UPI Banka dd Sarajevo - Intesa Sanpaolo Banka

Transcription

Annual Report 2006
CONTENTS
Page
INTRODUCTION BY THE CHAIRMAN OF THE SUPERVISORY BOARD
2
REPORT OF THE SUPERVISORY BOARD
3
REPORT OF INDEPENDENT AUDITORS
4
UPI Banka d.d. Sarajevo
Annual Report 2006
INTRODUCTION
BY THE
CHAIRMAN
OF THE
SUPERVISORY
BOARD
In the year 2006, UPI Banka d.d. Sarajevo
continued along the path of commercial
growth and financial strenghtening that has
characterized its recent history. All the main
indicators of the bank’s operating performance
indicate a consistent improvement: Net Interest
Income grew by 38%, Net Fee and Commission
Income grew by 19%, all in all leading to a
solid 44% growth of Profit Before Impairment
Losses, Provisions and Income Taxes.
But in parallel to these quantitative
achievements, other aspects of the year’s
activity are worth a special mention. I hereby
particularly refer to the substantial progress
made by the bank towards the integration into
the Intesa Sanpaolo group. The bank has in
fact completed a thorough revision of its main
practices and of its organizational set up, in line
with the best-practice approach and guidelines
agreed with the parent group. Through this
complex and challenging process, I trust that
UPI Banka d.d. will be able to better tackle the increasingly competitive market environment
of Bosnia and Herzegovina and to better offer to its customers an improved range of credit
products and banking services.
None of the above achievements would have been reached withouth the dedication of our
staff and the expertise of our management. With regret, we had to separate from some of
the people who contributed to this success, since their reached retirement age or decided
to pursue other personal or professional goals. In this respect, I feel obliged to extend my
heartfelt thanks to all the people who left the bank in the course of the recent year, and in
particular to Mr. Mirsad Letić, who lead the bank until the end of 2006 and whose support and
advice I deeply treasured in the performance of my assignment.
In view of all the above, I am particularly pleased to present the year 2006 annual report of
UPI Banka d.d. Sarajevo.
Chairman of the Supervisory Board
Giancarlo Miranda
Annual Report 2006
REPORT
OF THE
SUPERVISORY
BOARD
Major change in the ownership structure of the UPI Banka that started in 2005 was
completed by February 20, 2006 after which Intesa Holding International (Banca Intesa)
became major owner of 81,18 % shares of the Bank. After this change in the ownership
structure, the new members of the Supervisory Board were appointed. At the same time, the
new Audit Committee members were appointed too. In the second half of May 2006, deputy
Director of the Bank withdrew from the Management Board of the Bank and as of December
31, 2006, Director of the Bank and one Management Board in charge for managing risk and
non-performing loans withdrew from the Bank too, due to retirement. After getting approval
by the Banking Agency (FBA) a new Management Board member, in charge of Finance, was
appointed in May 2006.
In 2006, UPI Banka operated successfully, given the fact that significant provisions have been
created for the purpose of business network development, coming reorganization and new
brand of the Bank and achieved very good financial results, which can be seen from the
Annual Report of the Bank’s operations in 2006.
Direct cooperation, regular informing and more intensive contacts of the Management
Board with the Supervisory Board and Audit Committee, enabled harmonization of the Banks
operations with the requirements of the new major owner to be implemented in the way to
positively influence achieved business results and to maintain its good position in the banking
market in Bosnia and Herzegovina.
During 2006, the Supervisory Board held five meetings. The Audit Committee held two
sessions.
The Supervisory Board, Audit Committee and Management Board discussed the issues
relating to harmonization of work and operations of the Bank with the rules of Intesa
Group and especially the activities referring to introduction of new retail products and
creating conditions for strengthening competition in the banking market in the country.
During 2006, the activities on developing business network, modernization of equipment
and improving work conditions and operations as well as providing services in accordance
with world standards were conducted.
The Bank regularly and duly fulfilled its obligations in accordance with the laws and
regulations, including the stipulated obligations towards the controlling and regulatory
bodies and institutions in the banking field.
The bodies of the Bank paid due attention to the work and activities of the internal audit
and, on the basis of the internal audit reports, they regularly considered and controlled
the work and the activities of the Bank, undertaking the measures for elimination of the
detected deficiencies in the work.
With the engagement of the major owner, the steps referring to provision of better-quality
long-term sources and improving material basis for achieving the strategic development goals
of the Bank were made. This includes the preparation for the recapitalization process.
By adopting the Financial Statements on the Bank’s operations in 2006 with the Report
of the External Auditor as well as the Annual Statement for 2006, the Supervisory Board
evaluated the work of the Management Board as successful and stated that, during the
reporting period, the Management Board, Internal Audit and the Bank’s employees complied
with legal regulations and established internal acts, decisions, programs and procedures.
Given the above statements in this Report, the Supervisory Board of the Bank recommends
that, at the General Shareholder’s Meeting, the shareholders should:
• Adopt the Annual Report of the Bank’s operations in 2006 with the Report of the
Independent Auditor.
• Adopt the Annual Statement of Accounts for 2006 and the Decision on Distribution of Profit
for 2006.
• Approve the Report on the Work of the Supervisory Board.
Sarajevo, March 21, 2007
Chairman of the Supervisory Board
Giancarlo Miranda
Annual Report 2006
Financial statements
for the year ended 31 December 2006
prepared in accordance with
International Financial Reporting Standards
and Independent Auditors’ Report
Annual Report 2006
Contents
Page
Responsibility for the Financial Statements
6
Independent auditors’ report
7
Statement of income
8
Balance sheet
9
Statement of cash flow
10
Statement of changes in shareholders’ equity
11
Notes to the financial statements
12-41
Annual Report 2006
Responsibility
for the
Financial
Statements
Pursuant to the Law on Accounting and Audit of Federation of Bosnia and Herzegovina
(Official Gazette No. 32/05), the Management Board is responsible for ensuring that financial
statements are prepared for each financial year in accordance with International Financial
Reporting Standards (IFRS) as published by the International Accounting Standards Board
(IASB) which give a true and fair view of the state of affairs and results of the Bank for that
period.
After making inquiries, the Management Board has a reasonable expectation that the Bank
has adequate resources to continue in operational existence for the foreseeable future. For
this reason, the Management Board continues to adopt the going concern basis in preparing
the financial statements.
In preparing those financial statements, the responsibilities of the Management Board
include ensuring that:
• suitable accounting policies are selected and then applied consistently;
• judgments and estimates are reasonable and prudent;
• applicable accounting standards are followed, subject to any material departures disclosed
and explained in the financial statements; and
• the financial statements are prepared on the going concern basis unless it is inappropriate
to presume that the Bank will continue in business.
The Management Board is responsible for keeping proper accounting records, which
disclose with reasonable accuracy at any time the financial position of the Bank and
must also ensure that the financial statements comply with the Bosnia and Herzegovina
Accounting Law (90/92). The Management Board is also responsible for safeguarding
the assets of the Bank and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
Signed on behalf of the Management Board
Almir Krkalić, Acting Director
Obala Kulina bana 9a
71000 Sarajevo
Bosnia and Herzegovina
19 January 2007
Annual Report 2006
Independent
auditors’
report
To the shareholders of UPI Banka d.d. Sarajevo:
Report on the financial statements
We have audited the accompanying financial statements of UPI Banka d.d. Sarajevo (the “Bank”)
set out on pages 8 to 41, which comprise of the balance sheet as at 31 December 2006, and
the income statement, statement of changes in equity and cash flow statement for the year
then ended, and a summary of significant accounting policies and other explanatory notes. The
financial statements of the Bank as of 31 December 2005, were audited by another auditor
whose report dated 21 April 2006, expressed an unqualified opinion on those statements.
Management’s responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these financial
statements in accordance with International Financial Reporting Standards.
This responsibility includes: designing, implementing and maintaining internal control
relevant to the preparation and fair presentation of financial statements that are free
from material misstatement, whether due to fraud or error; selecting and applying
appropriate accounting policies; and making accounting estimates that are reasonable in
the circumstances.
Auditor’s 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.
