ANNUAL REPORT 2007 - Banking with Citi | Citi.com (Slovakia) a.s. Income statement Year ended 31 December 2007 11 2007) 2006) Notes Sk ‘000) Sk ‘000) Interest receivable and similar

Citibank (Slovakia) a.s.

ANNUAL REPORT 2007

Citibank (Slovakia) a. s.

5

Contents Letter by the Chairman of the Board of Directors 7 Balance sheet 10 Income statement 11 Statement of changes in shareholder’s equity 12 Cash flow statement 13 Notes to the financial statements 14 Independent auditors’ report 70

7

Dear Regulator, Customer and Shareholder, It is my pleasure to inform you about our accomplishments of last year and about some of our key priorities for 2008 and beyond. Citibank (Slovakia) a.s. is 100% owned by Citibank N.A. the largest financial services company in the world, through the direct 100% shareholder Citibank Overseas Investment Corporation, USA (each and all referred to as Citi). This provides tremendous advantages for our Customers, including access to the latest products and services, the most modern technology, strong risk taking capabilities, and a counterparty with financial strength that is unparalleled. This is very relevant in today’s market. Citi’s goal is to become the most respected global financial services company. To achieve this, we aspire to further develop our three shared responsibilities, as a clear statement of how we should think about and govern our behavior: responsibility to our Client, responsibility to Each Other, and responsibility to our Franchise. To continue to be competitive, we must continue to meet the ever-changing demands of Client. I am particularly proud that Citi in Slovakia has been awarded by Global Finance the Best Corporate/Institutional Internet Bank Award for 3 consecutive years. Furthermore, Citi in Central Eastern Europe has received EuroMoney’s Best Cash Management House Award for second consecutive year. Part of our contribution is product innovation, such as the UNIKASA service that we successfully expanded in 2008. In addition to having significant successes in Global Transactions Services, we also had important successes in Treasury and Corporate Finance. More and more, our success will be measured by our ability to provide the quality of service that inspires confidence in our Client so they entrust Citi with their business. Part of our shared responsibility to our franchise is our community life involvement (Corporate Social Responsibility), where we are justifiably perceived as one of the market leaders. Let me focus on employee involvement. Besides the participation in the traditional Citi volunteerism event called Global Community Day, we are very proud of leading the Engage group, which is a group of corporations fostering volunteerism among their employees. Our first common initiative became a tremendous success: some 18 companies and institutions and more than 400 volunteers, including 45 Citibankers, donated their time and talent in the “Nasa Bratislava” event to help make a difference in the community where we live and work. A special thanks goes to all our Employees and their supportive families. Their professional and personal commitment has been exemplary and has allowed us to provide our esteemed Customer, the service level they expect and absolutely deserve from Citi. Eric H.J.M.A. Lemmens Chairman of the Board of Directors and CEO Board of Directors: Eric H.J.M.A. Lemmens, Chairman Roman Kováč Marcela Tupá Supervisory Board: Zdenek Turek, Chairman Kevin Murray Branislav Sandtner

8


9


Financial statements Prepared in accordance with

International Financial Reporting Standards as adopted by the European Union

Year ended 31 December 2007 (English translation)

Citibank (Slovakia) a.s. Balance sheet at 31 December 2007

10

2007

2006

Notes Sk ‘000 Sk ‘000Assets Cash and cash equivalents

6 9,043,773 16,007,734

Trading assets 9 4,067,702 7,893,866 Loans and advances to banks 10 10,088 461,003 Loans and advances to customers 11 17,001,695 13,995,774 Investment securities 13 3,062,577 2,119,306 Property and equipment 14 88,490 112,898 Other assets 15 70,220 44,589 33,344,545 40,635,170 Liabilities Trading liabilities 9 2,944,474 7,084,512 Deposits by banks 16 3,241,921 4,037,143 Customer accounts 17 22,004,511 24,375,090 Loans received 18 210,326 210,326 Subordinated debt 19 1,269,361 1,304,860 Corporate income tax payable 20 19,269 17,355 Deferred tax liability 26 5,500 16,128 Provisions 21 6,866 5,342 Other liabilities 22 588,535 968,191 30,290,763 38,018,947 Share capital and reserves Share capital 23 1,650,000 1,650,000 Reserves 24 1,403,782 966,223 Share capital and reserves

3,053,782 2,616,223

33,344,545 40,635,170

Off balance sheet items 25 205,370,514 291,975,974 The financial statements, which include the notes on pages 14 to 69, were approved by the Board of Directors on 27 March 2008 and signed on its behalf by:


Income statement Year ended 31 December 2007

11

2007)

2006)

Notes Sk ‘000) Sk ‘000) Interest receivable and similar income arising from debt securities

27 11,629,784

1,408,810)Interest payable 28 (955,512) (801,513) Net interest income

674,272

607,297)

Fees and commissions receivable 29 236,682 189,188)Fees and commissions payable 29 (121,485) (144,441)Net trading income 30 553,759 599,680)Other operating income 22,684 9,887 Operating income 11,365,912 1,261,611) Administrative expenses

31 (699,869)

(735,628)

Depreciation 14 (37,009) (35,913) Operating expenditure

(736,878)

(771,541)

Operating profit before impairment

losses and provisions

629,034

490,070) Impairment losses on loans and advances 12 (55,835) (15,608)Impairment losses on investment securities 13 (3,010) - Impairment losses on property and equipment 14 - 837 Impairment losses on other assets 15 - 665 Provisions 21 (1,524) (1,167) Profit before taxation

568,665

474,797

Income tax expense

32 (121,051)

(112,303)

Profit after taxation

447,614

362,494)

The notes on pages 14 to 69 are an integral part of these financial statements.


Statement of changes in shareholder’s equity Year ended 31 December 2007

12

Share

Retained)

Legal

reserve

Reval- uation

capital earnings) fund reserve Total Sk ‘000 Sk ‘000) Sk ‘000 Sk ‘000 Sk ‘000

At 1 January 2006 1,650,000 318,932) 272,782 25,012 2,266,726

Transfers - (31,862) 31,862 - - Net gain on available for-sale assets, net of

tax - - - (12,997) (12,997)

Profit for 2006 - 362,494) - - 362,494 At 31 December 2006 1,650,000 649,564) 304,644 12,015 2,616,223

Transfers - (25,356) 25,356 - - Net loss on available for-sale assets, net of

tax - - - (10,055) (10,055)

Profit for 2007 - 447,614 - - 447,614 At 31 December 2007 1,650,000 1,071,822 330,000 1,960 3,053,782

See also notes 23 and 24 for details of movements in shareholder’s equity accounts during the year. The notes on pages 14 to 69 are an integral part of these financial statements.

Citibank (Slovakia) a.s. Cash flow statement Year ended 31 December 2007

13

2007)

2006)

Notes Sk ‘000) Sk ‘000) Cash flows from operating activities Profit before changes in operating assets and liabilities 33 619,171 481,895 Decrease/(increase) in trading assets 3,826,164 (5,673,058))Decrease/(increase) in loans and advances to banks 450,915 (176,407) Increase in loans and advances to customers (3,041,014) (649,855))Increase in other assets (25,631) (24,810) (Decrease)/increase in trading liabilities )(4,140,038) 4,728,176 (Decrease)/increase in deposits by banks )(794,351) 1,131,166 (Decrease)/increase in customer accounts (2,363,116) 5,149,746(Decrease)/increase in other liabilities (379,656) 267,585 Income tax paid (127,406) (77,231) Net cash (used in)/ from operating activities (5,974,962) 5,157,207 Cash flows from investing activities Acquisition of investment securities (940,121) (941,256))Proceeds from sale of property and equipment 2,941 2,307 Purchase of property and equipment (15,347) (35,378) Net cash used in investing activities (952,527) (974,327)) Cash flows from financing activities Loans paid - (520))Subordinated debt paid (36,472) (123,140)) Net cash used in financing activities (36,472) (123,660)) Net (decrease)/increase in cash and cash equivalents (6,963,961) 4,059,220 Cash and cash equivalents at beginning of year

16,007,734

11,948,514

Cash and cash equivalents at end of year

6 9,043,773

16,007,734

The notes on pages 14 to 69 are an integral part of these financial statements.

Citibank (Slovakia) a.s. Notes to the financial statements Year ended 31 December 2007

14

1. General information Citibank (Slovakia) a.s. with its registered office at Mlynské Nivy 43, 825 01 Bratislava; IČO: 31401295; DIČ: 2020927271 (hereinafter referred to as ‘Bank’) was established and registered with the Commercial Register in 1995. The Bank is a wholly-owned subsidiary of Citibank Overseas Investment Corporation with registered office at One Penn’s Way, New Castle, 19720 Delaware, U.S.A. The ultimate parent company is Citigroup Inc. 399 Park Avenue, 1043 New York, U.S.A. The members of the Board of Directors are as follows: Henricus Joseph Maria Alexander Lemmens, from 30 March 2007 Roman Kováč Marcela Tupá Igor Kottman, until 30 March 2007 Igor Tham, until 30 March 2007 The members of the Supervisory Board are as follows: Branislav Sandtner Zdeněk Turek Kevin Anthony Murray, from 31 May 2007 Claudio Konarzewski, until 31 May 2007 The Bank does not have any subsidiaries or associates. The principal activities of the Bank are the provision of banking and financial services to commercial and private customers resident mainly in the Slovak Republic. The Bank operates through its head office located in Bratislava and a network of 10 marketing offices. There are two marketing offices located in Bratislava, one in Trnava, two in Nitra, one in Banská Bystrica, one in Žilina, one in Trenčín and two in Košice. The financial statements of Citibank (Slovakia) a. s. for the preceding accounting period, the year ended 31 December 2006, were approved by the General Assembly on 30 March 2007. The financial statements of the Bank prepared in accordance with accounting principles generally accepted in the United States of America are included in the consolidated financial statements of Citigroup Inc. U.S.A. 2. Basis of preparation (a) Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the European Union and as required by Section 17(a) of the Slovak Act on Accounting 431/2002, as amended. (b) Basis of measurement The financial statements have been prepared on the historical cost basis except for the following: • derivative financial instruments are measured at fair value; • financial instruments at fair value through profit or loss are measured at fair value; • available-for-sale financial assets are measured at fair value.


15 15

2. Basis of preparation continued (c) Functional and presentation currency These financial statements are presented in Slovak crowns, which is the Bank’s functional currency. Except as indicated, financial information presented in Slovak crowns has been rounded to the nearest thousand. (d) Use of estimates and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements is provided in notes 4 and 5. (e) Comparative figures The comparative figures have been regrouped or reclassified, where necessary, on a basis consistent with the current period. 3. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these financial statements. (a) Foreign currency Transactions denominated in foreign currencies are translated into Slovak crowns at the exchange rates ruling on the date of the transaction. Monetary assets and liabilities are translated at the rates of exchange ruling on the balance sheet date. All resulting gains and losses are recorded in net trading income in the income statement. (b) Interest Interest income and expense are recognised in the income statement using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. The effective interest rate is established on initial recognition of the financial asset and liability and is not revised subsequently. The calculation of the effective interest rate includes all fees paid or received, transaction costs and discounts or premiums that are an integral part of the effective interest rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability. Interest income and expense on all trading assets and liabilities are considered to be incidental to the Bank’s trading operations and are presented, together with all other changes in the fair value of trading assets and liabilities, in net trading income.


