar deposits are adjusted to NBS reference interest rate movements, and, during 2011, they ranged from 6% to 12.8% annually. Exceptionally, an interest rate might be out of the aforesaid range in case of special arrangements. General purpose time deposits of enterprises and entrepreneurs in foreign currency earned interest at rates depending on the amount and the period the funds have been deposited for. Interest rates on deposits in EUR (or in dinars with foreign currency clause index to EUR) ranged from 2.5% to 3.7% annually, and annual interest rates on deposits in USD ranged from 1.7% to 2.6%. Exceptionally, an interest rate might be out of the aforesaid range in case of special arrangements. Short-term deposits of retail customers denominated in foreign currencies earned interest at rates ranging from 1.35% to 6.5% annually, depending on the currency. Long-term deposits of retail customers denominated in foreign currencies earned interest at rates ranging from 2.25% to 4.16% annually. As of December 31, 2011, the major depositors of the Bank were National Bank of Greece S.A. London, NIS a.d., Nоvi Sad, NBG Leasing d.о.о., Beograd, JP Elektromreţa Srbiјe and Galenika Fitofarmacija a.d., Zemun, accounting for 10.49% of the outstanding balance of other deposits at the balance sheet date.



28. OTHER DEPOSITS (Continued)

The structure of other deposits by customer type is presented in the table below:

December 31, 2011

December 31, 2010

Banks 749,133 1,674,494 Enterprises 5,839,540 8,983,727 Public sector 73,854 120,998 Entrepreneurs 73,538 18,849 Retail customers 39,737,978 34,081,759 Agricultural producers 264 754 Foreign entities 3,559,624 7,406,424 Other customers 143,558 320,892


29. BORROWINGS

December 31, 2011

December 31, 2010

Short-term borrowings: - in Dinars 68,218 83,177 - in foreign currency - 58,013

68,218 141,190

Long-term borrowings: - in Dinars - 22,199 - in foreign currency 5,232,045 -

5,232,045 22,199

Other financial liabilities: - in Dinars 5,648 5,708 - in foreign currency 141,907 248,661

147,555 254,369

Balance as of December 31 5,447,818 417,758

The liabilities arising from long-term borrowings totaling EUR 50,000,000 (RSD 5,232,045 thousand) relate to the first tranche of the loan extended by the European Bank for Restoration and Development (EBRD) in the total amount of EUR 100,000,000. The interest rate on the approved loan equals six-month EURIBOR increased by 2.5% mark-up. The funds obtained from this loan are used for the purpose of financing fixed and current assets of small, medium and large enterprises. The repayment is due in August 2015.

The structure of borrowings and other financial liabilties by customer type is presented in the table below:

December 31, 2011

December 31, 2010

Banks 59,357 69,679 Foreign entities 5,288,627 112,646 Public sector 62,790 88,677 Retail customers 9,583 142,596 Enterprises 24,333 1,007 Other customers 3,128 3,153

Balance as of December 31 5,447,818 417,758



30. INTEREST, FEE AND COMMISSION PAYABLES AND CHANGE IN VALUE OF DERIVATIVES

December 31, 2011

December 31, 2010

In Dinars Interest, fee and commission payable: - Banks 1,688 2,077 - Other customers - 10 - Enterprises - 10,879 - Public sector 18 18 - Foreign entities - 37

1,706 13,021 Liabilities arising from changes in the value of derivatives 135,763 372,733

137,469 385,754

In foreign currency Interest, fee and commission payable: - Foreign entities 446 78

446 78


31. PROVISIONS

December 31, 2011

December 31, 2010

Provisions for off-balance sheet items 35,105 10,841 Provision for retirement benefits (a) 184,656 161,975 Provision for litigations (b) 310,705 321,047


(a) Provisions for retirement benefits have been recognized in the Bank‟s financial statements on the

basis of an independent actuary‟s report as of December 31, 2011, and are stated in the amount of present value of the estimated future payments. When determining the present value of expected cash outflows, the Bank used assumptions disclosed in Note 3.20 b.

(b) The Bank made a provision for legal claims filed against the Bank, for which the Bank's Legal

Department expects a negative outcome (see Note 37b).



31. PROVISIONS (Continued)

The movements in provisions during the year were as follows:

December 31, 2011

December 31, 2010

Provisions for off-balance sheet items Balance at the beginning of the year 10,841 29,612 Charge for the year (Note 11a) 35,105 9,061 Reversal of provisions (Note 11a) (10,841) (27,832)

Balance at the year end 35,105 10,841

Provisions for retirement benefits Balance at the beginning of the year 161,975 267,293 Payments for early retirement and redundancy layoffs (322,923) (289,273) Charge for the year (Note 11a) 56,063 49,997 Retirement expense for mandatory and voluntary departure from

the Bank 289,541 133,958


Provisions for litigations Balance at the beginning of the year 321,047 411,908 Reversal of provisions (Note 11a) (11) (29,635) Payments during the year (10,331) (61,226)


Other provisions for liabilities Balance at the beginning of the year - 83,213 Reversal of provisions (Note 11a) - (83,213)

Balance at the year end - -


(c) The Redundancy Plan was launched in June and December 2011, which led to the decrease in number of employees by 418. The total amount paid to the employees who terminated their employment with the Bank due to redundancy or retirement totaled RSD 322,923 thousand, whereas the amount charged to the income statement as expense of the Mandatory and Voluntary Schemes was 289,541 thousand.



32. OTHER LIABILITIES

December 31, 2011

December 31, 2010

Net salaries and benefits 132,938 23,957 Taxes and contributions payable 52,016 8,794 Advances, deposits and retainers received: - in Dinars 7,953 8,221 - in foreign currency 8,726 10,924 Accounts payable: - in Dinars 97,598 174,381 - in foreign currency 81,986 83,972 Finance lease liabilities 32,866 25,713 Other liabilities: - in Dinars 204,027 325,654 - in foreign currency 25,900 69,049 Accrued interest expense: - in Dinars 50,238 51,753 - in foreign currency 413,834 344,032 Other accrued expenses in Dinars 56,533 18,655 Deferred interest income: - in Dinars 228,169 201,983 - in foreign currency 454 458 Deferred loan, guarantee and letter of credit origination fees 67,804 102,359 Other accruals: - in Dinars 6,753 7,115 - in foreign currency 2,804 2,890


33. EQUITY

(a) Equity Structure

The Bank‟s equity structure is presented in the table below:

December 31, 2011

December 31, 2010

Share and other capital 16,337,550 16,337,550 Reserves from profit 3,188,768 3,188,768 Revaluation reserves 1,523,720 1,622,300 Unrealized losses on securities available for sale (54,712) - Retained earnings 198,961 1,192,563 Loss for the year (1,172,647) (1,059,268)


As of December 31, 2011, share capital of the Bank comprised 1,633,743 common shares, with nominal value of RSD 10,000 per share. The Bank‟s shareholders are entitled to take part in the Bank‟s decision-making commensurately with their interest in the total amount of the Bank‟s common shares, in the distribution of profit, priority purchase rights of shares from subsequent issuances, priority collection rights in the event of the Bank‟s bankruptcy or liquidation.



33. EQUITY (Continued)

(a) Equity Structure (Continued)

In December 2006, in accordance with the terms of the Agreement on the Purchase and Sale of Share Capital, the National Bank of Greece, Athens became the major owner of the Bank‟s through the acquisition of an equity interest of 99.43%. The aforementioned acquisition was duly registered with the Central Securities Depository and Clearing House on December 12, 2006. Pursuant to the Articles of Incorporation no. 1.0-10340/2 and Decision on Increase in Capital no. 1.0-10340/3 dated November 29, 2007, the share capital of the Bank increased through the issue of 410,000 common shares with the individual par value of RSD 10,000. The National Bank of Greece, Athens purchased the entire share issue, and thereby became the sole owner of the Bank.

In accordance with the Decision issued by the Bank‟s Assembly dated January 3, 2008, the Bank enacted a Decision on the Merger of Vojvodjanska banka a.d. Novi Sad with the National Bank of Greece a.d. Beograd, in effect from December 31, 2007. The aforementioned merger was registered with the Serbian Business Registers Agency on 14 February 2008 under the registry number BD 6190/2008 (removal of the business entity “National Bank of Greece a.d. Beograd” as the acquired bank due to a merger) and the change in the core capital of Vojvodjanska banka a.d. Novi Sad was inscribed based on the Decision numbered BD 6210/2008. The National Bank of Greece a.d. Beograd was fully owned by the National Bank of Greece, Athens.

Pursuant to the aforesaid Decision dated 3 January 2008, enacted by the Bank‟s Assembly, the Bank‟s capital increased through the issue of shares without public offer for the amount of RSD 7,419,535 thousand (741,953 ordinary shares with the individual par value of RSD 10,000), i.e., in the amount equal to the share capital of the National Bank of Greece a.d. Beograd. Vojvodjanska banka a.d. Novi Sad is the legal successor of all rights and liabilities of the National Bank of Greece a.d. Beograd existing before the merger date, i.e., December 31, 2007.

(b) Bank Performance Ratios – Regulatory Compliance

The Bank is obliged to reconcile the scope and the structure of its operations and risk-weighted placements with the performance indicators prescribed by the Law on Banks and the relevant decisions of the National Bank of Serbia enacted on the basis of the aforementioned Law.

As of December 31, 2011, the Bank was in compliance with all prescribed performance indicators.

The Bank‟s performance ratios as of December 31, 2011 were as follows:

Performance ratios Prescribed Realized

1. Capital Minimum EUR 10 million

EUR 99,205,120

2. Capital adequacy ratio Minimum 12% 23.00% 3. Investment indicator Maximum 60% 54.44% 4. Related party exposure Maximum 20% 19.66% 5. Proportion between aggregate large exposures

and capital

Maximum 400%

72.53% 6. Monthly liquidity ratios:

- in the first month of the reporting period Minimum 1 1.23 - in the second month of the reporting period Minimum 1 2.11 - in the third month of the reporting period Minimum 1 2.44 7. Foreign exchange risk ratio Maximum 20% 9.87% 8. Exposure to a single party or a group of related

parties

Maximum 25%

23.40% 9. Exposure to an entity related to the Bank Maximum 5% 4.59% 10. Bank's investments in legal entities outside the

financial sector

Maximum 10%

2.88%

As of December 31, 2011, the Bank had large loans that exceed 10% of its capital, approved to the companies Eko Serbia a.d. Beograd (14.76% of the Bank‟s capital), JP Srbijagas, Nоvi Sad (14.89% of the Bank‟s capital), Naftna Industrija Srbije a.d., Nоvi Sad (23.40% of the Bank‟s capital) and NBG Group (19.48% of the Bank‟s capital).



