KOMERCIJALNA BANKA AD SKOPJE - nbrm.mk

KOMERCIJALNA BANKA AD SKOPJE

Financial Statements prepared in accordance withinternational Financial Reporting Standards

For the year ended 31 December 2009

KOMERCIJALNA BANKA AD - SKOPJEFinancial statements for the year ended 31 December 2009

Content

Independent auditor's report

Statement of comprehensive income

Statement of financial position

Statement of changes in equity ~*

Cash flow statement

Notes to the financial statements

___I>aiJe_

1-2

' 3

4

5

6-7

8-68

PricewaterhouseCoopersREVIZIJA DOOul. Marshal Tito 12,"Palata Makedonija" IV floor1000 SkopjeRepublic of MacedoniaTelephone +389 (02) 3116 638

+389(02)3111 012+389(02)3110623

Facsimile +389 (02) 3116 525. , , . ... , , www.pwc.com/mkindependent auditor s report

To the Shareholders of Komercijalna Banks AD - Skopje

We have audited the accompanying financial statements of Komercijalna Banka AD -Skopje, which comprise the statement of financial position as of 31 December 2009 and thestatement of comprehensive income, statement of changes in equity and cash flowstatement for the year then ended and a summary of significant accounting policies andother explanatory notes.

Management's responsibility for the financial statements

Management is responsible for the preparation and fair presentation of these financialstatements in accordance with International Financial Reporting Standards. Thisresponsibility includes: designing, implementing and maintaining internal control relevant tothe preparation and fair presentation of the financial statements that are free from materialmisstatement, whether due to fraud or error; selecting and applying appropriate accountingpolicies; and making accounting estimates that are reasonable in the circumstances.

Auditor's responsibility

Our responsibility is to express an opinion on these financial statements based on our audit.We conducted our audit in accordance with International Standards on Auditing. ThoseStandards require that we comply with ethical requirements and plan and perform the auditto obtain reasonable assurance whether the financial statements are free from materialmisstatement.

An audit involves performing procedures to obtain audit evidence about the amounts anddisclosures in the financial statements. The procedures selected depend on the auditor'sjudgment, including the assessment of the risks of material misstatement of the financialstatements, whether due to fraud or error. In making those risk assessments, the auditorconsiders internal control relevant to the entity's preparation and fair presentation of thefinancial statements in order to design audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of theentity's internal control. An audit also includes evaluating the appropriateness of accountingpolicies used and the reasonableness of accounting estimates made by management, aswell as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to providea basis for our audit opinion.

Opinion

In our opinion, the accompanying financial statements give a true and fair view of thefinancial position of Komercijalna Banka AD-Skopje as of 31 December 2009, and of itsfinancial performance and its cash flows for the year than ended in accordance withInternational Financial Reporting Standards.

r

PricewaterhouseCoopers REVIZIJA DOO

Skopje,

26 February 2010

KOMERCIJALNA BANKA AD - SKOPJEFinancial statements for the year ended 31 December 2009(All amounts in MKD thousands unless otherwise stated)

Statement of comprehensive income

Interest and similar incomeInterest expense and similar charges

Net interest income

Fee and commission incomeFee and commission expense

Net fee and commission income

Dividend incomeForeign exchange gains (net)Net gains (losses)/ on financial instruments

classified as held for tradingOther operating incomePersonnel expensesOther operating expensesImpairment charge for credit losses

Operating profit

Share of profit of associates accounted for usingthe equity method

Profit before income tax

Income tax expense

Profit for the year

Other comprehensive income for the year

Total comprehensive income for the year

Basic earnings per shareDiluted earnings per share

Notes

55

66

91011

12

1313

Year ended

31 December

2009

4,004,517(1,612,743)

2,391,774

832,834(145,201)

687,633

12,90390,447

2,881182,689

(853,564)(941,832)(514,926)

1,058,005

17,250

1,075,255

(125)

1,075,130

1,075,130

537534

2008

3,886,908(1,309,455)

2,577,453

899,384(135,191)

764,193

20,119101,194

(16,442)301,677

(722,182)(1,001,830)

(487,004)

1,537,178

14,174

1,551,352

(172,685)

1,378,667

1,378,667

690685

The notes on pages 8 to 68 are an integral part of these financial statements.



Notes

ASSETSCash and balances with theNational Bank of Republic of Macedonia 14Treasury and other eligible bills 15Financial assets at fair value through profiteerloss 16Loans and advances to banks 17Loans and advances to customers 18Investment securities 19Investments in associates 20Property and equipment 21Investment properties 22Intangible assets 23Other financial assets 24Collected collateral 25Other assets 26Deferred income tax assets 31

Total assets

LIABILITIESDeposits from banks 27Other deposits 28Borrowings 29Current income tax liabilitiesProvisions 32Other liabilities 30

Total liabilities

SHAREHOLDERS' EQUITYShare capital 35Share premiumRetained earningsStatutory reserves 36Other reserves 36

Total shareholders' equity

Total equity and liabilities

At 31 December

2009

8,112,561696,573

30,5929,116,49138,851,929

502,87588,799

1,637,12141,03756,864333,340

1,139,601101,282

313

60,709,378

1,829,12949,768,3001,587,235

5,303169,469396,690

53,756,126

2,014,067109,026

1,070,8863,649,556109,717

6,953,252

60,709,378

2008

7,708,9733,353,838

222,7815,550,64035,048,476

557,22249,693

1,582,4888,48840,191111,386767,20197.551

438

55,099,366

1,572,46145,769,870

984,10362,649181,380269,611

48,840,074

2,014,067109,026

1,373,3462,653,136109,717

6,259,292

55,099,366


KOMERCIJALNA BANKA AD - SKOPJE

Financial statements for the year ended 31 December 2009(All amounts in MKD thousands unless otherwise stated)

Statement of changes in equity

Share Share Statutory Other Retained Totalcapital premium Reserves reserves Earnings equity

Balance at Uanuary 2008 2,014,067 109,026 1,886,667 109,717 1,140,837 5,260,314

Total comprehensive income for 2008 - - _ _ _ - _ . - 1.378.667 1^378,667Dividends relating to 2007 " ............ - - "~ "" - (379~689) (379~689)Transfer to statutory reserve - - 766,469 - (766,469)

Balance at 31 December 2008 2,014,067 109,026 2,653,136 109,717 1,373,346 6,259,292

Balance at 1 January 2009 _A?!!i°J!»Z_-JL^^

Total comprehensive income for 2009 . . . 1,075,130 1,075,130Dividends relating to 2008 " - ...................... "" - ................................... - - (38" 1~1 76) .......... (38 1 ,1 70)Transfer to statutory reserve - - 996,420 - (996,420)

Balance at 31 December 2009 2,014,067 109,026 3,649,556 109,717 1,070,886 6,953.252

Detailed information is provided in Notes 34 and 35.



Cash flow statement

Cash flows from operating activitiesProfit before taxAdjustments for:Depreciation of property and equipment andamortization of intangible assetsGain on sale of property and equipmentLoss on sale of collected collateralDecrease in value of assets acquired throughforeclosure procedureDepreciation of investment propertyImpairment lossesDividend incomeInterest incomeInterest expenseNet trading incomeShare of profit from associates accounted forusing the equity methodInterest and commission receiptsInterest paid

Restricted accountsCurrent accounts with foreign banksBalances with NBRMFinancial assets at fair value through profit orlossPlacements with and loans to banksLoans and advances to customersOther financial assetsCollected collateralOther assetsDeposits from banks and other financialinstitutionsAmounts owed to other depositorsOther liabilities

Net cash from operating activities

Notes

10810

101011755

Year ended31 December

2009

1,075,255

193,618(6,095)8.864

961514,926(12,903)

(4,004,517)1,612,743

(2,881)

(17,250)3,852,198

(1,506,431)

2008

1,551,352

187,227(11,593)18,953

12,677546

487,004(20,119)

(3,886,908)1,309,455

16,442

(14,174)3,658,396

(1,193,126)

1,708,488 2,116,132

(92,932)10

(1,370,415)

192,189(3,565,416)(4,331,005)

(221,954)(372,400)

(3,815)

256,6683,998,430

127,682

(3,674,470)

(13,788)67,819

908,888

780,7618,282,978

(11,009,469)(47,517)

31,28842,652

779,543497,314(15.217)

2,421,384

Cash flows from investing activitiesAcquisition of property and equipmentProceeds from the sale of property andequipmentProceeds from sale of investmentsPurchase of investmentsDividends received

Net cash used in investing activities

(342,116)

10,903103,219(48,872)12,903

(263,963)

(289,850)

9,376674,203(934,444)

18,929

(521,786)



Cash flow statement (continued)

Cash flows from financing activitiesProceeds from borrowed funds 12,668,904 322,580Repayments of borrowed funds (12,065,946) (438,778)Dividends paid (381,819) (383,325)

Net cash used in financing activities 221,139 (499,523)

Cash and cash equivalents at beginning of year 6,418,426 5,018,351Net cash (used in)/provided by operatingactivities -* (3,674,470) 2,421,384Net cash used in investing activities (263,963) (521,786)Net cash used by financing activities 221,139 (499,523)

Cash and cash equivalents at end of year 37 2,701,132 6,418,426


KOMERCIJALNA BANKA AD - SKOPJENotes to the financial statements for the year ended 31 December 2009(All amounts in MKD thousands unless otherwise stated)

1 General Information

A Introduction

Komercijalna Banka AD Skopje (further "the Bank") is a joint stock companyincorporated and domiciled in the Republic of Macedonia. The Bank is listed on theMacedonian Stock Exchange under the ID code KMB. The Bank is licensed toperform all banking activities and the main activities include commercial lending,receiving of deposits, foreign exchange deals, and payment operation services inthe country and abroad and retail banking services. In addition, it provides tradefinance facilities to companies for export and import purposes.