Those standards require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance whether the financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the Company’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
Company’s internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our audit opinion.
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial
position UPI Banka d.d. Sarajevo as of 31 December 2006, and its financial performance and
its cash flows for the year then ended in accordance with International Financial Reporting
Standards.
Deloitte d.o.o.
Sarajevo, Bosnia and Herzegovina
19 January 2007
Annual Report 2006
Statement of
Income for the
year ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
Notes
2006
2005
restated
Interest income
5
28,044
22,140
Interest expense
6
(8,778)
(8,143)
19,266
13,997
Net interest income
Fee and commission income
7
6,534
5,940
Fee and commission expense
8
(1,853)
(2,011)
4,681
3,929
Net fee and commission income
Net trading income
9
330
208
Net income upon disposal of investments
11
-
431
Other operating income
10
496
363
826
1,002
Operating income
Administrative expenses
13
(15,367)
(11,973)
Depreciation of tangible fixed assets
23
(1,087)
(1,162)
(16,454)
(13,135)
8,319
5,793
Operating Expense
PROFIT BEFORE IMPAIRMENT LOSSES,
PROVISIONS AND INCOME TAX
Impairment losses and provisions
14
(10,320)
(5,199)
Collected write-offs
12
2,784
2,619
783
3,213
(32)
(56)
751
3,157
0,00328
0,01379
PROFIT BEFORE INCOME TAX
Income tax
15
NET PROFIT FOR THE YEAR
Earnings per share (KM)
16
The accompanying notes form an integral part of these financial statements.
Annual Report 2006
Balance sheet
as at 31
December 2006
(all amounts are
expressed in
thousands of KM)
Notes
31 December
2006
31 December
2005
restated
ASSETS
Cash and cash equivalents
17
97,517
49,039
Obligatory reserve with the Central Bank
18
69,744
58,805
Placements with other banks
19
68,339
99,469
Loans and receivables
20
248,112
214,437
Assets available for sale
21
1,271
1,376
Other assets
22
4,506
2,729
Property and equipment
23
14,937
13,278
504,426
439,133
TOTAL ASSETS
LIABILITIES
Due to banks
24
61,358
43,095
Subordinated debt
25
1,890
2,051
Due to customers
26
396,827
353,871
Provisions for contingent liabilities and commitments
30
1,345
1,387
Other liabilities
27
3,047
2,285
Other provisions
28
2,967
203
467,434
402,892
Share capital
22,900
22,900
Reserves and retained earnings
14,092
13,341
36,992
36,241
504,426
439,133
68,095
63,554
TOTAL LIABILITIES
SHAREHOLDERS’ EQUITY
TOTAL SHAREHOLDER’S EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
FINANCIAL COMMITMENTS AND CONTINGENCIES
29
Signed on behalf of UPI Banka d.d. Sarajevo on 19 January 2007:
___________________________
Acting Director
Almir Krkalić
___________________________
Executive Director of Finance
Livio Mannoni
Annual Report 2006
Statement of
cash flow for
the year ended
31 December
2006
(all amounts are
expressed in
thousands of KM)
2006
2005
Restated
751
3,157
1,087
1,162
10,320
5,199
2,764
203
-
(430)
28
(20)
(10,939)
(25,943)
31,010
(20,502)
(43,666)
(43,760)
Net (increase) / decrease in other assets, before
impairment losses
(1,833)
590
Net (decrease)/increase in due to banks
18,555
10
Net increase in demand and term deposits
42,956
45,940
763
(919)
51,796
(35,313)
(28)
1,138
(2,990)
(1,527)
154
243
(2,864)
(146)
Net proceeds from borrowings
(292)
8,636
Net proceeds from subordinated debt
(161)
357
(1)
(2)
NET CASH PROVIDED BY FINANCING ACTIVITIES
(454)
8,991
NET (DECREASE)/ INCREASE IN CASH AND CASH
EQUIVALENTS
48,478
(26,468)
CASH AND CASH EQUIVALENTS AT 1 JANUARY
49,039
75,507
CASH AND CASH EQUIVALENTS AT 31 DECEMBER
97,517
49,039
Operating Activities
Net Income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Impairment losses and provisions
Other provisions
Net income from sale of assets available for sale
Loss / (gain) on disposal of property, plant and
equipment
Changes in operating assets and liabilities:
Net (increase) in due from Central Bank
Net decrease / (increase) in placements with other
banks, before impairment losses
Net (increase) in loans and receivables, before
impairment losses
Net increase in other liabilities
NET CASH FROM/(USED IN) OPERATING ACTIVITIES
Investing Activities
Net increase in assets available for sale, before
impairment losses
Net purchases of property and equipment
Proceeds from sale of property, plant and equipment
NET CASH USED IN INVESTING ACTIVITIES
Financing Activities
Dividends paid
10
Annual Report 2006
Statement of
changes in
shareholders’
equity for the
year ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
Share
capital
Balance as at 31 December 2004
Fair value
reserve
Retained
earnings
Total
22,900
353
10,069
33,322
Changes in fair value of financial assets
available for sale
-
90
-
90
Deferred tax on change of fair value of
financial assets available for sale
-
(27)
-
(27)
Disposal of financial assets available for
sale
-
(430)
-
(430)
Deferred tax on disposal of financial assets
available for sale
-
129
-
129
Profit for the year
-
-
3,360
3,360
22,900
115
13,429
36,444
-
-
(203)
(203)
22,900
115
13,226
36,241
-
-
751
751
22,900
115
13,977
36,992
Changes in equity for 2005
Restatement (Note 2)
Balance as at 31 December 2005 Restated
Changes in equity for 2006
Profit for the year
11
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
1. GENERAL
History and incorporation
UPI Banka d.d. Sarajevo, Obala Kulina Bana 9a (the “Bank”) commenced operations in 1972
and was restructured as a shareholders’ company in 1990.
During the year 2007 another bank LT Gospodarska Banka d.d. Sarajevo (the “LTG Bank”)
will merge into the Bank, with the effect of the LTG Bank cancellation (without initiation
of liquidation process), while the Bank will become its legal successor. The effect of this
upcoming transaction on these financial statements are presented in Note 28.
Principal activities of the Bank
The Bank’s main operations are as follows:
1. accepting deposits from the public and placing of deposits,
2. providing current and term deposit accounts,
3. granting short-and long-term loans and guarantees to corporate customers, private
individuals, local municipalities and other credit institutions dealing with finance lease and
foreign exchange transactions,
4. money market activities,
5. performing local and international payments,
6. foreign currency exchange and other banking-related activities,
7. providing banking services through an extensive branch network in the Bosnia and
Herzegovina
Supervisory Board till 15 March 2006
Nazif Branković
President
Husein Ahmović
Member
Marija Brezovec
Member
Hajrudin Čengić
Member
Roberto Marzanati
Member
Supervisory Board from 15 March 2006
Giancarlo Miranda
President
Ivan Krolo
Vice-President
Adriano Arietti
Member
Paolo Baessato
Member
Massimo Malagoli
Member
Roberto Marzanati
Member
Massimo Pierdicchi
Member
Board of Directors
12
Mirsad Letić
General Director
Livio Mannoni
Executive Director of Finance
Branko Ekert
Executive Director of HRM and Support
Services
Zlata Mušić
Executive Director of Business Banking
Alma Škapur
Executive Director of Treasury and
Transaction Banking
Ljubica Tankosić
Executive Director of Risk Management
Nedim Lulo
Executive Director of Retail
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
As of 31 December 2006, the following members of Board of Directors were retired:
Mirsad Letić
General Director (Note 38)
Ljubica Tankosić
Executive Director of Risk Management
(Note 38)
Audit Committee till 27 April 2006
Enver Kazazić
President
Sunita Ejubović
Member
Mijo Grgić
Member
Šefik Handžić
Member
Sabaheta Imamović
Member
Audit Committee from 27 April 2006
Antonietta Guidali
President
Gianpiero Trevisan
Member
Maria Rosa Bonatti
Member
Alen Galavić
Member
Ivanka Petrović
Member
Chief Internal Auditor - Mediha Ćatović
13
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
The shareholding structure is as follows:
31 December 2006
Shareholders
No. of
shares
Amount
‘000 KM
31 December 2005
%
No. of
shares
%
Amount
‘000 KM
Intesa Holding International S.A.