34. OFF-BALANCE SHEET ITEMS

December 31, 2011

December 31, 2010

Managed funds (a) 550,371 667,904 Guarantees and other irrevocable commitments (b) 7,093,208 7,505,532 Received sureties for liabilities (c) 109,195,195 96,714,391 Derivatives (d) 33,650,599 33,476,875 Other off-balance sheet items (e) 63,039,942 61,790,082


(a) Managed Funds

December 31, 2011

December 31, 2010

Funds managed for the account and on behalf of third parties: - in Dinars 481,695 596,017 - in foreign currency 68,676 71,887


As of December 31, 2011 and 2010, managed funds mainly relate to funds received from the public sector customers and entrusted to the Bank‟s management. Managed funds primarily include loans for the Economic Recovery of Serbia, loans of the Republic of Serbia Development Fund for financing registered agricultural farms, loans granted from the funds of the Ministry of Agriculture, Forestry and Water Management and loans that companies extend to their employees or other companies through the Bank as an agent. The Bank charges fees for the services provided.

(b) Guarantees and Other Irrevocable Commitments

December 31, 2011

December 31, 2010

Guarantees and other sureties: - in Dinars 844,299 1,740,006 - in foreign currency 548,883 739,935

1,393,182 2,479,941

Irrevocable commitments for undrawn credit facilities:

- in Dinars 2,981,942 4,328,543 - in foreign currency 2,429,015 44,051

5,410,957 4,372,594

Other irrevocable commitments: - in Dinars 5,802 6,956 - in foreign currency 66,598 429,190

72,400 436,146

Guarantees and other irrevocable commitments which are classified in accordance with the NBS Decision on the Classification 6,876,539 7,288,681

Assets standing collateral for liabilities 216,669 216,851


7,093,208 7,505,532

Irrevocable committments relate to undrawn loans approved that cannot be cancelled unilaterally, such as: overdrafts, revolving loans to enterprises, multi-purpose frame loans and other irrevocable committments. Irrevocable committments usually have fixed expiry dates or other stipulations with respect to expiry dates.



34. OFF-BALANCE SHEET ITEMS (Continued)

(b) Guarantees and Other Irrevocable Commitments (Continued)

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

As disclosed in Note 31 to the financial statements, aas of December 31, 2010, provisions for guarantees and other irrevocable commitments amounted to RSD 35,105 thousand (december 31, 2010: RSD 10,841 thousand).

(c) Received sureties for liabilities

December 31, 2011

December 31, 2010

Sureties for liabilities:

- in Dinars 14,306,764 30,520,130 - in foreign currency 94,873,490 66,189,135 Securities received as pledge 14,941 5,126


109,195,195 96,714,391

(d) Derivatives

December 31, 2011

December 31, 2010

Receivables from currency swaps (nominal amount – purchase of EUR) 18,749,051 21,814,041

Receivables from currency swaps (nominal amount – purchase of RSD) 10,056,864

2,435,541

Receivables from currency swaps (nominal amount – sale of EUR) - 9,227,293

Receivables from currency swaps (nominal amount – sale of USD) 2,849,242

-

Receivables from currency swaps (nominal amount – sale of RSD) 1,995,442

-


(e) Other Off-balance Sheet Items

December 31, 2011

December 31, 2010

Suspended interest receivable 6,274,181 7,794,353 Revocable commitments for undrawn loans and placements 7,705,307 1,092,654 Other off-balance sheet items 49,060,454 52,903,075


Other off-balance sheet items as of December 31, 2011 mostly comprised placements in respect of receivables for cross border loans where the Bank was administrator in the amount of RSD 36,301,781 thousand (December 31, 2010: RSD 21,312,139 thousand), placements in respect of purchase and sale of foreign currency in the amount of RSD 5,819,304 thousand (December 31, 2010: RSD 18,148,619 thousand) and contractually defined credit limit amounting to RSD 5,232,045 thousand (December 31, 2010: RSD 10,549,820 thousand). The aforementioned credit limit relates to the agreement entered into with EBRD on December 3, 2010 in the amount of EUR 100,000,000.00 (RSD 10,549,820 thousand). The Bank withdrew 50% of the funds in accordance with the loan agreement entered into with EBRD, which at December 31, 2011 amounted to RSD 5,232,045 thousand (Note 29).



35. RELATED PARTY DISCLOSURES

A number of banking transactions are entered into with shareholders, subsidiaries and other related parties from the NBG Group in the regular course of business. These transactions are carried out on commercial terms and conditions and at market rates. (a) Outstanding balances of receivables and payables as of December 31, 2011 and 2010, resulting

from the Bank‟s related party transactions are summarized below:

Related party Type of transaction December 31,

2011 December 31,

2010

IMOS a.d., Sid – equity interest of 51.55% Transaction deposits (1,276) (2,473) Other deposits (9,000) (6,000) Deferred interest payables (133) (75) Deferred interest income (7) - Fee and commission receivables - 3

Net payables (10,416) (8,545)

National Bank of Greece S.A. Athens Current foreign currency account 47,387 57,097 Special accounts for securities 35,444 - Derivatives – assets - 107,761 Deposits made 345,315 - Interest receivables 7 - Derivatives – liabilities (9,532) (263,309) Other receivables - 29 Transaction deposits (49,472) (43,242) Short-term deposits - (3,059,448) Other payables - (3,116)

Net receivables/(payables) 369,149 (3,204,228)

NBG Leasing d.о.о. Beograd Loans 88,000 - Transaction deposits (38,759) (17,765) Short-term deposits (444) (293,285) Other deposits (415,000) (466,031) Finance lease liabilities (32,767) (25,713) Other payables (59) (50)

Net payables (399,029) (802,844)

NBG Services Beograd Loans - 16,000 Receivables for interest on loans - 14 Transaction deposits (27,025) (23,931) Short-term deposits (67,000) (31,649) Other payables (249) (40)

Net payables (94,274) (39,606)



35. RELATED PARTY DISCLOSURES (Continued)

(a) Receivables and Payables (Continued)

Related party Type of transaction December 31,

2011 December 31,

2010

National Bank of Greece S.A. London

Current foreign currency account

128,584 58,479

Other receivables - 105,739 Short-term deposits (2,197,459) (2,215,462) Other payables (40,919) (9,586)

Net payables (2,109,794) (2,060,830)

Ethnoplan S.A. Greece

Accounts payable

(20,928) (21,100)

Net payables (20,928) (21,100)

Banca Romaneasca S.A. Deposits made 470,884 -

Interest receivables 5,239 -

Net receivables 476,123 -

NBG Cyprus LTD Deposits made 449,956 -

Interest receivables 225 -


NBG Malta LTD Deposits made 449,956 -

Interest receivables 225 -


Total net payables (888,807) (6,137,153)

(b) The following table summarizes total income and expenses arising from related party transactions

realized during the years ended December 31, 2011 and 2010:

December 31, 2011

December 31, 2010

Interest income 13,593 1,316 Interest expense (231,096) (179,728) Fee and commission income 6,847 4,048 Fee and commission expense (445) (673) Other income 171 - Other expenses (595) (88)

Net expenses (211,525) (175,125)



35. RELATED PARTY DISCLOSURES (Continued)

(c) Remunerations to the Executive Board‟s members and the Board of Directors‟ members (stated in

gross amounts), during 2011 and 2010, are presented in the table below:

December 31, 2011

December 31, 2010

Salaries and benefits of the Executive Board‟s members 73,911 57,991 Remunerations to the members of the Board of Directors 7,853 8,457

Total 81,764 66,448

36. RISK MANAGEMENT

36.1. Introduction

The Risk Management Division in the Bank consists of two functions and sectors beneath them: - Risk Management Function (market risk management; operational risk management риzиком и

Basel II and risk transformation); - Credit Risk Function (portfolio and classification management; credit models; corporate credit risk;

retail credit risk).

With the support of the NBG Group Risk Management Authorities, the Bank established a strong Risk Management Function in line with the Group principles, with the following overall objectives:

To establish a set of fundamental standards for risk management across the Bank so as to maximize earnings potential and provide returns to shareholders;

To support the Bank‟s business strategy by ensuring that business objectives are pursued in a risk-controlled manner in order to preserve earnings stability by protecting against unforeseen losses;

To improve the usage and allocation of capital and to enhance risk adjusted return on capital by incorporating risks into business performance measures;

To support decision making processes by providing necessary and reasonable risk related estimates;

To ensure consistency with the best practices and compliance with local regulatory, quantitative and qualitative requirements;

To ensure the cost-effectiveness of risk management by reducing overlaps and avoiding inappropriate, excessive or obsolete policies, processes, methodologies, models, controls and systems.

The Bank distinguishes the two main types of losses:

Expected loss – is the amount expected to be lost on average within a given period of time (e.g.

one year) and is considered as a standard cost of doing business which is provided for and taken into account in the pricing of products.

Unexpected loss – is the statistically estimated loss at a given certainty level (e.g. 99.9%)

associated with adverse events and is considered to be the risk of doing business. Capital typically serves as a buffer absorbing such losses.

The Bank acknowledges the following major types of banking risks arising from its activities:



36. RISK MANAGEMENT (Continued) 36.1. Introduction (Continued)

Credit Risk

Credit risk – the current or prospective risk of adverse effects to earnings and capital arising from credit beneficiary‟s failure to discharge contractual obligations to the Bank or otherwise fail to perform as agreed. Pre-settlement risk - the current or prospective risk of adverse effects to earnings and capital arising from a counterparty‟s default on off-balance sheet products, where the credit equivalent exposure reflects both the current replacement cost (marked to market) of the product plus an estimate of the Bank‟s potential future credit exposure from the product as a result of prevailing market prices.

Settlement risk - the current or prospective risk of adverse effects to earnings and capital arising from a

counterparty‟s default on transactions in the process of being settled and where the sold asset or cash has been delivered to the counterparty but the purchased asset or cash has not yet been received in return as expected.

Residual risk - the current or prospective risk of adverse effects to earnings and capital arising from the fact that recognized risk measurement and mitigation techniques used (e.g. collaterals, guarantees, netting agreements), prove less effective than expected.

Market Risk – the current or prospective risk of adverse effects to earnings and capital arising from

adverse changes in market prices of bonds, shares, trading commodity and derivatives in the trading book. This risk arises in market making, dealing, and position taking activities. This risk comprises:

Equity instruments investment risk - the current or prospective risk of adverse effects to earnings and

capital arising from changes in the direction or volatility of equity instruments/equity derivatives prices indices or changes in the relationship between different equity instruments/equity derivatives prices indices.