16 16

3. Significant accounting policies continued (c) Fees and commissions Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees and commissions receivable, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees, are recognised as the related services are performed. When a loan commitment is not expected to result in the drawn-down of a loan, loan commitment fees are recognised on a straight-line basis over the commitment period. Other fees and commissions payable relates mainly to transaction and service fees, which are expensed as the services are received. (d) Net trading income Net trading income comprises gains less losses related to trading assets and liabilities, and includes all realised and unrealised fair value changes, interest and foreign exchange differences. (e) Dividends Dividend income is recognised when the right to receive income is established. Usually this is the ex-dividend date for equity securities. (f) Lease payments made Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under the finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the lease adjustment is confirmed. (g) Income tax expense Income tax expense comprises current and deferred tax. Income tax expense is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.


17 17

3. Significant accounting policies continued (h) Financial assets and liabilities (i) Recognition The Bank initially recognises loans and advances, deposits by banks, customer accounts, loans received and debt securities in issue on the date that they are originated. All other financial assets and liabilities (including assets and liabilities designated at fair value though profit or loss) are initially recognised on the trade date at which the Bank becomes a party to the contractual provisions of the instrument. (ii) Derecognition The Bank derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Bank is recognised as a separate asset or liability. The Bank derecognises a financial liability when its contractual obligations are discharged, cancelled or expire. The Bank enters into transactions whereby it transfers assets recognised on its balance sheet, but retains either all risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised from the balance sheet. Transfers of assets with retention of all or substantially all risks and rewards include, for example, securities lending and repurchase transactions. The Bank also derecognises certain assets when it writes off balances deemed to be uncollectible. (iii) Offsetting Financial assets and liabilities are set off and the net amount presented in the balance sheet when, and only when, the Bank has a legal right to set off the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the reporting standards, or for gains and losses arising from a group of similar transactions such as in the Bank’s trading activity. (iv) Amortised cost measurement The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment.


18 18

3. Significant accounting policies continued (h) Financial assets and liabilities continued (v) Fair value measurement The determination of fair values of financial assets and financial liabilities is based on quoted market prices or dealer price quotations for financial instruments traded in active markets. For all other financial instruments, fair value is determined by using valuation techniques. Valuation techniques include the discounted cash flow method, comparison to similar instruments for which market observable-prices exist and valuation models. The Bank uses widely recognised valuation models for determining the fair value of the more common financial instruments like options and interest rate and currency swaps. For these financial instruments, inputs into models are market observable. (vi) Identification and measurement of impairment At each balance sheet date, the Bank assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows of the asset that can be reliably estimated. The Bank considers evidence of impairment at both a specific asset and collective level. All individually significant financial assets are assessed for specific impairment. All significant assets found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Assets that are not individually significant are also collectively assessed for impairment by grouping together financial assets (carried at amortised cost) with similar risk characteristics. Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. In assessing collective impairment, the Bank uses statistical modelling of historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical modelling. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognised in the income statement and reflected in an allowance account against loans and advances. Interest on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through the income statement. Impairment losses on available-for-sale investment securities are recognised by transferring the difference between the amortised acquisition cost and the current fair value out of equity to the income statement. When a subsequent event causes the amount of impairment loss on an available-for-sale debt security to decrease, the impairment loss is reversed through the income statement.


19 19

3. Significant accounting policies continued (h) Financial assets and liabilities continued However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised directly in equity. Changes in impairment provisions attributable to time value are reflected as a component of interest income. (i) Cash and cash equivalents Cash and cash equivalents comprises cash, unrestricted balances held with the National Bank of Slovakia and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value and are used by the Bank in the management of short-term commitments. Cash and cash equivalents are carried at amortised cost in the balance sheet. (j) Trading assets and liabilities Trading assets and liabilities are those assets and liabilities that the Bank acquires or incurs principally for the purpose of selling or repurchasing in the near term, or holds as part of a portfolio that is managed together for short-term profit or position taking. Trading assets and liabilities are initially recognised and subsequently measured at fair value in the balance sheet with transaction costs taken directly to income. All changes in fair value are recognised as part of net trading income in the income statement. Trading assets and liabilities are not reclassified subsequent to their initial recognition. (k) Derivatives held for risk management purposes Derivatives held for risk management purposes include all derivative assets and liabilities that are not classified as trading assets or liabilities. Derivatives held for risk management purposes are measured at fair value in the balance sheet. The treatment of changes in their fair value depends on their classification into the following categories: (i) Fair value hedge When a derivative is designated as a hedge of the change in fair value of a recognised asset or liability or a firm commitment, changes in the fair value of the derivative are recognised immediately in income together with the changes in the fair value of the hedged item that are attributable to the hedged risk (in the same income statement line item as the hedged item). If the derivative expires or is sold, terminated, or exercised, no longer meets the criteria for fair value hedge accounting, or the designation is revoked, hedge accounting is discontinued. Any adjustment up to that point to a hedged item for which the effective interest method is used is amortised to income as part of the recalculated effective interest rate of the item over its remaining life. (ii) Cash flow hedge When a derivative is designated as a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect income, the effective portion of changes in the fair value of the derivative are recognised directly in equity. The amount recognised in equity is removed and included in income in the same period as the hedged cash flows affect the income statement under the same income statement line as the hedged item. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in the income statement.


20 20

3. Significant accounting policies continued (k) Derivatives held for risk management purposes continued If the derivative expires or is sold, terminated, or exercised, or no longer meets the criteria for cash flow hedge accounting, or the designation is revoked, then hedge accounting is discontinued and the amount recognised in equity remains in equity until the forecast transaction affects income. If the forecast transaction is no longer expected to occur, then hedge accounting is discontinued and the balance in equity is recognised immediately in the income statement. (iii) Other non-trading derivatives When a derivative is not held for trading and is not designated in a qualifying hedge relationship, all changes in its fair value are recognised immediately in income as a component of net income on the other financial instruments carried at fair value. (iv) Embedded derivatives Derivatives may be embedded in another contractual arrangement (a ‘host contract’). The Bank accounts for embedded derivatives separately from the host contract when the host contract is not itself carried at fair value through income, and the characteristics of the embedded derivative are not clearly and closely related to the host contract. Separated embedded derivatives are accounted for depending on their classification and are presented in the balance sheet together with the host contract. (l) Loans and advances Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Bank does not intend to sell immediately or in the near term. When the Bank is the lessor in a lease agreement that transfers substantially all of the risks and rewards incidental to ownership of an asset to the lessee, the agreement is presented within loans and advances. When the Bank purchases a financial asset and simultaneously enters into an agreement to resell the asset (or a substantially similar asset) at a fixed price on a future date (‘reverse repo or stock borrowing’), the agreement is accounted for as a loan or advance, and the underlying asset is not recognised in the Bank’s financial statements. Loans and advances are initially measured at fair value plus incremental direct transaction costs and subsequently measured at their amortised cost using the effective interest method. (m) Investment securities Investment securities are initially measured at fair value plus incremental direct transaction costs and subsequently accounted for depending on their classification as either held-to-maturity or available-for-sale. (i) Held-to-maturity Held-to-maturity investments are non-derivative assets with fixed or determinable payments and fixed maturity that the Bank has the positive intent and ability to hold to maturity and which are not designated at fair value through profit or loss or available-for-sale.


21 21

3. Significant accounting policies continued (m) Investment securities continued Held-to-maturity investments are carried at amortised cost using the effective interest method. Any sale or reclassification of a significant amount of held-to-maturity investments not close to their maturity would result in the reclassification of all held-to-maturity investments as available-for-sale and prevent the Bank from classifying investments securities as held-to-maturity for the current and the following two financial years. (ii) Available-for-sale Available-for-sale investments are non-derivative investments that are not designated in any other category of financial assets. Unquoted equity securities whose fair value cannot be reliably measured are carried at cost. All other available-for-sale investments are carried at fair value. Interest income is recognised in income using the effective interest method. Dividend income is recognised in income when the Bank becomes entitled to the dividend. Foreign exchange gains or losses on available-for-sale debt security investments are then recognised in income. Other fair value changes are recognised directly in equity until the investment is sold or impaired and the balance in equity is recognised in income. (n) Property and equipment (i) Recognition and measurement Items of property and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. (ii) Subsequent costs The cost of replacing part of an item of property or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Bank and its cost can be reliably measured. The costs of the day-to-day servicing of property and equipment are recognised in income as incurred. (iii) Depreciation Depreciation is recognised in income on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives. Land is not depreciated. The depreciation rates for the current and comparative periods are as follows: Rates Leasehold improvements 10% Furniture, fittings and equipment 12.5% - 33% Motor vehicles 25% Depreciation methods, useful lives and residual values are reassessed at the reporting date.


22 22

3. Significant accounting policies continued (o) Intangible assets Software Software is stated at cost less accumulated amortisation and impairment losses. Amortisation is recognised on a straight line basis over the 5–year estimated useful life of the software. (p) Leased assets Leases under which the Bank assumes substantially all the risks and rewards of ownership, are classified as finance leases. On initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. All other leases are operating leases and the leased assets are not recognised on the Bank’s balance sheet. (q) Impairment of non-financial assets The carrying amounts of the Bank’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in income. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less cost to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risk specific to the asset. Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (r) Deposits, customer accounts, loans received and subordinated debt Deposits, customer accounts, loans received and subordinated debt are the Bank’s sources of debt funding.


23 23

3. Significant accounting policies continued (r) Deposits, customer accounts, loans received and subordinated debt continued Deposits, customer accounts, loans received and subordinated debt are initially measured at fair value plus transaction costs, and subsequently measured at their amortised cost using the effective interest method. When the Bank sells a financial asset and simultaneously enters into a ‘repo’ or ‘stock lending’ agreement to repurchase the asset (or a similar asset) at a fixed price on future date, the arrangement is accounted for as a deposit, and the underlying asset continues to be recognised in the Bank’s financial statements. (s) Provisions A provision is recognised if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for restructuring is recognised when the Bank has approved a detailed and formal restructuring plan and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for. A provision for onerous contracts is recognised when the expected benefits to be derived by the Bank from a contract are lower than the unavoidable cost of meeting the obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Bank recognises any impairment loss on the assets associated with that contract. (t) Employee benefits (i) Defined contribution plans Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement when they are due. (ii) Termination benefits Termination benefits are recognised as an expense when the Bank is demonstrably committed, without realistic possibility of withdrawal, to a formal detailed plan to terminate employment before the normal retirement date. (iii) Short-term benefits Short-term employee benefits obligations are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be reliably estimated. (iv) Share-based payment transactions The fair value of the amount payable to employees in respect of share appreciation rights, which are settled in cash, is recognised as an expense, with a corresponding increase in liabilities, over the period in which the employees become unconditionally entitled to payment. The liability is remeasured at each reporting date and at settlement date. Any changes in the fair value of the liability are recognised as personnel expense in the income statement.