The address of its registered office is as follows: -* ~*Kej Dimitar Vlahov 4,1000 SkopjeRepublic of Macedonia

These financial statements have been approved for issue by the Supervisory Boardon 26 February 2010.

DirectorsThe names of the Directors of the Bank serving during the financial year and to thedate of this report are as follows:

Chief Executive Officer Hari Kostov

Chief Operative Officer Ilija lloski

Chief Financial Officer Maja Stevkova Sterieva

Liquidity and Financial Market Division Manager Suzana Moskovska

Corporate Lending Division Manager Biljana Maksimovska Popovik

International Division Manager Vesela Curilova

Retail Banking Division Manager Gabriela Stojanovska

Risk management and Planning Division Manager Maja Stevkova Sterieva

Human resources and General Affairs DivisionManager Slavko Razmilik

Legal Affairs, Problem Loans Workout andManagement Division Manager Teodora Guskova Prodanova

Information Technology Division Manager Zorica Cerepnalkoska

Finance Department Manager Violeta Markovska Valjak

Domestic Payment Operations DepartmentManager Biljana Mitevska

Vault Operation Department Manager Aneta Velevska

Marketing Department Manager Jasmina Bucevska

Branch Managing Department Margarita Ognenovska

Compliance and Anti Money LaunderingDepartment Manager Milica Georgieva

Head of Internal Audit Department Vesna Maslinko

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B Operating Environment of the Bank

Deepening of the global crisis had an impact on the Macedonian economy due to thesharp decline both in export demand and export prices. This made 2009 a year fullof uncertainties, where the implications from the crisis could have not been predictedeasily. In particular, this was the case with the corporate sector. The Bank, being amarket leader in corporate lending, had to deal with the dilemma of balancingbetween continuing the credit support to the corporate sector and maintaining asufficient buffer in terms of capital and liquidity in order to absorb potential lossesfrom credit portfolio deterioration.

The developments differed during the year. The economy entered into recessionafter the first half of the year. The deterioration continued until the last quarter of theyear, when certain stabilization took place. After the negative real GDP growth in thefirst three quarters of 2009, of 0.9 percent, 1.4 percent and 1.8 percent, respectively,following the improvements in the last quarter of 2009, a real GDP decline of 1percent is estimated for the year as a whole. The decline in the overall economicactivity was caused partly by the decline in industrial output by 7.7 percent, unlikethe increase of 5.5 percent in 2008. For 2010 a modest recovery is envisaged withthe real GDP growth being projected to increase between 1 and 2 percent,depending largely on the pace of economic recovery of the main trading partners.

Despite the economic decline, official statistics from the Labour force survey showeddecline in unemployment. It has decreased from 33.8 percent in 2008 to 31.7percent at the end of September 2009. On the other hand, the number of workers inthe industrial sector declined by 6.7 percent for the whole 2009. One of the keyfeatures of 2009 was that macroeconomic stability was preserved, despite theunfavourable economic developments. Contrary to the average annual inflation of8.3 percent in 2008, a deflation of 0.8 percent was recorded in 2009. It is expectedthat price stability would be maintained in 2010 so that the inflation will amount to 1percent p.a. The 10 percent annual increase in the wages of the public servants, thatwas planned by the Government to take place every year from 2007 to 2009, did nottake place in 2009 and is not envisaged for 2010.

The fiscal policy in 2009 continued it's expansionary trend from 2008, reflecting theGovernment's efforts to alleviate the impact of the crisis on the real sector withcountercyclical measures. The loss of tax revenues was addressed by twosupplementary budgets adopted by the Parliament. The projected revenues were notcollected anyway, which was offset by a cut in expenditures, so that the budgetdeficit amounted to 2.8 percent of GDP, as projected. In order to provide for budgetfinancing for 2009 the Government issued Eurobond in the amount of 175 millionEuros. The Budget for 2010 envisages a fiscal deficit of 2.5 percent of GDP,although the revenue assumptions may prove somewhat optimistic.

in 2009 the Central Bank took a number of measures to preserve the price stability.Given the monetary strategy of exchange rate targeting responded in line with itscommitment to protect the exchange rate peg. The Central bank tightened themonetary policy, increasing the policy rate from 7 to 9 percent in April 2009. Thiswas accompanied by tightening of banks' liquidity and reserve requirements. Giventhe improved conditions at the end of 2009, the Central Bank started to decrease thepolicy rate, which was lowered three times to the level of 7.5 percent at thebeginning of February 2010.


The Central Bank's efforts stopped the foreign reserves depletion, which was quitesubstantial at one point in time, amounting to 30 percent of the foreign reserves inthe course of several months. Heavy interventions of the Central Bank at the foreignexchange market enabled the exchange rate of the Denar against the Euro toremain stable at the targeted level. The loss of foreign reserves was reversed so thatat the end of 2009 they are brought back to a largely comfortable level of 4.3 monthscoverage of next year's imports of goods and services. Nevertheless, thisimprovement in the foreign reserves is mostly due to one-off factors, such as theproceeds from the Eurobond issue and the IMF quota increase due to the SDRallocation.

The tight monetary policy slowed down substantially the credit expansion, from 34.4percent in 2008 to only 3.5 percent in 2009. The quality of the credit portfoliosomewhat deteriorated and the banking sector profitability worsened in 2009compared to 2008. Nevertheless, the banking sector weather the crisis relativelywell, benefiting from the high capital adequacy, sufficient liquidity and stable fundingbase, composed dominantly of domestic deposits. No bank was closed in 2009.Credit growth is expected to accelerate in 2010 to 9% p.a.

Current account deficit narrowed substantially, from 13.1 percent of GDP in 2008 toestimated 7.5 percent of GDP in 2009, reflecting the declining trade deficit andrecovery of private transfers in the second half of the year, compensating for the fallin FDIs. For 2010 the current account deficit is expected to amount to 8.3 percent ofGDP. Having in mind the exchange rate peg, the large current account deficitremains the key macroeconomic risk. Constraints in financing the deficit, arisingfrom lower than expected export demand recovery and FDI inflow may again putpressure on the foreign exchange reserves.

The Bank's, management is unable to predict all developments which could have animpact on the banking sector and the wider economy and consequently what effect,if any, they could have on the future financial position of the Bank. Managementbelieves it is taking all the necessary measures to support the sustainability anddevelopment of the Bank's operations in the current circumstances.

Recent volatility in global and Macedonian financial markets. The global liquiditycrisis which started in spring 2008 has mostly resulted in a lower level of capitalmarket funding while liquidity levels across the banking sector remained high. It isexpected that there will be no liquidity shocks in domestic banking in 2010. Topreserve structural liquidity in 2009 NBRM has imposed minimum 100% fulfilment ofobligatory one and six month liquidity limits. These requirements are expected toremain in 2010. In January 2009 NBRM started with organizing foreign currencydeposits auctions with interest rates equal to those of Central Banks in the eurozone, international financial institutions and yields of government bills of countries ineuro zone. In May 2009, NBRM has increased the rate of mandatory reserve for theobligations in foreign currency and domestic currency indexed to foreign exchangecurrency.

Impact on liquidity: The funding base of the Bank is the mostly dependant on stabledeposit base, which may to be under pressure of increasing interest rates bidding bythe Banks' that are changing financing strategies. This may influence the cost offunding, but it is not expected to have a significant influence on the deposit base.

10


Impact on customers/borrowers: The Bank's clients both the borrowers anddepositors may be affected by weak domestic demand which could in turn impacttheir liquidity and their ability to repay the amounts owed or deposits placed with theBank. Deteriorating operating conditions for borrowers may also have an impact onmanagement's cash flow forecasts and assessment of the impairment of financialand non-financial assets. Management has properly reflected revised estimates ofexpected future cash flows in its impairment assessments.

Impact on collateral (especially real estate): The amount of provision for impairedloans and the carrying amount of foreclosed collateral is based orr management'sappraisals of these assets at the statement of financial position date after taking intoconsideration the cash flows that may result from foreclosure less costs for obtainingand selling the collateral. The market in the Republic of Macedonia for many types ofcollateral, especially real estate, has not been severely affected by the recentvolatility in global financial markets since the supply of real estates, especiallyresidential, is still lower than demand. Expected lower incomes of households andpossible lower liquidity of companies in 2010 may decrease liquidity for certain typesof assets. As a result, the actual realizable value on foreclosure may differ from thevalue ascribed in estimating allowances for impairment.

Fair value of financial assets and liabilities: The fair values of quoted investments inactive markets are based on current bid prices (financial assets) or offer prices(financial liabilities). If there is no active market for a financial instrument, the Bankestablishes fair value using valuation techniques. These include the use of recentarm's length transactions, discounted cash flow analysis, option pricing models andother valuation techniques commonly used by market participants. The valuationmodels reflect current market conditions at the measurement date which may not berepresentative of market conditions either before or after the measurement date. Asat the statement of financial position date management has reviewed its models toensure they appropriately reflect current market conditions, including the relativeliquidity of the market and credit spreads.

