annual report 2006 / commerzbank prague · Commerzbank’s Prague branch is focused on the corporate banking sector, and provides clients with complex and professional banking services,

/ annual report 2006 / commerzbank prague

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contents

Management report

Managementreportforthebusinessyear2006 5

Commerzbank AG

Commerzbankworldwide,CommerzbankinPrague 6 PragueBranch,GeneralManagers,Headsofdepartments 7

Report of independent auditors

Reportofindependentauditors 9

Financial statements

Balancesheetasat�1December2006 10 Off-balancesheetasat�1December2006 11 Incomestatementfortheyearended�1December2006 12 Statementofchangesinequityfortheyearended�1December2006 1�

Notes to financial statement for the year ended 31 December 2006

1Generalinformation 14 2Accountingpolicies 14 �Cashanddepositswithcentralbanks 18 4Duefrombanks 18 5Duefromcustomers 19 6Securities 20 7Longtermintangibleandtangiblefixedassets 21 8Otherassets 22 9Allowances,provisionsandwriteoffs 2� 10Duetobanks 25 11Duetocustomers 26 12Otherliabilities 27 1�Equityandprofitdistribution 27 14Contingenciesandcommitments 27 15Interestreceivableandsimilarincome 29 16Interestpayableandsimilarexpense 29 17Feeandcommissionincome �0 18Commissionandfeeexpense �0 19Gainslesslossesfromfinancialtransactions �0 20Otheroperatingincome �1 21Administrativeexpenses �1 22Taxation �2 2�Financialrisks �� 24Subsequentevents 42

Management Report

for Business Year 2006

2006wasoneofthemostsuccessfulyearseverfortheCzecheconomy.GiventhisfavourablemacroeconomicenvironmentwithhighGDPgrowth,maintainedpricestabilityand low interest rates,2006wasalsoagainayearwhenCommerzbankPragueachieveditsobjectives.

Thedevelopmentof the total assets ismainly influencedby thevolatilebank tobankbusinessleadingtoadecreaseinthebalancesheetnumber.

Ofmoreimportanceandreflectingthesuccessfulperformanceofthecorecorpo-ratebankingbusinessisthesignificantincreaseofreceivablesduetocustomersofmorethanonethird.IthasbeenbyfarthebiggestincreaseforyearsalsoshowingourcommitmenttotheCzechmarket.Tothegrowthincorporatebankingassetscontributedinparticularthebusinesswithnewclientsaswellasmajorstructuredfinancetransactions.

The business in private banking was dominated by securities advice provided inwealth-relatedissues.Ourclientsareabletobenefitdirectlyfromtheinvestmentopportunities in the international financial markets thanks to Commerzbank´sworldwidenetwork.

SinceCommerzbankisoneofthetopissuersofequityderivativesproductswecanofferinterestinginvestmentopportunitiesalsotoourCzechclients.

Thecombinationofapersonnel relationshipmanagementapproachwithabroadinternational product rangehas lead also in 2006 togreat success in newclientacquisition.

2007 has started promisingly; we are very confident to achieve our ambitiousbusinessgoalsalsointhenewyear.

NewsalesofficeswillbesetupinHradecKrálovéandinPlzeňaimedtoaccommodatethebusinesswithcorporateclientsintheregions.

Dr. Jutta Walter, Günter Steiner, GeneralManager GeneralManager

5

Commerzbank worldwide

Commerzbank´s international activities are geared to institutional clients andcompanies.Insomebranchesprivate-bankingfacilitiesexistforwealthyprivatecustomers.

Inthenineties,thebankprimarilyexpandeditspresenceinCentralandEasternEurope. Inorder to complement itsoperational outlets inMoscow,Bratislava,Budapest,PragueandBrno, itmaintains representativeoffices inAlmaty,Bel-grade,Bucharest,Kiev,Minsk,Moscow,Novosibirsk, Tashkent andZagreb. InPoland,itisactivethroughthesignificantBREBank,inwhichitholdsacontrollingstakeof72%.Insouth-EastEurope,CommerzbankhasstrengtheneditspositionthroughparticipationinlocalProCreditbanks.Inadditiontocontributingexpertiseandexperience,Commerzbank,asthecommercialpartneroftheseinstitutionsalsohandlesinternationalpaymentsandforeigncommercialbusiness.

InNorthAmerica,Commerzbank´sbranchesinNewYork,Atlanta,ChicagoandLosAngelesconductcommercialbankingandinvestmentbankingbusiness.InLatinAmerica,NorthAfricaandtheNearandMiddleEast,Commerzbankprima-rilymaintainsrepresentativeoffices.

AsianactivitiesarebundledintheformofCommerbankAsia-PacificinSingapore.

Commerzbank in Prague

CommerzbankopeneditsPragueBranchin1992.ThewiderangeofservicesthatCommerzbankprovidesinprivate,aswellascorporatebanking,hasmadeCommerzbankoneofthemostimportantbanksintheCzechRepublic.

Commerzbank’s Prague branch is focused on the corporate banking sector,andprovidesclientswithcomplexandprofessionalbankingservices,consulta-tionsandawiderangeofproductstailoredtoindividualneeds.Otherserviceofferings include structured and project financing, and advisory services forstrategicinvestors.

Commerzbankisalsoabankfordemandingclientsinthefieldofprivateban-king.TheofferofbankingproductsforprivateclientsisuniqueontheCzechmarket.

ThankstotheBank’sstrongpresenceinGermanyanditsglobalnetwork,Com-merzbankPragueisabletoofferlocalclientsastableenvironment,internationalknow-howandthepossibilityofmoreflexibletradingintheworldmarkets.

6

Prague Branch

General Managers:

Dr. Jutta Walter Günter Steiner(till�0.4.2007)

Heads of departments:

7

Dr. Bodo ThönsCorporateBankingDepartment

Dr. Petr VozkaCorporateBankingDepartment

Margaret DvorakStructuredFinance

Klaus H. SchuckCreditOffice

Ines SchoberPrivateBanking

RNDr. Jaromír Hronek, CSc.Treasury

Ralph KloseTradeFinance

Bernd KrönkeAdministration

Eva CollardováAccountingDepartment

Hana JáňováPersonnelDepartment

Dr. Bronislav HýblCorporateBankingDepartment,BrnoOffice

Dr. Roman ZedníčekCorporateBankingDepartment,OstravaOffice

88

9

REPORTOFINDEPENDENTAUDITORSTOTHEMANAGEMENTOFCOMMERZBANKAG,PRAGUEBRANCH

WehaveauditedtheaccompanyingbalancesheetofCommerzbankAG,Pra-guebranch(“Branch”)asat�1December2006,therelatedincomestatement,statement of changes in shareholders’ equity and notes for the year thenendedpresented in theannual reportof theBranchonpages10–42 (“thefinancialstatements”).Thefinancialstatements,whichincludedescriptionoftheBranch’sactivities,andunderlyingaccountingrecordsaretheresponsibilityoftheBranch’sDirectors.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudit.

WeconductedourauditinaccordancewiththeActonAuditors,InternationalStandardsonAuditingandrelatedapplicationguidanceoftheChamberofAudi-torsoftheCzechRepublic.Thoseauditingstandardsrequirethatweplanandperformtheaudit toobtainreasonableassuranceastowhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.An audit also includes assessing the accountingprinciplesusedand significant estimates made by management, as well as evaluating theoverallfinancialstatementspresentation.Webelievethatourauditprovidesareasonablebasisforouropinion.

Inouropinion,theaccompanyingfinancialstatementsgiveatrueandfairview,inallmaterialrespects,oftheassets,liabilitiesandequityoftheBranchasat�1December2006andtheresultsof itsoperationsfor theyear thenendedinaccordancewiththeActonAccountingandotherrelevantlegislationoftheCzechRepublic.

WehaveexaminedwhetherthesupplementaryfinancialinformationincludedintheannualreportoftheBranchonpages5–8,whichdoesnotformpartofthefinancialstatementsfortheyearended�1December2006,isconsistentwith theaudited financial statementsof theBranch. Inouropinion, all othersupplementaryinformationincludedintheannualreportisconsistentwiththeauditedfinancialstatementsinallmaterialrespects.

Withoutqualifyingouropinionwedrawattention to the fact that theBranchisnot a separate legal entity and the financial positionof theBranch is fullydependentonthatofCommerzbankAGasawhole.

�1March2007

PricewaterhouseCoopersAudit,s.r.o.representedby

PaulCunningham Ing.EvaLoulováPartner Auditor,LicenceNo.1981

PricewaterhouseCoopersAudit,s.r.o.,registeredseatKateřinská40/466,12000Prague2,CzechRepublic,IdentificationNumber:40765521, registeredwith theCommercialRegisterkeptby theMunicipalCourt inPrague,SectionC,Insert�6�7,andintheRegisterofAuditCompanieswiththeChamberofAuditorsoftheCzechRepublicunderLicenceNo021.

PricewaterhouseCoopersAudit,s.r.o.