24 24

3. Significant accounting policies continued (u) New standards and interpretations not yet adopted The following recently issued standards, amendments to standards and interpretations are not effective for the year ended 31 December 2007, and have not been applied in preparing these financial statements:.

• Revised IAS 1 Presentation of Financial Statements will require information in financial statements to be aggregated on the basis of shared characteristics and introduces a statement of comprehensive income. Items of income and expense and components of other comprehensive income may be presented either in a single statement of comprehensive income with subtotals, or in two separate statements (a separate income statement followed by a statement of comprehensive income). Revised IAS 1 will become effective from 1 January 2009. The Bank is currently evaluating the impact.

• IFRS 8 Operating Segments, requires segment disclosure based on the components of the entity that management monitors in making decisions about operating matters. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. IFRS 8 will become mandatory from 1 January 2009, and the Bank does not expect to fall within the scope of the new Standard.

• Revised IAS 23 Borrowing Costs. The revised Standard will require the capitalisation of borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. Revised IAS 23 will become effective from 1 January 2009, but is not relevant to the Bank’s operations as the Bank does not have any qualifying assets for which borrowing costs would be capitalised.

• IFRIC 11 IFRS 2 Group and Treasury Share Transactions will require a share-based payment arrangement in which an entity receives goods or services as consideration for its own equity-instruments to be accounted for as an equity-settled share-based payment transaction, regardless of how the equity instruments needed are obtained. It also provides guidance on whether share-based payment arrangements, in which suppliers of goods or services of an entity are provided with equity instruments of the entity’s parent should be accounted for as cash-settled or equity-settled in the entity’s financial statements. It becomes mandatory for 2008 financial statements but is not expected to have any impact on the Bank’s financial statements.

• IFRIC 12 Service Concession Arrangements. The Interpretation provides guidance to private sector entities on certain recognition and measurement issues that arise in accounting for public-to-private service concession arrangements. IFRIC 12 will become mandatory from 1 January 2008 and is currently not relevant to the Bank’s operations as the Bank has not entered into any service concession arrangements.

• IFRIC 13 Customer Loyalty Programmes. The Interpretation explains how entities that grant loyalty award credits to customers who buy other goods or services should account for their obligations to provide free or discounted goods or services (‘awards’) to customers who redeem those award credits. Such entities are required to allocate some of the proceeds of the initial sale to the award credits and recognise these proceeds as revenue only when they have fulfilled their obligations. The Interpretation will become effective from 1 July 2008 and the Bank does not expect the Interpretation to have any impact on the financial statements.

• IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interactions will be effective for annual periods beginning on or after 1 January 2008. The Bank does not have any Defined Benefit Assets and therefore this Interpretation should have no impact on the Bank’s financial statements.


25 25

4. Use of estimates and judgements These disclosures supplement the commentary on financial instruments. Key sources of estimation uncertainty Allowances for credit losses Assets accounted for at amortised cost are evaluated for impairment on a basis described in accounting policy 3 (h)(vi). The specific counterparty component of the total allowances for impairment applies to claims evaluated individually for impairment and is based on management’s best estimate of the present value of the cash flows that are expected to be received. In estimating these cash flows, management makes judgements about a counterparty’s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merits and the workout strategy and estimate of cash flows considered recoverable are independently approved by Credit Risk Management. Collectively assessed impairment allowances cover credit losses inherent in portfolios of claims with similar economic characteristics when there is objective evidence to suggest that they contain impaired claims, but the individual impaired items cannot yet be identified. In assessing the need for collective loan loss allowances, management considers factors such as credit quality, portfolio size, concentrations and economic factors. In order to estimate the required allowance, assumptions are made to define the way inherent losses are modelled and to determine the required input parameters based on historical experience and current economic conditions. The accuracy of the allowances depends on how well future cash flows are estimated for specific counterparty allowances and on the model assumptions and parameters used in determining collective allowances. Determining fair values The determination of fair value for financial assets and liabilities for which there is no observable market price requires the use of valuation techniques as described in accounting policy 3 (h)(v). For financial instruments that trade infrequently and have little price transparency, fair value is less objective and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. Critical accounting judgements in applying the Bank’s accounting policies Critical accounting judgements made in applying the Bank’s accounting policies include: Financial asset and liability classification The Bank’s accounting policies provide scope for assets and liabilities to be designated on inception into different accounting categories in certain circumstances: • In classifying financial assets or liabilities as ‘trading’, management has determined that the

Bank meets the description of trading assets and liabilities set out in accounting policy 3 (j). • In classifying financial assets as available-for-sale, management has determined that the Bank

meets the description of available-for-sale assets set out in accounting policy 3 (m)(ii).


26 26

5. Financial risk management (a) Introduction The Bank has exposure to the following risks from its use of financial instruments: • credit risk • liquidity risk • market risk • operational risk Information on the exposure to each of the above risks; the objectives, policies and processes for measuring and managing risk; and on the management of the Bank’s capital is set out below. Risk management framework The Board of Directors has overall responsibility for the establishment and oversight of the Bank’s risk management framework. The Board has established the Asset and Liability Committee (ALCO), Credit and Operational Risk committees, which are responsible for developing and monitoring the Bank’s risk management policies in their specified areas. All Board committees have both executive and non-executive members and report regularly to the Board of Directors on their activities. The Bank’s risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Bank, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations. The Risk and Compliance Committee (RCC) is responsible for monitoring compliance with the Bank’s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Bank. The RCC is assisted in these functions by Internal Audit. Internal Audit undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the RCC and the Management Committee. b) Credit risk Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arise principally from the Bank’s loans and advances to customers and other financial instruments. For risk management reporting purposes, the Bank considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, economic group, geography and industry risk). For risk management purposes, credit risk arising on trading securities is managed independently, and reported as a component of market risk exposure. Management of credit risk The Board of Directors delegated responsibility for the management of credit risk to the Credit Committee. Management of credit risk is performed by the Portfolio Management department, headed by the Country Risk Manager. Additionally, an independent Credit Risk Management Services department is responsible for the maintenance and monitoring of credit exposures and the custody of documentation.


27 27

5. Financial risk management continued (b) Credit risk continued Credit risk management consists of the following components: • Formulating local credit policies in consultation with business units, covering collateral

requirements, credit assessment, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements.

• Establishing the authorisation structure for the approval and renewal of credit facilities. Authorisation limits are allocated to the Credit Officers. Credit facilities require approval of at least two credit officers, one of them being from the Independent Risk Department, who have to have a credit delegation sufficient for the facility on question.

• Reviewing and assessing credit risk. All extensions of credit are subject to at least an annual review cycle, whereupon all facilities have to be re-approved at the appropriate level. All new facilities in the interim period, prior to being committed to customers are subject to the same review process.

• Limiting concentrations of exposure to counterparties, geographies and industries. • Implementation of the risk rating models, in order to categorise exposures according to the

degree of risk of financial loss faced and to focus management on the attendant risks. The current risk rating framework consists of grades reflecting varying degrees of risk of default. At facility level, the model reflects collateral or other credit risk mitigation. The responsibility for setting risk ratings lies with the final approvers as appropriate. Risk ratings models are reviewed periodically at the headquarter level (Citibank NY).

• Reviewing compliance of business units with agreed exposure limits, including those for selected industries, country risk and product types. Regular reports are provided to the senior risk management on the credit quality of local portfolios and appropriate corrective action is taken.

• Providing advice, guidance and specialist skills to business units to promote best practice throughout the Bank in the management of credit risk.

Each business unit is required to implement corporate credit policies and procedures, with credit approval authorities delegated from the Senior Credit Officers as appropriate. Each business unit is responsible for the quality and performance of its credit portfolio and for monitoring and controlling all credit risks in its portfolios, including those subject to central approval. Regular audits of business units and Group Credit processes are undertaken by Internal Audit.


28 28

5. Financial risk management continued (b) Credit risk continued Exposure to credit risk

Loans and advances to

customers Loans and advances to banks Investment securities

Note 2007 2006 2007 2006 2007 2006 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000

Individually impaired

Grade 1-4: Impaired - - - - - - Grade 5-7: Impaired 50,067 9,638 - - - - Grade 8-10: Impaired 48,169 - Gross amount 98,236 9,638 Allowance for

impairment (41,076) (1,867) - - - - Carrying amount 57,160 7,771 - - - -

Collectively impaired Performing loans 575,886 408,073 - - - - Non-performing loans 2,384 1,912 - - - - Gross amount 578,270 409,985 - - - - Allowance for

impairment (8,076) (8,409) - - - - Carrying amount 570,194) 401,576 - - - -

Past due but not impaired Grade 5-7: 183 2,087 - - - - Carrying amount 183 2,087 - - - - Past due but not

impaired comprises: 30-60 days 14 15 - - - - 60-90 days 47 2,049 - - - - 90-180 days 13 17 - - - - 181 days + 109 6 - - - -

Carrying amount 183 2,087 - - - - Neither past due nor

impaired Grade1-4: 7,619,695 5,165,566 10,088 461,003 3,062,577 2,119,306 Grade 5-7: 8,549,375 8,051,481 - - - - Carrying amount 16,169,070 13,217,047 10,088 461,003 3,062,577 2,119,306 Unrated 205,088 367,293 - - - -

Total carrying amount 17,001,695 13,995,774 10,088 461,003 3,062,577 2,119,306


29 29

5. Financial risk management continued (b) Credit risk continued Impaired loans and securities Impaired loans and securities are loans and securities for which the Bank determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan/securities agreement(s). The table with internal ratings (relating to exposures individually assessed for impairment) is as follows:

Internal rating (grade)

1-year Probability of Default Range

(%) S & P

* Moody’s

* 1 0.0 ) - 0.01 AAA Aaa

2+ >0.01 - 0.02 AA+ Aa1 2 >0.02 - 0.03 AA Aa2

2- >0.03 - 0.04 AA- Aa3 3+ >0.04 - 0.05 A+ A1

3 >0.05 - 0.06 A A2 3- >0.06 - 0.09 A- A3 4+ >0.09 - 0.14 BBB+ Baa1

4 >0.14 - 0.26 BBB Baa2 4- >0.26 - 0.63 BBB- Baa3 5+ >0.63 - 1.38 BB+ Ba1

5 >1.38 - 2.64 BB Ba2 5- >2.64 - 4.48 BB- Ba3 6+ >4.48 - 7.04 B+ B1

6 >7.04 - 10.32 B B2 6- >10.32 - 14.40 B- B3 7+ >14.40 - 19.37 CCC+ Caa1

7 >19.37 CCC Caa2 7- >19.37 CCC- Caa3 8 N/A

9+ Default 9 Default

10 Default SD Internal ratings from 1 up to 4 represent investment group grade, from 5 up to 7 sub-investment group grade and 8 and higher default group grade. Past due but not impaired loans Loans and securities where contractual interest or principal payments are past due but the Bank believes that impairment is not appropriate on the basis of the level of security/collateral available and/or the stage of collection of amounts owed to the Bank. Unrated loans Unrated loans mainly comprise loans extended to employees.