Foreign exchange risk - the current or prospective risk of adverse effects to earnings and capital arising from movements in spot and forward currency exchange rates in the banking book and the trading book.

Interest rate risk - the current or prospective risk of adverse effects to earnings and capital arising from changes in the direction or volatility of interest rates/interest rate derivatives, the shape of the yield curve and the spread between different interest rates that affect the trading book positions.

Commodity risk - the current or prospective risk of adverse effects to earnings and capital arising from changes in the direction or volatility of commodity/commodity derivative prices, the spread between spot and forward commodity prices and the relationship between different commodity/commodity derivatives prices.

Furthermore, market risks include: Underwriting risk – the current or prospective risk of adverse effects to earnings and capital arising

from underwriting commitments in the trading book on bonds, equity investments or other securities.

Market liquidity risk – refers to market positions, which cannot be sold within a desired time period or only at a discount. Such are the cases of securities/derivatives in illiquid markets, or when large positions that cannot be sold easily are held.



36. RISK MANAGEMENT (Continued)

36.1. Introduction (Continued)

Operational risk – the risk of adverse effects on the Bank‟s financial result and capital due to failures in

performance of system failure, human errors, frauds or unforeseen external events. This definition specifies the broad categories of operational risk sources and in particular:

Processes – refers to losses that have been incurred due to a deficiency in an existing procedure, or the absence of procedure documentation. Losses in this category can result from human error or failure to follow an existing procedure. Process-related losses are unintentional.

People – refers to losses associated with intentional violation of internal policies by current or former employees. In some specific cases, the risk extends to people who are being considered for employment.

Systems – reflects losses that are caused by breakdowns in existing systems or technology (IT risk falls in this category). Losses in this category are unintentional. If intentional technology-related losses occur, they would be categorized in either the People or External events.

External events – reflects losses occurring as a result of natural or man-made forces, or the direct result of a third party action.

IT risk is considered as a subcategory of operational risk, defined as the current or prospective risk of

adverse effects to earnings and capital arising from inadequate information technology and processing in terms of manageability, exclusivity, integrity, controllability and continuity, or arising from an inadequate IT strategy and policy or from inadequate use of the entity‟s information technology. Legal and compliance risk is considered as a subcategory of operational risk, defined as the current or prospective risk of adverse effects to earnings and capital arising from violations or non-compliance with laws, rules, regulations, agreements, prescribed practices, or ethical standards.

Liquidity risk – the current or prospective risk of adverse effects to earnings and capital arising from

the entity‟s inability to meet its liabilities when due without incurring unacceptable losses. The definition of liquidity risk includes: Term liquidity and withdrawal/call risk – reflects the potential mismatch of payment obligations to

incoming payments, taking into account unexpected delays in repayments (term liquidity risk) or unexpectedly high payment outflows (withdrawal/call risk).

Structural liquidity risk (funding liquidity risks) – refers to the cost of liquidity for the purpose of

closing liquidity gaps, which would change if refinancing becomes more expensive due to a decline in the Bank‟s creditworthiness, or adverse market conditions. Concentration risk – It is acknowledged that the key source of concentration risk is credit concentration risk, which is the current or prospective risk of adverse effects to earnings and capital

arising from excessive exposure places with one counterparty or group of related counterparties whose likelihood of default is driven by common underlying factors, e.g. economic sector, industry, geographical location, collateral type. Concentration risk refers both to banking and trading book exposures. Concentration risk can also arise in other risk types, such as:

Liquidity concentration risk – relates to funding liquidity risk and arises from the existence of a limited

number of funding sources.

Market concentration risk – arises from excessive exposure to specific market risk factors (stock prices/indices, foreign exchange and interest rates).




36.1. Introduction (Continued)

Country risk - the current or prospective risk of adverse effects to earnings and capital, caused by events in a particular country which are at least to some extent under the control of the government but definitely not under the control of a private enterprise or individual. Possible events include deterioration of economic conditions, political and social upheaval, nationalization and expropriation of assets and disruptive currency depreciation or devaluation. This definition includes all forms of cross-border lending in a country whether to the government, a bank, a private enterprise or an individual. It also includes:

Sovereign risk, where the government of a certain country cannot service its own debt because it does

not have the required amount of foreign currency or is unwilling to service its debts or enters in renegotiation and rescheduling schemes or any other form of technical default. Country risk assessment does not only involve an assessment of willingness of the state to fulfill its obligations, as other factors can also cause losses. In practice, sovereign risk and country risk are highly correlated, considering that the government is the major factor in sovereign and country risk affairs. Transfer risk is defined as the inability of private companies or individuals to fulfill their obligations due to government actions. One example of a transfer risk is when the government imposes prohibitive exchange restrictions, which may make it impossible for private agents to transfer payments.

Convertibility risk is defined as the inability of private companies or individuals to fulfill their obligations

due to government/central bank actions. One example of a convertibility risk is when the central bank imposes prohibitive foreign exchange controls, which may make it impossible for private agents to convert local to foreign currency payments and vice versa. Finally, the Bank further acknowledges:

Strategic risk - the current or prospective risk of adverse effects to earnings and capital arising from changes in the business environment and from adverse business decisions, improper implementation of decisions or lack of responsiveness to changes in the business environment. The Bank treats strategic risk within the processes related to strategic planning at the Group level.

Reputation risk - the current or prospective risk of adverse effects to earnings and capital arising from adverse perception of the Bank‟s image on the part of customers, counterparties, shareholders, investors or regulators. In order to manage the aforementioned risks, the Bank complies with the relevant decisions of the domestic regulatory bodies, and relies on the following strategic documents:

Bank risk management strategy,

Credit risk management policy for corporate customers,

Credit risk management policy for retail customers (which is in the final revision phase),

Trading book policy,

Liquidity risk management policy,

Strategy, policy and framework for operational risk management, as well as on different methodologies, procedures and guidelines (allowance for impairment of financial assets and provision, assessment of foreign currency risk, other estimates, early collection of receivables, etc.).



36. RISK MANAGEMENT (Continued) 36.2. Credit Risk

The Bank has implemented and it maintains appropriate on-going credit underwriting, administration, measurement and monitoring processes, including in particular: – Sufficient and fully documented credit risk policies which are in place (Corporate Lending Policy and

Retail Policies), such ensuring consistency across the Bank and acknowledging key regulatory requirements of the National Bank of Serbia, including the definition of default and credit portfolio segmentation according to regulatory rules (National Bank of Serbia, Basel II).

– Sound, well-defined credit granting criteria based on the particular target market, the borrower or counterparty and the transaction, as well as the purpose and structure of the credit and its source of repayment.

Credit limits that aggregate in a comparable and meaningful manner different types of exposures, at various levels: Individual borrowers and counterparties, Groups of related borrowers and counterparties, Industry / sector limits, and Product limits (loans, bonds, derivatives, etc.).

– Clearly established procedures for approving new loans, as well as the amendment, renewal and

re-financing of existing loans, while any exceptions are monitored with particular care taking appropriate steps to control or mitigate the relevant risks.

– Consistent credit grading/scoring tools to standardize and enhance credit risk assessment and portfolio management (RM3 corporate credit risk rating system, introduced during 2008 and Scorecards for the Retail Lending) to support a robust credit assessment process.

– Adequate and detailed procedures covering all aspects of the credit related activities.

– Information systems and analytical techniques that enable measurement of credit risk inherent in all relevant activities, providing adequate information on the composition of the credit portfolio, including identification of any concentration of risk.

– The monitoring process that covers the condition of individual credits, including determining the adequacy of provisions and reserves, as well as the overall composition and quality of the credit portfolio, taking into consideration potential future changes in economic conditions and allowing the assessment of credit risk exposures under stressful conditions.

The Bank has ensured adequate internal controls over the credit risk related processes, including: – Segregation of the crediting function from loan approval, monitoring and follow-up and credit

portfolio management functions.

– Approving Committees for all types of credit exposure, with escalation of credit authorization in accordance with the level of the exposure.

– Participation of the Risk Management Division in such Committees under a veto right.

– Proper management of the credit-granting functions ensuring that credit exposures are within set limits, while exceptions to policies, procedures and limits are appropriately reported.

– Periodical, early remedial actions on deteriorating credits, managing problem credits and similar workout situations.

– Independent, ongoing assessment of the credit risk management processes by Internal Audit, covering in particular the credit risk systems/models employed by the Bank. The results of such reviews are communicated to the Board of Directors and the Senior Management of the Bank.



36. RISK MANAGEMENT (Continued) 36.2. Credit Risk (Continued)

For the rating of the corporate customers‟ risk, during the course of 2008, the Bank implemented the rating model RM3, which had been calibrated in March 2009 and April 2011, while the new calibration is scheduled for April 2012. The model has 10 notches with defined debtor‟s limits per Corporate Lending Policy, which correspond to estimated Probabilities of Default (PD) as follows: RATING RISK PD% Limit per debtor in EUR

А1 Fair 0.4 250,000 А2 Fair 0.7 140,000 B1 Fair 1.8 90,000 B2 Moderate 3.3 50,000 C1 Moderate 4.3 30,000 C2 Moderate 6.6 25,000 D1 Significant 9.6 15,000 D2 Significant 14.5 6,000 E1 High 22.9 2,000 E2 High 28.9 2,000

In accordance with the regulations of the National Bank of Serbia, the Bank regularly examines and classifies its corporate and retail portfolio (A to D scale). For the purposes of this report, A and B rated credit risks may be considered as “Satisfactory”, C as “Special Mention” and G and D as “Unsatisfactory”. In order to mitigate credit risk, the Bank takes different types of collaterals, on which it calculates a securing value with the use of conservative coefficients, which reflect the time needed for the liquidation of the collateral and the uncertainty about the market prices at the time of liquidation.

For the calculation of the necessary provisions as per the National Bank of Serbia‟s regulations, the Bank recognizes as prime and adequate the collaterals defined in the relevant Decision, when the conditions for their recognition are met. The Bank recognizes committed and uncommitted credit limits and that the unused committed credit limits bear the same credit risk with its used part. Other off-balance sheet items, which bear counterparty credit risk (guarantees, letters of credit, etc.) are also accepted as bearing credit risk, the height of which varies depending on the applicant‟s creditworthiness and the purpose of the off-balance sheet item.