Kateřinská40/466

12000Prague2

CzechRepublic

Telephone+420251151111

Facsimile+420251156111

BALANCE SHEET

AS AT 31 DECEMBER 2006

10

Assets Note 31 December 2006CZK’000

31 December 2005CZK’000


Cash and deposits with central banks � 703,188 219,021 1,331,931

Due from banks 4a)repayableondemandb)otherreceivables

27,235,1686,944,246

20,290,922

73,650,13012,979,�8160,670,749

53,640,7121�,6�1,18540,009,527

Due from customers 5a)repayableondemandb)otherreceivables

38,014,895�,114,�21

�4,900,574

28,317,9321,720,284

26,597,648

29,487,398�,�6�,525

26,12�,87�

Debt securities 6a)issuedbygovernmentinstitutionsb)issuedbyotherentities

1,588,799570,284

1,018,515

1,148,00957�,218574,791

572,341572,�41

-

Long-termintangiblefixedassets 7 48,857 54,437 72,422

Long-term tangible fixed assets 7ofwhich:buildingsforoperatingactivities

40,956

17,776

31,659

16,578

35,993

16,487

Other assets 8 3,308,123 2,133,234 11,083,585

Prepayments and accrued income 11,770 133,307 173,446

Total assets 70,951,756 105,687,729 96,397,828

Liabilities Note 31 December 2006CZK’000



Due to banks 10a)repayableondemandb)otherpayables

46,495,7401�,102,619��,�9�,121

82,473,04019,8�6,98262,6�6,058

67,870,557

15,8�6,74752,0��,810

Due to customers 11a)repayableondemandb)otherpayables

20,081,4045,4�9,245

14,642,159

20,280,6445,141,725

15,1�8,919

16,511,1135,�16,68�

11,194,4�0

Other liabilities 12 4,009,579 2,421,956 11,133,934

Accrualsanddeferredincome 5,516 198,556 215,544

Provisions 9a)fortaxesb)otherprovisions

197-

197

4,332-

4,��2

187,938165,98021,958

Revaluation differences from assets and liabilities 10,721 1,159 -

Retained earnings (losses) from previous periods 29,019 (44,747) 211,036

Profit for the accounting period 13 319,580 352,789 267,706

Total liabilities 70,951,756 105,687,729 96,397,828

OFF-BALANCE SHEET AS AT 31 DECEMBER 2006

11

Off-balance sheet assets Note 31 December 2006 CZK’000



Commitmentsandguaranteesgiven 14 8,401,410 1�,96�,240 12,�08,721

Receivablesfromspottransactions 1,012,755 �70,904 726,956

Receivablesfromterminstruments 2�(d) 568,0�0,947 298,892,2�2 49�,4�1,514

Receivablesfromoptioninstruments 2�(d) 412,425 - -

Total off-balance sheet assets 577,857,087 313,226,376 506,467,191

Off-balance sheet liabilities Note 31 December 2006CZK‘000

31 December 2005CZK‘000


Commitmentsandguaranteesreceived 24,846,599 17,175,0�0 154,599

Collateralsreceivedandpledges 14 7,�05,011 15,176,069 1�,597,000

Payablesfromspottransactions 1,012,722 �71,064 726,646

Payablesfromterminstruments 2�(d) 568,41�,977 289,�04,�1� 487,845,50�

Payablesfromoptioninstruments 2�(d) 412,2�8 - -

Assetsundercustodyandmanagedbyathird 14party

7,016,148 7,019,667 �,90�,4�5

Assetsundermanagement 14 ��6,865 �74,556 �57,592

Total off-balance sheet liabilities 609,343,560 329,420,699 506,584,775

12

INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006

Note 2006CZK’000

2005CZK’000

2004CZK’000

Interest receivable and similar income 15ofwhich:interestincomefromdebtsecurities

1,765,627

62,816

1,663,456

�0,962

1,543,747

�1,014

Interest payable and similar expense 16 (1,218,898) (1,059,067) (851,438)

Fee and commission income 17 354,034 350,342 368,784

Fee and commission expense 18 (14,099) (14,648) (26,923)

Gains or losses from financial transactions 19 87,909 74,897 (18,405)

Other operating income 20 145,515 101,351 31,106

Other operating expense (16,275) (25,635) (37,257)

Administrative expense 21ofwhich:a)staffcostsofwhich:aa)wagesandsalariesab)socialandhealthinsuranceac)otherstaffcostsb)otheradministrativeexpenses

(642,650)

(��1,815)

(242,59�)(69,520)(19,702)

(�10,8�5)

(614,477)

(�07,990)

(2�1,489)(61,068)(15,4��)

(�06,487)

(544,085)

(289,240)

(210,821)(58,090)(20,�29)

(254,845)

Depreciation of long-term tangible and 7 intangible fixed assets

(40,627) (39,453) (34,374)

Release of allowances and provisions for 9 loans and guarantees, income from receivables already written-off

12,186 31,928 32,953

Write-offs, additions and utilisation 9of allowances and provisions for loans and guarantees

(22,108) (11,283) (39,765)

Release of other provisions 9 - - 10,116

Additions to and utilisation of other provisions 9 - - -

Profit on ordinary activities before taxation 410,614 457,411 434,459

Income tax 22 (91,034) (104,622) (166,753)

Profit for the year after taxation 1� 319,580 352,789 267,706

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2006

1�

Note Revaluation reserve*

CZK’000

Retained earnings /

Accumulated losses

CZK’000

Profit of the current year

CZK’000

Total equity

CZK’000

At 1 January 2004 - (110,657) 664,076 553,419

Allocationof200�profittoCommerzbankAG - - (��,876) (��,876)

AdditionalallocationtoCommerzbankAG - �21,69� (�21,69�) -

Foreignexchangedifferencesinequity - - (8,507) (8,507)

Profitfortheyear2004 1� - - 267,706 267,706

At 31 December 2004 - 211,036 267,706 478,742

Allocationof2004profittoCommerzbankAG 1� - - (51�,697) (51�,698)

AdditionalallocationtoCommerzbankAG 1� - (255,78�) 255,78� -

Valuationdifferencesnotreflectedinprofit,netoftax

1,159 - - 1,159

Foreignexchangedifferencesinequity 1� - - (9,792) (9,792)

Profitfortheyear2005 1� - - �52,789 �52,789

At 31 December 2005 1,159 (44,747) 352,789 309,201

Allocationof2005profittoCommerzbankAG 1� - - (289,020) (289,020)

AdditionalallocationtoCommerzbankAG 1� - 7�,766 (7�,766) -

Valuationdifferencesnotreflectedinprofit,netoftax

9,562 - - 9,562

Foreignexchangedifferencesinequity 1� - - 9,997 9,997

Profitfortheyear2006 1� - - �19,580 �19,580

At 31 December 2006 10,721 29,019 319,580 359,320

*Changesinthefairvalueofsecuritiesinavailableforsaleportfolio.In2004changesinthefairvalueweredisclosedintheincomestatement.

14

1 GENERAL INFORMATION

Commerzbank Aktiengesellschaft, Prague branch (here-in- after referred to as “the Branch”) was incorporatedon 1 December 1992 as a branch of Commerzbank AG,which is headquartered in Frankfurt am Main, Germany.TheBranchhas its registeredoffice inPragueandasubbranchinBrnoandanofficeinOstrava.In2006theBranchwasmanagedbyMr.GünterSteinerandDr.JuttaWalter.

TheBranch’soperationsprimarilyconsistof:

• providingCzechandforeigncurrencyloansandguarantees;

• acceptingandplacingdepositsinCzechandforeigncurrency;

• acceptingcurrentandtermaccountsdenominatedinCzechandforeigncurrency;

• renderingofgeneralbankingservicesthroughanetworkofbranchesandagencies;

• providingforeignexchangetransactionsontheinter-bankmoneymarket;

• providingforeigntradefinanceandrelatedbankingservices;

• tradinginsecuritiesandportfoliomanagement.

2 ACCOUNTING POLICIES

(a) Basis of preparation

The financial statements, comprising a balance sheet,statements of income and of changes in equity andaccompanying notes, are prepared in accordance withtheActonaccountingandtheapplicableaccountingrulessetbytheMinistryofFinanceoftheCzechRepublic.Thefinancialstatementsarepreparedunderthehistoricalcostconvention as modified by the revaluation of financi-al instruments at fair value through profit or loss andavailable-for-saleto fairvalues.TheBranchusesprimarilythe structureof accountsofCommerzbankAG,which issubsequentlytranslatedforCzechreportingpurposes.

The financial statements are rounded to thousands ofCzechCrowns(“CZK’000”)unlessotherwisestated.

(b) Accounting basis

Allcashtransactions,purchasesandsalesoftradingsecu-rities, term derivatives, options and foreign currencies,

transactions made through the Czech National Bank’s(the “CNB”) clearing centre, grants or acceptances of aguarantee or credit commitments are recognised at thesettlementdate.(c) Foreign currencies

Financial assets and liabilities denominated in foreigncurrencies are translated to Czech Crowns at theexchange rate announced by the Czech National Bank(“CNB”) effective at the balance sheet date. All resul-ting foreign exchange gains and losses from monetaryitems are recognised in gains less losses from financialtransactions.