30 30

5. Financial risk management continued (b) Credit risk continued Allowances for impairment The Bank establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loan loss allowance established for groups of homogeneous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment. Write-off policy The Bank writes off a loan/security balance (and any related allowances for impairment losses) when Group Credit determines that the loans/securities are uncollectible. This determination is reached after considering information such as the occurrence of significant changes in the borrower/issuer’s financial position such that the borrower/issuer can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure. For smaller balance standardised loans, charge-off decisions generally are based on a product-specific past due status. Set out below is an analysis of the gross and net (of allowance for impairment amounts of individually impaired assets by risk grade.

Loans and advances

to customers Loans and advances to

banks Investment securities

Gross Net Gross Net Gross Net

Sk ‘000 Sk 000 Sk ‘000 Sk 000 Sk ‘000 Sk 000 31 December 2007

Grade 1-4: Individually impaired - - - - - -

Grade 5-7: Individually impaired 50,067 43,919 - - - -


98,236 57,160 - - - -

31 December 2006




9,638 7,771

-

-

-

-


31 31

5. Financial risk management continued (b) Credit risk continued The Bank holds collateral against loans and advances to customers in the form of pledges over property, notarial pledges over movable assets and guarantees. Estimates of fair values are based on the value of collateral assessed at the time of borrowing, and periodically updated as per the Collateral management policy. An estimate of the fair value of collateral and other security enhancement held against financial assets is shown below:

Loans and advances

to customers Loans and advances

to banks 2007 2006 2007 2006 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Against individually impaired

Real estate 45,872 - - - Equipment, inventory and receivables 39,370 12,717 - -

Against neither past due nor impaired Pledged accounts and pledged term deposits 2,187,360 2,320,437 - -

Guarantees 7,134,846 5,291,166 - - Life assurance, promissory notes and securities 1,439,897 1,146,251 10,088 461,003

10,847,345

8,770,571

10,088 461,003


32 32

5. Financial risk management continued (b) Credit risk continued The Bank monitors concentrations of credit risk by sector and by geographic location. An analysis of concentrations of credit risk is shown below: Loans and advances


to banks Investment securities

2007 2006 2007 2006 2007 2006 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Sk ’000 Sk ‘000 Concentration

by sector

Government - - - - 3,062,577 2,119,306 Corporate 16,269,902 13,409,183 - - - - Bank - - 10,088 461,003 - - Retail 731,793 586,591 - - - - 17,001,695 13,995,774 10,088 461,003 3,062,577 2,119,306 Loans and advances


to banks Investment securities

2007 2006 2007 2006 2007 2006 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Concentration

by location

Slovak Republic 16,686,597 13,370,685 6,509 461,003 3,062,577 2,119,306 Turkey 159,120 208,776 - - - - Luxembourg 102,651 - - - - - Switzerland 14,876 60,202 - - - - Bosnia and

Herzegovina 12,826

23,604

- - - - Germany 8,417 21,292 - - - - Czech Republic 6,349 285,422 - - - - U.S.A. 5,066 1,572 - - - - Other 5,793 24,221 3,579 - - - 17,001,695 13,995,774 10,088 461,003 3,062,577 2,119,306 Concentration by location for loans and advances is measured based on the location of the entity holding the assets, which has a high correlation with the location of the borrower. Concentration by location of the investment securities is measured based on the location of the issuer of the security. Loans and advances were made to customers in the following sectors: 2007 2006 Sk ‘000 Sk ‘000

Non-financial 13,155,905 8,971,238 Financial 2,759,728 3,765,859 Resident individuals 731,793 586,592 Non-resident 315,097 625,089 Self-employed 38,606 46,484 Insurance 564 510 Non-profit organisations 2 2 17,001,695 13,995,774


33 33

5. Financial risk management continued (b) Credit risk continued Settlement risk The Bank’s activities may give rise to risk at the time of settlement of transactions and trades. Settlement risk is the risk of loss due to the failure of a company to honour its obligations to deliver cash, securities or other assets as contractually agreed. For certain types of transactions the Bank mitigates this risk by conducting settlements through a settlement/clearing agent to ensure that a trade is settled only when both parties have fulfilled their contractual obligations. Alternatively, some customer trades are executed on a payment versus delivery basis, which eliminates settlement risk. Settlement limits form part of the credit approval/limit monitoring process. (c) Liquidity risk Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations from its financial liabilities. Management of liquidity risk The Bank’s approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s reputation. Treasury Department receives daily information from other business units regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows. Treasury then maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, loans and advances to banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Bank. The liquidity requirements of business units and subsidiaries are met through short-term loans from Treasury to cover any short-term fluctuations and longer term funding to address any structural liquidity requirements. There is a combination of liquidity ratios and limits which is used to manage the liquidity position of the Bank. Monitoring and reporting of these ratios and limits is performed by the Independent unit, and Treasury is obliged to comply with these requirements. Any exceptions are reviewed and addressed by country ALCO and properly documented in the minutes. The structure of limits is derived from the forecast balance sheet and behavioural assumptions associated with each balance sheet category. The liquidity position is further tested by a set of different scenarios which cover business as usual as well as stress situations estimating the different level of severity of market conditions and its impact on the liquidity position of the Bank.


34 34

5. Financial risk management continued (c) Liquidity risk continued The remaining period to maturity of monetary assets and liabilities at 31 December 2007 was as follows:

Within 1 year

Sk ‘000

1-5

years Sk ‘000

More than

5 years Sk ‘000

Not

specified Sk’000

Total Sk ‘000

Monetary assets Cash and cash

equivalents 9,043,773 - - - 9,043,773 Trading assets 2,653,893 1,412,567 1,242 - 4,067,702 Loans and advances

to banks 10,088 - - - 10,088 Loans and advances

to customers 12,986,242 3,313,126 664,845 37,482 17,001,695 Investment securities 219,706 2,591,260 251,611 - 3,062,577 Other assets 70,220 - - - 70,220 24,983,922 7,316,953 917,698 37,482 33,256,055

Monetary liabilities

Trading liabilities 2,558,161 386,313 - - 2,944,474 Deposits by banks 1,057,726 - 2,184,195 - 3,241,921 Customer accounts 22,004,511 - - - 22,004,511 Loans received 210,326 - - - 210,326 Subordinated debt 5,888 - 1,263,473 - 1,269,361 Corporate income tax

payable 19,269 - - - 19,269 Deferred tax liability - - - 5,500 5,500 Other liabilities 559,514 11,252 - 17,769 588,535 26,415,395 397,565 3,447,668 23,269 30,283,897


35 35

5. Financial risk management continued (c) Liquidity risk continued The remaining period to maturity of monetary assets and liabilities at 31 December 2006 was as follows:

Within 1 year

Sk ‘000

1-5

years Sk ‘000

More than

5 years Sk ‘000

Not

specified Sk’000

Total Sk ‘000

Monetary assets Cash and cash

equivalents 16,007,734 - - - 16,007,734 Trading assets 6,740,270 954,174 199,422 - 7,893,866 Loans and advances

to banks 461,003 - - - 461,003 Loans and advances

to customers 10,653,983 2,301,029 1,019,440 21,322 13,995,774 Investment securities 339,826 1,069,667 706,803 3,010 2,119,306 Other assets 44,589 - - - 44,589 34,247,405 4,324,870 1,925,665 24,332 40,522,272

Monetary liabilities

Trading liabilities 6,214,330 870,182 - - 7,084,512 Deposits by banks 1,789,898 - 2,247,245 - 4,037,143 Customer accounts 24,375,090 - - - 24,375,090 Loans received 210,326 - - - 210,326 Subordinated debt 4,915 - 1,299,945 - 1,304,860 Corporate income tax

payable

17,355

-

-

-

17,355 Deferred tax liability - - - 16,128 16,128 Other liabilities 943,622 6,692 - 17,877 968,191 33,555,536 876,874 3,547,190 34,005 38,013,605


36 36

5. Financial risk management continued (c) Liquidity risk continued The remaining period to maturity of off balance sheet items at 31 December 2007 was as follows:

Within 1 year

Sk ‘000

1-5

years Sk ‘000

More than

5 years Sk ‘000

Total Sk ‘000

Off balance sheet Guarantees 2,518,696 1,195,276 10,466 3,724,438 Irrevocable letters of

credit

150,795

11,892

-

162,687 Committed unused

lines 770,000 1,736,548 179,052 2,685,600 Contract/notional

amount of derivative instruments

Currency derivatives

Forward exchange contracts 8,172,592 3,457,955 - 11,630,547

Currency and cross currency swaps 80,832,160 3,038,137 - 83,870,297

Options 46,889,835 18,638,512 - 65,528,347 Interest rate derivatives

Interest rate swaps 1,260,000 11,837,472 - 13,097,472 Interest rate options 560,000 261,250 - 821,250 141,154,078 40,177,042 189,518 181,520,638


37 37

5. Financial risk management continued (c) Liquidity risk continued The remaining period to maturity of off balance sheet items at 31 December 2006 was as follows:

Within 1 year

Sk ‘000

1-5

years Sk ‘000

More than

5 years Sk ‘000

Total Sk ‘000

Off balance sheet Guarantees 2,181,885 1,197,641 23,666 3,403,192 Irrevocable letters of

credit

446,258

146,513

-

592,771 Committed unused

lines 877,475 1,241,585 305,877 2,424,937

Contract/notional

amount of derivative instruments

Currency derivatives

Forward exchange contracts

22,129,854

726,033

-

22,855,887

Currency and cross currency swaps

152,015,308

5,151,397

-

157,166,705

Options 42,585,146 28,217,626 - 70,802,772 Interest rate derivatives

Interest rate swaps 3,750,647 6,934,520 - 10,685,167 Interest rate options 3,080,581 3,080,581 - 6,161,162 227,067,154 46,695,896 329,543 274,092,593