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2 Accounting policiesThe principal accounting policies adopted in the preparation of these financialstatements are set out below:

A Basis of presentation

The financial statements of Komercijalna Banka AD - Skopje have been prepared inaccordance with International Financial Reporting Standards (IFRS) and arepresented in Macedonian Denars (MKD).

The financial statements have been prepared under the historical cost convention,as modified by the revaluation of available-for-sale financial assets and fiffancialassets held at fair value through profit or loss.

The preparation of financial statements in conformity with IFRS requires the use ofestimates and assumptions that affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Although these estimates are based on management's bestknowledge of current events and actions, actual results ultimately may differ fromthose estimates. Those areas where assumption and estimates are significant to thefinancial statement are disclosed in Note 4.

(a) Adoption of New or Revised Standards and Interpretations

Certain new standards and interpretations became effective for the Bank from 1January 2009:

IFRS 8, Operating Segments. The standard applies to entities whose debt or equityinstruments are traded in a public market or that file, or are in the process of filing,their financial statements with a regulatory organisation for the purpose of issuingany class of instruments in a public market. IFRS 8 requires an entity to reportfinancial and descriptive information about its operating segments, with segmentinformation presented on a similar basis to that used for internal reporting purposes.

/>AS 23, Borrowing Costs, revised in March 2007. The main change is the removalof the option of immediately recognizing as an expense borrowing costs that relateto assets that take a substantial period of time to get ready for use or sale.Borrowing costs that are directly attributable to the acquisition, construction orproduction of an asset that necessarily takes a substantial period of time to getready for its intended use or sale (a qualifying asset) form part of the cost of thatasset, if the commencement date for capitalisation is on or after 1 January 2009.Other borrowing costs are recognised as an expense using the effective interestmethod.

IAS 1, Presentation of Financial Statements, revised in September 2007. Themain change in IAS 1 is the replacement of the income statement by a statement ofcomprehensive income which includes all non-owner changes in equity, such as therevaluation of available-for-sale financial assets. Alternatively, entities are allowed topresent two statements: a separate income statement and a statement ofcomprehensive income. The Bank has elected to present a single statement ofcomprehensive income. The revised IAS 1 also introduces a requirement to presenta statement of financial position (balance sheet) at the beginning of the earliest

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KOMERCUALNA BANKA AD - SKOPJENotes to the financial statements for the year ended 31 December 2009(All amounts in MKD thousands unless otherwise stated)

comparative period whenever the entity restates comparatives due toreclassifications, changes in accounting policies, or corrections of errors. Therevised IAS 1 had an impact on the presentation of the Bank's financial statementsbut had no impact on the recognition or measurement of specific transactions andbalances.Improvements to International Financial Reporting Standards (issued in May2008). In 2008, the International Accounting Standards Board decided to initiate anannual improvements project as a method of making necessary, but non-urgent,amendments to IFRS. The amendments consist of a mixture of substantive changes,clarifications, and changes in terminology in various standards. The substantivechanges relate to the following areas: classification as held for sale under IFRS 5 incase of a loss-of control over a subsidiary; possibility of presentation of financialinstruments held for trading as non-current under IAS 1; accounting for sale of IAS16 assets which were previously held for rental and classification of the related cashflows under IAS 7 as cash flows from operating activities; clarification of definition ofa curtailment under IAS 19; accounting for below market interest rate governmentloans in accordance with IAS 20; making the definition of borrowing costs in IAS 23consistent with the effective interest method; clarification of accounting forsubsidiaries held for sale under IAS 27 and IFRS 5; reduction in the disclosurerequirements relating to associates and joint ventures under IAS 28 and IAS 31;enhancement of disclosures required by IAS 36; clarification of accounting foradvertising costs under IAS 38; amending the definition of the fair value throughprofit or loss category to be consistent with hedge accounting under IAS 39;introduction of accounting for investment properties under construction inaccordance with IAS 40; and reduction in restrictions over manner of determining fairvalue of biological assets under IAS 41. Further amendments made to IAS 8, 10, 18,20, 29, 34, 40, 41 and to IFRS 7 represent terminology or editorial changes only,which the IASB believes have no or minimal effect on accounting. The amendmentsdid not have an impact on the Bank except for:IAS 16, Property, Plant and Equipment (and consequential amendments to IAS7). Under the amended standard, entities that routinely sell assets previously held forrental are required to classify such assets as inventories from the point that theassets cease to be leased and become held for sale, while the proceeds from saleare recognised as revenue. The rent and proceeds from sale have to be classifiedas cash flows from operating activities. The Bank amended its accounting policiesaccordingly.IAS 40, Investment Property (and consequential amendments to IAS 16).Property that is under construction or development for future use as investmentproperty is brought within the scope of the revised IAS 40. Where the fair valuemodel is applied, such property is measured at fair value. Where the fair value ofinvestment property under construction is not reliably measurable, the property ismeasured at cost until the earlier of the date construction is completed or the date atwhich the fair value becomes reliably measurable. The Bank applies the amendmentprospectively from 1 January 2009.

Puttable Financial Instruments and Obligations Arising on Liquidation—IAS 32and IAS 1 Amendment. The amendment requires classification as equity of somefinancial instruments that meet the definition of financial liabilities. The amendmentdid not have an impact on these financial statements.

Vesting Conditions and Cancellations—Amendment to IFRS 2, Share-basedPayment. The amendment clarified that only service conditions and performanceconditions are vesting conditions. Other features of a share-based payment are notvesting conditions. The amendment specifies that all cancellations, whether by the

13


entity or by other parties, should receive the same accounting treatment. Theamendment did not have an impact on these financial statements.

IFRIC 13, Customer Loyalty Programmes. IFRIC 13 clarifies that where goods orservices are sold together with a customer loyalty incentive (for example, loyaltypoints or free products), the arrangement is a multiple-element arrangement and theconsideration receivable from the customer is allocated between the components ofthe arrangement using fair values. The amendment did not have an impact on thesefinancial statements. The Bank concluded that the revised standard does not haveany effect on its financial statements.

IFRIC 15, Agreements for the Construction of Real Estate. The interpretationapplies to the accounting for revenue and associated expenses by entities thatundertake the construction of real estate directly or through subcontractors, andprovides guidance for determining whether agreements for the construction of realestate are within the scope of IAS 11 or IAS 18. It also provides criteria fordetermining when entities should recognize revenue on such transactions. The Bankconcluded that the revised standard does not have any effect on its financialstatements.

Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate—IFRS 1 and IAS 27 Amendment, issued in May 2008. The amendment allows first-time adopters of IFRS to measure investments in subsidiaries, jointly controlledentities or associates at fair value or at previous GAAP carrying value as deemedcost in the separate financial statements. The amendment also requires distributionsfrom pre-acquisition net assets of investees to be recognized in profit or loss for theyear rather than as a recovery of the investment. The amendment did not have animpact on these financial statements. The Bank concluded that the revised standarddoes not have any effect on its financial statements.

Improving Disclosures about Financial Instruments - Amendment to IFRS 7,Financial Instruments: Disclosures, issued in March 2009. The amendmentrequires enhanced disclosures about fair value measurements and liquidity risk. Theentity is required to disclose an analysis of financial instruments using a three-levelfair value measurement hierarchy. The amendment (a) clarifies that the maturityanalysis of liabilities should include issued financial guarantee contracts at themaximum amount of the guarantee in the earliest period in which the guaranteecould be called; and (b) requires disclosure of remaining contractual maturities offinancial derivatives if the contractual maturities are essential for an understanding ofthe timing of the cash flows. An entity will further have to disclose a maturity analysisof financial assets it holds for managing liquidity risk, if that information is necessaryto enable users of its financial statements to evaluate the nature and extent ofliquidity risk. The enhanced disclosures are included in these financial statements.

Embedded Derivatives - Amendments to IFRIC 9 and IAS 39, issued in March2009. The amendments clarify that on reclassification of a financial asset out of the'at fair value through profit or loss' category, all embedded derivatives have to beassessed and, if necessary, separately accounted for. The amendment did not havean impact on these financial statements. The Bank concluded that the revisedstandard does not have any effect on its financial statements.

IFRIC 16, Hedges of a Net Investment in a Foreign Operation. The interpretationexplains which currency risk exposures are eligible for hedge accounting and statesthat translation from the functional currency to the presentation currency does not

14


create an exposure to which hedge accounting could be applied. The IFRIC allowsthe hedging instrument to be held by any entity or entities within a group except theforeign operation that it is being hedged. The interpretation also clarifies how thecurrency translation gain or loss reclassified from other comprehensive income toprofit or loss is calculated on disposal of the hedged foreign operation. Reportingentities apply I AS 39 to discontinue hedge accounting prospectively when theirhedges do not meet the criteria for hedge accounting in IFRIC 16. IFRIC 16 did nothave an impact on these financial statements. The Bank concluded that the revisedstandard does not have any effect on its financial statements.

The International Financial Reporting Standard for Small and Medium-sizedEntities (issued in July 2009) is a self-contained standard, tailored to theneeds and capabilities of smaller businesses. Many of the principles of full IFRSfor recognising and measuring assets, liabilities, income and expense have beensimplified, and the number of required disclosures have been simplified andsignificantly reduced. The IFRS for SMEs may be applied by entities which publishgeneral purpose financial statements for external users and do not have publicaccountability. The Bank is not eligible to apply the IFRS for SMEs due to the publicaccountability of its banking business. The Bank concluded that the revised standarddoes not have any effect on its financial statements.