(d) Fair value of securities

Thefairvalueofasecurityisdeterminedasthemarketmidvaluequotedbyarelevantstockexchangeorotheractivepublicmarket.Inothercasesthefairvalueisestimatedbytheriskadjustednetpresentvaluefordebtsecurities.

(e) Available-for-sale securities

Available-for-sale securities are neither securities at fairvaluethroughprofitorlossnorsecuritiesheld-to-maturity.They comprise mainly debt securities held for liquidi-ty management. Available-for-sale securities are initiallyrecognized at cost which includes expenses incurred inconnection with their acquisition and are subsequentlymeasuredat fairvalue.Anysubsequentgainsand lossesarising fromchanges in the fair valueof available-for-salesecurities are recognized directly in equity (net of anytax effect) until the financial asset is derecognized orimpaired at which time the cumulative gain or losspreviouslyrecognizedinequityshouldberecognizedintheincomestatement.

Forchangesinaccountingpoliciesrelatedtoavailable-for-salesecurities,seeNote2(u).

(f) Securities financing arrangements

Securitiesborrowedorpurchasedunderagreementstoresell(resale or reverse repo agreements) are not recognised onthe balance sheet. They are recognised off-balance sheetas Collaterals received and pledges. Securities lent or soldunder agreements to repurchase (repo agreements) areretainedintheiroriginalportfolio.Theunderlyingcash-flows

NOTES TO FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2006

15

are recorded as Due to banks or customers and Due frombanksorcustomers,asappropriate,onthesettlementdate.

(g) Derivative financial instruments and hedging

Derivativefinancialinstrumentsincludingforeignexchan-gecontracts,forwardrateagreements(“FRAs”),curren-cy and interest rate swaps, currency and interest rateoptions and other derivative financial instruments areinitially recognised on balance sheet at cost andsubsequently are remeasured at their fair value. Fairvalues are obtained from quoted market prices,discountedcash-flowmodelsandoptionspricingmodelsas appropriate. All derivatives are presented in Otherassets or in Other liabilities when their fair value ispositiveornegativerespectively.

ChangesinthefairvalueofderivativesheldfortradingareincludedinGainslesslossesfromfinancialtransactions.

The Branch designates prospectively certain derivativesaseitherahedgeofthefairvalueofarecognisedassetorliability(fairvaluehedge).

Hedge accounting is used for derivatives designated inthiswayprovidedthefollowingcriteriaaremet:

thederivative is incompliancewith theBranch’s riskmanagementstrategy;formaldocumentationofthegeneralhedgingstrategy,hedged risk, hedging instrument, hedged item andtheirrelationshipispreparedbeforehedgeaccountingisapplied;thehedgedocumentationprovesthatitisexpectedtobehighlyeffectiveinoffsettingtheriskinthehedgeditematinceptionandthroughoutthereportingperiod;thehedgeiseffectiveonanongoingbasis;andthehedged item isnotasecurityclassifiedasat fairvaluethroughtheprofitorloss.

Changes in the fair value of derivatives that qualify aseffective fair value hedges are recorded in the incomestatement, along with the corresponding change in fairvalueofthehedgedassetorliabilitythatisattributabletothatspecifichedgedrisk.AstheBranchhedgesthefairvalueof its loansagainst interest rate risk, thechangesin the fair value of the appropriate hedging derivativesandrelevanthedgeditemsarerecognisednetininterestexpenseorinterestincome.

If the fair value hedge no longer meets the criteria for

i)

ii)

iii)

iv)v)

hedgeaccounting,theadjustmenttothecarryingamountofahedged item isamortised toprofitor lossover theperiodtomaturityofhedgeditem.

For changes in accounting policies related to derivativefinancialinstruments,seeNote2(u).

(h) Interest income and expense

Interest incomeandexpensearerecognisedforall inte-rest bearing instruments on an accrual basis using theeffectiveyieldmethodbasedontheacquisitioncost.

Theeffectiveinterestmethodisamethodofcalculatingthe amortised cost of a financial asset or a financialliability and of allocating the interest income or interestexpenseovertherelevantperiod.

The effective interest rate is the rate that exactlydiscounts estimated future cash flows until maturity orthe nearest change of interest rate to the net carryingamountofthefinancialassetorfinancialliability.

The linear method is used as an approximation of theeffective interest method for securities with remainingmaturity shorter than1 year at the settlementdate, forloans, other receivables and liabilities with individualrepayment periods shorter than 1 year. Interest incomeincludesaccruedcoupons,discountandpremiumonallfixedincomeinstruments.

Incomeonnon-performingreceivablesisalsoaccruedandcapitalisedintotherelatedloanbalance.Suchamountsareconsideredinestimatingtheprovisionfornonperformingreceivables.

(i) Penalty interest

Penaltyinterestincome,whichissuspendedorforgiven,isexcludedfrominterestincomeuntilreceived.Amountspreviouslyrecognisedasincomearenotreversed.(j) Fee and commission income

Fees and commissions are generally recognisedon an accrual basis when the service has been provi-ded. Commission and fees arising from negotiating, orparticipating in thenegotiationofa transactionfora thirdparty are recognised on completion of the underlyingtransaction.Portfolioandothermanagementadvisoryand

16

servicefeesarerecognisedbasedontheapplicableservicecontracts,usuallyonatimeapportionedbasis.

(k) Receivables

ReceivablesoriginatedbytheBrancharestatedatnominalvaluelessallowances.Irrecoverablereceivablesarewrittenoffuponcompletionofbankruptcyproceedingsagainstthedebtor.

(l) Provisions

ProvisionsarerecognisedwhentheBranchhasapresentobligation as a result of past events, it is probable thatan outflow of resources embodying economic benefitswill be required to settle the obligation, and a reliableestimateoftheamountoftheobligationcanbemade.Allprovisionsarepresentedinliabilities.

Additions to provisions are recognised in the incomestatement, their utilisation is recognised together withexpensesorlosses,forwhichpurposetheywerecreatedin the income statement. Release of provisions in casetheyarenolongernecessaryisrecognisedasincome.

Provisionsaresetaside in thecurrency inwhichsettle-mentisexpectedtobemade.

(m) Allowances

The Branch first assesses whether evidence of impair-ment exists for individual receivables. Individual recei-vablesarecategorisedinaccordancewiththedefinitionsissued by the CNB in five categories (standard, watch,substandard,doubtful,loss).Impairedreceivablesincludesubstandard, doubtful and loss receivables and repre-sent total outstanding principal and accrued interestreceivablewithservicepaymentsoverduemorethan90days or other defaults in contractual terms or financialperformance. Watch receivables represent totaloutstandingprincipalandaccruedinterestreceivablewithservicepaymentsoverduelessthan90days.

Allowances to individual receivables are deducted fromthe nominal value of each receivable originated bythe Branch. The amount of allowance for watch andimpaired receivables is based on appraisals of theseassetsatthebalancesheetdateaftertakingintoconside-rationthepresentforcedsalevalueofcollateral.

Additionstoallowancesarerecognisedintheincomesta-tement,theirutilisationisrecognisedtogetherwithexpen-sesandlossesconnectedwiththedecreaseofassets,intheincomestatement.Releaseofallowancesincasetheyarenolongernecessaryisrecognisedasincome.

Allowancesforassetsdenominatedinaforeigncurrencyare created in that foreign currency. Foreign exchangedifferences are recognised in the same way as foreignexchangedifferencesfromtherelatedasset.

(n) Long-term tangible and intangible fixed assets

Long-term tangible and intangible fixed assets arerecordedatcost.Fixedassetsaredepreciated/amortisedby applying the reducing balance method over the esti-matedusefullives.Nontangiblefixedassetsacquiredafter�1December2000areamortisedbyapplyingthestraight-linebasisovertheestimatedusefullives.

Repair and maintenance expenditures are charged toexpense as incurred. Expenditures enhancing the valueoftheassetarecapitalisedanddepreciated.

Assets held under finance lease agreements are notcapitalisedandareaccountedforinthesamewayasope-rating leases, with rental charges being reflected in theincomestatementonastraight-linebasis.Neitheristhecorrespondingleaseobligationrecordedasaliability.

(o) Value added tax

Since 1 August 2004 is the Bank registered for valueadded tax (hereinafter “VAT”) with quarterly settle-ment period. Intangible and tangible fixed assets andinventories are stated at acquisition cost including theappropriateVAT.TheBankdoesnotclaiminputVATastheratioofthetaxableincometothetotalincomeoftheBankissuchthatitisnoteconomicalfortheBanktoclaimtheinput VAT. Input VAT (except for intangible and tangiblefixedassets)isexpensedimmediately.

(p) Deferred taxation

A deferred tax liability is recognised on all temporarydifferencesbetweenthecarryingamountofanassetorliability in the balance sheet and its tax base using thefull liability method. A deferred tax asset is recognisedtotheextentthatit isprobablethatfuturetaxableprofit

17

willbeavailableagainstwhichthisassetcanbeutilised.TheapprovedtaxratefortheperiodinwhichtheBranchexpectstoutilisetheassetorsettletheliabilityisusedforthemeasurementofdeferredtax.Adeferredtaxrelatedto revaluation of hedging instruments and available-for-salesecuritieswhicharechargedandcrediteddirectlytoequity,isalsochargedandcrediteddirectlytoequity.