(a) Maximum Credit Risk Exposure per Balance Sheet and Off-balance Sheet Items

The breakdown of maximum credit risk exposure, presented in gross amounts, before collaterals held or other credit enhancements, as of December 31, 2011 and 2010, is presented in the table below:

December 31, 2011

December 31, 2010

Credit risk exposure per balance sheet items:

Loans and deposits to customers 54,310,433 57,194,514 Interest, fees and commission receivables, trade receivables, changes in fair value of derivatives 815,087 893,876 Securities 637,438 282,259 Other placements 1,514,799 1,357,823 Other assets 3,782,682 863,359

61,060,439 60,591,831

Credit risk exposure per off-balance sheet items:

Financial guarantees 1,393,182 2,479,941 Undrawn credit facilities 13,116,264 5,465,248 Other irrevocable commitments 72,400 436,146

14,581,846 8,381,335

Total exposure 75,642,285 68,973,166

The breakdown of maximum credit risk exposure as of December 31, 2011, before taking into account collaterals held or other credit enhancements, grouped by geographical locations is presented in the table below:

Balances on Accounts and

Placements with Banks

Loans and Advances to

customers


Investments

Interest, Fees and

Commissions and Other

Assets

Guarantees and Other

Commit- ments

Total 2011

Serbia 1,935,089 52,122,048 637,438 1,540,303 14,581,846 70,816,724 European Union 4,069,721 747,236 - 8,604 - 4,825,561

6,004,810 52,869,284 637,438 1,548,907 14,581,846 75,642,285

The breakdown of maximum credit risk exposure as of December 31, 2010, before taking into account collaterals held or other credit enhancements, grouped by geographical locations is presented in the table below:

Balances on Accounts and

Placements with Banks

Loans and Advances to

customers


Investments

Interest, Fees and

Commissions and Other

Assets

Guarantees and Other

Commit- ments

Total 2010

Serbia 1,406,497 55,991,753 282,259 1,640,797 8,381,335 67,702,641 European Union 400,504 753,583 - 116,438 - 1,270,525

1,807,001 56,745,336 282,259 1,757,235 8,381,335 68,973,166




(a) Credit Risk Maximum Exposure through Balance Sheet and Off-balance Sheet Items (Continued)

The Bank‟s credit risk exposure analysis, by industry sectors, before and after taking into account collaterals held and other credit enhancements, as of December 31, 2011 and 2010 is presented in the table below:

Gross Maximum Exposure

Net Maximum Exposure

Gross Maximum Exposure

Net Maximum Exposure

2011 2011 2010 2010

Mining and processing industry 20,387,027

15,096,388

15,679,618 7,344,328

Energy sector 431,760 427,505 457,051 452,609 Trade 10,730,712 9,234,144 10,612,370 8,943,893 Finance 6,632,820 5,631,470 2,094,992 1,099,426 Agriculture and forestry 1,956,658 1,510,884 2,115,921 1,521,285 Construction 2,432,137 2,282,589 2,505,747 2,359,737 Tourism, catering and services

650,265

575,642

675,638 602,095

Retail customers 28,734,858 27,133,357 30,573,985 29,130,578 Other 3,686,048 3,461,527 4,257,844 3,988,444

75,642,285 65,353,506 68,973,166 55,442,395




(b) Portfolio Quality

The Bank manages the quality of its financial assets using the internal classification of placements.

The structure of loan portfolio (loans and deposits to banks and customers, including other placements and securities from the maximum credit risk exposure table) according to internal credit rating as of December 31, 2011 and 2010 is presented in the following table:

2011 2010

Neither past due nor impaired Neither past due nor impaired

High

Rating Standard

Rating

Sub-standard

Rating

Past Due and

Impaired Total High

Rating Standard

Rating

Sub-standard

Rating

Past Due and

Impaired Total

Receivables from banks 2,009,679 - 43 946,225 2,955,947 287,313 - - 947,613 1,234,926 Loans to customers 8,598,078 1,862,733 3,047,868 12,618,831 26,127,510 8,403,248 5,417,033 217,038 15,940,755 29,978,074 Loans to entrepreneurs 362,166 5,949 11,610 684,457 1,064,182 615,922 10,041 1,171 600,883 1,228,017 Loans to retail customers 17,107,860 173,408 1,918,899 6,477,426 25,677,593 18,821,314 173,308 437,612 6,679,086 26,111,320

Total loans and placements 28,077,783 2,042,090 4,978,420 20,726,939 55,825,232 28,127,797 5,600,382 655,821 24,168,337 58,552,337

299,231 814 269,109 68,284 637,438 178,215 - 1,302 - 179,517 Unlisted securities – equity

and debt instruments - - - - - 28,076 - 1,921 72,745 102,742

28,377,014 2,042,904 5,247,529 20,795,223 56,462,670 28,334,088 5,600,382 659,044 24,241,082 58,834,596




(b) Portfolio Quality (Continued)

The table below represents the structure of the Bank‟s loans and advances to banks and customers, including other placements, as of December 31, 2011 and 2010, according to their quality:

Neither Past Due nor

Impaired

Past Due but not

Impaired Impaired

Total Gross Loans and

Placements

Individual Allowance for

Impairment

Collective Allowance for

Impairment Total Allowance

for Impairment

Total Net Loans and

Placements

December 31, 2011 Credit cards 784,882 110,685 306,457 1,202,024 (206) (161,136) (161,342) 1,040,682 Consumer loans 8,884,197 1,674,887 2,363,809 12,922,893 (12,344) (1,251,208) (1,263,552) 11,659,341 Housing loans 9,531,088 1,537,720 483,868 11,552,676 (583) (36,941) (37,524) 11,515,152 Loans to small entities 379,725 379,279 305,178 1,064,182 (5,221) (235,118) (240,339) 823,843 Loans to corporate customers 13,508,679 4,366,776 8,252,055 26,127,510 (6,037,389) (676,291) (6,713,680) 19,413,830

33,088,571 8,069,347 11,711,367 52,869,285 (6,055,743) (2,360,694) (8,416,437) 44,452,848

Loans and advances to banks 2,009,722 - 946,225 2,955,947 (946,224) - (946,224) 2,009,723

35,098,293 8,069,347 12,657,592 55,825,232 (7,001,967) (2,360,694) (9,362,661) 46,462,571

December 31, 2010 Credit cards 1,223,928 63,030 201,046 1,488,004 - (112,661) (112,661) 1,375,343 Consumer loans 9,445,233 2,079,437 2,637,419 14,162,089 - (1,153,820) (1,153,820) 13,008,269 Housing loans 8,763,073 1,123,065 575,089 10,461,227 - (71,270) (71,270) 10,389,957 Loans to small entities 627,134 252,811 348,072 1,228,017 (79,868) (184,608) (264,476) 963,541 Loans to corporate customers 14,037,319 3,863,810 12,076,945 29,978,074 (4,900,070) (5,184,595) (10,084,665) 19,893,409

34,096,687 7,382,153 15,838,571 57,317,411 (4,979,938) (6,706,954) (11,686,892) 45,630,519

Loans and advances to banks 287,313 - 947,613 1,234,926 (947,614) - (947,614) 287,312

34,384,000 7,382,153 16,786,184 58,552,337 (5,927,552) (6,706,954) (12,634,506) 45,917,831





Neither Past Due nor Impaired Loans and Advances

Satisfactory Special

Mention Substandard Total

December 31, 2011

Credit cards 744,220 14,036 26,626 784,882 Consumer loans 8,346,234 103,764 434,199 8,884,197 Housing loans 8,034,112 55,607 1,441,369 9,531,088 Loans to small entities 362,166 5,949 11,610 379,725 Loans to corporate customers 8,598,078 1,862,733 3,047,868 13,508,679

26,084,810 2,042,089 4,961,672 33,088,571

Loans and advances to banks 2,009,679 - 43 2,009,722

28,094,489 2,042,089 4,961,715 35,098,293

December 31, 2010

Credit cards 1,143,519 19,093 61,316 1,223,928 Consumer loans 9,097,769 115,995 231,469 9,445,233 Housing loans 8,580,026 38,220 144,827 8,763,073 Loans to small entities 615,922 10,041 1,171 627,134 Loans to corporate customers 8,403,248 5,417,033 217,038 14,037,319

27,840,484 5,600,382 655,821 34,096,687

Loans and advances to banks 287,313 - - 287,313

28,127,797 5,600,382 655,821 34,384,000





Aging Analysis of Loans and Advances Past Due but Not Impaired

Up to 30 Days Past

Due From 31 to

60 Days From 60 to

90 Days

From 91 to 180 Days

From 180 to 365 Days

From 1 to 5 Years

Over 5 Years Total

December 31, 2011 Credit cards 110,311 199 - 58 117 - - 110,685 Consumer loans 1,665,537 - 7,910 999 1 150 290 1,674,887 Housing loans 1,119,276 123,808 57,730 71,171 111,771 53,964 - 1,537,720 Loans to small entities 175,501 3,511 56,219 15,776 478 127,794 - 379,279 Loans to corporate customers 1,741,533 385,584 243,683 53,583 255,683 1,565,750 120,960 4,366,776

4,812,158 513,102 365,542 141,587 368,050 1,747,658 121,250 8,069,347

4,812,158 513,102 365,542 141,587 368,050 1,747,658 121,250 8,069,347

December 31, 2010 Credit cards 63,030 - - - - - - 63,030 Consumer loans 1,931,605 126,576 - 6,080 - 15,176 - 2,079,437 Housing loans 962,701 57,573 - 12,729 34,959 55,103 - 1,123,065 Loans to small entities 124,486 10,819 - - 10,939 106,567 - 252,811 Loans to corporate customers 1,298,035 200,287 104,846 163,888 751,257 1,295,688 49,809 3,863,810

4,379,857 395,255 104,846 182,697 797,155 1,472,534 49,809 7,382,153

4,379,857 395,255 104,846 182,697 797,155 1,472,534 49,809 7,382,153

Aging Analysis of Impaired Loans and Placements

Up to 30 Days Past

Due From 31 to

60 Days From 60 to

90 Days

From 91 to 180 Days

From 180 to 365 Days

From 1 to 5 Years

Over 5 Years Total

December 31, 2011 Credit cards - 21,121 56,453 15,235 24,708 188,908 32 306,457 Consumer loans - 363,158 118,955 201,967 276,176 1,219,904 183,649 2,363,809 Housing loans - 198,651 90,994 65,822 59,594 65,593 3,214 483,868 Loans to small entities - 12,496 1,791 3,324 8,999 237,249 41,319 305,178 Loans to corporate customers 360 29,829 14,602 75,651 49,717 3,042,606 5,039,290 8,252,055

360 625,255 282,795 361,999 419,194 4,754,260 5,267,504 11,711,367

Loans and advances to banks 16 - - - 3 325 945,881 946,225

376 625,255 282,795 361,999 419,197 4,754,585 6,213,385 12,657,592

December 31, 2010 Credit cards - 20,408 9,366 23,895 46,082 101,295 - 201,046 Consumer loans 160,040 461,476 207,798 432,017 467,949 849,428 58,711 2,637,419 Housing loans 139,931 188,119 74,496 88,976 55,821 25,959 1,787 575,089 Loans to small entities 6,122 18,282 10,236 11,796 47,835 224,385 29,416 348,072 Loans to corporate customers 11,685 73,847 63,014 55,705 672,035 5,350,666 5,849,993 12,076,945

317,778 762,132 364,910 612,389 1,289,722 6,551,733 5,939,907 15,838,571

Loans and advances to banks 14

-

-

-

57,652

889,947

-

947,613

317,792 762,132 364,910 612,389 1,347,374 7,441,680 5,939,907 16,786,184




(c) Default Receivables

The Bank pays special attention to default receivables by monitoring the total outstanding balance and the trend of these loans and advances. Default is monitored at the Bank level and in accordance with the product criteria (for retail customers) and the industrial sector the customer belongs to, as well as the maturity structure (for enterprises and entrepreneurs).