38 38

5. Financial risk management continued (d) Market risk Market risk is the risk that changes in market prices, such as interest rates, equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor’s/issuer’s credit standing) will affect the Bank’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. Management of market risks The Bank separates its exposure to market risk between trading and banking portfolios. Overall authority for market risk is vested in ALCO. Market Risk Management is responsible for the development of detailed risk management policies (subject to review and approval by ALCO) and for the day-to-day review of their implementation. The Country Risk Manager provides an independent oversight. Trading portfolio The Bank holds trading positions in various financial instruments including financial derivatives. The majority of the Bank’s business activities are conducted based on the requirements of its customers. In accordance with the estimated demand of its customers, the Bank holds a certain supply of financial instruments and maintains access to the financial markets through the quoting of bid and ask prices and by trading with other market makers. These positions are also held for the purpose of speculation on the expected future developments of financial markets. The speculative expectation and market making thus affect the Bank’s business strategy, and its goal is to maximise net income from trading. The Bank manages the risks associated with its trading activities on the level of individual risks and individual types of financial instruments. The basic instruments used for risk management are volume limits for individual transaction types, stop loss limits and Value at Risk (VaR) limits. The quantitative methods applied to risk management are described below. Risk management methods Market risk is the risk of a change in a product portfolio value arising from changes in market conditions (i.e. changes in interest rates, exchange (FX) rates, prices of commodities, equity instruments and changes in volatility of market factors) that impact the value of the portfolio. The Bank monitors market risks by modelling the result of a fixed change in the monitored market factor while keeping other factors constant. The potential change in the portfolio value is then defined depending on the current sensitivity of the opened position to the changes in the market factors. The fixed changes in the market factors used by the Bank for the respective open positions to monitor the market risk are: • FX rate – 1 % relative change in exchange rate, • Interest rates – a simultaneous change at all points of the yield curve by 1 basis point (0.01 %)

for the trading portfolio and 100 basis points for the banking portfolio, • Commodity price – 1 % relative change in the commodity price, • Equity instrument price – 1 % relative change in the share price.


39 39

5. Financial risk management continued (d) Market risk continued The Bank sets limits for the individual sensitivities of the portfolio value to the fixed changes in market factors. These limits are regularly reassessed. Interest rate risk The Bank is exposed to an interest rate risk as its interest-bearing assets and liabilities have different maturity dates, periods of interest rate changes and volumes during these periods. For variable interest rates, the Bank is exposed to a basis risk due to the different mechanisms of setting different interest rates, such as LIBOR (BRIBOR), announced interest on deposits, etc. The Bank’s interest rate risk management activities are aimed at optimising net interest income in accordance with the Bank’s strategy. Interest rate risk is measured separately for the banking portfolio and the trading portfolio. The interest rate risk of the banking portfolio is measured using a gap analysis. From the results of this analysis, the value of the Interest Rate Exposure (IRE) is calculated. IRE shows the potential change in net interest income before taxation if interest rates for the monitored currency change by 100 basis points during the fixed period. The measurement of the banking portfolio risk also uses the calculation of Total Return (TRT), which shows the change in value of a hypothetically immunified banking portfolio at current levels of interest rates during the fixed period. The Bank also carries out stress testing of the banking portfolio. This testing is performed using the same methodology as the IRE calculation, but using the change in interest rates defined for the purpose of the stress testing instead of the change by 100 basis points. Interest rate risk of the trading portfolio is measured by analysing the change in the value of the portfolio for a given modification of the yield curve. The Bank simulates changes to the yield curve of 1 basis point at particular points of the curve with unchanged values of the yield curve at non-tested periods. Finally, the sensitivity of the portfolio present value as a result of an increase of the whole yield curve by 1 basis point is performed. A more complex view is obtained by calculating the Value at Risk (VaR). The Bank also carries out stress testing of the interest rate risk of the trading portfolio. These tests are based on the same methodology, but using the changes in interest rates defined for the purpose of stress testing instead of the changes in yield curves by 1 basis point.


40 40

5. Financial risk management continued (d) Market risk continued Value at Risk (VaR) Value at Risk represents a statistical estimate of the potential loss from an unfavourable market development within a certain time period and at a certain significance level. The Bank determines VaR using the stochastic simulation of a large number of scenarios of potential developments in the financial markets. The VaR is measured based on a one-day holding period and a confidence level of 99 %. The Value at Risk related to the both interest rate and currency risks was as follows: December

2007 Average

2007 Sk ‘000 Sk ‘000 Total VaR 5,410 5,358


41 41

5. Financial risk management continued (d) Market risk continued The average effective interest rates at 31 December 2007 and the periods in which interest-bearing assets and liabilities denominated in Slovak crowns reprice were as follows:

Effective interest

rate %

3 months or less

Sk ‘000

1 year or less but

over 3 months

Sk ‘000

1 – 5 years

Sk ‘000

Over 5 years

Sk ‘000

Total Sk ‘000

Interest-bearing assets Cash and cash

equivalents 3.65 7,165,320 - - - 7,165,320 Trading assets 4.50 18 38,142 1,009,146 1,242 1,048,548 Loans and advances

to banks 1.50 6,509 - - - 6,509 Loans and advances

to customers 6.17 6,623,854 1,949,706 832,653 183,742 9,589,955 Investment securities 4.50 172,393 47,313 2,591,260 251,611 3,062,577 13,968,094 2,035,161 4,433,059 436,595 20,872,909 Interest-bearing liabilities

Trading liabilities - - 5,459 52,944 - 58,403 Deposits by banks 2.48 608,038 - - - 608,038 Customer accounts 1.93 15,201,431 - - - 15,201,431 Loans received 1.80 - 210,326 - - 210,326

15,809,469

215,785

52,944

-

16,078,198 Off balance sheet items 1,272,500 1,234,500 3,556,750 - 6,063,750 Interest rate repricing gap (1,841,375) 1,819,376 4,380,115) 436,595) 4,794,711| Cumulative interest rate

repricing gap

(1,841,375) (21,999) 4,358,116) 4,794,711) -)


42 42

5. Financial risk management continued (d) Market risk continued The average effective interest rates at 31 December 2007 and the periods in which interest-bearing assets and liabilities denominated in Euro reprice were as follows:

Effective interest

rate %

3 months or less

Sk ‘000

1 year or less but

over 3 months

Sk ‘000

1 – 5 years

Sk ‘000

over 5 years Sk ‘000

Total Sk ‘000


equivalents 3.67 13,027 1,199 - - 14,226 Loans and advances

to customers 5.37 5,547,332 628,877 313,246 13,795 6,503,250 5,560,359 630,076 313,246 13,795 6,517,476 Interest-bearing

liabilities

Deposits by banks 4.71 2,443,268 - - - 2,443,268 Customer accounts 2.47 4,153,437 - - - 4,153,437 Subordinated debt 5.24 1,269,361 - - - 1,269,361 7,866,066 - - - 7,866,066 Off balance sheet items 502,182 1,335,536 6,017,254 - 7,854,972 Interest rate repricing gap (2,305,707) 630,076 313,246 13,795 (1,348,590) Cumulative interest rate

repricing gap

(2,305,707) (1,675,631) (1,362,383) (1,348,590) -


43 43

5. Financial risk management continued (d) Market risk continued The average effective interest rates at 31 December 2006 and the periods in which interest-bearing assets and liabilities denominated in Slovak crowns reprice were as follows:

Effective interest

rate %

3 months or less

Sk ‘000

1 year or less but

over 3 months

Sk ‘000

1 – 5 years

Sk ‘000

Over 5 years

Sk ‘000

Total Sk ‘000


equivalents 3.88 10,953,749 - - - 10,953,749 Trading assets 4.32 224 12,042 98,526 199,422 310,214 Loans and advances

to banks 1.50 461,003 - - - 461,003 Loans and advances

to customers 6.44 7,491,611 364,425 1,007,827 270,988 9,134,851 Investment securities 4.49 309,665 30,162 1,069,666 706,803 2,116,296

19,216,252 406,629 2,176,019 1,177,213 22,976,113 Interest-bearing

liabilities

Trading liabilities - 224 12,042 98,526 - 110,792 Deposits by banks 4.15 1,435,490 - - - 1,435,490 Customer accounts 3.72 16,083,772 - - - 16,083,772 Loans received 1.80 - 210,326 - - 210,326 17,519,486 222,368 98,526 - 17,840,380 Off balance sheet items 1,915,000 196,250 2,137,500 356,250 4,605,000 Interest rate repricing gap 1,696,766 184,261 2,077,493 1,177,213 5,135,733 Cumulative interest rate

repricing gap

1,696,766 1,881,027 3,958,520 5,135,733 -


44 44

5. Financial risk management continued (d) Market risk continued The average effective interest rates at 31 December 2006 and the periods in which interest-bearing assets and liabilities denominated in Euro reprice were as follows:

Effective interest

rate %

3 months or less

Sk ‘000

1 year or less but

over 3 months

Sk ‘000

1 – 5 years

Sk ‘000

over 5 years Sk ‘000

Total Sk ‘000


equivalents 3.73 1,280,990 - - - 1,280,990 Loans and advances

to customers 4.39 2,424,604 620,864 670,296 15,498 3,731,262 3,705,594 620,864 670,296 15,498 5,012,252 Interest-bearing liabilities

Deposits by banks 3.60 2,513,172 - - - 2,513,172 Customer accounts 3.75 5,665,742 - - - 5,665,742 Subordinated debt 4.13 1,304,860 - - - 1,304,860 9,483,774 - - - 9,483,774 Off balance sheet items 447,564 4,672,414 5,847,958 1,673,394 12,641,330 Interest rate repricing gap (5,778,180) 620,864) 670,296 15,498 (4,471,522) Cumulative interest rate

repricing gap

(5,778,180) (5,157,316) (4,487,020) (4,471,522) -

Foreign exchange risk Foreign exchange risk arises from the impact on the value of financial assets and liabilities from changes in foreign exchange rates. The policy of the Bank is to maintain minimal net exposures to foreign exchange risk. Limits are set for individual foreign currencies and the Bank also uses forward foreign currency contracts to hedge balance sheet positions.