(q) Staff costs and pensions

StaffcostsareincludedinAdministrativeexpenses.

TheBranchmakescontributionsonbehalfofitsemployeestoadefinedcontributionpensionplan.Contributionspaidby the Branch are accounted for directly as an expense.Regular contributions are made to the state to fund thenationalpensionplan.

(r) Related parties

RelatedpartiesaredefinedinaccordancewiththeActonBanksasfollows:

• boardmembers;• seniormanagementoftheBranch,beingpersons

responsibleformanagementfunctionsbasedonemploymentorothercontractsandpowersandresponsibilitiesofwhicharedefinedintheBranch’sstatute(“seniormanagement”);

• entitiescontrollingtheBranch,theirshareholdersholdingmorethan10%ofcapitalandtheirseniormanagement;

• relatives(directfamilymembers)ofboardmembersandofseniormanagementoftheBranch;

• entitiesinwhichboardmembersoftheBranch,seniormanagementorentitiescontrollingtheBranchholdatleast10%shareholding;

• shareholdersholdingmorethan10%ofthesharecapitalorvotingrightsoftheBankandentitiescont-rolledbythem.

Material transactions, outstanding balances and pricingpolicieswith relatedpartiesaredisclosed inNotes4,5,10,11,14and21.

(s) Foreign exchange differences in equity

ForeignexchangedifferencesarisingfromthedistributionoftheBranch’sprofitstoCommerzbankAG,whichaccoun-tingrecordsareinEuro,areaccountedforinequity.

(t) Subsequent events

The effects of events, which occurred between thebalance sheet date and the date of preparation of thefinancial statements, are reflected in the financial state-ments inthecasethattheseeventsprovidefurtherevi-denceofconditions,whichexistedatthebalancesheetdate.Wheresignificanteventsoccursubsequent to thebalancesheetdatebutprior topreparationof the finan-cial statements that are indicative of conditions whicharosesubsequenttothebalancesheetdate,theeffectsof these events are disclosed, but are not themselvesreflectedinthefinancialstatements.

(u) Changes in accounting policy

Since1January2005theBranchchangedtheaccountingofgainsandlossesarisingfromchangesinthefairvalueofavailable-for-salesecuritiesinlinewiththechangesinrespectivelegislation.Since1January2005subsequentgains and losses arising from changes in the fair valueof available-for-sale securities are recognized directly inequity (netof any taxeffect) until the financial asset isderecognizedor impairedatwhich time thecumulativegain or loss previously recognized in equity should berecognized in the income statement. In 2004, changesinthefairvalueofavailable-for-salesecuritieswerereco-gnized in the income statement. Comparative figureswerenotrestatedasrequiredbyCzechaccountingrules.Interest calculated using the effective interest ratemethodandforeignexchangedifferencesondebtsecu-ritiesarerecognizedintheincomestatement.

Since1January2006, theBranchchangedthebalancesheet presentation of accrued interest on interest rateswaps. Prior to 1 January 2006 the accrued interestarising from interest rate swaps was presented withinprepaymentsandaccruedincome,since1January2006this accrued interest is included within other assetstogetherwith thepositive fairvalueof the interest rateswaps. Further the Branch changed the presentationof recognitionofForwardRateAgreementsoff-balancesheet. Prior to 1 January 2006, the nominal amount ofForward Rate Agreements was recognised only as anoff-balancesheetassetorliabilitydependingonwhetherthe Forward Rate Agreement was purchased or sold,whereas since 1 January 2006 the nominal values ofForward Rate Agreement are recognised together asoff-balancesheetassetandliability.

18

3 CASH AND DEPOSITS WITH CENTRAL BANKS

ObligatoryreservesaremandatorydepositswiththeCNB.ThesedepositsbearinterestattheCZKreporate,whichwas2.50%p.a.at�1December2006(�1December2005:2.00%;�1December2004:2.50%;).

4 DUE FROM BANKS

Loans and receivables to related parties of the Commerzbank AG Group

StandardloansandreceivablestobanksincludethefollowingloansandreceivablestorelatedpartiesoftheCommerzbankAGGroup:




Cashonhand 62,650 76,464 60,6�4

Obligatoryreserves 640,5�2 142,544 1,271,281

Currentaccountswithcentralbanks 6 1� 16

703,188 219,021 1,331,931




Currentaccountswithbanks 502,017 290,�49 221,716

Termdepositsupto24hours 6,442,229 12,689,0�2 1�,409,469

Othertermdepositswithbanks 17,055,282 49,056,212 24,280,170

Standardloanstobanks 1,405,871 1,600,904 1,550,975

Otherreceivablesfrombanks �08,720 445,�72 45�,949

ReceivablesfromREPOtransactions 1,521,049 9,568,261 1�,724,4��

27,235,168 73,650,130 53,640,712




Commerzbank,Frankfurt 1�,9�1,700 29,674,�62 2�,987,8�8

BREBankS.A.,Warsaw - 506 -

Commerzbank,Tokyobranch 6,675 10,988 -

Commerzbank,Bratislavabranch 2,��2,690 4,�90,269 4,912,189

Commerzbank,Bruxellesbranch 59 286 -

Commerzbank,HongKongbranch 1,5�9 722 -

Commerzbank(Euroasija)SAO,Moscow 695 765 -

Commerzbank(Budapest)R.t.,Budapest 26,468 11�,657 142,641

Commerzbank,Parisbranch 10,119 1,29� 290

16,309,945 34,192,848 29,042,958

5 DUE FROM CUSTOMERS

In2006noloanswererestructured(2005:CZK1�.9million;2004noloanswererestructured).

Syndicated loans forming part of Due from banks and the exposure of the Branch totalled CZK 1,802 millionat�1December2006(2005:CZK1,51�million;2004:CZK1,424million).

(a) Quality of loan portfolio

WhencontractinganewloantheBranchassessesthequalityoftheclient.

TheBranchsendstoitsclientsawrittennoticeforoverdueloansandunsuccessfulcasesarepassedforlegalsolutions(filingpetitionsandparticipatingincourtproceedings).Inlimitedcases,besidesthelegalprocedures,theBranchalsousesexecutor’sservices.

19




Currentaccountstogovernmentalentities 615 2,588 2,�98

Currentaccountstootherclients �,11�,706 1,717,696 �,�61,127

Loanstogovernmentalentities - - 229,712

Standardloanstootherclients �4,�87,880 26,505,7�2 25,617,266

Impairedloanstocompaniesandindividuals 49�,011 79,20� 85,819

Debtinstrumentspurchasedinprimaryissuesnotheldfortrading

- - 241,5�8

Otherreceivablesfromcustomers 104,418 89,868 ��,572

�8,099,6�0 28,�95,087 29,571,4�2

Allowanceforimpairedloans(Note9) (84,7�5) (77,155) (84,0�4)

38,014,895 28,317,932 29,487,398




Standard �7,606,619 28,�15,884 29,485,61�

Watched �,678 - -

Impaired-Substandard -Doubtful -Loss

80,219 - -

�4�,8�8 - -

65,276 79,20� 85,819

38,099,630 28,395,087 29,571,432

The forcedsalevalueascribed toassets receivedascollateral for impaired loans tocustomerscanbeanalysedasfollows:

(b) Loans to related parties Standardloanstocompaniesandindividualsareasfollows:

As at �1 December 2006, the Branch has provided loans of CZK �22,000 to its senior management members(2005:CZK945,000,2004:CZK�,748,000).

Allloanstorelatedpartiesweremadeintheordinarycourseofbusinessonsubstantiallythesametermsandconditions,includinginterestrates,asthoseprevailingatthesametimeforcomparabletransactionswithothercustomers,anddidnot,intheopinionofmanagement,involvemorethannormalcreditriskorpresentotherunfavourablefeatures.

6 SECURITIES

Debt securities as 31 December

Noneoftheabovementionedsecuritieswasusedasacollateralinrepotransactions.

TheBranchdoesnotpurchaseorholdanysecuritiesissuedbyasubsidiaryorassociatedundertakingofCommerzbankAG.