Unless otherwise stated above, the amendments and interpretations did not haveany significant effect on the Bank's consolidated financial statements.

(b) New Accounting Pronouncements

Certain new standards and interpretations have been published that are mandatoryfor the Bank's accounting periods beginning on or after 1 January 2010 or laterperiods and which the Bank has not early adopted:IFRIC 17, Distributions of Non-Cash Assets to Owners (effective for annualperiods beginning on or after 1 July 2009). The interpretation clarifies when and howdistribution of non-cash assets as dividends to the owners should be recognised. Anentity should measure a liability to distribute non-cash assets as a dividend to itsowners at the fair value of the assets to be distributed. A gain or loss on disposal ofthe distributed non-cash assets will be recognised in profit or loss for the year whenthe entity settles the dividend payable. IFRIC 17 is not relevant to the Bank'soperations because it does not distribute non-cash assets to owners.IFRIC 18, Transfers of Assets from Customers (effective for annual periodsbeginning on or after 1 July 2009). The interpretation clarifies the accounting fortransfers of assets from customers, namely, the circumstances in which thedefinition of an asset is met; the recognition of the asset and the measurement of itscost on initial recognition; the identification of the separately identifiable services(one or more services in exchange for the transferred asset); the recognition ofrevenue, and the accounting for transfers of cash from customers. The Bankconcluded that the standard does not have any effect on its financial statements.

Classification of Rights Issues - Amendment to I AS 32 (issued 8 October 2009;effective for annual periods beginning on or after 1 February 2010). The amendmentexempts certain rights issues of shares with proceeds denominated in foreigncurrencies from classification as financial derivatives. The Bank concluded that therevised standard does not have any effect on its financial statements.

15


IAS 27, Consolidated and Separate Financial Statements (revised January 2008;effective for annual periods beginning on or after 1 July 2009). The revised IAS 27will require an entity to attribute total comprehensive income to the owners of theparent and to the non-controlling interests (previously "minority interests") even if thisresults in the non-controlling interests having a deficit balance (the current standardrequires the excess losses to be allocated to the owners of the parent in mostcases). The revised standard specifies that changes in a parent's ownership interestin a subsidiary that do not result in the loss of control must be accounted for asequity transactions. It also specifies how an entity should measure any gain or lossarising on the loss of control of a subsidiary. At the date when control is lost, anyinvestment retained in the former subsidiary will have to be measured at its fairvalue. "Fhe Bank concluded that the revised standard does not have any effect on itsfinancial statements.

IFRS 3, Business Combinations (revised January 2008; effective for businesscombinations for which the acquisition date is on or after the beginning of the firstannual reporting period beginning on or after 1 July 2009). The revised IFRS 3 willallow entities to choose to measure non-controlling interests using the existing IFRS3 method (proportionate share of the acquiree's identifiable net assets) or at fairvalue. The revised IFRS 3 is more detailed in providing guidance on the applicationof the purchase method to business combinations. The requirement to measure atfair value every asset and liability at each step in a step acquisition for the purposesof calculating a portion of goodwill has been removed. Instead, in a businesscombination achieved in stages, the acquirer will have to remeasure its previouslyheld equity interest in the acquiree at its acquisition-date fair value and recognise theresulting gain or loss, if any, in profit or loss for the year. Acquisition-related costswill be accounted for separately from the business combination and thereforerecognised as expenses rather than included in goodwill. An acquirer will have torecognise at the acquisition date a liability for any contingent purchaseconsideration. Changes in the value of that liability after the acquisition date will berecognised in accordance with other applicable IFRSs, as appropriate, rather than byadjusting goodwill. The revised IFRS 3 brings into its scope business combinationsinvolving only mutual entities and business combinations achieved by contract alone.IFRS 3 is not relevant to the Bank as it does not expect a business combination tooccur.Eligible Hedged Items—Amendment to IAS 39, Financial Instruments:Recognition and Measurement (effective with retrospective application for annualperiods beginning on or after 1 July 2009). The amendment clarifies how theprinciples that determine whether a hedged risk or portion of cash flows is eligible fordesignation should be applied in particular situations. The amendment is notexpected to have any impact on the Bank's financial statements as the Bank doesnot apply hedge accounting.

IFRS 1, First-time Adoption of International Financial Reporting Standards(following an amendment in December 2008, effective for the first IFRS financialstatements for a period beginning on or after 1 July 2009). The revised IFRS 1retains the substance of its previous version but within a changed structure in orderto make it easier for the reader to understand and to better accommodate futurechanges. The Bank concluded that the revised standard does not have any effect onits financial statements.

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Group Cash-settled Share-based Payment Transactions - Amendments to IFRS2, Share-based Payment (effective for annual periods beginning on or after 1January 2010). The amendments provide a clear basis to determine theclassification of share-based payment awards in both consolidated and separatefinancial statements. The amendments incorporate into the standard the guidance inIFRIC 8 and IFRiC 11, which are withdrawn. The amendments expand on theguidance given in IFRIC 11 to address plans that were previously not considered inthe interpretation. The amendments also clarify the defined terms in the Appendix tothe standard. The Bank does not expect the amendments to have any material effecton its financial statements.

Additional Exemptions for First-time Adopters - Amendments to IFRS 1, First-time Adoption of IFRS (effective for annual periods beginning on or after 1 January2010). The amendments exempt entities using the full cost method fromretrospective application of IFRSs for oil and gas assets and also exempt entitieswith existing leasing contracts from reassessing the classification of those contractsin accordance with IFRIC 4, 'Determining Whether an Arrangement Contains aLease' when the application of their national accounting requirements produced thesame result. The Bank concluded that the standard does not have any effect on itsfinancial statements.

Improvements to International Financial Reporting Standards (issued in April2009; amendments to IFRS 2, IAS 38, IFRIC 9 and IFRIC 16 are effective forannual periods beginning on or after 1 July 2009; amendments to IFRS 5, IFRS8, I AS 1, I AS 7, IAS 17, IAS 36 and I AS 39 are effective for annual periodsbeginning on or after 1 January 2010). The improvements consist of a mixture ofsubstantive changes and clarifications in the following standards and interpretations:clarification that contributions of businesses in common control transactions andformation of joint ventures are not within the scope of IFRS 2; clarification ofdisclosure requirements set by IFRS 5 and other standards for non-current assets(or disposal groups) classified as held for sale or discontinued operations; requiringto report a measure of total assets and liabilities for each reportable segment underIFRS 8 only if such amounts are regularly provided to the chief operating decisionmaker; amending IAS 1 to allow classification of certain liabilities settled by entity'sown equity instruments as non-current; changing IAS 7 such that only expendituresthat result in a recognised asset are eligible for classification as investing activities;allowing classification of certain long-term land leases as finance leases under IAS17 even without transfer of ownership of the land at the end of the lease; providingadditional guidance in IAS 18 for determining whether an entity acts as a principal oran agent; clarification in IAS 36 that a cash generating unit shall not be larger thanan operating segment before aggregation; supplementing IAS 38 regardingmeasurement of fair value of intangible assets acquired in a business combination;amending IAS 39 (i) to include in its scope option contracts that could result inbusiness combinations, (ii) to clarify the period of reclassifying gains or losses oncash flow hedging instruments from equity to profit or loss for the year and (iii) tostate that a prepayment option is closely related to the host contract if upon exercisethe borrower reimburses economic loss of the lender; amending IFRIC 9 to state thatembedded derivatives in contracts acquired in common control transactions andformation of joint ventures are not within its scope; and removing the restriction inIFRIC 16 that hedging instruments may not be held by the foreign operation thatitself is being hedged. The Bank does not expect the amendments to have anymaterial effect on its financial statements.

17


Amendment to IAS 24, Related Party Disclosures (issued in November 2009 andeffective for annual periods beginning on or after 1 January 2011). I AS 24 wasrevised in 2009 by: (a) simplifying the definition of a related party, clarifying itsintended meaning and eliminating inconsistencies; and by (b) providing a partialexemption from the disclosure requirements for government-related entities.

IFRS 9, Financial Instruments Part 1: Classification and Measurement. IFRS 9was issued in November 2009 and replaces those parts of IAS 39 relating to theclassification and measurement of financial assets. Key features are as follows:

• Financial assets are required to be classified into two measurementcategories: those to be measured subsequently at fair value, and those to bemeasured subsequently at amortised cost. The decision is to be made at initialrecognition. The classification depends on the entity's business model formanaging its financial instruments and the contractual cash flowcharacteristics of the instrument.

• An instrument is subsequently measured at amortised cost only if it is a debtinstrument and both (i) the objective of the entity's business model is to holdthe asset to collect the contractual cash flows, and (ii) the asset's contractualcash flows represent only payments of principal and interest (that is, it has only"basic loan features"). All other debt instruments are to be measured at fairvalue through profit or loss.

• All equity instruments are to be measured subsequently at fair value. Equityinstruments that are held for trading will be measured at fair value throughprofit or loss. For all other equity investments, an irrevocable election can bemade at initial recognition, to recognise unrealised and realised fair value gainsand losses through other comprehensive income rather than profit or loss.There is to be no recycling of fair value gains and losses to profit or loss. Thiselection may be made on an instrument-by-instrument basis. Dividends are tobe presented in profit or loss, as long as they represent a return on investment.