45 45

5. Financial risk management continued (d) Market risk continued The Bank had the following foreign exchange positions at 31 December 2007:

Euro Sk ‘000

US dollar

Sk ‘000

Other

Sk ‘000

Slovak crown

Sk’000

Total

Sk ‘000 Assets Cash and cash equivalents 14,226 1,817,378 46,849 7,165,320 9,043,773 Trading assets - - - 4,067,702 4,067,702 Loans and advances

to banks - 3,579 - 6,509 10,088 Loans and advances

to customers 6,503,250 897,675 10,815 9,589,955 17,001,695 Investment securities - - - 3,062,577 3,062,577 Other assets 2,488 4,755 321 62,656 70,220 6,519,964 2,723,387 57,985 23,954,719 33,256,055 Liabilities

Trading liabilities - - - 2,944,474 2,944,474 Deposits by banks 2,443,268 157,591 33,024 608,038 3,241,921 Customer accounts 4,153,437 2,116,396 533,247 15,201,431 22,004,511 Loans received - - - 210,326 210,326 Subordinated debt 1,269,361 - - - 1,269,361 Corporate income tax

payable - - - 19,269 19,269 Deferred tax liability - - - 5,500 5,500 Other liabilities 62,915 67,980 13,788 443,852 588,535

7,928,981 2,341,967 580,059 19,432,890 30,283,897


46 46

5. Financial risk management continued (d) Market risk continued The Bank had the following foreign exchange positions at 31 December 2006:

Euro Sk ‘000

US dollar

Sk ‘000

Other

Sk ‘000

Slovak crown

Sk’000

Total

Sk ‘000 Assets Cash and cash equivalents 1,307,837 3,694,435 29,767 10,975,695 16,007,734 Trading assets - - - 7,893,866 7,893,866 Loans and advances

to banks - - - 461,003 461,003 Loans and advances

to customers 3,736,312 876,625 246,337 9,136,500 13,995,774 Investment securities - - - 2,119,306 2,119,306 Other assets 177 16,399 207 27,806 44,589 5,044,326 4,587,459 276,311 30,614,176 40,522,272 Liabilities

Trading liabilities - - - 7,084,512 7,084,512 Deposits by banks 2,513,172 86,095 2,386 1,435,490 4,037,143 Customer accounts 5,665,742 2,155,231 470,345 16,083,772 24,375,090 Loans received - - - 210,326 210,326 Subordinated debt 1,304,860 - - - 1,304,860 Corporate income tax

payable - - - 17,355 17,355 Deferred tax liability - - - 16,128 16,128 Other liabilities 273,951 261,196 25,183 407,861 968,191 9,757,725 2,502,522 497,914 25,255,444 38,013,605 (e) Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events. It includes reputation and franchise risks associated with Citi’s business practices or market conduct. It also includes the risk of failing to comply with applicable laws, regulations, Regulatory Administrative Actions or Citi policies.


47 47

5. Financial risk management continued (e) Operational risk continued The Bank’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Bank’s reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity. The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Bank standards for the management of operational risk in the following areas: • requirements for appropriate segregation of duties, including the independent authorisation of

transactions • requirements for the reconciliation and monitoring of transactions • compliance with regulatory and other legal requirements • documentation of controls and procedures • requirements for the periodic assessment of operational risks faced, and the adequacy of

controls and procedures to address the risks identified • requirements for the reporting of operational losses and proposed remedial action • development of contingency plans • training and professional development • ethical and business standards • risk mitigation, including insurance where this is effective. The Operational Risk Process is made up of the following components: 1. Identify and Assess Key Operational Risks

Key Operational Risks are derived from a judgmental assessment of the Important Risks identified through the Risk Compliance Self Assessment Processes (“RCSA”), as well as other relevant factors that can include internal operational risk loss data, industry events, and other forms of scenario analysis. The identification of Key Operational Risks benefits from a collaborative effort, with the input of business and functional experts. 2. Establish Key Risk Indicators

Key Risk Indicators (‘KRIs’) are management tools that can be used to monitor exposure to a risk, or to monitor the control of a risk. They may be quantitative in nature, or they may be judgmental so far as possible, KRIs should:

• Recognise both improvements and deterioration in operational risk exposures on a timely basis;

• Provide forward-looking information to management;

• Translate into quantifiable measures that lend themselves to monitoring and verification; and

• Be identified through a collaborative effort, with the input of business and functional experts. 3. Comprehensive Quarterly Operational Risk Reporting

• Internal Operational Risk Events

• RCSA and ARR Results


48 48

5. Financial risk management continued (e) Operational risk continued

• Key Operational Risks and KRI’s

• Operational Risk Capital Results

• Management Summary The internal audit function is exercising independent control over management of operational risk by checking for compliance with statutes, other generally binding legal regulations, and the Bank’s internal regulations and procedures; in particular, examining and evaluating the functionality and effectiveness of the Bank’s management and control system, risk management system, and internal capital adequacy assessment process, the fulfillment of requirements for own funds and liquidity, and compliance with exposure limits; examining and evaluating the Bank’s preparedness in terms of risk management for performing new types of transactions. The results of Internal Audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the senior management of the Bank and the Supervisory Board. (f) Capital management The Bank’s regulator, the National Bank of Slovakia (‘NBS’) sets and monitors capital requirements. In implementing current capital requirements, the NBS requires the Bank to maintain a prescribed ratio of total capital to total risk-weighted assets. Up to March 2007 the Bank calculated the requirements for market risk in its trading portfolios based on the requirements of NBS regulation No 4/2004 on adequacy of own funds. Since 30 March 2007, the requirements for market risk are calculated in accordance with NBS regulation No 4/2007 on own funds and requirements on own funds. The Bank’s regulatory capital is analysed into three tiers: • Tier 1 capital includes ordinary share capital, legal reserve fund and retained earnings, after

deductions for intangible assets, and other regulatory adjustments relating to items that are included in equity but are treated differently for capital adequacy purposes.

• Tier 2 capital includes part of the qualifying subordinated liabilities. • Tier 3 capital includes part of the qualifying subordinated liabilities. Various limits are applied to elements of the capital base. Banking operations are categorised as either trading book or banking book, and risk-weighted assets are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures. The Bank’s policy is to maintain a strong capital base so as to maintain shareholder, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholder’s return is taken into account as the Bank recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. The Bank has complied with all externally imposed capital requirements throughout the year. There have been no material changes in the Bank’s management of capital during the year.


49 49

5. Financial risk management continued (f) Capital management continued The Bank’s regulatory capital position at 31 December was as follows:

2007 2006 Sk ‘000 Sk ‘000

Regulatory capital Tier 1 capital Ordinary share capital (note 23) 1,650,000 1,650,000 Reserve funds and other funds created from profit (note 24) 330,000 304,644 Retained earnings less profit for the year (note 24) 624,208 287,070 Less: certain intangible assets (1,947)| (5,908)) Total 2,602,261 2,235,806 Tier 2 capital Subordinated debt less accrued interest (note 19) 1,263,473 1,117,903 Other reserves - - Total 3,865,734 3,353,709 Tier 3 capital Subordinated debt - 182,042 Total - 182,042 3,865,734 3,535,751 Risk-weighted assets (RWA) RWA - weight 20% 821,327 1,444,000 RWA - weight 50% - 95 RWA - weight 100% 18,944,763 16,902,256 Risk weighted assets in the banking book 19,766,090 18,346,351 Risk weighted assets in the trading book 1,237,039 2,370,625 Other risk weighted assets 138,131 267,713 21,141,260 20,984,689 Capital ratios Total regulatory capital expressed as a percentage of total risk-weighted assets 18.29% 16.85% Total tier 1 capital expressed as a percentage of risk weighted assets 12.31% 10.65%


50 50

6. Cash and cash equivalents

2007 2006 Sk ‘000 Sk ‘000

Cash and balances at the central bank (note 7) 7,139,170 8,911,198 Treasury bills and similar securities (note 8) - 1,111,671 Loans and advances to banks with contractual maturity up to 3 months (note 10) 1,904,603

5,984,865

9,043,773 16,007,734

7. Cash and balances at the central bank

2007 2006 Sk ‘000 Sk ‘000

Balances with the National Bank of Slovakia: Compulsory minimum reserve 6,509 461,003 Receivables from repurchase agreements 4,975,832 6,976,019 Other 2,124,735 1,873,548 7,107,076 9,310,570 Balances with other central banks Other 111 - 7,107,187 9,310,570 Cash in hand 38,492 61,631 7,145,679 9,372,201 Less compulsory minimum reserve (note 10) (6,509)| (461,003)) 7,139,170 8,911,198

The compulsory minimum reserve balance is maintained in accordance with the requirements of the National Bank of Slovakia.

8. Treasury bills and similar securities

2007 2006 Sk ‘000 Sk ‘000

Treasury bills and other similar securities: Treasury bills available for sale - 991,851 Debt securities available for sale - 119,820 - 1,111,671


51 51

9. Trading assets and liabilities 2007 2006

Sk ‘000 Sk ‘000

Trading assets Debt securities (a) 990,145 199,422 Derivative instruments (b) 3,077,557 7,694,444 4,067,702 7,893,866 Trading liabilities Derivative instruments (b) 2,944,474 7,084,512 (a) Debt securities 2007 2006 Sk ‘000 Sk ‘000 Slovak government bonds 990,145 199,422 (b) Derivative instruments Contract/

notional 2007

Fair value Contract/

notional 2006

Fair value amount Assets Liabilities amount Assets Liabilities Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Sk‘000 Sk‘000 Currency derivatives Forward exchange

contracts 11,630,547 89,142 694,801 22,855,887 550,337 1,219,142 Currency and cross-

currency swaps 83,870,297 2,401,790 1,663,048 157,166,705 6,105,565 4,826,828 Options 65,528,347 528,222 528,222 70,802,772 927,750 927,750 Interest rate

derivatives Interest rate swaps 13,097,895 58,070 58,070 10,685,167 81,473 81,473 Interest rate options 821,250 333 333 6,161,162 29,319 29,319 174,948,336 3,077,557 2,944,474 267,671,693 7,694,444 7,084,512


52 52

10. Loans and advances to banks 2007 2006 Sk ‘000 Sk ‘000

Repayable on demand 100,885 128,948 Other loans and advances by remaining maturity: - 3 months or less 1,803,718 5,855,917 - over 3 month 3,579 - Compulsory minimum reserve (note 7) 6,509 461,003 1,914,691 6,445,868 Less amounts with contractual maturity up to 3 months (note 6) (1,904,603)| (5,984,865)| 10,088 461,003 11. Loans and advances to customers 2007 2006 Sk ‘000 Sk ‘000

Repayable on demand 5,607,294 4,244,152 Other loans and advances to customers by remaining maturity: - 3 months or less 2,531,992 3,893,110 - 1 year or less but over 3 months 3,269,912 1,561,058 - 5 years or less but over 1 year 3,579,332 2,618,686 - over 5 years 2,062,317 1,689,044

17,050,847 14,006,050 Allowances for impairment (note 12) (49,152)) (10,276)) 17,001,695 13,995,774 The exposure to the various business segments of loans and advances to customers according to main product types is as follows:

31 December 2007 31 December 2006

Gross

amount Impairment

allowance Carrying

amount Gross

amount Impairment

allowance Carrying

amount Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Sk ‘000 Retail customers Personal loans 587,743 (8,076) 579,667 421,912 (8,409) 413,503 Staff loans 147,469 - 147,469 159,403 - 159,403 Credit cards 4,650 - 4,650 5,276 - 5,276 Corporate customers Large 13,030,409 - 13,030,409 10,331,527 - 10,331,527 Small business 3,280,576 (41,076) 3,239,500 3,087,932 (1,867) 3,086,065