20




Securities - - 283




ImmobiliengesellschaftOstHägle,s.r.o. 66,288 88,184 110,8�9

BRELeasing,Sp.zo.o.,Warsaw 5,944,�75 �,17�,812 4,4�0,144

Commerzleasing,s.r.o.,Praha 16,690 11,�97 6,881

Transfinance,a.s. 495,465 �64,054 476,964

6,522,818 3,637,447 5,024,828

2006CZK’000

2005CZK’000

2004CZK’000

Available-for-sale 1,588,799 1,148,009 572,341

21

Available-for-sale securities

Debt securities

7 LONG TERM INTANGIBLE AND TANGIBLE FIXED ASSETS

Long term intangible fixed assets

Long term operating tangible fixed assets




Main or auxiliary market of recognised stock exchanges

1,588,799 1,148,009 572,341

31 December 2004

CZK’000

31 December 2005

CZK’000

Additions / Depreciation

CZK’000

Disposals

CZK’000

31 December 2006

CZK’000

Cost

Software 158,849 184,450 7,789 (1,692) 190,547

Accumulated amortisation

Software (122,677) (1�6,580) (21,8�1) 1,692 (156,719)

Net book amount 36,172 47,870 33,828

Advancesgrantedandassetsincourseofimplementation

�6,250 6,567 15,029

72,422 54,437 48,857

31 December 2004

CZK’000

31 December 2005

CZK’000

Additions/ Depreciation

CZK’000

Disposals

CZK’000

31 December 2006

CZK’000

Cost

Buildings 2�,��1 24,744 2,606 (68) 27,282

Equipment 197,526 19�,184 19,711 (9,274) 20�,621

Accumulated depreciation

Buildings (6,844) (8,166) (1,�5�) 1� (9,506)

Equipment (181,417) (178,778) (17,�70) 9,25� (186,895)

Net book amount 32,596 30,984 34,502

Advancesgrantedandassetsincourseofconstruction

�,�97 675 6,454

35,993 31,659 40,956

Long term fixed assets held under lease contracts

TheBranchalsousesassetsheldunderfinanceleasecontracts,whicharerecordedasfixedassetsinthefinancialstate-mentsonlyafterterminationoftheleasecontract.Theleasescanbeanalysedasfollows:

Assets pledged as collaterals

TheBranchdidnotprovideanytangiblefixedassetsascollateralforitsliabilitiestothirdpartiesasat�1December2006,2005and2004.

8 OTHER ASSETS

22




Amountsalreadypaidonexistingleases 1�,56� 9,461 8,452

Amountspayablewithinoneyear 2,482 1,6�1 2,275

Amountspayablewithin1-5years 2,684 961 1,949

Total amount paid and payable on existing finance leases

18,729 12,053 12,676




Financialderivatives(Note2�(d)) �,25�,9�6 1,9�4,90� 10,209,510

Netdeferredtax(Note22) - 1,601 4,264

Otherreceivables 54,187 196,7�0 869,811

3,308,123 2,133,234 11,083,585

2�

9 ALLOWANCES, PROVISIONS AND WRITE OFFS

The Branch had the following provisions and allowances for assets at risk:

The movements in provisions can be analyzed as follows:




Provisions

Specificprovisionsforguaranteesgiven(Note14) 197 4,��2 21,958

Provisionfortaxes - - 165,980

197 4,332 187,938

Allowances

Impairedloanstocustomers(Note5) 84,7�5 77,155 84,0�4

84,735 77,155 84,034

General provisions for

loans CZK’000

Provisions for off-balance sheet

itemsCZK’000

Provision for taxes

CZK’000

Other provisions

CZK’000

Total provisions

CZK’000

At 1 January 2004 24,387 1,000 - 9,116 34,503

Additions - 21,958 165,980 - 187,9�8

Writebacks (24,�87) (1,000) - (9,116) (�4,50�)

At 31 December 2004 - 21,958 165,980 - 187,938

Usage - - (165,980) - (165,980)

Foreignexchangetranslationdifference

- (419) - - (419)

Writebacks - (17,207) - - (17,207)

At 31 December 2005 - 4,332 - - 4,332

Foreignexchangetranslationdifference

- (150) - - (150)

Writebacks - (�,985) - - (�,985)

At 31 December 2006 - 197 - - 197

24

The movements in allowances can be analyzed as follows:

Release of allowances and provisions for loans and guarantees, income from receivables already written-off

Write-offs, additions and utilisation of allowances and provisions for loans and guarantees

BaddebtsarewrittenoffagainstestablishedspecificallowancesordirectlyexpensedinthecasethatmanagementoftheBranchassertstheirrecoverabilityasbeingremote.

Impaired loans to customersCZK’000

At 1 January 2004 115,533

Addition 16,745

Usage (�5,46�)

Foreignexchangetranslationdifference (4,252)

Writebacks (8,529)

At 31 December 2004 84,034

Addition 11,272

Usage (2�4)

Foreignexchangetranslationdifference (�,789)

Writebacks (14,128)

At 31 December 2005 77,155

Addition 21,266

Usage (1,649)

Foreignexchangetranslationdifference (4,155)

Writebacks (7,882)

At 31 December 2006 84,735

2006CZK’000

2005CZK’000

2004CZK’000

Writebacksofprovisionsforloansandguarantees �,985 17,207 24,�87

Writebacksofallowancesforloansandguarantees 7,882 14,128 8,529

Incomefromamountduefromclientswrittenoff �19 59� �7

12,186 31,928 32,953

2006CZK’000

2005CZK’000

2004CZK’000

Amountsduefromclientswrittenoff (2,491) (245) (�6,525)

Additionstoprovisionsandallowancesforloansandguarantees

(21,266) (11,272) (�8,70�)

Usageofprovisionsandallowancesforloansandguarantees

1,649 2�4 �5,46�

(22,108) (11,283) (39,765)

25

10 DUE TO BANKS

Deposits from related parties

Intheopinionofmanagementdepositsfromrelatedpartieswereacceptedonsubstantiallythesametermsandcondi-tions,includinginterestrates,asthoseprevailingatthesametimeforcomparabletransactionswithothercustomers,anddidnotinvolvemorethannormalinterestrateandliquidityriskorpresentotherunfavourablefeatures.




Currentaccountswithbanks 151,627 �76,576 1,54�,619

Termdepositsdueupto24hours 12,950,992 19,460,406 14,29�,128

Othertermdepositswithbanks ��,�81,098 62,509,974 52,009,800

Otherliabilities 12,02� 126,084 24,010

46,495,740 82,473,040 67,870,557




Commerzbank,Frankfurt 27,890,058 44,91�,489 29,406,269

BREBankS.A.,Warsaw 440,461 584,7�8 �,196,946

Commerzbank,Londonbranch 2,292 �,�68 2,6�1

Commerzbank,NewYorkbranch 8,719 �46 7,27�

Commerzbank,Tokyobranch - - 8,4�4

Commerzbank,Madridbranch 2,915 - -

Commerzbank(Schweiz)AG,Zürich 218 127 285

Commerzbank(Budapest)R.t.,Budapest 8,04� - 12,204

Commerzbank(Nederland)N.V.,Amsterdam 15,805 484 ��2

Commerzbank,Bruxellesbranch - - 54

Commerzbank,Bratislavabranch 461,589 81,760 297,401

CaisseCentraledeRéescompte,Paris 2�0 2�0 2�0

EurohypoAG,Frankfurt 1,60� 9 80

28,831,933 45,584,551 32,932,139

26

11 DUE TO CUSTOMERS

Deposits from related parties

TheBranchaccepteddepositsfromseniormanagementoftheBranchofCZK12,�52,000asof�1December2006(2005:CZK10,157,000;2004:CZK8,75�,000).

Intheopinionofmanagementdepositsfromrelatedpartieswereacceptedonsubstantiallythesametermsandcondi-tions,includinginterestrates,asthoseprevailingatthesametimeforcomparabletransactionswithothercustomers,anddidnotinvolvemorethannormalinterestrateandliquidityriskorpresentotherunfavourablefeatures.




Amountsduetogovernmentalentities 9,828 11,849 �9,287

Amountsduetomunicipalities �,08�,225 2,555,501 1,947,121

Amountsduetoprivatecustomers 16,988,�51 17,71�,294 14,524,705

20,081,404 20,280,644 16,511,113




Liabilitiesrepayableondemand 5,4�9,245 5,141,725 5,�16,68�

Termaccountsforfixedterm 1�,999,644 14,511,075 10,656,89�

Termaccountswithfixednoticeperiod 5�8,097 5�7,976 50�,964

Otherliabilities 104,418 89,868 ��,57�

20,081,404 20,280,644 16,511,113




CommerzbankCapitalMarkets(EasternEurope),a.s. - - 992

Commerzleasing,s.r.o.,Praha �,661 4,678 756

ImmobiliengesellschaftOstHägle,s.r.o. �9,858 �9,48� �1,9�2

BRELeasingSp.Zo.o.,Warsaw 215 91 99

Transfinance,a.s. 26,��9 1,611 1�,917

70,073 45,863 47,696

12 OTHER LIABILITIES

13 EQUITY AND PROFIT DISTRIBUTION

Profit distribution

ThenetprofitofCZK267,706,000for2004andthenetprofitofCZK�52,789,000for2005weredistributedandthenetprofitofCZK�19,580,000for2006hasbeenproposedtobeallocatedasfollows:

14 CONTINGENCIES AND COMMITMENTS

Commitmentstoprovidealoan,loanguaranteestothirdparties,guaranteesfromacceptanceofbillsofexchangeandlettersofcreditexposetheBranchtocreditriskandtolossintheeventofaclient’sinabilitytomeethisobligations.Variouscommitmentsandcontingent liabilitiesarise in thenormal courseofbusiness involvingelementsof credit,interestrateandliquidityrisk.