• While adoption of IFRS 9 is mandatory from 1 January 2013, earlier adoptionis permitted.

The Bank is considering the implications of the standard, the impact on the Bankand the timing of its adoption by the Bank. Unless otherwise described above, thenew standards and interpretations are not expected to significantly affect the Bank'sfinancial statements.

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B Segment reporting

Operating segments are components that engage in business activities that may earnrevenues or incur expenses, whose operating results are regularly reviewed by thechief operating decision maker (CODM) and for which discrete financial information isavailable. The CODM is the person or group of persons who allocates resources andassesses the performance for the entity.

The functions of CODM are performed by Supervisory Board of the Bank. The internalreporting within the Bank presented to the CODM is on a Bank level and as oneoperating segment. The decisions brought by the CODM are based on receivedreports presented as one operating segment.

C Foreign currencies

Functional and presentation currency

Items included in the financial statements are measured using the currency of theprimary economic environment in which the Bank operates ('the functional currency').The financial statements are presented in MKD thousands, which is the Bank'sfunctional and presentation currency.

Transactions and balances

Assets and liabilities denominated in foreign currency are translated into MKD atexchange rates ruling at the statement of financial position date. Transactionsdenominated in foreign currency are translated into MKD at the exchange rates valid atthe date of the transactions.Gains and losses resulting from the settlement of such transactions and from thetranslation of monetary assets and liabilities denominated in foreign currencies arerecognized in the profit or loss.

Exchange rate: 31 December 2009 31 December 2008MKD MKD

USD 42.66 43.56EUR 61.17 61.41

D Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in thestatement of financial position when there is a legally enforceable right to set off therecognized amounts and when there is an intention to settle on a net basis, orrealize the asset and settle the liability simultaneously.

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E Interest income and expense

Interest income and expenses for all interest-bearing financial instruments, exceptfor those classified as held for trading or designated at fair value through profit orloss, are recognized within 'interest income' and 'interest expense' in the the profit orloss using the effective interest method.

Interest income and expense are recognized in the the profit or loss for all interestbearing instruments on an accrual basis using the effective interest method. Whenloans become doubtful of collection, they are written down to their recoverableamounts and interest income is thereafter recognised based on the rate of interestthat was used to discount the future cash flows for the purpose of measuring therecoverable amount.

The effective interest method is a method of calculating the amortised cost of afinancial asset or a financial liability and of allocating the interest income or interestexpense over the relevant period. The effective interest rate is the rate that exactlydiscounts estimated future cash payments or receipts through the expected life ofthe financial instrument or, when appropriate, a shorter period to the net carryingamount of the financial asset or financial liability. When calculating the effectiveinterest rate, the Bank estimates cash flows considering all contractual terms of thefinancial instrument (for example, prepayment options) but does not consider futurecredit losses. The calculation includes all fees and points paid or received betweenparties to the contract that are an integral part of the effective interest rate,transaction costs and all other premiums or discounts.

F Fee and commission income

Fees and commissions consist mainly of fees received from enterprises arising fromguarantees and letter of credits and fees arising from domestic and foreign paymenttraffic and other banking activities. Fees and commissions are generally recognizedon an accrual basis when the service has been provided.

G Rental income

Rental income from investment property is recognized in the profit or loss on astraight line basis over the term of the lease. Lease incentives granted arerecognized as an integral part of the total rental income.

H Financial assets

The Bank classifies its financial assets in the following categories: financial assets atfair value through profit or loss; loans and receivables; held-to-maturity investments;and available-for-sale financial assets. Management determines the classification ofits investments at initial recognition.

Financial assets at fair value through profit or loss

This category has two sub-categories: financial assets held for trading, and thosedesignated at fair value through profit or loss at inception. A financial asset isclassified in this category if acquired principally for the purpose of selling in the shortterm or if so designated by management. There are no financial assets at fair valuethrough profit and loss that are not held for trading.

20

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A financial asset is classified as held for trading if it is acquired principally for thepurpose of selling or repurchasing it in the near term and for which there is evidenceof a recent actual pattern of short-term profit-taking. The only trading assets held bythe Bank are Treasury bills and government treasury bills.

Income from debt and other fixed-income instruments is recognised in interestincome. Income from equity investments and other non-fixed income instruments isrecognised in dividend income.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinablepayments that are not quoted in an active market. They arise when the Bankprovides money to a debtor with no intention of trading the receivable.

Loans are recognized when cash is advanced to the borrowers and are carried atamortised cost using the effective interest method. Loans and advances to banks,loans and advances to customers and cash and balances to NBRM are classified asloans and receivables.

Held-to-maturity

Held-to-maturity investments are non-derivative financial assets with fixed ordeterminable payments and fixed maturities that the Bank's management has thepositive intention and ability to hold to maturity. Were the Bank to sell other than aninsignificant amount of held-to-maturity assets, the entire category would be taintedand reclassified as available for sale.

Available-for-sale

Available-for-sale investments are those intended to be held for an indefinite periodof time, which may be sold in response to needs for liquidity.

Available-for-sale financial assets are subsequently carried at fair value. The fairvalues of quoted investments in active markets are based on current bid prices,if there is no active market for a financial asset, the Bank establishes fair value usingvaluation techniques. Unrealized gains and losses arising from changes in the fairvalue of securities classified as available-for sale are recognized in othercomprehensive income. All regular way purchases of available-for-sale investmentsare recognized at trade date, which is the date that the Bank commits to purchasethe asset.

i Impairment of financial assets

Assets carried at amortised cost

The Bank assesses at each statement of financial position date whether there isobjective evidence that a financial asset or group of financial assets is impaired. Afinancial asset or a group of financial assets is impaired and impairment losses areincurred if, and only if, there is objective evidence of impairment as a result of one ormore events that occurred after the initial recognition of the asset (a 'loss event') andthat loss event (or events) has an impact on the estimated future cash flows of thefinancial asset or group of financial assets that can be reliably estimated.

21


The criteria that the Bank uses to determine that there is objective evidence of animpairment loss include:

• Delinquency in contractual payments of principal or interest;• Cash flow difficulties experienced by the borrower (for example, equity ratio,

net income percentage of sales);• Breach of loan covenants or conditions;• Initiation of bankruptcy proceedings;• Deterioration of the borrower's competitive position; and• Deterioration in the value of collateral;

The Bank first assesses whether objective evidence of impairment exists individuallyfor financial assets that are individually significant, and individually or collectively forfinancial assets that are not individually significant. If the Bank determines that noobjective evidence of impairment exists for an individually assessed financial asset,whether significant or not, it includes the asset in a group of financial assets withsimilar credit risk characteristics and collectively assesses them for impairment.Assets that are individually assessed for impairment and for which an impairmentloss is or continues to be recognized are not included in a collective assessment ofimpairment.

When a loan is uncollectible, it is written off against the related provision for loanimpairment. Such loans are written off after all the necessary procedures have beencompleted and the amount of the loss has been determined. Subsequent recoveriesof amounts previously written off decrease the amount of the provision for loanimpairment in the profit or loss. If, in a subsequent period, the amount of theimpairment loss decreases and the decrease can be related objectively to an eventoccurring after the impairment was recognised (such as an improvement in thedebtor's credit rating), the previously recognised impairment loss is reversed byadjusting the allowance account. The amount of the reversal is recognised in theprofit or loss.

Once a financial assets or a group of financial assets has been written down as aresult of the impairment loss, interest income is recognised using the rate of interestused to discount the future cash flows for the purpose of measuring the impairmentloss.

Assets classified as available for sale

The Bank assesses at each statement of financial position date whether there isobjective evidence that a financial asset or a group of financial assets is impaired. Inthe case of equity investments classified as available for sale, a significant orprolonged decline in the fair value of the security below its cost is considered indetermining whether the assets are impaired. If any such evidence exists foravailable for - sale financial assets, the cumulative loss - measured as thedifference between the acquisition cost and the current fair value, less anyimpairment loss on that financial asset previously recognised in profit or loss - isremoved from other comprehensive income and recognised in the profit or loss.Impairment losses recognised in the profit or loss on equity instruments are notreversed through the profit or loss. If, in a subsequent period, the fair value of a debtinstrument classified as available for sale increases and the increase can beobjectively related to an event occurring after the impairment loss was recognised inprofit or loss, the impairment loss is reversed through the profit or loss.

22

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KOMERCiJALNA BANKA AD - SKOPJENotes to the financial statements for the year ended 31 December 2009(All amounts in MKD thousands unless otherwise stated)

J Property and equipment

All property and equipment is stated at cost or valuation less accumulateddepreciation.

Assets in course of construction are reported at their cost of construction includingcosts charged by third parties. No depreciation is charged on assets duringconstruction. Upon completion, all accumulated costs of the asset are transferred tothe relevant tangible property and equipment category and subsequently subject tothe applicable depreciation rates. Gains and losses on disposal of property andequipment are recognized in the profit or loss.

Depreciation on all assets except assets in the course of construction is calculatedusing the straight-line method to allocate their cost to their residual values over theirestimated useful lives, as follows:

Buildings 40 yearsFurniture and equipment 4-10 yearsThe assets' residual values and useful lives are reviewed, and adjusted ifappropriate, at each statement of financial position date.