17,050,847 (49,152) 17,001,695 14,006,050 (10,276) 13,995,774


53 53

12. Impairment losses on loans and advances The movements on impairment losses on loans and advances to customers were as follows: 2007 2006 Sk ‘000 Sk ‘000 Specific allowances for impairment: At 1 January 1,867 23,175 Charge for the year 50,790 20,930 Release of impairment losses on loans written-off (11,581) (42,238) At 31 December 41,076 1,867 Collective allowances for impairment: At 1 January 8,409 11,516 Charge for the year 3,782 6,463 Release of impairment losses on loans written-off (4,115) (9,570) At 31 December 8,076 8,409 Total allowances for impairment 49,152 10,276 2007 2006 Sk ‘000 Sk ‘000 Charge for the year (54,572) (27,393)Recoveries 15,696 51,808 (38,876) 24,415 Expenses related to transfer of receivable (26,112) (52,412)Income related to transfer of receivables 9,153 12,389 (16,959) (40,023) (55,835) (15,608)


54 54

13. Investment securities 2007 2006 Sk ‘000 Sk ‘000

Debt securities available for sale (a) 3,062,577 2,116,296 Equity shares available for sale (b) - 3,010 3,062,577 2,119,306 (a) Debt securities available for sale 2007 2006 Sk ‘000 Sk ‘000

Slovak government securities 3,062,577 2,116,296 (b) Equity shares available for sale 2007 2006 Name Activity Sk ‘000 Sk ‘000 RVS, a.s. Conference and leisure 3,010 3,010 Specific allowance for impairment (3,010) - - 3,010 The Bank holds 1.29 % (2006: 1.29%) share in RVS, a.s. - a company registered in the Slovak Republic. In 2007, a full impairment loss was recognised for the investment in RVS. The movements on available-for-sale securities during the year were as follows:

2007 2006 Sk ‘000 Sk ‘000As at 1 January 2,119,306 1,162,460

Additions 1,641,852 1,105,828Disposals (683,157) (132,936)Losses from changes in fair value (note 24) (12,414) (16,046)Specific allowance for impairment (3,010) -

As at 31 December 3,062,577 2,119,306 The movements on specific allowances for impairment on investment securities were as follows:

2007 2006 Sk ‘000 Sk ‘000As at 1 January - -Charge for the year 3,010 - As at 31 December 3,010 -


55 55

14. Property and equipment

At 31 December 2006 and 2007, no assets were held under finance leases. The Bank’s property is not pledged. The Bank’s buildings and equipment are insured against fire, burglary, floods and storms for the replacement value as at 31 December of the preceding period. The Bank has motor hull and compulsory motor car insurance.

Leasehold improvements

Sk ‘000

Furniture, fittings

and equipment

Sk ‘000

Motor vehicles Sk ‘000

Software Sk ‘000

Assets not yet in use

Sk ‘000 Total

Sk ‘000 Cost At 1 January 2006 35,646 183,621 35,185 36,512 2,688 293,652 Additions 786 13,553 19,511 2,809 (1,281) 35,378 Disposals/transfers (1,123) (13,968) (5,818) (758) - (21,667)

At 31 December 2006 35,309 183,206 48,878 38,563 1,407 307,363

At 1 January 2007 35,309 183,206 48,878 38,563 1,407 307,363 Additions 904 4,102 9,082 335 15,347 29,770 Disposals/transfers - (16,440) (5,387) - (14,423) (36,250)

At 31 December 2007 36,213 170,868 52,573 38,898 2,331 300,883

Depreciation and impairment losses

At 1 January 2006 9,161 132,283 9,936 26,379 837 178,596 Charge for the year 3,481 17,064 10,576 4,792 - 35,913 Disposals (1,105) (13,621) (3,721) (760) - (19,207)Impairment losses - - - - (837) (837)

At 31 December 2006 11,537 135,726 16,791 30,411 - 194,465

At 1 January 2007 11,537 135,726 16,791 30,411 - 194,465 Charge for the year 3,582 16,105 13,025 4,297 - 37,009 Disposals - (16,435) (2,646) - - (19,081)

At 31 December 2007 15,119 135,396 27,170 34,708 - 212,393

Net book value:

At 31 December 2007 21,094 35,472 25,403 4,190 2,331 88,490

At 31 December 2006 23,772 47,480 32,087 8,152 1,407 112,898


56 56

15. Other assets 2007 2006 Sk ‘000 Sk

‘000 Prepaid expenses 10,938 10,180 Other 59,282 34,409

70,220 44,589 The movements on impairment losses on other assets were as follows: 2007 2006 Sk ‘000 Sk ‘000 At 1 January - 665 Release for the year - (665) At 31 December - - 16. Deposits by banks 2007 2006 Sk ‘000 Sk ‘000

Repayable on demand 837,060 452,833 Other deposits by banks with remaining maturity: - 3 months or less 210,340 1,328,378 - 5 years or less but over 1 year 2,194,521 2,255,932 3,241,921 4,037,143 17. Customer accounts 2007 2006 Sk ‘000 Sk ‘000

Repayable on demand 17,246,935 16,582,234 Other deposits with agreed maturity dates or periods of notice, by remaining maturity:

- 3 months or less 4,707,384 7,792,856 - 1 year or less but over 3 months 50,192 - 22,004,511 24,375,090


57 57

18. Loans received 2007 2006 Sk ‘000 Sk ‘000

Exportno-importná banka SR, a.s. 210,326 210,326 The amounts due to the Exportno-importná banka SR, a.s. (‘Eximbank’) comprise loans of Sk 150 million and Sk 60 million. Both loans were provided by Eximbank to assist in supporting the exporting activities of qualifying companies. Both loans bear interest at 1.8% p.a. 19. Subordinated debt 2007 2006 Sk ‘000 Sk ‘000

Citigroup Netherlands B.V. 1,269,361 1,304,860 The subordinated loan was provided under a contract entered into on 9 November 2005. The loan is denominated in Euro and the principal debt amounts to EUR 37,600 thousand. The interest rate was set as three-month EURIBOR plus 0.5% p.a. The original debt’s tenor is 10 years. In the event of bankruptcy or similar the Bank is obliged to repay the debt with related interest after settling all other creditors’ claims. 20. Corporate income tax 2007) 2006) Sk ‘000) Sk ‘000)

Tax payable for the current period (note 32) 128,697 109,412) Tax prepayments (109,428) (92,057) Corporate income tax payable 19,269 17,355) 21. Provisions The movements on provisions were as follows: 2007

Sk ‘000 2006

Sk ‘000 At 1 January

5,342 4,175

Increase for the year 1,524 1,167 At 31 December 6,866 5,342


58 58

22. Other liabilities 2007 2006 Sk ‘000 Sk ‘000

Items in course of settlement 338,430 547,943 Expense accruals 90,049 123,440 Social fund 109) 79 Other 159,947) 296,729

588,535 968,191 The movements on the Social fund were as follows: 2007 2006 Sk ‘000 Sk ‘000

At 1 January 79 172 Creation 3,900 3,743 Drawings (3,870) (3,836), At 31 December 109 79 23. Share capital

2007 Sk ‘000

2006 Sk ‘000

Authorised, issued and fully paid:

1,650,000 ordinary shares of Sk 1,000 each 1,650,000 1,650,000 24. Reserves

Retained) earnings) Sk ‘000)

Legal) reserve)

fund) Sk ‘000)

Reval-) uation)

reserve) Sk ‘000)

Total) Sk‘000)

At 1 January 2007 649,564) 304,644) 12,015) 966,223) Dividend for 2007 (a) -) -) -) -) Transfers (b) (25,356)

25,356)

-) -)

Net loss on available-for- sale assets, net of tax (c) -) -) (10,055) (10,055) Profit for 2007 (d) 447,614) -) -) 447,614) At 31 December 2007 1,071,822) 330,000) 1,960) 1,403,782)


59 59

24. Reserves continued (a) Dividends During 2007 no dividend was paid from the profit for the year ended 31 December 2006. (b) Legal reserve fund The General Meeting on 30 March 2007 approved the transfer to legal reserve fund of Sk 25,356 thousand from 2006 profit. Under the Slovak Commercial Code, all companies are required to maintain a legal reserve fund to cover future adverse financial conditions. The Bank is obliged to contribute an amount to the fund each year, which is not less than 10% of its annual net profit until the aggregate amount reaches a minimum level equal to 20% of the issued share capital. The legal reserve fund is not distributable to the shareholder. (c) Revaluation reserve The revaluation reserve includes the cumulative net change in the fair value of available-for-sale investment securities until the investment is derecognised or impaired. (d) Proposed allocation of profit The Directors will propose the following allocation of the profit for the year ended 31 December 2007: Sk ‘000Transfer to legal reserve fund - Dividends - Retained earnings 447,614 447,614 25. Off balance sheet items 2007

Sk ‘000 2006

Sk ‘000 Contingent liabilities: Guarantees 3,724,438 3,403,192 Irrevocable letters of credit 162,687 592,771 Commitments: Committed unused lines 2,685,600 2,424,937 Uncommitted unused lines 23,849,453 17,883,381 Derivative instruments: Trading assets and liabilities (note 9) 174,948,336 267,671,693

205,370,514 291,975,974


60 60

26. Deferred tax Deferred tax assets and liabilities are attributable to the following: Assets/

(liabilities) Assets/

(liabilities) 2007)

Sk ‘000) 2006)

Sk ‘000) Write-off of loans 2,190 1,775) Origination fees - (2,017) Property and equipment (1,439) (1,270) Allowances for impairment on loans and advances (6,533) (13,067) Revaluation of available-for-sale securities (460) (2,819) Other 742 1,270)

(5,500) (16,128) The deferred tax assets and liabilities have been calculated using a corporate income tax rate of 19% (2006: 19%). The movements on deferred tax were as follows: 2007 2006 Sk ‘000 Sk ‘000

Deferred tax: Charge to income statement (note 32) 8,269 (2,570)Charge to equity 2,359 3,049)

10,628 479


61 61

27. Interest receivable and similar income arising from debt securities 2007

Sk ‘000 2006

Sk ‘000 Interest receivable and similar income arising from: Loans and advances to banks 583,772 561,078 Loans and advances to customers 951,253 782,706 Debt securities 94,759 65,026 1,629,784 1,408,810 Included within the various captions of interest receivable and similar income for the year ended 31 December 2007 is a total interest income of Sk 5,675 thousand accrued on impaired financial assets (2006: Sk 4,110 thousand). 28. Interest payable 2007

Sk ‘000 2006

Sk ‘000 Deposits by banks 144,964 191,956 Customer accounts 746,550 557,294 Subordinated debt 60,165 48,483 Loans received 3,833 3,780 955,512 801,513 29. Fees and commissions receivable and payable 2007 2006

Fees and commissions receivable: Sk ‘000 Sk ‘000

Payment services income 155,920 136,936 Corporate banking credit related fees 22,523 - Retail banking customer fees 14,509 11,056 Guarantee and letter of credit contracts issued 38,302 36,018 Other 5,428 5,178 Total fees and commissions receivable 236,682 189,188 Fees and commissions payable: Payment services (89,306) (96,137)Inter bank transaction fees (4,772) (5,090)Brokerage (5,485) (8,996)Other (21,922) (34,218) Total fees and commissions payable (121,485) (144,441) Net fees and commissions income 115,197

44,747


62 62

30. Net trading income 2007

Sk ‘000 2006

Sk ‘000 Net income/(loss) from foreign exchange operations 978,475 (234,251)Net (loss)/income from derivative instruments ) Net (loss)/income relating to currency derivatives (578,864) 647,921 Net income from interest rate derivatives - 1,268 Net income from options 133,659 181,446Net income from trading with securities 20,489 3,296 553,759 599,680) 31. Administrative expenses 2007

Sk ‘000 2006

Sk ‘000Employee costs: Wages and salaries 296,379 288,743 Social insurance 43,465 41,071 Other 23,178 27,195

363,022 357,009 Operating lease rentals 29,076 31,378 Other operating expenses 307,771 347,241

699,869 735,628 At 31 December 2007, the average number of employees was 238 (2006: 244). The Bank granted shares of Citibank N.A., New York within the Capital Accumulation Program (‘CAPs’) to certain employees that entitle these employees to obtaining the shares of Citibank N.A., New York. There were 32,662 CAPs granted as at 31 December 2007 (2006: 13,059) with 4 years vesting period. The amount of CAPs being charged to income statement during 2007 amounts to Sk 9,273 thousand (2006: 7,467) and is included in the ‘Wages and salaries’ line.