Commitments and guarantees granted

27


31 December 2005 CZK’000


Financialderivatives(Note2�(d)) �,819,196 1,799,808 10,6�5,�14

Estimatedpayables 82,6�� 90,209 78,870

Otherliabilities 106,904 5�1,9�9 419,750

Deferredtaxliability 846 - -

4,009,579 2,421,956 11,133,934

2006CZK’000

2005CZK’000

2004CZK’000

AllocationtoCommerzbankAG �24,0�2 289,020 51�,697

Foreignexchangetransactiondifference - (9,997) 9,792

Transferto/(from)retainedearnings (4,452) 7�,766 (255,78�)

Net profit as at 31 December 319,580 352,789 267,706




Commitments �,558,742 8,658,048 7,1�5,429

Guaranteesgranted 4,842,668 5,�05,192 5,17�,292

Total commitments and guarantees granted 8,401,410 13,963,240 12,308,721

28

Guarantees granted can be analysed as follows:

Contingent liabilities can be analysed as follows:

Theabovementionedassetsarestatedatfairvalueincaseofpubliclytradedsecuritiesoratnominalvalueincaseofnot-publiclytradedsecurities.

TheBranchhasgrantedonbehalf of its seniormanagementguaranteesofCZK225,000asat�1December2006(2005:CZK225,000;2004:CZK225,000).

Management considers that no present obligations were associated with these fiduciary duties at �1 December2006.




Guarantees granted included guarantees from letters of credit

Onbehalfofbanks 584,258 1,019,�11 466,818

Onbehalfofcustomers 4,258,410 4,285,881 4,706,474

Totalguaranteesgranted 4,842,668 5,�05,192 5,17�,292

Specificprovisionforguaranteesgranted(Note9) (197) (4,��2) (21,958)

Net guarantees granted and letters of credit 4,842,471 5,300,860 5,151,334




Assets placed in custody

Shares 2,619,68� 2,600,�80 25,�80

Assets managed by a third party

Shares 5�9,764 797,�56 �05,678

Bonds 1,575,108 1,740,66� 1,1�5,054

Other 2,017,461 1,091,589 1,651,162

4,132,333 3,629,608 3,091,894

Assets under custody

Shares 264,1�2 789,679 786,161

Assetsundercustodyandmanagedbythirdparty 7,016,148 7,019,667 �,90�,4�5

Assets under management

Shares 5�7 ��,890 �9,17�

Bonds ��2,�15 ��1,020 �14,1�4

Other 4,01� 9,646 4,285

336,865 374,556 357,592

29

Collaterals received and pledges

ReceivablesfromReverserepotransactionsareincludedinDuefrombanks(Note4).In2004theBranchdidnotreceivecollateralandpledgesexceptCNBtreasury-bills.

15 INTEREST RECEIVABLE AND SIMILAR INCOME

ManagementestimatesthatapproxmatelyCZK28.2millionof interest incomewasrecognizedon impaired loans intheyearended�1December2006(2005:CZK5.5million,2004:CZK28.1million).Registeredunrecognizedpenaltyinterest incomeoutstandingasat�1December2006ofCZK0 (�1December2005:CZK0.1million,�1December2004:CZK0.1million)wasaccrued.

In2006,2005and2004 theBranchdidnot forgiveanypenalty interestandnoperiod forclaimingpenalty interestexpired.

16 INTEREST PAYABLE AND SIMILAR EXPENSE




Assets placed in custody

Shares 2,619,68� 2,600,�80 25,�80

Assets managed by a third party

Shares 5�9,764 797,�56 �05,678

Bonds 1,575,108 1,740,66� 1,1�5,054

Other 2,017,461 1,091,589 1,651,162

4,132,333 3,629,608 3,091,894

Assets under custody

Shares 264,1�2 789,679 786,161

Assetsundercustodyandmanagedbythirdparty 7,016,148 7,019,667 �,90�,4�5

Assets under management

Shares 5�7 ��,890 �9,17�

Bonds ��2,�15 ��1,020 �14,1�4

Other 4,01� 9,646 4,285

336,865 374,556 357,592




CNBtreasury-bills 1,497,000 9,4�8,000 1�,597,000

Realestatepledges �,599,952 �,526,94� -

Securities 852,840 1,427,8�4 -

Othercollateralsreceived 1,�55,219 78�,292 -

7,305,011 15,176,069 13,597,000

2006CZK’000

2005CZK’000

2004CZK’000

Interestoninter-banktransactions 484,106 500,588 �70,215

Interestonloanstocustomersandstate 1,218,705 1,1�1,906 1,142,518

Interestanddiscountondebtsecurities 62,816 �0,962 �1,014

1,765,627 1,663,456 1,543,747

2006CZK’000

2005CZK’000

2004CZK’000

Interestoninter-banktransactions 889,097 811,401 621,66�

Interestondepositsfromcustomersandstate �29,801 247,666 229,775

1,218,898 1,059,067 851,438

�0

17 FEE AND COMMISSION INCOME

18 COMMISSION AND FEE EXPENSE

19 GAINS LESS LOSSES FROM FINANCIAL TRANSACTIONS

2006CZK’000

2005CZK’000

2004CZK’000

Brokerageincomefrompurchaseandsaleofsecuri-tiesandderivatives

�5,772 28,985 4�,108

Custodyfeeincome 210 20� 81

Assetmanagementfeeandrelatedfeeincome 9,469 10,266 9,429

Foreignanddomesticpayments 169,��2 179,000 182,�75

Lettersofcredit �1,64� 52,976 52,84�

Guarantees 2�,968 26,762 25,�58

Commissionsfromloans 67,000 �5,�66 �7,5��

Other 16,640 16,784 18,057

354,034 350,342 368,784

2006CZK’000

2005CZK’000

2004CZK’000

Domesticandforeigntransfers (7,466) (7,550) (7,057)

Brokerageexpensefrompurchaseandsaleofsecurities

(2,289) (1,906) (�,222)

Foreignexchangeoperation (2,647) (2,674) (2,976)

Otherfinancialactivities (1,697) (2,518) (1�,668)

(14,099) (14,648) (26,923)

2006CZK’000

2005CZK’000

2004CZK’000

Unrealisedgains/(losses)fromthesaleofsecurities - - 5,574

Realisedgainsfromthesaleofsecurities - - 16

Gains/(losses)fromforeigncurrencytransactionsincludingFXfinancialderivatives

89,6�4 48,84� (94�)

Gains/(losses)frominterestratefinancialderivatives

(1,725) 26,054 (2�,052)

87,909 74,897 (18,405)

�1

20 OTHER OPERATING INCOME

21 ADMINISTRATIVE EXPENSES

Staff costs can be analyzed as follows:

Staff statistics

In2006theBranchprovidedcontributionforpensioninsurancetoitsemployeesofCZK726,000(2005:CZK0).

2006CZK’000

2005CZK’000

2004CZK’000

Incomefromintercompanyreinvoicing 127,544 80,475 6,862

Otheroperatingincome 17,971 20,876 24,244

145,515 101,351 31,106

2006CZK’000

2005CZK’000

2004CZK’000

Staffcosts ��1,815 �07,990 289,240

Rentandleasecharges 48,707 49,45� 46,894

Audit,taxandlegaladvisoryservices 4,127 4,266 7,585

Otheradministrationexpenses 258,001 252,768 200,�66

642,650 614,477 544,085

2006CZK’000

2005CZK’000

2004CZK’000

Wagesandsalaries 242,59� 2�1,489 210,821

Socialsecurityandothersocialcosts 69,520 61,068 58,090

Otherstaffcosts 19,702 15,4�� 20,�29

331,815 307,990 289,240

2006 2005 2004

Averagenumberofemployees 235 205 176

�2

22 TAXATION

ThetaxontheBranch’sprofitbeforetaxcanbeanalysedasfollows:

2006CZK’000

2005CZK’000

2004CZK’000

Profitbeforetaxation 410,614 457,411 4�4,459

Differences between profit and tax base:Non-taxableincomeNon-deductibleexpenses

(29,468)�1,686

(115,887)50,012

(11,159)169,957

Otherexpensesreducingnettaxableprofit (950) (880) (257)

Nettaxableprofit 411,882 �90,656 59�,000

Currenttaxchargeat24%(2005:26%,2004:28%)beforediscount

98,852 101,571 166,040

Discountontax (148) (120) (60)

Currenttaxchargeafterdiscount 98,704 101,451 165,980

The income tax charge is comprised of:Deferredtaxexpense/(income)recognisedontemporarydifferencesCurrentincometaxexpenseAdjustmentofprioryearincometaxexpense

(572)98,704

(7,098)

2,66�101,451

508

(1,501)165,980 2,274

Income tax expense 91,034 104,622 166,753

2006CZK’000

2005CZK’000

2004CZK’000

Netdeferredincometaxassetatthebeginningoftheperiod

1,601 4,264 2,76�

Deferredtaxincome/expensefromthechangeintem-porarydifferences

572 (2,��5) 1,698

Changeindeferredtaxduetothechangeoftaxrate - (50) (197)

Changeofthedeferredtaxasset/liabilityonavailable-for-salesecurities

(�,019) (278) -

Netdeferredincometaxasset/(liability)on�1December (846) 1,601 4,264

Deferred income tax assetsAllowancestoloansNon-taxdeductiblesocialinsuranceDifferencebetweenaccountingandtaxdepreciation

22,09477

1761,791116

1,210�,1161�1

2,173 2,083 4,457

Deferred income tax liabilityAvailable-for-salesecuritiesBranchreceivablefrompenaltyinterest

(�,019)-

(278)(204)

-(19�)

(3,019) (482) (193)

Net deferred tax asset (24%) (Note8) - 1,601 4,264

Net deferred tax liability (24%) (Note12) (846) - -

��

23 FINANCIAL RISKS

(a) Strategy in using financial instruments

TheBranch’sactivitiesareprincipallyrelatedtotheuseof financial instruments.TheBranchacceptsdepositsfrom customers at both fixed and floating rates andfor various periods and seeks to earn above averageinterestmarginsbyinvestingthesefundsinhighqualityassets.TheBranchseekstoincreasethesemarginsbyconsolidating short-term funds and lending for longerperiods at higher rates whilst maintaining sufficientliquiditytomeetallclaimsthatmightfalldue.