185909
18,591
81.18
80,208
8,021
35.03
European Bank for Reconstruction and
Development
22,900
2,290
10.00
45,770
4,577
19.99
Other shareholders
20,191
2,019
8.82
103,022
10,302
44.98
229,000
22,900
100.00 229,000
22,900
100.00
Total
In February 2006, Intesa Holding International S.A. took over the major share package of the
UPI Banka d.d. Sarajevo, and became the major owner of UPI Bank shares.
The Bank considers that it operates in a single business segment, and a single geographical
segment, that is the provision of banking services in Bosnia and Herzegovina.
2. PRIOR YEAR RESTATEMENT
The Bank has restated the financial statements for the year ended 31 December 2005 in order to
correct an error related to the recognition and valuation of the provisions for the long employee
benefits as required by International accounting standard 19 – Employee benefits. Since the
Management has considered these provisions to be immaterial, previously the Bank recorded
the costs of retirement severance payments when it become due. In 2006, the Management has
estimated the present value of these future obligations and as result, as of 31 December 2005,
the Bank has increased provisions and decreased net result for the year then ended for the
amount of KM 203,071.
3. ADOPTION OF NEW AND REVISED STANDARDS
In the current year, the Bank has adopted all of the new and revised Standards and
Interpretations issued by the International Accounting Standards Board (the IASB) and the
International Financial Reporting Interpretations Committee (the IFRIC) of the IASB that
are relevant to its operations and effective for annual reporting periods beginning on 1 January
2006. The adoption of these new and revised Standards and Interpretations has not resulted
in changes to the Bank’s accounting policies and accordingly has not materially affected the
amounts reported for the current or prior years.
At the date of authorisation of these financial statements, the following Standards and
Interpretations were in issue but not yet effective:
14
(a) IFRS 7 Financial Instruments: Disclosures
Effective for annual periods
beginning on or after 1 January 2007
(b) IFRIC 7 Applying the Restatement Approach under IAS
29, Financial Reporting in Hyperinflationary Economies
beginning on or after 1 March 2006
(c) IFRIC 8 Scope of IFRS 2
beginning on or after 1 May 2006
(d) IFRIC 9 Reassessment of Embedded Derivatives
beginning on or after 1 June 2006
(e) IFRIC 10 Interim Financial Reporting and Impairment
beginning on or after 1 November
2006
(f) IFRIC 11 IFRS 2: Group and Treasury Share Transactions
beginning on or after 1 March 2006
(g) IFRIC 12 Service Concession Arrangements
beginning on or after 1 January 2008
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
3. ADOPTION OF NEW AND REVISED STANDARDS (CONTINUED)
The directors anticipate that the adoption of these Standards and Interpretations in future
periods will have no material financial impact on the financial statements of the Bank.
Limitation of ability to designate financial assets and financial liabilities through
profit or loss
Following amendments to IAS 39 Financial Instruments: Recognition and Measurement in
June 2005 the ability of entities to designate any financial asset or financial liability as ‘at
fair value through profit or loss’ (FVTPL) has been limited. The adoption of this amendment
has not affected the amounts reported in prior years.
Accounting for financial guarantee contracts
The IASB has also amended IAS 39 Financial Instruments: Recognition and Measurement
to require certain financial guarantee contracts issued by the Bank to be accounted for
in accordance with that Standard. Financial guarantee contracts that are accounted for
in accordance with IAS 39 are measured initially at their fair values, and subsequently
measured at the higher of:
• the amount of the obligation under the contract, as determined in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets; and
• the amount initially recognised less, where appropriate, cumulative amortisation
recognised.
The adoption of this amendment has not materially affected the amounts reported in prior
years.
4. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
These financial statements are prepared in accordance with International Financial
Reporting Standards (‘IFRS’) as published by the International Accounting Standards Board.
As required by local legislation, the Bank prepares financial statements in accordance
with International Financial Reporting Standards (IFRSs) as published by the International
Accounting Standards Board and as modified by the regulatory requirements prescribed by
the Banking Agency of Federation of Bosnia and Herzegovina (the FBA) with respect to the
calculation of provision for impairment of financial instruments. The FBA rules require banks
to calculate the allowance for impairment of financial assets including a 2% allowance for
performing financial instruments.
Management of the Bank believes that provisions made under IFRSs as modified by the regulatory
requirements prescribed by the Banking Agency of Federation of Bosnia and Herzegovina are not
significantly different from provisions that would be made under IFRSs.
The financial statements have been prepared on the historical cost basis except for certain
non-current assets and financial instruments which are reported at fair value. The principal
accounting policies are set out below.
The financial statements are presented in thousands of convertible mark (KM’000) which is
the functional currency of the Bank.
The financial statements are prepared on an accrual basis of accounting, under the going
concern assumption.
The preparation of financial statements in conformity with IFRS requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements
and their reported amounts of revenues and expenses during the reporting period. These
estimates are based on the information available as at the balance sheet date and actual
results could differ from those estimates.
15
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basis of presentation (continued)
The Bank maintains its books of accounts and prepares financial statements for regulatory
purposes in accordance with the regulations of the Banking Agency of Federation of Bosnia and
Herzegovina (“FBA”) and Law on Banks of the Federation of Bosnia and Herzegovina.
Interest Income and Expense
Interest income is accrued on a time basis, by reference to the principal outstanding and
at the effective interest rate applicable, which is the rate that exactly discounts estimated
future cash receipts through the expected life of the financial asset to that asset’s net
carrying amount.
Interest charged on deposits is added to the principal where this is foreseen by the
agreement. Interest income is suspended when it is considered that recovery of the income
is unlikely. Suspended interest is recognized as income when collected.
Fee and commission income and expense
Fees and commissions consist mainly of fees earned on domestic and foreign payment
transactions, and fees for loans and other credit instruments issued by the Bank.
Fees for payment transactions are recognised in the period when services are rendered.
Loan origination fees, after approval and drawdown of loans, are deferred (together with
related direct costs) and recognized as an adjustment to the effective yield of the loan over
its life.
Taxation
Income tax expense represents the sum of the tax currently payable and deferred tax.
The tax expense is based on taxable income for the year. Taxable income differs from net
income as reported in the income statement because it excludes items of income or expense
that are taxable or deductible in other years and it further excludes items that are never
taxable or deductible. The Company’s liability for current tax is calculated using tax rates
that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the
carrying amount of assets and liabilities in the financial statements and the corresponding
tax basis used in the computation of taxable profit, and is accounted for using the balance
sheet liability method.
Deferred tax liabilities are generally recognised for all taxable temporary differences and
deferred tax assets are recognised to the extent that it is probable that taxable profits will
be available against which deductible temporary differences can be utilised.
The carrying amount of deferred tax assets is reviewed at each balance sheet 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 asset to be recovered. Deferred tax is calculated at the
tax rates that are expected to apply in the period when the liability is settled or the asset
realised.
Deferred tax is charged or credited in the income statement, except when it relates to items
charged or credited directly to equity, in which case the deferred tax is also dealt with in
equity.
Deferred tax assets and liabilities are offset when they relate to income taxes levied by
the same taxation authority and the Bank has the ability and intention to settle on a net
basis. The Bank is subject to various indirect taxes which are included in administrative
expenses.
16
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
For the purpose of reporting cash flows, cash and cash equivalents are defined as cash,
balances with the Central Bank (‘CBBH’) and current accounts with other banks.
Cash and cash equivalents excludes the compulsory minimum reserve with the Central Bank
as these funds are not available for the Bank’s day to day operations. The compulsory
minimum reserve with the CBBH is a required reserve to be held by all commercial banks
licensed in Bosnia and Herzegovina.
Financial assets and liabilities
Financial assets are recognised and derecognised on a trade date where the purchase or sale
of an investment is under a contract whose terms require delivery of the instrument within
the timeframe established by the market concerned, and are initially measured at fair
value, net of transaction costs, except for those financial assets classified as at fair value
through profit or loss, which are initially measured at fair value.