K intangible assets

Intangible assets consist of computer software and licences. The initial cost ofacquiring the intangible asset is recognised as an asset and amortised on a straight-line basis over the estimated useful life, not exceeding a period of 5 years.

L Investment property

Investment property is defined as property held by the owner to earn rental income.Investment property is stated at cost less accumulated depreciation. The depreciationrate based on the estimated useful life is 40 years.

M Assets held for sale

Collected collateral is classified as assets held for sale. Collected collateral includeapartments, equipment and business premises which are not used by the Bank forits core operations. These assets are stated at the lower of carrying amount and fairvalue less costs to sell. The Bank plans to dispose the collected collateral within oneyear of forced acquisition.

N Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents comprisebalances with less than 90 days maturity from the date of acquisition including: cashand balances with NBRM and treasury bills and government treasury bills.

O ProvisionsProvisions are recognized when the Bank has a present legal or constructive obligationas a result of past events, it is probable that an outflow of resources embodyingeconomic benefits will be required to settle the obligation, and a reliable estimate of theamount of the obligation can be made.

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P Employee benefits

The Bank, in the normal course of business, makes payments on behalf of itsemployees for pensions, health care, employment and personnel tax that arecalculated on the basis of gross salaries and wages, food allowances and travelexpenses according to the legislation. The Bank makes these contributions to theGovernment's health and retirement funds, at the statutory rates in force during theyear, based on gross salary payments. The Bank pays contributions to publicpension insurance fund on a mandatory basis. Once the contributions have beenpaid, the Bank has no further payment obligations. The regular contributionsconstitute costs for the year in which they are due and as such are included in staffcosts. The cost of these payments is charged to the profit or loss in the same periodas the related salary cost.

The Bank does not operate any other pension scheme or post retirement benefitsplan and consequently, has no obligation in respect of pensions. In addition, theBank is not obliged to provide further benefits to current and former employees. TheBank recognizes liability and expense for share in profit and payments for bonuses toemployees, members of the managing board and management.

Q Taxation

Income tax on the profit or loss comprises current and deferred tax.

Current income tax

In 2008 current income tax is recognised in the Profit for the year. Current incometax was the expected tax payable on the taxable income for the year, using tax ratesenacted at the financial statement date, and any adjustment to tax payable inrespect of previous years. From 2009 companies do not have to pay income tax ontheir profit before tax (earned since 1 January 2009) until that profit is distributed in aform of dividend or other forms of profit distributions. If dividend is paid, 10% incometax is payable on the paid dividend. Tax is still payable on the non-deductableexpenses in the year the expenses are incurred, regardless of distribution ofdividends (decreased by the amount of tax credits).

Deferred income taxIn 2008 deferred income tax is provided in full, using the Statement of financialposition liability method, for all temporary differences arising between the tax basisof assets and liabilities and their carrying values for financial reporting purposes.Currently enacted tax rates were used in the determination of deferred income tax.Deferred tax assets were recognized to extend that it is probable that future taxableprofit will be available against which the temporary differences can be utilized.Due to the changes in the Macedonian tax legislation effective from 1 January 2009,the tax rate for undistributed profits was effectively reduced to zero, as tax is onlypayable when profits are distributed. According IAS 12.52A, deferred tax assets andliabilities should be measured using the undistributed rate.However, tax is still payable on the non-deductable expenses in the year theexpenses are incurred, regardless of distribution of dividends. If these expenses arereversed in the future, they will create a credit that can be used against the non-deductible expenses in the year of the reversal, i.e., the tax paid in the year relatedto such temporary difference creates a deferred tax asset that can be used in futureyears.

24


Therefore, a deferred tax asset is recognized to the extent that, and only to theextent that, it is probable that the temporary difference will reverse in the future anditems will be available against which the temporary difference can be utilized.

R Borrowings

Borrowings are recognized initially at fair value net of transaction costs incurred.Subsequent to the initial recognition, interest-bearing borrowings are stated atamortised cost. If debt is settled before maturity, any difference between the amountrepaid and the carrying amount is recognized in the profit or loss for the period.

S Share capital

Share capital comprises ordinary and preference shares.

Share issue costsIncremental costs directly attributable to the issue of new shares are shown in equityas a deduction, net of tax, from the proceeds.

DividendsDividends on ordinary shares are recognized as a liability in the period in which theyare declared.

Treasury sharesShare capital consists of ordinary and non-voting shares. The consideration paid forpurchase of Bank's own share capital is deducted from total shareholders' equity astreasury shares until they are cancelled or sold. Where such shares aresubsequently sold or reissued, any consideration received is included inshareholders' equity.

I Investment in associates

An associate is an entity over which the Bank has significant influence but not control,generally accompanying a shareholding of between 20% and 50% of the voting rights.Investments in associates are accounted for by the equity method of accounting andare initially recognized at cost.

U Financial guarantees contracts

Financial guarantee contracts are contracts that require the issuer to make specifiedpayments to reimburse the holder for a loss it incurs because a specified debtor fails tomake payments when due. Such financial guarantees are given to Banks, financialinstitutions and other bodies on behalf of customers to secure loans, overdrafts andother banking facilities. Financial guarantees are initially recognized in the financialstatements at fair value on the date the guarantee was given. Subsequent to initialrecognition, the Bank's liabilities under such guarantees are measured at the higher ofthe initial measurement, less amortization calculated to recognize in the profit or lossthe fee income earned on a straight line basis over the life of the guarantee and thebest estimate of the expenditure required to settle any financial obligation arising at thestatement of financial position date. These estimates are determined based onexperience of similar transactions and history of past losses, supplemented by thejudgment of Management. Any increase in the liability relating to guarantees is takento the profit or loss under other operating expenses.

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3 Financial risk management

The Bank's activities expose it to a variety of financial risks, so the adequate riskmanagement is basic Bank's aim. The efforts to maintain adequate balance betweenaccepted risk level and business stability and profitability are permanent. Also,operative risk is monitoring, evaluating and managing on regular basis.The most important types of risks identified, evaluated and mitigated by the Bank'srisk management policies are credit risk, liquidity risk, interest rate and currency risk,market risk and operational risk.

Risk management framework-—c

Bank's Shareholders Assembly appoints the members of the Supervisory Board andthe Audit Committee. Supervisory Board has overall responsibility for theestablishment and oversight of the Bank's risk management framework. TheSupervisory Board has established the Board of Directors, Credit Committee, RiskManagement Committee and Commission for pursuing of liquidity and liquidity riskmanagement, which are responsible for monitoring and developing risk managementpolicies in specific areas.Regarding the organizational structure of the Bank, the Risk Management andPlanning Division is responsible for monitoring and reporting of global risk exposure,while the organizational units of the Bank which creates risk exposure areresponsible for operative risk management. Internal audit is responsible for theindependent review of risk management.

According to the Bank's risk management policies which includes set of appropriaterisk limits and controls, identifying, monitoring and risk's analysis are made onregular basis.

3.1. Credit risk

The Bank takes on exposure to credit risk, which is the risk that a counterparty willbe unable to pay amounts in full when due. Credit risk is the most important risk ofthe Bank's business, so the Bank carefully manages its exposure to credit risk.Principally, credit exposure arises in the lending activities and investment activities.

Taking in consideration the latest events arising from the global financial crisis, theBank applies more restrictive credit policy (higher precautious in assessing thecreditworthiness of customer and projects subject to financing) and increased theinterest rates of loans and advances. In line with the current circumstances, theBank maintains a high quality loan portfolio, which is closely monitored, withtightening the credit collection activities.

A Credit risk management

Decision-making authorities of the Supervisory Board are defined by law and by-lawregulations of Central Bank according to which the Supervisory Board makesdecisions for rescheduling of claims and write-off of Bank's claims.

• Supervisory Board is responsible for creation and implementation of theCredit Policy and Procedures for monitoring the implementation of the policyand procedures for assessment of loans and their management. All creditexposures exceeding 10% of the Bank's regulatory capital up to the legally

26

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determined limit of exposure towards single client (up to 25% of regulatorycapital) are subject to approving of the Supervisory Board.

• Credit Committee oversees the overall credit operation of the Bank. Also,Credit Committee is mainly responsible for approving and proposing to theRisk Management Committee and Board of Directors, all policies, proceduresand amendments thereto relating to the extension of credit, to ensure thatthese policies are applied consistently and complied with throughout the Bank,to approve credit exposure between 3% and 10% from the regulatory capital.

• Board of directors, Corporate Lending Division Manager and DepartmentManagers of the Bank are authorized for approving credit exposures up to 3%of the Bank's regulatory capital.

—c

& Credit risk assessment

(a) Loans and advances

In assessing credit risk of loans and advances to customers and to Banks at acounterparty level, the Bank uses three components: (I) the 'probability of default' bythe client or counterparty on its contractual obligation (expected cash flows); (ii) thelikely recovery ratio on the defaulted obligations, the 'loss given default'; (iii) theamount and quality of the collateral for the exposure.

These credit risk assessments, which reflect expected loss (the 'expected lossmodel') and are required by the IAS 39, are based on losses that have been incurredat the statement of financial position date (the 'incurred loss model') rather thanexpected losses.