TheBranchalsoseekstoraiseits interestmarginsbyobtaining above average margins, net of provisions,through lending to commercial and retail borrowerswitharangeofcreditstanding.Suchexposuresinvolvenot juston-balancesheet loansandadvancesbut theBranchalsoenters intoguaranteesandothercommit-mentssuchas lettersofcreditandothersimilar liabi-lities.

TheBranchalsotrades infinancial instrumentswhere

it takes positions in traded and over the counterinstruments includingderivativestotakeadvantageofshort-term market movements in the bond marketsandincurrencyandinterestrates.ManagementoftheBranch places trading limits on the level of exposurethatcanbetakeninrelationtobothovernightandintra-day market positions. With the exception of specifichedging arrangements, foreign exchange and interestrate exposures associated with these derivatives arenormallyoffsetbyenteringintocounterbalancingposi-tions,therebycontrollingthevariabilityinthenetcashamountsrequiredtoliquidatemarketpositions.

(b) Credit risk

TheBranchstructuresthelevelsofcreditriskitunder-takesbyplacinglimitsontheamountofriskacceptedin relation to one borrower, or groups of borrowers,and to geographical and business segments. Suchrisksaremonitoredonarevolvingbasisandaresubje-cttoanannualormorefrequentreview.Limitsonthelevelofcreditriskbyproduct, industrysectorandbycountryareapprovedbyCommerzbankAG,FrankfurtamMain.

Geographical segmentation

At 31 December 2006

Assets Domestic CZK’000

European unionCZK’000

OtherCZK’000

TotalCZK’000

Cashanddepositswithcentralbanks 70�,188 - - 70�,188

Duefrombanks 8,075,529 18,806,�56 �5�,28� 27,2�5,168

Duefromcustomers �0,682,122 6,841,247 491,526 �8,014,895

Securitiesavailable-for-sale 1,588,799 - - 1,588,799

Otherassets 81�,179 2,�27,506 269,021 �,409,706

41,862,817 27,975,109 1,113,830 70,951,756

At 31 December 2005

At 31 December 2004

Business segmentation

At 31 December 2006

�4


European union CZK’000

Other CZK’000

TotalCZK’000

Cashanddepositswithcentralbanks 219,021 - - 219,021

Duefrombanks 14,554,�78 58,516,662 579,090 7�,650,1�0

Duefromcustomers 2�,577,759 �,�4�,5�7 1,�96,6�6 28,�17,9�2

Securitiesavailable-for-sale 1,148,009 - - 1,148,009

Otherassets 891,168 1,�18,1�9 14�,��0 2,�52,6�7

40,390,335 63,178,338 2,119,056 105,687,729


European unionCZK’000

OtherCZK’000

TotalCZK’000

Cashanddepositswithcentralbanks 1,��1,9�1 - - 1,��1,9�1

Duefrombanks 19,2�9,777 �4,05�,642 �47,29� 5�,640,712

Duefromcustomers 24,201,�05 5,16�,514 122,579 29,487,�98

Securitiesavailable-for-sale 572,�41 - - 572,�41

Otherassets �,769,65� 7,�14,�1� 281,480 11,�65,446

49,115,007 46,531,469 751,352 96,397,828

Assets Local banks

CZK’000

Foreign banks

CZK’000

Corporate sector

CZK’000

State insti-tutions

CZK’000

Individuals

CZK’000

Other

CZK’000

Total

CZK’000

Cashandbalanceswithcentralbanks

70�,188 - - - - - 70�,188

Duefrombanks 8,075,529 19,159,6�9 - - - - 27,2�5,168

Duefromcustomers - - �7,581,896 615 4�1,868 516 �8,014,895

Securitiesavailablefor-sale - - 1,018,515 570,284 - - 1,588,799

Otherassets 7�9,682 2,595,415 42,748 29,875 1,986 - �,409,706

9,518,399 21,755,054 38,643,159 600,774 433,854 516 70,951,756

At 31 December 2005

At 31 December 2004

�5

Assets Local banks

CZK’000

Foreign banks

CZK’000

Corporate sector

CZK’000

State insti-tutions

CZK’000

Individuals

CZK’000

Other

CZK’000

Total

CZK’000


219,021 - - - - - 219,021

Duefrombanks 14,554,�78 59,095,752 - - - - 7�,650,1�0

Duefromcustomers - - 27,968,011 2,588 �47,��0 � 28,�17,9�2

Securitiesavailablefor-sale - - 574,791 57�,218 - - 1,148,009

Otherassets 41�,072 1,151,75� 747,570 �7,�79 2,86� - 2,�52,6�7

15,186,471 60,247,505 29,290,372 613,185 350,193 3 105,687,729

Assets Local banks

CZK’000

Foreign banks

CZK’000

Corporate sector

CZK’000

State insti-tutions

CZK’000

Individuals

CZK’000

Other

CZK’000

Total

CZK’000


1,��1,9�1 - - - - - 1,��1,9�1

Duefrombanks 19,2�9,777 �4,400,9�5 - - - - 5�,640,712

Duefromcustomers - - 29,046,194 2�2,110 209,092 2 29,487,�98

Securitiesavailablefor-sale - - - 572,�41 - - 572,�41

Otherassets �,080,174 7,�91,051 541,270 �51,955 996 - 11,�65,446

23,651,882 41,791,986 29,587,464 1,156,406 210,088 2 96,397,828

�6

(c) Market risk

TheBranchtakesonexposuretomarketriskswhicharisefromopenpositionsininterestrate,currencyandequityproducts.

The Branch applies a ”value at risk” (“VAR”) methodo-logy to estimate the market risk of positions held andthe maximum losses expected based on a parametricmodel describing relations between risk factors withinhistorical simulations of changes in market conditions.CommerzbankAG,FrankfurtamMainsets limitsonthelevelofriskthatmaybeaccepted,whichismonitoredonadailybasis.

ThedailymarketVAR isanestimate,withaconfidencelevelsetat97.5%,ofthepotentiallosswhichmightariseif the current positions were to be held unchanged foronebusinessday.Theactualdailygains/lossesaremoni-toreddailybyasocalledBackTesttotestthevalidityoftheassumptionsandparameters/factorsusedintheVARcalculation.

Since VAR constitutes an integral part of the Branch’smarketriskcontrolregime,VARlimitsareestablishedbythe Board for all trading and portfolio operations; actualexposure against limits, together with a consolidatedbank-wideVAR, is revieweddailybymanagement.VARfortheBranchasat�1December2006isCZK6.90mil-lion(�1December2005:CZK7.28million,�1December2004: CZK 7.40 million) and average daily consolidatedVARfortheBranchwasCZK4.78millionin2006(2005:CZK5.18million,2004:CZK5.50million).

TheBranchperformsthestresstestingonadailybasis,whichgivestheinformationonriskexposureandpoten-tial losses of the Branch, the results are presented tothe management within daily reporting. The reason forstress testing is to gain an estimate of loss, which theBranchcouldsuffer,iftheworstcasescenarioofmarketdevelopment would occur. The probability that theseexpectationswouldbefulfilledisveryunlikely.

However, the use of this approach does not preventlossesoutsideoftheselimitsintheeventofmoresignifi-cantmarketmovements.