63 63

32. Income tax expense

2007 2006

Recognised in the income statement: Sk ‘000 Sk ‘000

Current tax expense Current year (note 20) (128,697) (109,412)Adjustments in respect of prior years (623) (321)

(129,320)

(109,733)

Deferred tax expense Origination and reversal of temporary differences (note 26) 8,269 (2,570) Total income tax expense (121,051) (112,303)

The effective tax rate was calculated as follows:

2007 2006 Sk ‘000 Sk ‘000

Profit before taxation at 19% 568,665 474,797 Non-taxable items Tax adjustments due to IFRS adoption (7,618) (11,723) Provisions (1,775) - Income from written-off loans (9,153) (7,423) Difference between accounting and tax depreciation - (2,934) Other (17,531) (4,088) (36,077) (26,168) Tax non-deductible expenses Severance payments 6,234 360 Capital Accumulation Program related expenses 26,630 11,671 Marketing related expenses 3,688 5,405 Provisions - 4,982 Consumer loans write-off 26,051 30,457 Taxation of 2003 loan impairment allowance 34,386 34,386 Difference between accounting and tax depreciation 3,920 - Tax adjustments due to IFRS adoption - 8,659 Other 43,853 31,303 144,762 127,223 Tax base 677,350 575,852 Tax at 19% 128,697 109,412 Underprovision in respect of previous year 623 321 Total income tax expense 129,320 109,733 Effective tax rate 22.74% 23.11%


64 64

33. Profit before changes in operating assets and liabilities 2007

Sk ‘000 2006

Sk ‘000 Profit before taxation 568,665 474,797 Adjustments for non-cash items: Depreciation 37,009 35,913 (Gain)/loss on disposal of property and equipment (195) 153 Interest receivable (1,629,784)) (1,408,810)) Interest received 1,590,468 1,362,628 Interest payable 955,512 801,513 Interest paid (962,873)) (799,572) Impairment losses on loans and advances 55,835 15,608 Impairment losses on investment securities 3,010) - Impairment losses on property and equipment - (837) Impairment losses on other assets - (665) Provisions 1,524 1,167

619,171 481,895 34. Lease commitments 2007

Sk ‘000 2006

Sk ‘000 Non-cancellable commitments under operating leases 161,106 147,496


65

35. Related party transactions In the normal course of business, the Bank is engaged in transactions with other members of Citigroup. These transactions, which include the taking and placing of deposits, foreign currency operations and the provision of management and technology services, are conducted on an arm’s length basis. (a) Enterprises related to the shareholder 2007)

Sk ‘000) 2006

Sk ‘000 Assets Cash and cash equivalents 32,061 98,361) Trading assets 2,557,006 5,821,107) Other assets 1,284 8,453) Liabilities Trading liabilities 1,648,639 4,226,502) Deposits by banks 3,003,858 2,669,872) Subordinated debt 1,269,361 1,304,860) Other liabilities 11,697 3,626) Transactions during the year were as follows: Interest received and receivable 25,037 78,991) Interest paid and payable (177,923) (112,733)) Fees and commissions receivable 13,460 10,125) Fees and commissions payable (52,864) (79,649)) Net trading income 8,360,524 4,794,690) Other operating income 19,311 7,778) Administrative expenses (108,875) (95,721)) (b) Key management personnel Amounts due from and to directors, senior management or close relatives or companies in which they have a substantial interest, of the Bank were as follows: 2007

Sk ‘000 2006

Sk ‘000 (i) Board of Directors Assets Loans and advances to customers 2,170 6,215 Liabilities Customer accounts 32,705 27,329 Other liabilities (CAPs) 3,360 3,637 Transactions during the year were as follows: Interest received and receivable 58 456 Interest paid and payable 1,206 1,028


66

35. Related party transactions continued (b) Key management personnel continued 2007

Sk ‘000 2006

Sk ‘000 (ii) Supervisory Board Assets Loans and advances to customers 568 1,937 Liabilities Customer accounts 4 7 Transactions during the year were as follows: Interest received and receivable 58 52 Interest paid and payable 1 3 (iii) Senior management Liabilities Customer accounts 871 3,381 Other liabilities (CAPs) 505 113 Transactions during the year were as follows: Interest paid and payable 128 114 Interest is charged on loans and advances at more favourable rates than current market rates. The loans are primarily secured by promissory notes. During the period, the Bank did not record impairment losses for loans and advances provided to related parties and no specific allowances have been made for impairment losses to related parties. Key management personnel compensation for the period comprised:

2007 Sk ‘000

2006 Sk ‘000

(i) Board of Directors Employee benefits Wages and salaries 26,988 39,719 Other liabilities (CAPs) 1,314 3,073 Other - 5,177

(ii) Supervisory Board Employee benefits Wages and salaries 4,122 3,828


67 67

35. Related party transactions continued (b) Key management personnel continued

2007 Sk ‘000

2006 Sk ‘000

(iii) Senior management Employee benefits Wages and salaries 4,838 4,412 Other liabilities (CAPs) 193 99 36. Custodial services The Bank administers securities and other valuables totalling Sk 6,853 million (2006: Sk 3,809), which have been received from customers into the Bank’s custody. 37. Fair values Fair value is the amount at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. The estimated fair values of the Bank’s financial assets and liabilities at year end were as follows: Carrying

value Fair

value Carrying

value Fair

value 2007

Sk ‘000 2007

Sk ‘000 2006

Sk ‘000 2006

Sk ‘000 Financial assets Cash and cash

equivalents 9,043,773 9,043,773

16,007,734 16,007,734 Trading assets 4,067,702 4,067,702 7,893,866 7,893,866 Loans and advances

to banks 10,088 10,088

461,003 461,003 Loans and advances

to customers 17,001,695 16,938,643

13,995,774 13,961,950 Investment securities 3,062,577 3,062,577 2,119,306 2,119,306 Financial liabilities

Trading liabilities 2,944,474 2,944,474 7,084,512 7,084,512 Deposits by banks 3,241,921 3,241,921 4,037,143 4,037,143 Customer accounts 22,004,511 22,004,511 24,375,090 24,375,090 Loans received 210,326 206,671 210,326 206,673 Subordinated debt 1,269,361 1,269,321 1,304,860 1,304,860 The following methods and assumptions were used in estimating the fair values of the Bank’s financial assets and liabilities: Trading assets The fair values of trading assets are calculated using quoted market prices or theoretical prices determined by discounting future cash flows by reference to the relevant interest rate for the maturity period.


68 68

37. Fair values continued Loans and advances to banks The fair value of current accounts with other banks approximates to book value. For amounts with a remaining maturity of less than three months, it is also reasonable to use book value as an approximation of fair value. Loans and advances to customers Loans and advances are stated net of impairment losses. For loans and advances to customers with a remaining maturity of less than three months, it is reasonable to use book value as an approximation of fair value. The fair values of other loans and advances to customers are calculated by discounting the future cash flows using current market rates. Investment securities Investment securities are stated at quoted market prices. Trading liabilities The fair values of trading liabilities are calculated using quoted market prices or theoretical prices determined by discounting future cash flows by reference to the relevant interest rate for the maturity period. Deposits by banks The fair value of current accounts with other banks approximates to book value. For other amounts owed to banks with a remaining maturity or repricing period of less than three months, it is also reasonable to use book value as an approximation of fair value. Customer accounts The fair values of current accounts and term deposits with a remaining maturity of less than three months approximate their carrying amounts. Loans received The fair values of loans received with a remaining maturity of less than three months approximate their carrying amounts. The fair values of other loans received are calculated by discounting the future cash flows using current market rates. Subordinated debt The fair value of subordinated debt approximates to book value as the debt is being repriced on quarterly basis (3-month EUR LIBOR).


69 69

38. Subsequent events Amendment to the Income Tax Act effective from 1 January 2008 According to the Income Tax Act valid until 31 December 2007, all impairment allowances on loans and receivables recognised in accordance with IFRS were considered as tax deductible. The amendment to the Income Tax Act effective from 1 January 2008 implements new criteria for tax-deductibility of impairment allowances on loans and receivables. These criteria are also applicable to impairment allowances on loans and receivables existing as at 31 December 2007. This will result in an additional tax liability of approximately Sk 10,941 thousand in 2008. The Bank will also create a deferred tax asset of approximately the same amount as the tax liability. Personal consumer loans (Citifinancial) The management of the Bank decided on 17 December 2007 to restructure the retail operations (Citifinancial) of the Bank. Subsequently, a plan was put in place and was communicated to those affected on 9 January 2008. According to the plan, retail outlets will be closed and the number of staff will be reduced. Management estimates restructuring costs of approximately Sk 23 million. The Bank will ensure that all the necessary controls and procedures relating to the consumer loan portfolio remain in place.

71

72

73

76

Citibank (Slovakia) a.s. www.citibank.sk BRATISLAVA Mlynské nivy 43, 825 01 Bratislava BANSKÁ BYSTRICA Kuzmányho 7, 974 01 Banská Bystrica KOŠICE Werferova 3, 040 11 Košice ŽILINA Horný Val 19, 010 01 Žilina © 2008 Citibank (Slovakia) a.s.

Documents

ANNUAL REPORT 2007 - Banking with Citi | Citi.com (Slovakia) a.s. Income statement Year ended 31 December 2007 11 2007) 2006) Notes Sk ‘000) Sk ‘000) Interest receivable and similar