In accordance with the regulations, default receivables related to corporate customers and entrepreneurs are monitored at customer (counter party) level, and, as for retail customers, at the level of individual receivable.

As of December 31, 2011, default receivables totaled to RSD 16,305,941 thousand (December 31, 2010: RSD 19,598,887 thousand). Allowances for impairment of default receivables amounted to RSD 10,300,021 thousand (December 31, 2010: RSD 13,533,447 thousand).

Default off-balance sheet items amounted to RSD 176,339 thousand as of December 31, 2011 (December 31, 2010: RSD 193,388 thousand), while the related provisions for those items amounted to RSD 35,105 thousand (December 31, 2010: RSD 10,841 thousand).

(d) Rescheduled Loans

In 2009 the Bank introduced guidelines and/or criteria for rescheduling of corporate and retail loans, based on which rescheduling was performed in 2010 and 2011 as well.

Through the aforesaid, the Bank aims to help the debtors/borrowers that are positively assessed as strong enough to overcome the present adverse period and repay properly their debts towards the Bank. Loans to customers experiencing more significant problems, and for which there are doubts about their ability to repay their debts, are not rescheduled.

As of December 31, 2011, gross rescheduled loans and advances including those rescheduled prior to 2009 amounted to RSD 3,543,958 thousand (December 31, 2010: RSD 3,707,658 thousand).

36.3. Liquidity Risk

The Bank manages the relevant risk in accordance with its Liquidity Risk Management Policy, updated in 2011, which provides for diversified funding sources in addition to its core deposit base, proper management of assets and liabilities and monitoring future cash flows and liquidity on a daily basis. The Bank assesses daily the expected cash flows in Dinars and in foreign currency, as well as the availability of assets which could be used as collaterals to secure additional funding if required.

The Bank manages its assets and liabilities in such a way that it can always fulfill its due obligations and honor its commitments on time.

The Bank‟s framework for managing liquidity risk encompasses:

Operating standards relating to liquidity risk, including appropriate policies, procedures and resources for controlling, limiting and managing liquidity risk;

Maintenance of a stock of liquid assets appropriate for the cash flow profile that can be readily converted into cash without incurring undue capital losses;

Management of access to funding sources and measurement, control and scenario testing of funding requirements;

Management information system (MIS) and other systems that identify, measure, monitor and control liquidity risk;

Contingency plans for handling liquidity disruptions by means of the ability to fund some or all activities in a timely manner and at a reasonable cost;

Liquidity risk limits (e.g. maturity mismatch ratio, liquid asset ratio) taking into account the existing regulatory limits.




36.3. Liquidity Risk (Continued)

The Bank has established and maintains adequate liquidity measurement, monitoring and control and reporting functions, addressing:

The maturity profile of cash flows under varying scenarios, including scenarios for non-maturing assets and liabilities (e.g. savings, credit cards);

The stock of liquid assets available to the institution and their market values;

The ability of the Bank to execute assets sales in various markets (notably under adverse conditions) and to borrow in markets;

Potential sources of volatility in assets and liabilities (including claims and obligations arising from off-balance sheet business);

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

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

The impact of market disruptions on cash flows and customers;

The type of new deposits being obtained, as well as its source, maturity and price;

Regulatory reporting requirements. The Market Risk Department of the Risk Management Division is responsible for the monitoring liquidity risk. The daily management of liquidity is performed by the Treasury Division. The Assets and Liabilities Management Committee may recommend to the Executive Board measures and actions to improve the maturity structure, and other measures important for the better liquidity management.

The level of liquidity is expressed using the ratio of the liquid sum of the first and second level (cash, assets on accounts with other banks, deposits with the National Bank of Serbia, receivables in the process of realization, irrevocable credit lines approved to the Bank, quoted financial instruments and other receivables due within a month) and sum of liabilities on demand without determined maturity date and liabilities with fixed maturity up to a month.

In 2011 and 2010, the Bank had an indicator of daily liquidity significantly above the legally-prescribed levels.

The aforementioned ratio in 2011 and 2010 was as presented in the table below:

December 31,

2011 December 31,

2010

Average during the period 1.84 1.77 Highest 2.67 2.12 Lowest 1.12 1.15 As of December 31 2.45 1.83

The maturity structure of guarantees and other irrevocable commitments based on the maturity period outstanding as of December 31, 2011and 2010 is presented in the table below:

Up to 14

Days

From 15 Days to

1 Month From 1 to 3

Months From 3 to 12

Months From 1 to 5

Years Over 5 Years Total

Financial guarantees 31,302 36,078 202,598 509,310 480,913 132,981 1,393,182 Undrawn credit facilities 248,038 75,908 4,401,836 7,242,535 1,143,866 4,081 13,116,264 Other irrevocable

commitments 18,236 13,731 - 40,433 - - 72,400

December 31, 2011 297,576 125,717 4,604,434 7,792,278 1,624,779 137,062 14,581,846

December 31, 2010 3,126,746 82,338 663,935 3,507,156 824,498 176,662 8,381,335

The Bank expects that not all of the contingent liabilities and irrevocable commitments will be withdrawn before they expire.



36. RISK MANAGEMENT (Continued) 36.3. Liquidity Risk (Continued)

The liquidity risk exposure as of December 31, 2011 is presented in the following table. The table includes financial assets and financial liabilities, presented at their carrying amounts as at the balance sheet date.

Up to 1 Month

From 1 to 3 Months

From 3 to 12 Months

From 1 to 5 Years

Over 5 Years Total

ASSETS

Cash and cash equivalents and revocable deposits 9,150,564 - - - - 9,150,564

Revocable deposits and loans 21,575,211 - - - - 21,575,211 Receivables arising from interest,

fees and commissions, trade, fair value adjustments of derivatives and other receivables 274,026 - - - - 274,026

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

Securities 567,293 31,700 1,025,439 256,170 - 1,880,602 Other placements 621,835 - - - - 621,835 Other assets 221,380 13,469 11,991 26,001 - 272,841

Total assets 35,724,964 4,094,315 13,702,748 17,650,324 13,849,892 85,022,243

LIABILITIES

Transaction deposits 14,551,765 - - - - 14,551,765 Other deposits 17,132,065 8,506,990 23,364,848 706,341 467,245 50,177,489 Borrowings 199,345 - 1,057,337 4,185,636 5,500 5,447,818 Liabilities arising from securities - - - - 316 316 Interest, fee and commission

payables and change in the value of derivatives 137,915 - - - - 137,915

Other liabilities 546,117 1,969 9,766 17,463 - 575,315

Total liabilities 32,567,207 8,508,959 24,431,951 4,909,440 473,061 70,890,618

Net liquidity gap as of: - December 31, 2011 3,157,757 (4,414,644) (10,729,203) 12,740,884 13,376,831 14,131,625

- December 31, 2010 (4,205,237) (1,755,919) (9,547,949) 19,226,207 10,950,415 14,667,517

The Bank‟s management judges that the diversification of deposits by the type of deposit placed and the number of customers, as well as the historical experience of the Bank, provide adequate assurance that its deposits represent a stable and reliable source of finance.

The structure of the Bank‟s asset and liability components as classified into their relevant maturities at December 31, 2011 indicated the existence of liquidity gaps in the periods from up to one month, one-to-three months and in the periods from three to twelve months as well as from one to five years and over five years.



36. RISK MANAGEMENT (Continued) 36.3. Liquidity Risk (Continued)

Maturity Mismatch Analysis

The table below analyses assets and liabilities of the Bank into relevant maturity groupings based on the remaining period as of the balance sheet date to the contractual maturity date. Also, the table shows that in the Bank‟s experience, assets and liabilities with nominal short-term maturities, in practice may have much longer maturity periods due to revolving facility allowed. The following table presents Maturity Mismatch report as of December 31, 2011:

Up to 1 Month

From 1 to 3 Months

From 3 to 12 Months

From 1 to 5 Years

Over 5 Years Total

ASSETS

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

Revocable deposits and loans 21,575,211 - - - - 21,575,211 Receivables arising from interest, fees

and commissions, trade, fair value adjustments of derivatives and other receivables 274,026 - - - -

274,026

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

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

Equity investments (interests) - - - - 53,503 53,503

Other placements 621,835 - - - - 621,835

Intangible assets - - - - 367,935 367,935

Property, equipment and investment property - - - - 5,557,391

5,557,391

Assets held for sale and assets from discontinued operations - - - 155,496 -

155,496

Deferred tax assets - - - 104,536 350,751 455,287 Other assets 447,367 41,463 395,970 210,731 72,674 1,168,205

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

LIABILITIES AND EQUITY

Transaction deposits 14,551,765 - - - - 14,551,765

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

Borrowings 199,345 - 1,057,337 4,185,636 5,500 5,447,818 Liabilities on securities - - - - 316 316 Interest, fee and commission

payables and change in the value of derivatives 137,915 - - - -

137,915

Provisions - - - - 530,466 530,466

Tax liabilities 44,617 - - - - 44,617

Deferred tax liabilities - - - 124,594 - 124,594 Other liabilities 911,962 144,386 290,234 48,200 75,817 1,470,599

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

Total equity - - - - 20,021,640 20,021,640

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

Maturity mismatch as of:

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

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



36. RISK MANAGEMENT (Continued) 36.4. Market Risks

The main document, based on which the Bank manages market risks is the Trading Book Policy, which defines the measurement methodologies, processes and tools, risk limits, reporting and remedial action guidelines and responsibilities, as well as trading book definition, for both accounting and capital adequacy purposes. The policy was updated in 2011. In addition, several other procedures are applied, in accordance with the risk strategy, the instructions of the NBG Group and the regulations of the local authorities.