Financial assets are classified into the following specified categories: financial assets as ‘at
fair value through profit or loss’ (FVTPL), ‘held-to-maturity investments’, ‘available-for-sale’
(AFS) financial assets and ‘loans and receivables’. The classification depends on the nature and
purpose of the financial assets and is determined at the time of initial recognition.
Financial assets at FVTPL
Financial assets are classified as at FVTPL where the financial asset is either held for trading
or it is designated as at FVTPL.
A financial asset is classified as held for trading if:
• it has been acquired principally for the purpose of selling in the near future; or
• it is a part of an identified portfolio of financial instruments that the Bank manages
together and has a recent actual pattern of short-term profit-taking; or
• it is a derivative that is not designated and effective as a hedging instrument.
A financial asset other than a financial asset held for trading may be designated as at FVTPL
upon initial recognition if:
• such designation eliminates or significantly reduces a measurement or recognition
inconsistency that would otherwise arise; or
• the financial asset forms part of a group of financial assets or financial liabilities or both,
which is managed and its performance is evaluated on a fair value basis, in accordance with
the Bank’s documented risk management or investment strategy, and information about the
grouping is provided internally on that basis; or
• it forms part of a contract containing one or more embedded derivatives, and IAS 39
permits the entire combined contract (asset or liability) to be designated as at FVTPL.
Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognised
in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend or
interest earned on the financial asset.
17
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
Financial assets and liabilities (Continued)
The fair values of financial assets and financial liabilities are determined as follows:
• the fair value of financial assets and financial liabilities with standard terms and
conditions and traded on active liquid markets are determined with reference to quoted
market prices;
• the fair value of other financial assets and financial liabilities (excluding derivative instruments)
are determined in accordance with generally accepted pricing models based on discounted cash
flow analysis using prices from observable current market transactions; and
• the fair value of derivative instruments, are calculated using quoted prices. Where such
prices are not available use is made of discounted cash flow analysis using the applicable
yield curve for the duration of the instruments for non-optional derivatives, and option
pricing models for optional derivatives.
Held-to-maturity investments
Bills of exchange and debentures with fixed or determinable payments and fixed maturity
dates that the Group has the positive intent and ability to hold to maturity are classified
as held-to-maturity investments. Held-to-maturity investments are recorded at amortised
cost using the effective interest method less impairment, with revenue recognised on an
effective yield basis.
AFS financial assets
Listed shares and listed redeemable notes held by the Bank that are traded in an active
market are classified as being AFS and are stated at fair value. Fair value is determined in the
manner described in previous paragraphs. Gains and losses arising from changes in fair value are
recognised directly in equity in the investments revaluation reserve with the exception of
impairment losses, interest calculated using the effective interest rate method and foreign
exchange gains and losses on monetary assets, which are recognised directly in profit or loss.
Where the investment is disposed of or is determined to be impaired, the cumulative gain or
loss previously recognised in the investments revaluation reserve is included in profit or loss
for the period.
Dividends on AFS equity instruments are recognised in profit or loss when the Bank’s right to
receive payments is established.
The fair value of AFS monetary assets denominated in a foreign currency is determined in
that foreign currency and translated at the spot rate at the balance sheet date. The change
in fair value attributable to translation differences that result from a change in amortised
cost of the asset is recognised in profit or loss, and other changes are recognised in equity.
Loans and receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market.
Loan and receivables are measured at initial recognition at fair value, and are subsequently
measured at amortised cost using the effective interest method, less any allowance for
impairment. Third party expenses, such as legal fees, incurred in securing a loan are treated
as part of the cost of the transaction as well as fees received from customers.
An allowance for loan impairment is established if there is objective evidence that the Bank will
not be able to collect all amounts due. The amount of the allowance is the difference between
the carrying amount and the recoverable amount, being the present value of expected cash
flows, including amounts recoverable from guarantees and collateral, discounted at the original
effective interest rate of loans computed at initial recognition. Specific allowances are assessed
with reference to the credit standing and performance of the borrower and take into account the
value of any collateral or third party guarantees.
18
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
Financial assets and liabilities (Continued)
If the Bank determines that no objective evidence of impairment exists for an individually
assessed financial asset, whether significant or not, it includes the asset in a group of financial
assets with similar credit risk characteristics and collectively assesses them for impairment.
Assets that are individually assessed for impairment and for which an impairment loss is or
continues to be recognised are not included in a collective assessment of impairment.
Objective evidence of impairment for financial assets assessed collectively for impairment
are the adverse changes in the payment status of borrowers in the group (e.g. an increased
number of delayed payments) or national or local economic conditions that correlate with
defaults on the assets in the group. When a loan is uncollectible, it is written off against the
related allowance for impairment; subsequent recoveries are credited to the ‘Impairment
losses on loans and advances’ line in the income statement.
The Bank charges penalty interest to borrowers when a portion of the loan falls overdue.
Penalty interest is accounted for on a cash received basis in the caption ‘Interest income’.
Property and equipment
Property and equipment are started at cost less accumulated depreciation and accumulated
impairment losses, if any. Cost includes the purchase price and directly associated cost of
bringing the asset to a working condition for its intended use. Maintenance and repairs,
replacements and improvements of minor importance are expensed as incurred. Significant
improvements and replacement of assets are capitalised. Gains or losses on the retirement
or disposal of property and equipment are included in the statement of income in the period
in which they occur.
Properties in the course of construction are carried at cost, less impairment loss, if any.
Depreciation commences when the assets are ready for their intended use. Depreciation is
calculated on a straight-line basis over the estimated useful life of the applicable assets and
based upon the application of the following annual percentages to historical costs:
Buildings
Furniture and other equipment
2006
2005
1.30%
1.30%
10.00%-20.00%
10.00%-20.00%
Computers
20.00%
20.00%
Leasehold improvements
20.00%
20.00%
Software
20.00%
20.00%
Foreign currency translation
Transactions in currencies other than Bosnia and Herzegovina KM are initially recorded at the
rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities are
translated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair
value that are denominated in foreign currencies are retranslated at the rates prevailing on the
date when the fair value was determined. Non-monetary items that are measured in terms of
historical cost in a foreign currency are not retranslated. Profits and losses arising on translation
are included in the statement of income for the period.
The Bank values its assets and liabilities by middle rate of Central Bank of Bosnia and
Herzegovina valid at the date of balance sheet. The principal rates of exchange set forth by
the Central Bank and used in the preparation of the Bank’s balance sheet at the reporting
dates were as follows:
31 December 2006
EUR 1= KM 1.95583
USD 1=KM 1.485065
31 December 2005
EUR 1= KM 1.95583
USD 1=KM 1.657905
19
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
• the amount of the obligation under the contract, as determined in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets; and
• the amount initially recognised less, where appropriate, cumulative.
Off-balance sheet commitments
In the ordinary course of business, the Bank enters into credit related commitments which
are recorded in off-balance sheet accounts and primarily include guarantees, letters of
credit and undrawn loan commitments. Financial guarantee contract liabilities are measured
initially at their fair values and are subsequently measured at the higher of:
Provisions
Provisions are recognised when the Bank has a present obligation as a result of a past event,
and it is probable that the Bank will be required to settle that obligation. Management Board
estimates the provisions based at the best estimate of expenditure to settle the Bank’s
obligation. Provisions are discounted to present value where the effect is material.
Reclassification
Certain amounts in the previous year financial statements have been reclassified to conform
with the current year presentation.
Regulatory requirements
The Bank is subject to the regulatory requirements of the Federal Banking Agency. These
regulations include limits and other restrictions pertaining to minimum capital adequacy
requirements, classification of loans and off balance sheet commitments and forming
allowances to cover credit risk, liquidity, interest rate and foreign currency position. At
year end the Bank was substantially in compliance with all regulatory requirements.