(i) The Bank assesses the probability of default of individual counterparties usinginternal rating tools tailored to the various categories of counterparty. They havebeen developed internally and combine statistical analysis with credit officerjudgment and are validated, where appropriate, by comparison with externallyavailable data. Clients of the group are segmented in four rating classes. The Bank'srating scale, which is shown below, reflects the range of default probabilities definedfor each rating class. These means that, in principal, exposures migrate betweenclasses as the assessment of their probability of default changes. The rating toolsare kept under review and upgraded as necessary. The Bank regularly validates theperformance of the rating and their predictive power with regard to default events.

Bank's internal rating scale

Bank's rating Description of the gradeA Pass/acceptable for financingB Watch (careful)C Sub-standardD+E Suspicious (doubtful)+Loss

Bank's rating grade A (Pass/acceptable for financing) includes:• Claims from National Bank of the Republic of Macedonia and the Republic of

Macedonia;• Credit exposure towards customer who settles its obligation towards the Bank

at maturity or up to 15 days overdue;• Credit exposure being fully secured by first class security instruments, as

defined in NBRM Decision on classification of claims of Banks, up to realization

27


of the instrument, provided that the realization is not in term longer than 30days after the claim's maturity.

Bank's rating grade B (Watch (careful)) includes:• Credit exposure towards customer, for whom on the basis of credit worthiness

evaluation, the Bank assesses that the cash flow will be sufficient for regularsettlement of the due obligations, regardless to the presented current financialweaknesses, showing no signs of further worsening of the customer'scondition;

• Credit exposure towards customer who repays its due obligations up to 30days or by exception in period from 31 up to 90 days, if the delay is onlyperiodical in the interval of 31 to 90 days.

Bank's rating grade C (Sub-standard) includes:• Credit exposure towards customer who is confirmed and assessed to have

inadequate cash flow which will enable fulfilment of its obligations at thematurity;

• Credit exposure towards customer being inadequately capitalized;• Credit exposure towards customer with inadequate term structure of the assets

and liabilities, i.e. insufficiency in the long-term sources for financingcustomer's long-term activities;

• Credit exposure towards customer for which the Bank does not havesatisfactory information available, i.e. the Bank does not have the requireddocumentation for the Credit File in accordance with the Guidelines for keepingcredit files passed by NBRM;

• Credit exposure towards customer who has restructured obligations or otherprolongation of repayment of loan or other types of credit exposure due toserious financial difficulties;

• Credit exposure towards customer for whom payment has been settled for theissued letters of credit, guarantees, banking guarantees and other forms ofguarantee (warranty);

• Credit exposure towards customer who usually fulfils its obligations with a delayfrom 31 up to 90 days, or as an exception from 91 up to 180 days, if the delayis only periodical in the interval from 91 up to 180 days.

Bank's rating grade D+E (Suspicious (doubtful) loss) includes:• Credit exposure towards customer who is illiquid or insolvent and credit

exposure towards customer in bankruptcy or liquidation;• Credit exposure towards customer whose creditors has written-off their claims;• Credit exposure towards customer in financial recovery;• Credit exposure towards a customer for whom a proposal is submitted to the

authorized court for initiating a procedure for liquidation or bankruptcy and outof which the Bank fairly expects to collect a part of its claims;

• Credit exposure towards customer with a suspicious legal base;• Credit exposure towards customer whose debts collection depends on the

realization of the security instruments;• Credit exposure with expectations that the Bank will collect only a part of its

claims from the customer;• Credit exposure towards customer that is being subject to litigation and at the

same time it is not being secured with a qualitative security instrument;• Customer with undefined legal status;• Credit exposure towards customer for whom there are firm expectations that

the Bank will not be in position to collect its claims from the customer;• Credit exposure towards customer who usually fulfils its obligations with a delay

from 91 up to 180 days, or as an exception from 181 up to 365 days, if the

28


delay is only periodical in the interval from 181 up to 365 days and creditexposure towards customer who fulfils its obligations with delay longer than365 days or does not fulfil them at all.

(ii) Loss given default or loss severity represent the Bank's expectations of the extentof loss on a clame should default occur. It is expressed as percentage loss per unitof exposure and typically varies by type of counterparty, type and seniority of claimand availability of collateral or other credit mitigations.

iii) Amount and quality of the collateral depends on the terms, type (non movables,movables (inventories, receivables) and the possibility for its enforcement. The Bankdivides the clients in two groups: one where the exposure of the Bank is securedwith value of the collateral that is lower than the amount of the exposure and secondwhere the value of the collateral is higher than the amount of the exposure.

(b) Debt securities and other bills

The Bank is striving to maintain acceptable level of credit risk exposure regardingdebt securities, so investment activities are dominantly in government debtsecurities.

C Risk limit control and mitigation policies

The Bank manages and controls concentration of credit risk to individual and groupbasis, and to industries and countries.

The Bank structures the levels of credit risk it undertakes by placing limits on theamount of risk accepted in relation to one borrower, or groups of borrowers, and togeographical and industry segments. Such risks are monitored on a revolving basisand subject to an annual or more frequent review.

Exposure to credit risk is managed through regular analysis of the ability ofborrowers and potential borrowers to meet interest and capital repayment obligationsand by changing these lending limits where appropriate.

As measures for specific control and mitigation of credit risk prescribed in Bank's actthat regulates credit activities and procedures are obtaining collateral and credit-related contingencies.

(a) Collateral

Collateral always is considered as a secondary factor in granting a credit facility.Security by itself, in lack of ability to generate cash flow, is insufficient to justify thegranting of credit facilities. The principal collateral types for loans and advances are:(i) For corporate entities

• Cash• Property• Equipment and vehicles• Inventory• Receivables• Guarantees (Bank guarantees, guarantees from legal entities)• Securities (Debt securities issued by the Government of RM, Securities issued

by legal entities).

29


Loans to corporate entities are generally secured.

(ii) For individuals• Property• Cars• Deposits• Securities (Debt securities issued by the Government of RM, Securities issued

by legal entities)• In some cases draft or draft with endorsers covering the total receivables.

Loans to individuals are generally secured.

(tf) Credit-related contingencies

The primary purpose to these instruments is to ensure that funds are available to acustomer as required. Guarantees and standby letters of credit carry the same creditrisk as loans. The Bank issues collateralized and uncollateralized guarantees andletters of credit. The Bank monitors the term of maturity of these creditcommitments, because long-term commitments have greater degree of credit riskthan short-term commitments, also as uncollateralized commitments regardingcollateralized commitments.

D Impairment and provisioning policies

The Bank establishes an allowance for impairment losses that represents itsestimate of incurred losses in its loan portfolio. The main components of thisallowance are specific loss component that relates individually significant exposures,and a collective loan loss allowance established for groups of homogeneous assetsin respect of losses that have been occurred but have not been identified on loanssubject to individual assessment impairment, by using the available historicalexperience, experienced judgment and statistical techniques.

According to the Bank's policy, there are four internal rating grades. The majority ofthe impairment provision comes from the bottom two grading. The table belowshows the structure of Bank's loans and advances portfolio regarding internal ratingsystem and the associated impairment provision for each internal rating grade:

2009 2008Loans % Impairment % Loans % Impairment %

Pass/acceptable for financing (A) 81.6 1.4 72.8 1.8Watch (careful) (B) 7.0 11.1 14.4 6.8Sub-standard (C) 3.2 26.5 5.1 25.0Suspicious (doubtful)+Loss (D) + (E) 8.2 91.9 7.7 84.2

Total 100 10.3 100 10.1

30


E Maximum exposure to credit risk before collateral held or other creditenhancement

2009 2008

Loans and advances to banks 9,116,491 5,550,640Treasury and other eligible bills 696,573 3,353,838Loans to customersLoans to individuals

- overdrafts ( exemption off-balance sheet exposure) 1,207,105 1,044,527- credit cards (exemption off-balance sheetexposure) 715,306 735,990

-loans 5,031,900 5,094,198-other - 14,136

Loans to corporate entities- Large corporate clients 10,205,667 8,862,131- Small and medium size companies (SMEs) 21,691,951 19,297,494

Financial assets at fair value through Profit and loss 30,592 222,781Financial assets available for sale 306,674 306,071Financial assets held to maturity 120,784 176,476Other financial assets 333,340 111,386

Off balance sheet itemsFinancial guaranties 8,129,436 8,211,030Letter of credit 1,466,032 853,353Unused overdrafts for current accounts 2,177,806 2,262,602Unused overdrafts for Credit cards 898,565 788,651Overdrafts for legal entities for salary payments 192,924 628,584

The above table presents a worse case scenario of credit risk exposure to the Bankas at 31 December 2009 and 2008, without taking account of any collateral held orother credit enhancements attached. For on-balance-sheet items, the exposure setout above are based on net carrying amounts as reported in the statement offinancial position.

As shown above, 75% of the total maximum exposure is derived from loans andadvances to banks and customers (2008: 69%); 20% represents off-balance-sheetitems (2008: 22%).

Management is confident that in its ability to continue to control and sustainminimum exposure to credit risk to the Bank resulting from both loans and advancesportfolio and off balance sheet items based on following:

• 88.6% of the loans and advances are categorized in top two grades on theinternal rating system (2008: 87.2%);

• Loans and advances to customers are collateralized and loans to banks aremostly in first class banks;

• 62% of loans and advances are considered as to be neither past due norimpaired (2008: 58%);

• The increase of off-balance-sheet items generally resulting of increase ofletter of credit as a result of the need in the whole economy for this kind ofbank service.