The Bank has established and maintains adequate market risk measurement, monitoring, and control functions, including: – Market risk measurement processes that capture all material sources of market risk and assess

the effect of market risk factors‟ changed in ways that are consistent with the scope of Bank‟s activities. These measurement systems include VaR for major foreign currencies and models where appropriate.

– Operating limits and other practices that maintain exposures within levels consistent with internal policies, in terms of exposure to individual market risk types, position and loss limits.

– Measurement of vulnerability to loss under stressful market conditions (including the breakdown of key assumptions) considering those results when establishing and reviewing policies and limits for market risks.

– Adequate and effective processes and information systems for measuring, monitoring, controlling and reporting market risk exposures. Related IT systems must be sophisticated enough to cover the complexity of trading activities of Bank. Controls (limits) are embedded in these systems. Reports must be provided on a timely basis to the Board of Directors, Senior Management, and all other appropriate levels.

36.4.1. Interest Rate Risk

The Bank is exposed to this risk through the items included in the banking book, and it assesses the aforementioned risk in total and per each significant foreign currency for whose exposure limits it has established criteria. In accordance with these criteria, the Bank considers RSD, EUR, USD and CHF to be materially significant currencies. The established Interest Rate Risk Management Policy within the banking book is a document whose primary objective is management of the processes of interest rate risk identifying, measuring, mitigating, monitoring and reporting.

The Bank‟s goal when managing the interest rate risk is to optimize its effect to the increase in interest rate on one hand and the economic value of equity on the other.

In determining interest rates the Bank considers market interest rates and their movements. Interest rate changes result in increases or decreases in interest margins.

The Market Risk Department of the Risk Management Division monitors the interest rate risk, while the Asset and Liability Management Committee may propose to the Bank‟s Executive Board measures and actions for the maturity matching of assets and liabilities based on the Bank‟s strategy, on macroeconomic analysis, on forecasts of the Bank‟s liquidity and on interest trend analysis for different segments of assets and liabilities.

The following table shows Repricing Gap report, i.e. the Bank‟s exposure to the interest rate risk as of December 31, 2011. The table includes the Bank‟s assets and liabilities at carrying amounts, categorized by the earlier of contractual re-pricing or maturity dates.




36.4. Market Risks (Continued)

36.4.1. Interest Rate Risk (Continued)

Up to 1 Month

From 1 to 3 Months

From 3 to 12 Months Over 1 Year

Non-Interest Bearing Total

ASSETS 3,213,422 - - - 5,937,142 9,150,564

Cash and cash equivalents 4,700,000 - - - 16,875,211 21,575,211

Revocable deposits and loans 274,026 - - - - 274,026 Receivables arising from interest,

fees and commissions, trade, fair value adjustments of derivatives and other receivables 37,328,601 2,895,835 1,110,900 9,911,828 - 51,247,164

Securities 31,475 31,700 1,025,438 256,170 535,819 1,880,602

Equity investments (interests) - - - - 53,503 53,503

Other placements 621,835 - - - - 621,835

Intangible assets - - - - 367,935 367,935

Property, equipment and investment property - - - - 5,557,391 5,557,391

Assets held for sale and assets from discontinued operations - - - - 155,496 155,496

Deferred tax assets - - - - 455,287 455,287 Other assets - - - - 1,168,205 1,168,205

Total assets 46,169,359 2,927,535 2,136,338 10,167,998 31,105,989 92,507,219

LIABILITIES AND EQUITY

Transaction deposits 3,916,896 - - - 10,634,869 14,551,765

Other deposits 14,894,744 8,452,652 23,139,491 258,073 3,432,529 50,177,489

Borrowings 199,345 - 1,057,337 4,191,136 - 5,447,818 Liabilities on securities - - - - 316 316 Interest, fee and commission

payables and change in the value of derivatives 137,915 - - - - 137,915

Provisions - - - - 530,466 530,466

Tax liabilities - - - - 44,617 44,617

Deferred tax liabilities - - - - 124,594 124,594 Other liabilities 33,638 - - - 1,436,961 1,470,599


Total equity - - - - 20,021,640 20,021,640

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

Interest sensitivity gap as of: – December 31, 2011 26,986,821 (5,525,117) (22,060,490) 5,718,789 (5,120,003)

– December 31, 2010 (15,814,773) (1,706,424) (9,192,494) 31,437,332 (4,723,641)





36.4.1. Interest Rate Risk (Continued)

Interest rate risk is also monitored by scenario analyses, i.e. observing the effect of interest rate fluctuations to the Bank‟s income and expenses, as presented in the following table:

Change in

Percentage Points

Income Statement Sensitivity

2011

Change in Percentage

Points

Income Statement

Sensitivity 2010

Increase in percentage points 1% 56,889 1% 52,485 Decrease in percentage points -1% (46,545) -1% (42,942)

Interest Rate Risk in the Banking Book

The Bank has established and maintains adequate measurement, monitoring, and control functions for interest rate risk in the banking book, including measurement systems that capture all material sources of interest rate risk and that assess the effect of interest rate changes in ways that are consistent with the scope of the Bank‟s activities.

Exposure to the interest rate risk arising from financial instruments as of the balance sheet date is presented in the following table:

Interest Bearing

Non-Interest Bearing Total

ASSETS Cash and cash equivalents 3,213,422 5,937,142 9,150,564 Revocable deposits and loans 4,700,000 16,875,211 21,575,211 Receivables arising from interest, fees and

commissions, trade, fair value adjustments of derivatives and other receivables 274,026 - 274,026

Loans and advances to customers 51,247,164 - 51,247,164 Securities 1,344,783 535,819 1,880,602 Other placements 621,835 - 621,835 Other assets - 272,841 272,841

Total assets 61,401,230 23,621,013 85,022,243

LIABILITIES Transaction deposits 3,916,896 10,634,869 14,551,765 Other deposits 46,744,960 3,432,529 50,177,489 Borrowings 5,447,818 - 5,447,818 Liabilities on securities - 316 316 Interest, fees and commissions payable and

changes in fair value of derivatives 137,915 - 137,915 Other liabilities 33,638 541,677 575,315

Total liabilities 56,281,227 14,609,391 70,890,618

Net open interest rate position as of: – December 31, 2010 5,120,003 9,011,622 14,131,625

– December 31, 2011 4,723,641 9,943,876 14,667,517





36.4.2. Foreign Currency Risk

Banking operations in different foreign currencies cause the exposure to fluctuation in exchange rates.

The Bank manages foreign currency risk, striving to prevent adverse effects of changes in cross-currency rates and foreign exchange rates comparing to dinar (foreign currency losses) on the Bank‟s financial result, as well as on customers‟ ability to repay loans in foreign currency. For the purposes of protection against foreign currency risk, the Bank monitors the changes in foreign currency exchange rate on the financial market on daily basis, carries out the policy of low level exposure to the foreign currency risk and contracts the foreign currency clause with its customers monitoring the results of stress scenario testing.

The Bank has established and maintains adequate foreign currency risk measurement, monitoring and control functions, including an application to daily monitor the open position of the Bank in foreign currencies, which at December 31, 2011, was as follows:

EUR USD

Other Foreign

Currencies

Total in Foreign

Currency Total in Local

Currency Total

ASSETS Cash and cash equivalents 2,441,670 1,641,037 720,836 4,803,543 4,347,021 9,150,564 Revocable deposits and loans 16,875,211 - - 16,875,211 4,700,000 21,575,211 Receivables arising from interest,

fees and commissions, trade, fair value adjustments of derivatives and other receivables 142,625 1,662 13,901 158,188 115,838 274,026

Loans and advances to customers 28,078,831 625,090 6,515,528 35,219,449 16,027,715 51,247,164 Securities 20,373 - - 20,373 1,860,229 1,880,602 Equity investments (interests) 1,121 14,731 - 15,852 37,651 53,503 Other placements 159,538 296,130 583 456,251 165,584 621,835 Intangible assets - - - - 367,935 367,935 Property, equipment and investment

property - - - - 5,557,391 5,557,391 Assets held for sale and assets from

discontinued operations - - - - 155,496 155,496 Deferred tax assets - - - - 455,287 455,287 Other assets 186,575 7,939 11,230 205,744 962,461 1,168,205

Total assets 47,905,944 2,586,589 7,262,078 57,754,611 34,752,608 92,507,219

LIABILITIES Transaction deposits 3,503,281 255,311 105,149 3,863,741 10,688,024 14,551,765 Other deposits 42,966,989 872,367 1,035,282 44,874,638 5,302,851 50,177,489 Borrowings 5,300,025 66,662 7,265 5,373,952 73,866 5,447,818 Liabilities on securities 316 - - 316 - 316 Interest, fees and commissions

payable and changes in fair value of derivatives 446 - - 446 137,469 137,915

Provisions - - - - 530,466 530,466 Tax liabilities - - - - 44,617 44,617 Deferred tax liabilities - - - - 124,594 124,594 Other liabilities 641,071 6,694 8,272 656,037 814,562 1,470,599


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

Net foreign currency position at: – December 31, 2011 1,077,220 3,404 8,211 1,088,835 18,833,745

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





36.4.2. Foreign Currency Risk (Continued)

The table below shows the Bank‟s exposure to foreign currency risk per financial instruments as of December 31, 2011. The table includes financial assets and financial liabilities at their carrying values:

EUR USD Other

Currencies

Total Foreign Currency Balance Total in RSD Total

FINANCIAL ASSETS Cash and cash equivalents 2,441,670 1,641,037 720,836 4,803,543 4,347,021 9,150,564 Revocable deposits and loans 16,875,211 - - 16,875,211 4,700,000 21,575,211 Receivables arising from interest,

fees and commissions, trade, fair value adjustments of derivatives and other receivables 142,625 1,662 13,901 158,188 115,838 274,026

Loans and advances to customers 28,078,831 625,090 6,515,528 35,219,449 16,027,715 51,247,164 Securities 20,373 - - 20,373 1,860,229 1,880,602 Other placements 159,538 296,130 583 456,251 165,584 621,835 Other assets 32,053 2,440 946 35,439 237,402 272,841

Total financial assets 47,750,301 2,566,359 7,251,794 57,568,454 27,453,789 85,022,243

FINANCIAL LIABILITIES Transaction deposits 3,503,281 255,311 105,149 3,863,741 10,688,024 14,551,765 Other deposits 42,966,989 872,367 1,035,282 44,874,638 5,302,851 50,177,489 Borrowings 5,300,025 66,662 7,265 5,373,952 73,866 5,447,818 Liabilities on securities 316 - - 316 - 316 Interest, fees and commissions

payable and changes in fair value of derivatives 446 - - 446 137,469 137,915

Other liabilities 202,657 1,547 5,710 209,914 365,401 575,315

Total financial liabilities

51,973,714 1,195,887 1,153,406 54,323,007 16,567,611 70,890,618

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

Net exposure to currency risk: – December 31, 2011 1,359,991 (11,679) 489 1,348,801 12,683,764

– December 31, 2010 1,632,837 (29,873) (25,886) 1,577,078 12,695,981





36.4.2. Foreign Currency Risk (Continued)

The sensitivity analysis provides for two scenarios prepared under assumed potential movements in foreign exchange, where all other variables remain constant, and presents potential effects on the financial result.