20
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
5. INTEREST INCOME
2006
2005
Companies
11,906
11,123
Individuals
9,650
6,977
Domestic banks
3,217
1,725
Foreign banks
2,817
1,975
Government
250
278
Other
204
62
Total
28,044
22,140
2006
2005
Companies
3,911
3,936
Individuals
2,968
2,577
Banks and other financial institutions
1,899
1,630
Total
8,778
8,143
2006
2005
Credit card activities
1,699
1,460
Domestic payment transactions
1,593
1,599
Foreign payment transactions
976
867
Guarantees
965
903
Agency services
342
287
FX transactions
546
485
Other
413
339
Total
6,534
5,940
6. INTEREST EXPENSE
7. FEE AND COMMISSION INCOME
21
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
8. FEE AND COMMISSION EXPENSE
2006
2005
1,100
1,330
Federal Banking Agency services
309
275
Central Bank BiH services
138
119
Domestic payment transactions
126
114
E-banking service
83
82
Other
97
91
Total
1,853
2,011
2006
2005
5,345
46,536
(5,015)
(46,328)
330
208
2006
2005
Rental income
158
112
Dividend income
113
79
-
20
Other income
225
152
Total
496
363
2006
2005
Sale of shares in Triglav BH osiguranje d.d.
Sarajevo
-
362
Other sales of shares
-
68
Total
-
430
Credit card operations
9. NET TRADING INCOME
Gains on foreign exchange transactions
Loss on foreign exchange transactions
Total
10. OTHER OPERATING INCOME
Gain on disposal of fixed assets
11. NET INCOME UPON DISPOSAL OF INVESTMENTS
22
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
12. COLLECTED WRITE-OFFS
2006
2005
1,090
903
685
947
Other
1,009
769
Total
2,784
2,619
2006
2005
Personnel expenses
7,612
7,065
Provisions (Note 28)
Principal
Interest
13. GENERAL AND ADMINISTRATIVE EXPENSES
2,764
203
Representation and marketing expense
706
553
Telecommunication and post expense
763
689
Saving deposit insurance and other insurance
charges
585
510
Rent and other rent related expense
539
246
Material expenses
425
411
Energy
196
165
Consultancy expenses
158
612
Loss on disposal of property, plant and equipment
Other expenses
Total
28
-
1,591
1,519
15,367
11,973
The Bank does not have pension arrangements separate from Bosnia and Herzegovina
pension system. This system requires that current contributions by the employer be calculated
as a percentage of current gross salary payments and taxes on net salary; these expenses are
charged to the profit and loss statement in the period the related compensation is earned by
the employee.
The average number of personnel employed by the Bank during the years ended 31
December 2006 and 2005 was 217 and 200 respectively.
14. IMPAIRMENT LOSSES AND PROVISIONS
2006
Placements with banks
2005
120
(61)
9,574
4,884
133
(25)
Other assets
118
(57)
Provisions
375
458
10,320
5,199
Total
23
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
15. INCOME TAX
2006
2005
783
3,416
(Realised)/unrealised gains on financial assets
available for sale
-
(340)
Non-deductible expenses and taxable income
relieves
1,379
664
Taxable income
2,162
3,740
649
1,122
Reinvestment allowance
(487)
(841)
Tax allowance for foreign investment
(130)
(225)
32
56
Profit before income tax
Income tax liability of 30%
Income tax liability
Tax liability is based on accounting income before restatement taking into the account
non-deductible expenses and non-taxable income. Tax income rate for the years ended 31
December 2006 and 2005 was 30 %. The Bank is eligible for a 75% reduction of its liability to
corporate profit tax to the extent that it will reinvest the amount of the underlying taxable
profits into fixed assets in the following period.
The Bank is eligible for an allowance against taxable profits in proportion to its foreign
owned percentage of share capital in the first five years of such foreign investment.
16. EARNINGS PER SHARE
2006
2005
751
3,157
229,000
229,000
0,00328
0,01379
2006
2005
Cash on hand in domestic currency
6,125
5,573
Cash on hand in foreign currency
Net profit
Weighted average number of ordinary shares
outstanding
Basic earnings per share
17. CASH AND DUE FROM BANKS
4,226
3,719
Current account in domestic currency with the
Central Bank
85,778
38,916
Correspondent accounts with banks in foreign
currency
1,388
831
97,517
49,039
Total
24
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
18. OBLIGATORY RESERVE AT CENTRAL BANK
Obligatory reserve
Total
2006
2005
69,744
58,805
69,744
58,805
Minimum obligatory reserve as of 31 December 2006 and 31 December 2005 is calculated in
amount of 15% of the average amount of total deposits and the borrowings for each working
day during 10 calendar days following the period of maintaining the obligatory reserve.
19. PLACEMENTS WITH OTHER BANKS
2006
2005
1,600
1,613
OECD countries
66,900
97,897
Placements to other financial institutions, gross
68,500
99,510
(161)
(41)
68,339
99,469
Short-term placements with banks in following
countries:
Bosnia and Herzegovina
Less: Provisions for possible losses for placements
Total
The interest rate for placements in EUR was 2.72% – 2.84% p.a. and 1.42% – 2.44% p.a. and
for placements in USD 5.09% p.a. and 0.90% – 3.16% p.a. as at 31 December 2006 and 31
December 2005, respectively. Interest rate on placements in other currencies was 4.53% p.a.
as at 31 December 2006. There were no placements in other currencies in 2005.
The movements in the provision for impairment of placements with other banks are
summarized as follows:
Balance as at 1 January
2006
2005
41
102
Provisions
149
30
Reversal provisions
(29)
(91)
Balance as at 31 December
161
41
25
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
20. LOANS AND RECEIVABLES
Short-term loans in domestic currency
Short-term loans in foreign currency
Current portion of long-term loans
Total short-term loans
2006
2005
140,872
152,000
199
-
14,159
10,855
155,230
162,855
Long-term loans in domestic currency
91,560
54,430
Long-term loans in foreign currency
34,035
22,191
(Current portion of long-term loans)
(14,159)
(10,855)
Total long-term loans
111,436
65,766
Total loans before provisions
266,666
228,621
Provision for impairment
(18,554)
(14,184)
Total
248,112
214,437
Short-term loans are granted for periods of 1 to 365 days. The majority of short-term loans
in domestic currency are granted to clients for working capital financing. Long-term loans
are mostly granted to individuals for housing and vehicle purchases.
The movements in the provision for impairment of loans are summarized as follows:
Provisions charged
2006
2005
14,184
11,223
22,026
13,117
(12,452)
(8,233)
Write-offs
(5,204)
(1,923)
18,554
14,184
Reversal of provision
Total amount of non-performing loans on which interest was suspended as at 31 December
2006 and 2005 was KM 17,398 thousand and KM 25,770 thousand, respectively.
2006
2005
Manufacturing industry
62,633
59,253
Trade
50,533
43,039
Construction industry
15,573
20,699
Services, finance, sport, tourism
12,792
9,242
371
4,674
11,694
12,243
4,721
4,442
Administrative and other public institutions
Agriculture, forestry, mining and energy
Transport and telecommunications
Other
Citizens
Total
26
542
1,217
107,807
73,812
266,666
228,621
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
20. LOANS AND RECEIVABLES (CONTINUED)
Interest rates for granted loans as at 31 December 2006 and 2005 are summarized as
follows:
31 December 2006
‘000 KM
Annual
interest rate
31 December 2005
‘000 KM
Annual
interest rate
Domestic currency
Companies
145,137
4.40% - 13.00%
137,005
3.65% - 18.00 %
87,294
3.88% - 14.50%
69,425
2.00% - 18.00%
Companies
13,721
7.20% - 10.93%
17,804
7.58% - 10.27%
Citizens
20,514
4.61% - 10.00%
4,387
8.00% - 10.00
Citizens
Foreign currency
Total
266,666
228,621
21. ASSETS AVAILABLE FOR SALE
31 December 2006
31 December 2005
Gross value
1,319
1,573
Impariment
(48)
(197)
1,271
1,376
Total
Assets available for sale include investments of 20.03% in share capital of Bamcard d.d.
Sarajevo in the amount of KM 488 thousand, since the Bank is planning to sell this investment
in the near future.
Also, assets available for sale include investments of 3% or less in various companies in
Bosnia and Herzegovina recognized at cost of KM 95 thousand (2005: KM 461 thousand) and
one investment representing a 14.63% shareholding in Bosna Reosiguranje d.d. Sarajevo
which is recognised at estimated fare value of KM 736 thousand (2005: KM 736 thousand).