(d) Derivative financial instruments

TheBranchhasoutstandingderivativecontracts,whichcanbeanalysedasfollows:

Total financial derivatives

31 December 2006

31 December 2005

31 December 2004

�7

Nominal amount assets

CZK’000

Nominal amount liabilitiesCZK’000

Fair value positive

CZK’000

Fair value negative

CZK’000

Interestratederivatives 44�,�59,700 44�,�59,700 488,96� (614,947)

Currencyderivatives 125,08�,222 125,466,515 2,764,97� (�,204,249)

Total 568,442,922 568,826,215 3,253,936 (3,819,196)


CZK’000


Fair value positive

CZK’000

Fair value negative

CZK’000

Interestratederivatives 164,�29,675 155,024,075 500,712 (611,487)

Currencyderivatives 1�4,562,557 1�4,280,2�8 1,4�4,191 (1,188,�21)

Total 298,892,232 289,304,313 1,934,903 (1,799,808)


CZK’000


Fair value positive

CZK’000

Fair value negative

CZK’000

Interestratederivatives ��2,888,�42 �26,898,817 920,815 (1,104,778)

Currencyderivatives 160,54�,172 160,946,686 9,288,695 (9,5�0,5�6)

Total 493,431,514 487,845,503 10,209,510 (10,635,314)

Trading agreements

31 December 2006

31 December 2005

�8


CZK’000


Fair value positive

CZK’000

Fair value negative

CZK’000

Interest rate derivatives

FRAs 416,119,700 416,119,700 �40,600 (�44,689)

Swaps 26,561,959 26,651,959 148,�6� (171,218)

442,681,659 442,681,659 488,963 (515,907)

Currency derivatives

Forwards 46�,84� 452,884 1�,608 (194)

Swaps 124,206,954 124,601,�9� (2,749,781) (�,201,001)

Options 412,425 412,2�8 1,584 (�,054)

125,083,222 125,466,515 2,764,973 (3,204,249)

Total 567,764,881 568,148,174 3,253,936 (3,720,156)


CZK’000


Fair value positive

CZK’000

Fair value negative

CZK’000


FRAs 150,0�9,675 140,7�4,075 �90,285 (�77,�1�)

Swaps 1�,511,959 1�,511,959 108,986 (126,�25)

163,551,634 154,246,034 499,271 (503,638)


Forwards 606,552 595,895 9,848 (1,511)

Swaps 1��,956,005 1��,684,�4� 1,424,�4� (1,186,810)

134,562,557 134,280,238 1,434,191 (1,188,321)

Total 298,114,191 288,526,272 1,933,462 (1,691,959)

31 December 2004

Fair value hedging agreements

31 December 2006

31 December 2005

31 December 2004

�9


CZK’000


Fair value positive

CZK’000

Fair value negative

CZK’000


FRAs �18,7�4,450 �12,744,925 807,790 (817,�7�)

Swaps 1�,42�,049 1�,42�,049 11�,025 (165,016)

332,157,499 326,167,974 920,815 (982,389)


Forwards 554,744 575,740 5,254 (26,�18)

Swaps 159,988,428 160,�70,946 9,28�,441 (9,504,218)

160,543,172 160,946,686 9,288,695 (9,530,536)

Total 492,700,671 487,114,660 10,209,510 (10,512,925)

Interest rate derivatives Nominal amount assets

CZK’000


Fair value positive

CZK’000

Fair value negative

CZK’000

Swaps 678,041 678,041 - (99,040)


CZK’000


Fair value positive

CZK’000

Fair value negative

CZK’000

Swaps 778,041 778,041 1,441 (107,849)


CZK’000


Fair value positive

CZK’000

Fair value negative

CZK’000

Swaps 730,843 730,843 - (122,389)

40

(e) Currency risk

TheBranchtakesonexposureresultingfromfluctuationsin the prevailing foreign currency exchange rates on itsfinancialpositionandcashflows.TheBoardofDirectorssets limits on the level of exposure by currency and intotalforbothovernightandintra-daypositions,whicharemonitoreddaily.

(f) Interest rate risk

TheBranchtakesonexposureresultingfromfluctuationsin the prevailing levels of market interest rates on itsfinancial position and cash flows. Interest margins mayincreaseasaresultofsuchchangesbutmayreduceorcreate losses in theevent that unexpectedmovementsarise. The Commerzbank AG, Frankfurt am Main setslimitsonthe levelofmismatchof interestraterepricingthatmaybeundertaken,whicharemonitoreddaily.

(g) Liquidity risk

The Branch is exposed to daily calls on its available cashresourcesfromovernightdeposits,currentaccounts,matu-

ringdeposits,loandrawdowns,guaranteesandfrommarginandothercallsoncashsettledderivatives.TheBranchdoesnotmaintaincash resources tomeetallof theseneedsasexperienceshowsthataminimumlevelofreinvestmentofmaturingfundscanbepredictedwithahighlevelofcertain-ty. In a short termview (up to twodays) theBranchdoesnotholdcashforallamountsonitscurrentaccountsasitisabletorefinanceitselfontheinter-bankmarketorwiththeheadquarters.

TheBoardofDirectorssetsliquiditylimitsaccordingtotimebandsandindividualcurrencies.Theselimitsaremonitoreddaily.

Thefairvaluesofderivativesarerecognizedinotherassetsandotherliabilitiesrespectivelyasunspecified,becausetheBranchisnotabletoanalyzethefairvalueaccordingtorema-iningmaturity.TheBranchisabletocloseitsopenpositionsoncapitalmarkets,ifnecessary.Currentmaturitiesoffinanci-alderivativesarebetweensixmonthsandfiveyears.

ThetablebelowanalysesassetsandliabilitiesoftheBranchintorelevantmaturitybandsbasedontheremainingperiodatthebalancesheetdatetothecontractualmaturitydate.

At 31 December 2006

At 31 December 2005

41

Within 3 months CZK’000

3 – 12 months

CZK’000

1 – 5 years

CZK’000

Over 5 years

CZK’000

Unspecified

CZK’000

Total

CZK’000

Assets


62,656 - - - 640,5�2 70�,188

Duefrombanks 25,5�5,6�6 97�,605 �67,856 69,�74 288,697 27,2�5,168

Duefromcustomers 14,286,125 7,�1�,842 12,724,079 �,282,57� 408,276 �8,014,895

Securitiesavailable-for-sale - - 915,185 67�,614 - 1,588,799

Otherassets 1,710,�96 1,200,862 92,272 427 405,749 �,409,706

41,594,813 9,488,309 14,099,392 4,025,988 1,743,254 70,951,756

Liabilities

Duetobanks �7,859,784 �,452,752 �,455,�45 1,727,859 - 46,495,740

Duetocustomers 19,948,244 129,�68 2,�6� 1,429 - 20,081,404

Provisions - - - - 197 197

Otherliabilities 1,991,�50 1,��9,077 1�4,105 625 909,258 4,�74,415

59,799,378 4,921,197 3,591,813 1,729,913 909,455 70,951,756

Net assets/(liabilities) (18,204,565) 4,567,112 10,507,579 2,296,075 833,799 -


3 – 12 months

CZK’000

1 – 5 years

CZK’000

Over 5 years

CZK’000

Unspecified

CZK’000

Total

CZK’000

Assets


76,477 - - - 142,544 219,021

Duefrombanks 71,790,475 1,027,566 556,277 - 275,812 7�,650,1�0

Duefromcustomers 1�,899,657 �,279,550 7,551,52� �,585,154 2,048 28,�17,9�2

Securitiesavailable-for-sale - - �44,104 80�,905 - 1,148,009

Otherassets 917,748 61�,864 78,227 2,027 740,771 2,�52,6�7

86,684,357 4,920,980 8,530,131 4,391,086 1,161,175 105,687,729

Liabilities

Duetobanks 75,�68,096 �,059,499 �,47�,�77 572,068 - 82,47�,040

Duetocustomers 19,878,�12 �99,490 1,420 1,422 - 20,280,644

Provisions - - - - 4,��2 4,��2

Otherliabilities 86�,�11 �94,6�6 122,004 7,519 1,542,24� 2,929,71�

96,109,719 3,853,625 3,596,801 581,009 1,546,575 105,687,729

Net assets/-liabilities (9,425,362) 1,067,355 4,933,330 3,810,077 (385,400) -

42

At 31 December 2004

24 SUBSEQUENT EVENTS

Therewerenoevents,whichhaveoccurredsubsequenttotheyear-end,whichwouldhaveamaterialimpactonthefinancialstatementsoftheBranchasat�1December2006.

ThesefinancialstatementshavebeenapprovedbyCommerzbankAGandhavebeensignedontheirbehalfby:

DateSignatureofthestatutoryrepresentative

Personresponsibleforaccounting

Personresponsibleforthefinancialstatementspreparation

�1March2007 Dr.JuttaWalter Ing.EvaCollardová Ing.RadekHudáček


3 – 12 months

CZK’000

1 – 5 years

CZK’000

Over 5 years

CZK’000

Unspecifi ed

CZK’000

Total

CZK’000

Assets


60,649 - - - 1,271,282 1,��1,9�1

Duefrombanks 51,655,809 1,0�2,555 540,78� - 411,565 5�,640,712

Duefromcustomers 17,4�4,120 5,175,851 4,414,5�9 2,461,104 1,784 29,487,�98

Securitiesavailable-for-sale - - - 572,�41 - 572,�41

Otherassets �,898,590 5,740,02� 61,859 4,840 1,660,1�4 11,�65,446

73,049,168 11,948,429 5,017,181 3,038,285 3,344,765 96,397,828

Liabilities

Duetobanks 6�,469,211 1,476,199 2,692,862 2�2,285 - 67,870,557

Duetocustomers 16,��2,879 177,0�5 599 600 - 16,511,11�

Provisions - - - - 187,9�8 187,9�8

Otherliabilities 4,261,140 5,52�,800 74,582 27,�10 1,941,�88 11,828,220

84,063,230 7,177,034 2,768,043 260,195 2,129,326 96,397,828

Net assets/(liabilities) (11,014,062) 4,771,395 2,249,138 2,778,090 1,215,439 -

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