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

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

2011 Foreign exchange fluctuations Total 10 % -10%

ASSETS

Cash and cash equivalents 4,803,543 533,727 (436,686) Revocable deposits and loans 16,875,211 1,875,023 (1,534,110) Receivables arising from interest, fees and

commissions, trade, fair value adjustments of derivatives and other receivables 158,188 17,576 (14,381)

Loans and advances to customers 35,219,449 3,913,272 (3,201,768) Securities 20,373 2,264 (1,852) Other placements 456,251 50,695 (41,477) Other assets 35,439 3,938 (3,222)

Total assets 57,568,454 6,396,495 (5,233,496)

LIABILITIES Transaction deposits 3,863,741 429,304 (351,248) Other deposits 44,874,638 4,986,071 (4,079,513) Borrowings 5,373,952 597,106 (488,541) Liabilities on securities 316 35 (29) Interest, fees and commissions payable and

changes in fair value of derivatives 446 50 (41) Other liabilities 209,914 23,324 (19,083)

Total liabilities 54,323,007 6,035,890 (4,938,455)

Net exposure to currency risk: – December 31, 2011 360,605 (295,041)

– December 31, 2010 265,010 (216,826)

36.5. Exposure/Concentration Risk

The Bank‟s exposure risk includes the risk of its exposure to a single person or a group of related parties, as well as its exposure risk to a person related to the Bank.

The Bank‟s Corporate Lending Policy defines the maximum limits per customer/debtor or a group of customers corresponding to each credit rating notch. Exceptions can be approved only under the consent of the Risk Management Division.

At the same time, the above policy complies with the prescribed requirements in respect of exposure risks to a single person or a group of related parties defined by the relevant decisions of the National Bank of Serbia. In 2011, the Bank took care of the compliance of the exposure risk indicators and performed the appropriate activities envisaged by relevant procedures and decisions on approving loans, secured the compliance of its placements and investments with the indicators prescribed by the National Bank of Serbia (see Note 33b).



36. RISK MANAGEMENT (Continued) 36.6. Investment Risk

The Bank‟s investment risks include equity investments of the Bank in other legal entities‟ capital and investments in property, plant and equipment.

In accordance with the National Bank of Serbia legislation, the level of the Bank‟s investments and the level of regulatory capital is being monitored by the Risk Management Function in order to ensure that the Bank‟s investments in a single non-financial sector entity do not exceed 10% of its capital, while the total investments of the Bank in non-financial entities and in property, plant and equipment cannot exceed 60% of its capital.

In 2011, the Bank maintained the investment risk ratios within the range prescribed by the National Bank of Serbia.

36.7. Country Risk

The Trading Book Policy of the Bank clearly defines roles, responsibilities and procedures for the country risk management. The Market Risk Department, organized within the Risk Management Function, is responsible for ensuring and monitoring that internally determined limits of exposures per countries of origin are observed. In general, the Bank has an almost insignificant country risk exposure.

36.8. Operational Risk

The Bank treats operational risks as a distinct risk category. Accountability and responsibilities for these risks reside locally, as close as possible to where the risks actually originate. The Bank has approved a firm-wide and high quality Operational Risk Management Framework in order to:

– Promote a Bank-wide operational risk awareness and management culture further contributing to

process efficiency and control effectiveness; – Establish a set of fundamental standards for Operational Risk Management across the Bank

leading to the avoidance of unexpected and catastrophic losses and the minimization of expected losses;

– Ensure that business objectives are pursued in a risk-controlled manner; – Ensure the cost-effectiveness of operations by reducing overlaps and avoiding excessive or

obsolete controls; – Ensure consistency with relevant best practices and compliance with regulatory (quantitative and

qualitative) requirements; and – Improve the use of capital and enhance return on capital, regarding operational risk.

The Bank‟s Operational Risk Management Framework is focused on operations and processes aiming at both proactive and reactive role in operational risk management. The Framework includes: – Regular monitoring of the Bank's operational risk exposure;

– Operational risk methodology including risk self-evaluation and control, key risk indicators and

gathered loss data; and

– Gathering materially significant operating losses on the Bank level.

The Operational Risk Management Framework, including the applicable strategies of controls and mitigation of risks are reviewed periodically and adjusted in accordance with the overall risk profile of the Bank, as prescribed for the operational risk.

Data on operational risks are gathered in all organizational units of the Bank. Data is classified and analyzed, and the methods of risk mitigation and its impact reduction are recommended.

During the course of 2009, the Bank developed its Business Continuity Plan in order to respond to unexpected business disruptions of its Critical Divisions and recover their operations in an organized and efficient way.



36. RISK MANAGEMENT (Continued) 36.8. Operational Risk (Continued)

The Business Continuity Plan aims to:

– Ensure the achievement of the desired business recovery and continuity level; – Prevent a Division‟s business disruption from having significant impact on another Division‟s

business continuity; – Achieve business resumption under the predefined business recovery time period; – Maintain a high level of plan activation and implementation readiness and effectiveness in

relation to the Bank‟s critical process recovery; and – Mitigate (if possible) the impact of a potential business disruption and the occurring possibility.

The Disaster Recovery Plan was developed as description of the procedures related to recovery and continuity of the Bank applications, data, hardware, communication and other IT infrastructure, and presumes the existence of an alternative site (Disaster recovery site).

36.9. Capital Management

The Bank permanently manages its capital, in order to: - Comply with the capital requirements set by the National Bank of Serbia;

- Provide an adequate level of capital so as to enable the Bank to continue as a going concern; and

- Maintain a strong capital base to support the development of its business.

The Bank‟s management monitors regularly the Bank‟s capital adequacy ratios and other ratios established by the National Bank of Serbia and delivers quarterly reports on achieved values of ratios. The Bank manages its capital structure and may make adjustments to it, after approval by the NBG Group and in the light of changes in economic conditions and the risk characteristic of its activities. The Bank‟s strategy of capital management has remained unchanged in comparison with the prior year. The National Bank of Serbia has defined the following capital limits: - The minimum amount of the capital of EUR 10 million; and

- Capital adequacy ratio of 12%.

The Decision on the Capital Adequacy of Banks (Official gazette of the Republic of Serbia, no. 46/2011) sets forth the method of calculating the regulatory capital adequacy.

The Bank‟s total capital comprises Tier 1 and Tier 2 capital, as decreased by prescribed deductible items:

– Core capital (Tier 1 capital) includes: share capital from common shares (except for preference

cumulative shares), share premium, statutory reserves and retained earnings, decreased by prior year losses, current year loss, intangible assets, acquired treasury common and preference shares (except for preference cumulative shares), treasury common and preference shares (except for preference cumulative shares) the Bank received as pledges and regulatory value adjustments;

– Supplementary capital (Tier 2 capital) includes: paid-in share capital based on preference

cumulative treasury shares, share premium, portion of positive revaluation reserves, hybrid capital instruments, preference cumulative shares, preference cumulative shares the Bank received as pledges, receivables securitized with hybrid instruments or bank's subordinated debt; and

– Capital deductible items of the Bank include: the amount exceeding qualified investments in non-

financial sector entities and additional amount of the special reserves for potential losses on balance sheet assets and off-balance sheet items.



36. RISK MANAGEMENT (Continued) 36.9. Capital Management (Continued)

Capital adequacy ratio of the Bank is equal to the ratio of the Bank‟s capital and the sum of the credit risk-weighted assets, capital requirement in relation to market risks, which is multiplied with the reciprocal value of the capital adequacy ratios and capital requirements in relation to operational risk multiplied with the reciprocal value of the capital adequacy ratios. The table below summarizes the structure of the Bank‟s regulatory capital as of December 31, 2011 and 2010, as well as the capital adequacy ratios:

December 31,

2011 December 31,

2010

Regulatory capital Tier 1 capital 18,064,319 19,544,157 Tier 2 capital 1,371,348 1,602,837

Total Tier 1 and Tier 2 capital 19,435,667 21,146,994

Deductible items:

Additional amount of the special reserves for potential losses (8,897,312) (8,810,015) Excess of qualified investment in non-financial entities (157,442) -

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

Risk-weighted balance sheet assets and off-balance sheet

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

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

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

36.10. Judgments on the Effects of the Global Financial Crisis

The effects of the ongoing global financial crises which permeated Serbia in the last quarter of 2008, continued to impact the general liquidity crisis, fluctuation and decrease in the Dinar exchange rate against foreign currencies and decrease in the commercial activities and the purchasing power of the population and economy in 2011.

The National Bank of Serbia (“NBS”) and the Government of the Republic of Serbia introduced a set of measures in order to mitigate the early effects of the crisis, thus contributing to the return of the confidence in the banking sector, as well as establishing the conditions for reviving the commercial activities through more favorable financing terms and conditions. The goal of these measures was to enable protection of commercial banks against difficulties related to liquidity by obtaining a loan from the NBS for the purposes of overcoming temporary difficulties related to liquidity; increase of the liquidity of the banking sector which is jeopardized by a decreased confidence into the banking sector and money market, by amendments to the regulations regarding statutory reserve for foreign sources and other debts; overcoming of difficulties at repayment of the Bank's customers' loans; measures for stimulating credit activities and an increase of the insured amount of deposits. In 2011, the aforementioned measures and the financial support the country secured from the International Monetary Fund (“IMF”) resulted in the stabilization of the banking sector liquidity and regaining citizens' confidence in the banking system, which was reflected in the return of the drawn deposits and increase in retail savings. The Bank‟s management expects that, with the decreased intensity, the effects of the crisis on the economic environment can continue to affect the volume of commercial activities, maintenance of liquidity of economic entities, as well as the degree of receivables collection.