2006
2005
197
222
Provisions
133
-
Write offs
-
(25)
(282)
-
48
197
27
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
22. OTHER ASSETS
Prepaid income taxes
Prepaid expenses
Fees receivable
2006
2005
2,282
1,243
796
136
430
521
Other assets
1,186
1,046
Total other assets
4,694
2,946
Provision for impairment
(188)
(217)
4,506
2,729
Total
The movements in the provision for impairment of other assets are summarized as follows:
Provisions
2006
2005
217
274
948
124
(830)
(181)
Write-offs
(147)
-
188
217
23. PROPERTY AND EQUIPMENT
Land and
Buildings
‘000 KM
Computers
and other
equipment
‘000 KM
Software
‘000 KM
Construction
in progress
Leasehold
improvements
Total
‘000 KM
9,986
5,674
846
967
187
17,660
‘000 KM
‘000 KM
Cost value
31 December 2005
Additions
Transfers from/to
Transfer to other assets
Disposals
-
52
-
2,938
-
2,990
350
1,821
128
(2,299)
-
-
-
-
-
-
(187)
(187)
-
(163)
(335)
(2)
-
10,173
7,212
972
1,606
31 December 2005
584
3,189
484
-
125
4,382
Depreciation in 2006
134
783
170
-
-
1,087
-
-
-
-
(125)
(125)
31 December 2006
(500)
19,963
Depreciation
Transfer to other assets
Disposals
28
(8)
(308)
(2)
-
-
(318)
31 December 2006
710
3,664
652
-
-
5,026
Net book value:
31 December 2006
9,463
3,548
320
1,606
-
14,937
Net book value:
31 December 2005
9,402
2,485
362
967
62
13,278
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
24. DUE TO BANKS
2006
2005
Current portion of long-term borrowings
12,322
10,593
Long-term borrowings from foreign banks and other institutions
35,686
32,714
8,220
9,755
(12,322)
(10,593)
Total long-term borrowings
31,584
31,876
Current accounts in domestic currency
14,174
14
Long-term borrowings from domestic banks and other institutions
(Current portion of long-term borrowings)
Current accounts in foreign currency
Total current accounts
Long-term deposits
Total
5
-
14,179
14
3,273
612
61,358
43,095
Long-term borrowings from international banks and non-banking financial institutions as at
31 December 2006 and 31 December 2005 were as follows:
2006
2005
848
249
Federal Ministry of Forest and Water Supply, Sarajevo
1,028
1,028
Investment Bank of Federation of Bosnia and Herzegovina
6,133
7,868
21
21
Federal Ministry of Finance
The Lutheran World Federation
Investment Guarantee Agency (IGA)
191
589
Partners for Development, USAID Moneterization
1,750
2,265
Banca Intesa SPA Milano
9,856
-
USAID
1,340
2,419
European Bank for Research and Development, London
9,643
12,966
OPEC FUND for International Development
2,294
2,802
Croation Bank for Development (HBOR)
1,636
1,761
European FUND for Southeast Europe
9,166
10,501
43,906
42,469
Total
Interest rates for long-term borrowings from banks were in the range from 0.00% to 8.11%
per annum and from 0.00% to 8.11% per annum as of 31 December 2006 and 31 December
2005, respectively.
29
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
25. SUBORDINATED DEBT
2006
2005
USAID
1,890
2,051
Total
1,890
2,051
The subordinated loan from USAID as of 31 December 2006 and 31 December 2005 respectively
amounting to KM 1,890 thousand and KM 2,051 thousand, was received in August 2003 in the
amount of KM 2,408 thousand, and it is repayable in 60 semi annual installments starting from 1
December 2003 until 1 September 2018. Interest rate is Euro LIBOR p.a.
Subject to the approval of the Federal Banking Agency, the subordinated debit may be used
as additional capital.
26. DUE TO CUSTOMERS
2006
2005
20,145
11,296
5,062
4,143
25,207
15,439
195,728
172,495
Demand deposits:
Citizens:
In KM
In foreign currencies
Subtotal
Legal entities:
In KM
30,617
30,857
226,345
203,352
251,552
218,791
In KM
24,852
15,771
64,751
44,399
Subtotal
89,603
60,170
In KM
41,480
57,414
14,192
17,496
Subtotal
Total demand deposits
Term deposits:
Citizens:
Legal entities:
Subtotal
55,672
74,910
Total term deposits
145,275
135,080
Total
396,827
353,871
During 2006 interest rates for demand deposits in KM were from 0.25% to 1.15% ( during
2005 from 0.25% to 3.00%), and 0.25% for demand deposits in foreign currency (during 2005
0.25%). Short-term deposit interest rates were from 0.00% to 4.70% and from 0.00% to 6.00%
during 2006 and 2005, respectively. Long-term deposit interest rates were from 0.00% to
6.50% and from 0.00% to 6.00% during 2006 and 2005, respectively.
30
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
27. OTHER LIABILITIES
2006
2005
Liabilities to employees bonuses
675
378
Liabilities to vendors
820
493
Liabilities to shareholders
148
149
Managed fund difference (Note 33)
26
57
Deferred tax liability
50
50
Other liabilities
1,328
1,158
Total
3,047
2,285
2006
Restated
1,923
-
28. OTHER PROVISIONS
Provisions relating to the merger of LT Gospodarska banka d.d. Sarajevo
2005
Provisions relating to the court case with tax authority
822
-
Provisions for retirement employee benefits
222
203
2,967
203
Total
Regarding the forthcoming merger process of LT Gospodarska banka d.d. Sarajevo, another
Banca Intesa Group entity, into the Bank, the Supervisory board made the decision on initiation
of merger, estimating the present value of future obligations relating to the merger activities.
Provisions regarding the court case are made based on the uncertainty in the outcome of the
ongoing court case with the tax authority.
Changes in provisions can be presented as follows:
2006
Balance at the beginning of the year
Provisions for retirement employee benefits
Provisions relating to the merger of LT Gospodarska banka d.d. Sarajevo
Provisions relating to the court case with tax authority
Balance at the end of the year
2005
203
-
19
203
1,923
-
822
-
2,967
203
31
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
29. FINANCIAL COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Bank has been involved in a number of legal proceedings
to recover collateral or outstanding credit balances, as well as related interest and expenses
from defaulted credit customers and interbank counterparts. The management of the Bank
believes that any legal proceedings pending as at 31 December 2006 will not result in material
loss to the Bank.
2006
2005
Payment guarantees
10,800
14,721
Performance guarantees
19,187
19,917
Contingent liabilities
Letters of credit
Total contingent liabilities
1,133
2,328
31,120
36,966
Commitments
Unused portion of overdraft loans
36,975
26,588
Total commitments
36,975
26,588
Total contingent liabilities and commitments
68,095
63,554
30. PROVISIONS
In the ordinary course of business, the Bank enters into credit related commitments which
are recorded in off-balance sheet accounts and primarily include guarantees, letters of
credit and undrawn loan commitments. Provisions for contingent liabilities are recognised
when the Bank has a present obligation as a result of a past event, and it is probable that the
Bank will be required to settle that obligation. Management Board estimates the provisions
based at the best estimate of expenditure to settle the Bank’s obligation.
Movements in provision for contingent liabilities and commitments is as follows:
2006
2005
1,387
1,259
Provisions
2,008
1,539
(1,633)
(1,081)
(417)
(330)
1,345
1,387
Reversal of provisions
Write - offs
32
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
31. RELATED-PARTY TRANSACTIONS
(all amounts are
expressed in
thousands of KM)
b. associates – enterprises in which the Bank has significant influence and which is neither a
subsidiary nor a joint venture of the investor;
Related parties, as defined by IAS 24, are those counter parties that represent:
a. enterprises that directly, or indirectly through one or more intermediaries, control, or are
controlled by, or are under common control with, the reporting enterprise. (This includes
holding companies, subsidiaries and fellow subsidiaries);
c. individuals owning, directly or indirectly, an interest in the voting power of the Bank that
gives them significant influence over the Bank, and anyone expected to influence, or be
influenced by, that person in their dealings with the Bank;
d. key management personnel, that is, those persons having authority and responsibility for
planning, directing and controlling the activities of the Bank, including directors and officers
of the Bank and close members of the families of such individuals; and
e. enterprises in which a substantial interest in the voting power is owned, directly or indirectly,
by any person described in (c) or (d) or over which such a person is able to exercise significant
influence. This includes enterprises owned by directors or major shareholders of the Bank and
enterprises that have a member of key management in common with the Bank.