36.10. Judgments on the Effects of the Global Financial Crisis (Continued)

So far, the ongoing financial crisis has had a limited impact on the financial position and performance of the Bank, mainly due to the implemented internal risk management policies and regulatory restrictions. The Bank has adopted strict policies on credit approvals, collateral acceptance and evaluation policies and treasury operations. The Bank closely monitors credit, liquidity, interest rate and foreign exchange risks on a regular basis. The capital adequacy in the Bank is expected to remain at higher levels than those required by the NBS, sufficient to guarantee the continuance of its operations under even more adverse market conditions. The escalation in the European crisis and in effect the crisis in the Greek economy, resulted in impairment losses in several classes of assets like Greek government bonds and other loans in Greece which have adversely impacted the financial position, the results, cash flows and regulatory ratios of NBG and consequently of the Group. Furthermore, the crisis has reduced NBG‟s access to liquidity from other financial institutions. The recapitalization program for Greek banks was established as an integral part of the financial assistance under the second economic adjustment program for Greece, adopted by the Council of the EU meetings on 21 February 2012 and 13 March 2012 (the “Program”). The Program, which has already been approved by the EU and the International Monetary Fund (the “IMF”), along with a specific sequencing of disbursements, commits funds for the recapitalization plan, amounting to about EUR 50 billion and is now in the implementation phase under the auspices of the Bank of Greece (the “BoG”). Despite the negative global trends in the financial services industry, the Bank remained well-capitalized, highly liquid, and primarily funded by domestic deposits. As disclosed in Note 35, the Bank has placements with its Parent Bank in the amount of RSD 428,153 thousand with a maturity of up to one week and interbank placements with other NBG branches in the amount of RSD 1,593,069 thousand, with a maturity of up to 3 months (representing 2.1% of the total Bank's assets). As disclosed in note 35, as of December 31, 2011, the Bank had received deposits due to its Parent and NGB Bank London totaling RSD 49,472 thousand and RSD 2,197,459 thousand respectively, with six-month maturities (representing 2.4 % of the total Bank's liabilities). The robust core capital with a capital adequacy ratio of 23%, as disclosed in Note 36.9, enables the Bank to face any reasonably foreseeable adversity. Management believes that the Bank is well positioned to adequately support its business plan over the coming year.

36.11. Fair Value of Financial Assets and Liabilities

It is a policy of the Bank to disclose the fair value information of those components of assets and liabilities for which published or quoted market prices are readily available, and of those for which the fair value may be materially different than their carrying amounts.

A market price, where an active market exists, is the best evidence of the fair value of a financial instrument. However, market prices are not available for a significant number of financial assets and liabilities held by the Bank. Therefore, for financial instruments for which no market price is available, the fair values of financial assets and liabilities are estimated using present value or other estimation and valuation techniques based on current prevailing market conditions.

In the Republic of Serbia, sufficient market experience, stability and liquidity do not exist for the purchase and sale of receivables and other financial assets or liabilities, for which published market prices are presently not readily available. As a result of this, fair value cannot readily or reliably be determined in the absence of an active market.

The Bank‟s management assesses its overall risk exposure, and in instances in which it estimates that the value of assets stated in its books may not have been realized, it recognizes a provision.

In the opinion of the Bank‟s management, the reported carrying amounts are the most valid and useful reporting values under the present market conditions, as required under the Law on Accounting and Auditing.




36.11. Fair Value of Financial Assets and Liabilities (Continued)

The following table presents the carrying amounts and fair values of the main categories of financial assets and liabilities as of the balance sheet date: Carrying Value Fair Value December 31, December 31, December 31, December 31, 2011 2010 2011 2010

Financial assets Revocable deposits and loans 21,575,211 22,235,813 21,575,211 22,235,813 Loans and advances 51,247,164 51,725,496 50,925,229 51,357,961 Securities 1,880,602 2,184,691 1,880,602 2,184,691

74,702,977 76,146,000 74,381,042 75,778,465

Financial liabilities Transaction deposits 14,551,765 15,091,470 14,551,765 15,091,470 Other deposits 50,177,489 52,607,897 50,272,472 52,155,956 Borrowings 5,447,818 417,758 5,447,818 417,758

70,177,072 68,117,125 70,272,055 67,665,184

Out of the above listed financial instruments, only securities held for trading and securities available-for-sale are measured at fair value.

Equity investments that do not have a quoted market price in an active market and for which other methods of reasonably estimating fair value are inappropriate, are excluded from measurement at fair value and stated at cost less any allowance for impairment. All other assets and liabilities have been stated at amortized cost and variable interest rates. In regular intervals their cost is redetermined. Consequently, the Bank is not exposed to the risk of changes in fair value, and the carrying value of assets and liabilities does not depart from their fair value significantly. The following methods and assumptions were used to estimate the fair values of the Bank‟s financial instruments as of December 31, 2011 and 2010:

Cash and Cash Equivalents: The carrying amount of cash and cash equivalents approximates their fair

value. Revocable deposits: The fair value of revocable deposits with no defined maturity is determined to be the amount payable on demand at the reporting date. The fair value for fixed-maturity deposits is estimated using discounted cash flow models based on rates for similar remaining maturities.

Loans to customers: The fair value of loans to customers is estimated using discounted cash flow models. The discount rates are based on current market interest rates offered for instruments with similar terms to borrowers of similar credit quality. The fair value for impaired loans is estimated using discounted cash flow analysis or underlying collateral values, where applicable. Trading and Available-for-Sale Securities: Fair value of trading and available-for-sale assets, which is

also the amount recognized in the balance sheet, is based on quoted market prices of the same or comparable instruments. These instruments are included in level 1 of the fair value measurement hierarchy.

For debt instruments, for which such quoted market prices are not available the fair value is estimated using discounted cash flow analysis based on contractual cash flows discounted at the corresponding market rates.




36.11. Fair Value of Financial Assets and Liabilities (Continued)

Derivative Financial Instruments: All derivatives are recognized on the balance sheet at fair value. For standard forward contracts and options traded on active markets, fair value is based on quoted market prices. For non-exchange traded contracts, fair value is based on dealer quotes and discounted cash flow analysis.

Transaction Deposits, Other Deposits and Borrowings: Deposits from other banks and customers are mostly on demand and with short-term maturity, all deposits bear variable market interest rates; therefore, the Bank‟s management is of the opinion that the fair value of deposits equals their carrying values. The fair value of other borrowed funds is estimated using discounted cash flow analysis based on the Bank‟s current incremental borrowing rates for similar types of borrowings arrangements. Fair Value Hierarchy

IFRS 7 “Financial Instruments: Disclosures” specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Bank‟s market assumptions. These two types of inputs have created the following fair value hierarchy.

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices); and Level 3 – Inputs for the asset or liability that are not based on observable market data (unobservable inputs). The fair value hierarchy for the financial assets and liabilities of the Bank measured at fair value as of December 31, 2011 is summarized below: Level 1 Total

Shares of banks and enterprises (Note 21) 535,389 535,389 Foreign currency savings bonds (Note 21 ) 19,944 19,944

Total assets 555,333 555,333

37. COMMITMENTS AND CONTINGENT LIABILITIES

(a) Operating Lease Commitments

The Bank has entered into commercial operating leases on certain business premises.

The future minimum lease payments are as follows:

December 31,

2011 December 31,

2010

Up to 1 year 327,678 391,715 From 1 to 5 years 817,103 1,029,925 Over 5 years 800,172 675,240

1,944,953 2,096,880



37. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)

(b) Litigations

As of December 31, 2011, the Bank was named a defendant in a certain number of legal proceedings. The total amount sought in litigations filed against the Bank, including court expenses and interest, amounted to RSD 1,852,thousand (December 31, 2010: RSD 2,018,142 thousand). The final outcome of pending lawsuits cannot be assessed with any certainty. As disclosed in Note 31 to the financial statements, at December 31, 2011, the Bank recognized provision of RSD 310,705 thousand (December 31, 2010: RSD 321,047 thousand). The abovestated amount includes potential penalty interest charged thereof, further increased by court expenses incurred in the year ended December 31, 2011. The Bank‟s management considers that no material losses will arise from other lawsuits that are not provided for. (c) Tax Risks

Tax system in the Republic of Serbia is undergoing continuous amendments. The fiscal periods remain open for review by the tax and customs‟ authorities with regard to the tax-paying entity‟s tax liabilities for a period of five years. The interpretation of tax legislation by tax authorities as applied to the transactions and activities of the Bank may not concur with the views of the Bank‟s management. Consequently, transactions may be challenged by the relevant tax authorities and the Bank could be assessed additional taxes, penalties and interest, which can be significant. The Bank‟s management believes that tax liabilities recognized in the accompanying financial statements are fairly presented.

38. RECONCILIATION OF OUTSTANDING BALANCES WITH COUNTERPARTIES

In accordance with Article 20 of the Law on Accounting and Auditing, the Bank performed reconciliation of receivables and payables with its debtors and creditors, and it maintains credible documentation on the circularization process.

The Bank submitted the requests for confirmation to its customers and debtors for the outstanding items of receivables/payables as of October 31, 2011. Upon completion of audit, the Bank performed reconciliation of outstanding receivables and payables with major clients as of December 31, 2011. Based on the exchanged outstanding item statements, the total amount of unreconciled balances of balance sheet and off-balance sheet items amounted to RSD 94,337 thousand and RSD 286,946 thousand respectively, while the requests for confirmation returned due to failure to deliver totaled RSD 195,731 thousand, whereof RSD 80,096 thousand relates to balance sheet items.

39. EXCHANGE RATES

The official exchange rates of the National Bank of Serbia, determined in the Interbank Foreign Exchange Market, used in the translation of balance sheet items denominated in foreign currencies as of December 31, 2011 and 2010 into Serbian Dinars (RSD), for the major currencies were as follows:

In RSD

2011 2010

EUR 104.6409 105.4982 USD 80.8662 79.2802 CHF 85.9121 84.4458

40. SUBSEQUENT EVENTS

There have been no significant events subsequent to the reporting date, which would require adjustments and/or disclosures in the Notes to the accompanying financial statements of the Bank as of and for the year ended December 31, 2011.

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