33
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
31.RELATED-PARTY TRANSACTIONS (CONTINUED)
In considering each possible related party relationship, attention is directed to the
substance of the relationship, and not merely the legal form.
2006
2005
Supervisory Board members and close family members
-
65
Audit Committee and close family members
-
24
425
206
Bank accounts Privredna Banka Zagreb
26
-
Bank accounts Banca Intesa SPA Milano
14
-
Bank accounts Banca Intesa NY Branch
16
-
Other receivables from EBRD
58
60
Other receivables from Banca Intesa SPA Milano
36
-
Other receivables from Privredna Banka Zagreb
120
-
695
355
Deposits Supervisory Board members and close family members
-
606
Deposits Audit Committee and close family members
-
156
Key Management personnel and close family members
Deposits key Management personnel and close family members
1,868
1,025
Borrowings EBRD
9,646
12,966
3
-
9,856
-
21,373
14,753
Due to banks Privredna Banka Zagreb
Borrowings Banca Intesa SPA Milano
2006
2005
Interest income Supervisory Board members and close family members
-
8
Interest income Audit Committee and close family members
-
9
Interest income key Management personnel and close family members
34
29
23
Interest income Privredna banka Zagreb
162
-
Interest income Banca Intesa SPA Milano
1
-
Interest income Banca Intesa NY Branch
5
-
Other income EBRD
8
-
Other income Privredna banka Zagreb
8
-
Other income key Management personnel and close family members
5
-
218
40
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
31. RELATED-PARTY TRANSACTIONS (CONTINUED)
2006
2005
Interest expense EBRD
637
701
Interest expense Banca Intesa SPA Milano
154
-
Interest expense Supervisory Board members and close family members
-
25
Interest expense Audit Committee and close family members
-
6
77
29
Interest expense key Management personnel and close family members
Other expenses Banca Intesa NY Branch
2
-
Other expenses key Management personnel and close family members
29
154
Other expense Privredna Banka Zagreb
11
-
Other expense Banca Intesa SPA Milano
4
-
Other expense EBRD
2
-
916
915
A number of banking transactions are entered into with related parties in the normal course
of business. These transactions were carried out on commercial terms and conditions and
at market rates.
The remuneration of Directors and other key Management were as follows:
2006
2005
Compensation for Directors and other key Management
446
437
Taxes and contributions on compensation
308
302
Termination benefits
234
-
Bonuses to Management Board – Accrued expenses
294
207
Compensations for Supervisory Board members
7
42
Compensations for Audit Board members
4
8
45
44
1,338
1,040
Other Management benefits
35
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
32. ESTIMATED FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
Fair value of financial instruments is the amount for which an asset could be exchanged, or a
liability settled, between knowledgeable, willing parties in an arm’s-length transaction. Where
available, fair value is based on quoted market prices. However, no readily available market
prices exist for a significant portion of the Bank’s financial instruments. In circumstances where
the quoted market prices are not readily available, the fair value is estimated using discounted
cash flow models or other pricing techniques as appropriate. Changes in underlying assumptions,
including discount rates and estimated future cash flows, significantly affect the estimates.
Therefore, the calculated fair market estimates may not be realisable in a current sale of the
financial instrument.
It is the opinion of the management of the Bank that the fair value of the Bank financial assets
and liabilities are not materially different from the amounts stated in the balance sheets as at
31 December 2006 and 31 December 2005. In estimating the fair value of the Bank’s financial
instruments, the following methods and assumptions were used.
(a) Cash balances with the Central bank
The carrying values of cash and balances with the Central bank are generally deemed to
approximate their fair value.
(b) Due from banks
The estimated fair value of amounts due from banks that mature in 180 days or less
approximates their carrying amounts. The fair value of other amounts due from banks is
estimated based upon discounted cash flow analyses using interest rates currently offered
for investments with similar terms (market rates adjusted to reflect credit risk). The fair
value of non-performing amounts due from banks is estimated using a discounted cash
flow analysis or the appraised value of the underlying collateral. Allowances are not taken
into consideration when calculating fair values.
(c) Loans and advances to customers
The fair value of variable yield loans that regularly reprice, with no significant change in credit
risk, generally approximates their carrying value. The fair value of loans at fixed interest rates
is estimated using discounted cash flow analyses, based upon interest rates currently offered for
loans with similar terms to borrowers of similar credit quality. The fair value of non-performing
loans to customers is estimated using a discounted cash flow analysis or the appraised value of
the underlying collateral, where available. Loans at fixed interest rates represent only a fraction of the total carrying value and hence the fair value of total loans and advances to customers
approximates the carrying values as at the balance sheet date.
(d) Amounts due to banks and customers
The fair value of term deposits payable on demand represents the carrying value of amounts
payable on demand as at the balance sheet date. The fair value of term deposits at variable
interest rates approximates their carrying values as at the balance sheet date. The fair value
of deposits at fixed interest rates is estimated by discounting their future cash flows using
rates currently offered for deposits of similar remaining maturities.
36
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
33. MANAGED FUNDS
The Bank manages assets on behalf of third parties. These assets are recorded separately
from the Bank’s assets. For its services, the Bank charges a fee amounting from 0.75% to
2.50% p.a. (in 2005 from 0.75% to 2.50% p.a.) of the total amount contributed.
2006
2005
2,519
2,742
18,326
18,838
2,415
3,053
168
482
-
889
23,428
26,004
21,603
23,925
1,799
2,022
23,402
25,947
26
57
37
Liabilities
Investment Bank of Federation of Bosnia and Herzegovina
Companies
Investment Guarantee Agency (IGA)
Managed on behalf and for the account of Sarajevo Canton, Ministry of
finance
Managed on behalf and for the account of individuals
Total
Assets
Loans to companies
Loans to citizens
Total
Amounts due to original creditors – managed funds (Note 27)
The Bank has not issued any guarantees related to managed funds.
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
34. FOREIGN CURRENCY RISK
The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency
exchange rates on its financial position and cash flows.
The table below provides an analysis of the Bank’s main currency exposures. The
remaining currencies are shown within ‘Other currencies.’ The Bank monitors its foreign
exchange (FX) position for compliance with the regulatory requirements of the Federal
Banking Agency established in respect of limits on open positions. The Bank seeks to
match assets and liabilities denominated in foreign currencies to avoid foreign currency
exposures.
‘000 KM
KM
EUR
USD
Other
currencies
Provisions
Total
91,903
4,264
355
995
-
97,517
Obligatory reserve with the Central
Bank
69,744
-
-
-
-
69,744
1,610
59,398
5,016
2,476
(161)
68,339
232,433
33,780
453
-
(18,554)
248,112
1,290
29
-
-
(48)
1,271
Other assets
4,309
373
12
-
(188)
4,506
ASSETS
Fixed and intangible assets
Total assets (1)
14,937
-
-
-
-
14,937
416,226
97,844
5,836
3,471
(18,951)
504,426
28,303
32,604
451
-
-
61,358
1,890
-
-
-
-
1,890
282,205
108,872
5,340
410
-
396,827
LIABILITIES
Due to banks
Subordinated debt
Due to customers
Provisions
1,345
-
-
-
-
1,345
Other liabilities
2,912
128
7
-
-
3,047
Other provisions
2,967
-
-
-
-
2,967
319,622
141,604
5,798
410
-
467,434
Balance as at 31 December 2006,
net (1) - (2)
96,604
(43,760)
38
3,061
(18,951)
36,992
Total assets as of 31 December
2005 (3)
328,888
119,680
4,507
697
(14,639)
439,133
Total liabilities as of 31 December
2005 (4)
276,475
122,196
3,886
335
-
402,892
TOTAL BALANCE AS AT
31 DECEMBER 2005, NET (3) – (4)
52,413
(2,516)
621
362
(14,639)
36,241
Total liabilities (2)
38
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
35. INTEREST RATE RISK
Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes
in market interest rates. The length of time for which the rate of interest is fixed on a financial
instrument, therefore, indicates to what extent it is exposed to interest rate risk. The table
below provides information on the extent of the Bank’s interest rate exposure based either on
the contractual maturity date of its financial instruments or, in the case of instruments that
reprice to a market rate of interest before maturity, the next repricing date. It is the policy
of the Bank to manage the exposure to fluctuations in net interest income arising from
changes in interest rates by the degree of repricing mismatch in the balance sheet. Those
assets and liabilities that do not have contractual maturity date or are not interest bearing
are banked in ‘maturity undefined’ category.
‘000 KM
0-1
month
1 to 6
months
6 to 12
months
Over 1
year
Non
interest
bearing
Provision
for
impairment
Total
87,166
-
-
-
10,351
-
97,517
Obligatory reserve with the
Central Bank
69,744
-
-
-
-
-
69,744
65,359
1,211
1,744
186
-
(161)
68,339
59,272
57,607
52,732
97,055
-
(18,554)
248,112
-
-
-
1,224
95
(48)
1,271
Other assets
-
-
-
-
4,694
(188)
4,506
-
-
-
-
14,937
-
14,937
281,541
58,818
54,476
98,465
30,077
(18,951)
504,426
14,476
5,733
6,022
30,806
4,321
-
61,358
ASSETS
TOTAL ASSETS (1)
LIABILITIES
Due to banks
Subordinated debt
Due to customers
Provisions
Other liabilities
Other provisions
4
80
80
1,726
-
-
1,890
246,710
43,175
45,269
46,031
15,642
-
396,827
-
-
-
-
1,345
-
1,345
2,981
-
-
66
-
-
3,047
-
-
-
-
2.967
-
2.967
264,171
48,988
51,371
78,629
24,275
-
467,434
Mismatch as of 31 December
2006 (1) - (2)
17,370
9,830
3,105
19,836
5,802
(18,951)
36,992
Total assets as at
31 December 2005
371,889
10,551
31,555
11,197
28,580
(14,639)
439,133
Total liabilities as at
31 December 2005
220,872
20,182
55,802
83,510
22,526
-
402,892
151,017
(9,631)
(24,247)
(72,313)
6,054
(14,639)
36,241
TOTAL LIABILITIES (2)
Balance mismatch as of
31 December 2005
39
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
36. LIQUIDITY RISK
Liquidity risk is a measure of the extent to which the Bank may be required to raise funds
to meet its commitments associated with financial instruments. The Bank maintains its
liquidity profiles in accordance with regulations laid down by the Federal Banking Agency.
The table below provides an analysis of assets, liabilities and shareholders’ equity into
relevant maturity groupings based on the remaining period from the balance sheet date
to the contractual maturity date. It is presented under the most prudent consideration
of maturity dates where options or repayment schedules allow for early repayment
possibilities. Those assets and liabilities that do not have a contractual maturity date are
grouped together under ‘maturity undefined’ category.
The Bank is exposed to daily calls on its available cash resources from overnight deposits,
current accounts, maturing deposits, loan drawdowns, guarantees and from margin and other
calls on cash-settled derivatives. The Bank does not maintain cash resources to meet all of
these needs as experience shows that a minimum level of reinvestment of maturing funds can
be predicted with a high level of certainty. The Bank sets limits on the minimum proportion of
maturing funds available to meet such calls and on the minimum level of interbank and
other borrowing facilities that should be in place to cover withdrawals at unexpected levels
of demand.
‘000 KM
On
demand
0-6
months
6-12
months
Over
1 year
Non
defined
maturity
Provisions
Total
Cash and due from banks
97,517
-
-
-
-
-
97,517
Due from the Central Bank
69,744
-
-
-
-
-
69,744
65,359
1,211
1,744
186
-
(161)
68,339
59.272
57,607
52,732
97,055
-
(18,554)
248,112
-
-
-
-
1,319
(48)
1,271
4,694
-
-
-
-
(188)
4,506
ASSETS
Other assets
Total assets (1)
-
-
-
-
14,937
-
14,937
296,586
58,818
54,476
97,241
16,256
(18,951)
504,426
14,476
5,990
6,172
34,720
-
-
61,358
LIABILITIES
Due to other banks
Subordinated debt
Due to customers
Provisions
Other liabilities
Other provisions
80
80
1,726
-
-
1,890
43,175
45,269
56,815
-
-
396,827
-
-
-
-
1,345
-
1,345
2,981
-
-
4
62
-
3,047
-
-
-
-
2,967
-
2,967
269,029
49,245
51,521
93,265
4,374
-
467,434
TOTAL LIQUIDITY MISMATCH
AS OF 31 December 2006
27,557
9,573
2,955
3,976
11,882
(18,951)
36,992
Total assets as of
31 December 2005
371,889
17,514
38,516
11,197
14,656
(14,639)
439,133
Total liabilities as of
31 December 2005
220,872
38,921
55,802
83,510
3,787
-
402,892
151,017
(21,407)
(17,286)
(72,313)
10,869
(14,639)
36,241
Total liabilities (2)
TOTAL LIQUIDITY MISMATCH
AS OF 31 DECEMBER 2005
40
4
251,568
Annual Report 2006
Notes to the
financial
statements
for the year
ended 31
December 2006
(all amounts are
expressed in
thousands of KM)
37. CREDIT RISK
The Bank takes on exposure to credit risk which is the risk upon credit approval and when
counterparty will be unable to pay amounts in full when due. The Bank structures the levels
of credit risk it undertakes by placing limits on the amount of risk accepted in relation to
one borrower, or groups of borrowers, and to industry segments. Such risks are monitored
on a revolving basis and subject to an annual or more frequent review.
Exposure to credit risk is managed through regular analysis of the ability of borrowers and
potential borrowers to meet interest and capital repayment obligations and by changing
these lending limits where appropriate. Exposure to credit risk is also managed in part by
obtaining collateral and corporate and personal guarantees.
Commitments arising from the issuance of letters of credit. Documentary letters of credit,
which are written irrevocable undertakings by the Bank on behalf of a customer (mandatory)
authorising a third party (beneficiary) to draw drafts on the Bank up to a stipulated amount
under specific terms and conditions, are collateralised by the underlying shipments of goods
to which they relate and therefore have significantly less risk. Cash requirements under
open letters of credit are considerably less than the commitments under issued guarantees
or stand-by letters of credit. However, the Bank records provisions against these instruments
on the same basis as is applicable to loans.
Commitments to extend credit, undrawn loan commitments, unutilised overdrafts and
approved overdraft loans. The primary purpose of commitments to extend credit is to
ensure that funds are available to a customer as required. Commitments to extend credit
represent unused portions of authorisations to extend credits in the form of loans,guarantees
or stand-by letters of credit. Commitments to extend credit issued by the Bank represent
issued loan commitments or guarantees, undrawn portions of and approved overdrafts loans.
Commitments to extend credit or guarantees issued by the Bank which are contingent upon
customers maintaining specific credit standards (including the condition that a customer’s
solvency does not deteriorate) are revocable commitments.
Irrevocable commitments represent undrawn portions of authorised loans and approved
overdraft facilities because they result from contractual terms and conditions in the credit
agreements.
38. EVENTS AFTER THE BALANCE SHEET DATE
Under decisions of the Supervisory board, the following new members of Board of Directors
are appointed starting from 1 January 2007:
Almir Krkalić
Acting Director
Till 31 March 2007
Igor Bilandžija
Executive Director of Risk
Management
Till 4 June 2007
38. APPROVAL OF THE FINANCIAL STATEMENTS
These financial statements were approved by the Management Board on 19 January 2007.
Signed on behalf of the Management Board:
___________________________
Almir Krkalić
Acting Director
____________________________________
Livio Mannoni
Executive director of the Finance Department
41
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UPI Banka dd Sarajevo - Intesa Sanpaolo Banka

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