31


Loan and advances

Loans and advances are summarized as follows:

31 December 2009 31 December 2008Loans and

advances tocustomers

23,398,0763,835,733

16,070,92043,304,729(4,452,800)38,851,929

Loans andadvances to

banks

9,094,284-

23,3029,117,586

(1,095)9,116,491


customers

20,164,1964,862,725

13,956,04738,982,968(3,934,492)35,048,476


banks

5,507,638-

44,5325,552,170

(1,530)5,550,640

Neither past due nor impairedPast due but not impairedImpairedGrossLess: allowance for impairmentNet

The total impairment provision for loans and advances is MKD 4,453,895,000 (2008:MKD 3,936,022,000) of which MKD 2,628,247,000 (2008: MKD 1,988,963,000)represents the individually impaired loans and the remaining amount of MKD1,825,648,000 represents the portfolio provision (2008 MKD: 1,947,059,000).Further information of the impairment allowance for loans and advances is providedin Notes 17 and 18,

(a) Loans and advances neither past due nor impaired

The credit quality of the portfolio of loans and advances that were neither past duenor impaired can be assessed by reference to the Bank's internal rating system.

31 December

Loans and advances to banksLoans to customers

Loans to individuals- loans

Loans to corporate entities- Large corporate clients- Small and medium sizecompanies (SMEs)

Total

Degree ofinvestment (A) 2009

9,094,284

Degree ofinvestment (A) 2008

5,507,638

643,970

8,073,871

14,680,235

32,492,360

378,000

6,982,005

12,804,191

25,671,834

(b) Loans and advances past due but not impaired

Loans and advances less than 90 days past due are not considered impaired,unless other information is available to indicate the contrary. Gross amount of loansand advances by class of customer that were past due but not impaired were asfollows:

32


31 December 2009

Loans to corporate entities- Small and medium sizecompanies (SMEs)

Value of collateral

Up to 30 days Up to 90 days Over 90 days

2,533,652 1,302,081

Total

3,835,7333,912,448

31 December 2008

Loans to corporate entities- Small and medium sizecompanies (SMEs)

Value of collateral

Up to 30 days Up to 90 days Over 90 days

4,155,931 706,794

Total

4,862,7257,240,608

(c) Loans and advances individually impaired

(i) Loans and advances to customersThe breakdown of individually impaired loans and advances to customers by classand the fair value of related collateral held by the Bank as security, are as follows:

31 December 2009

Small andmedium

Large sizecorporate companies

clients (SMEs) Total

Individuallyimpairment

loans

Gross amountValue of collateral

3,902,5694,019,417

4,417,0794,595,710

8,319,6488,615,127

2,627,152

31 December 2008

Largecorporate

clients

Small andmedium

sizecompanies

(SMEs) Total

Individuallyimpairment

loans

Gross amountValue of collateral

2,923,7863,508,543

3,910,2883,832,082

6,834,0747,340,625

1,987,433

The disclosed fair value of collateral is determined by local certified valuers andrepresents value realisable by the legal owners of the assets. Managementconsiders the loans covered by collateral as impaired because experience showsthat a significant proportion of the collateral cannot be enforced due toadministrative and legal difficulties. The impairment provisions reflect the probabilitythat management will not be able to enforce its rights and repossess collateral ondefaulted loans. Despite difficulties in enforcing repossession of collateral, theBank's management will vigorously pursue the outstanding debts with all possiblemeans at their disposal.

33


(ii) Loans and advances to banks

The total gross amount of individually impaired loans and advances to banks as at31 December 2009 is MKD 23,302,000 (2008: MKD 44,532,000). Generally nocollateral is held by the Bank.

(d) Loans and advances renegotiatedLoans with renegotiated terms are loans that have been restructured due todeterioration in the borrower's financial position and when the Bank has madeconcession that it would not otherwise consider. Once the loan is restructured itremains in the same rating grade at least two quarters independent of satisfactoryperformance after restructuring, except when the quality of the loan was improvedand the loan was transferred in a less risky category. The renegotiated loans as at31 December 2009 and 31 December 2008 are as follows:

31 December 2009Re-structured loans

Carrying amount1,020,952

31 December 2008Re-structured loans

Carrying amount373,144

G Debt securities, treasury bills and other eligible bills

The table below presents an analysis of debt securities, treasury bills and othereligible bills regarding issuer as at 31 December 2009. Issuer of the investmentsecurities is the Central Bank of the Republic of Macedonia and Republic ofMacedonia. Standard & Poor's Ratings Services assigned its foreign currencyratings of 'BB and 'BB+-' for local currency sovereign credit ratings to the Republic ofMacedonia. Issuers of the investment securities are Banks which are unrated

31 December 2009

Issuer

Central bank of Republic ofMacedoniaRepublic of MacedoniaBanks

Total

31 December 2008

Issuer

Central bank of Republic ofMacedoniaRepublic of MacedoniaBanks

Total

Treasuryand other

eligible bills

696,573

696,573

Treasuryand other

eligible bills

3,186,502167,336

3,353,838

Trading Investmentsecurities securities

120,784306,674

3,092

3,092 427,458

Tradingsecurities

Investmentsecurities

176,476306,071

200,597

200,597 482,547

Total

696,573123,876306,674

1,127,123

Total

3,186,502544,409306,071

4,036,982

34


H Repossessed collateral

During 2009, the Bank obtained assets by taking possession of collateral held assecurity as follows:

Carrying amount

Nature of assets 2009 2008Residential property 1,139,601 767,201

I Concentration of risks of financial assets with credit risk exposure

(a) Geographical sectors

The following table breaks down the Bank's credit exposure at their carryingamount, categorized by geographic region, based on the country of domicile of ourcounterparties:

Non-EURepublic of EU Countries Other

Total Macedonia Countries in Europe countriesASSETSCash and balances with theNational Bank of Republic ofMacedonia 8,112,561 7,082,791 1,029,770Treasury and other eligible bills 696,573 696,573Financial assets at fair valuethrough P&L 30,592 30,592Loans and advances to banks 9,116,491 179,933 8,507,835 385,323 43,400Loans and advances tocustomers

Loans to individuals-Term Loans 5,031,900 5,031,900-Overdrafts 1,207,105 1,207,105-Credit cards 715,306 715,306Loans to corporate entities- Large corporate customers 10,205,667 10,205,667-SMEs 21,691,951 21,691,951

investment securities 502,875 502,875Other financial assets 333,340 333,340

Total assets at 31 December2009 57,644,361 47,678,033 9,537,605 385,323 43,400

Total assets at 31 December2008 52,553,316 45,445,286 5,821,674 354,214 932,142

35


(b) Industry sector

The following table breaks down the Bank's credit exposure at their carryingamount, categorized by industry sector of our counterparties:

ASSETSTotal Industry

Cash and balanceswith the NationalBank of Republic ofMacedoniaTreasury and othereligible billsFinancial assets atfair value throughP&LLoans and advancesto banksLoans and advancesto customers

Loans toindividuals

- Term Loans

- Overdrafts

- Credit cardsLoans to corporate

entities- Large corporate

customers-SMEs

Investment securitiesOther financialassets

8,112,561

696,573

30,592

9,116,491

5,031,900

1,207,105

715,306

10,205,667 4,304,192

21,691,951 5,612,761

502,875

333,340

Commerceand finance

8,112,561

696,573

30,592

9,116,491

Retailcustomers Agriculture

Government and localauthorities

Construc-tion Transport Other

5,031,900

1,207,105

715,306

2,364

881,165 239,167

3,626,975

6,509,950

2,272,136

8,448,908

502,875

333,340

Total assets at 31December 2009 57,644,361 9,916,953 18,792,432 6,954,311 883,529 239,167 10,136,925 10,721,044

Total assets at 31December 2008 52,553,316 9,137,479 26,246,320 6,888,851 1,255,919 563,193 3,688,911 1,686,452 3,086,191

36


3.2 Market risk

The Bank takes on exposure to market risk. Market risk arises from open positionsin interest rate, and currency, all of which are exposed to general and specificmarket movements. The Bank estimates the market risk of positions held and themaximum losses expected based upon a number of assumptions for variouschanges in market conditions. The Board of Directors sets limits on the value of riskthat may be accepted, which is monitored on a regular basis.

A Market risk measurement

Regarding market risk managing and measuring, the Bank's management on aregular basis through adequate analysis and reporting process, is monitoring:

• interest rate changes regarding market movements and internal decisions,and the influence on interest bearing assets and liabilities and the interest ratemargin;

• changes of foreign currency rates regarding foreign currency assets andliabilities and maintain adequate structure regarding foreign exchange riskexposure;

The aim of the Bank is maximizing the stability and profitability, by applying theoptimum combination of foreign currency and interest rate structure of the assetsand liabilities.

B Foreign currency risk

The Bank takes on exposure to effects of fluctuations in the prevailing foreigncurrency exchange rates on its financial position and cash flows. The Board ofDirectors sets limits on the level of exposure by currency and in total for overnightposition, which are monitored daily. The table below summarizes the Bank'sexposure to foreign currency exchange rate risk at 31 December. Included in thetable are the Bank's assets and liabilities at carrying amounts categorized bycurrency.

37


Concentrations of assets and liabilitiesThe Bank had the following significant currency positions:

As at 31 December 2009

AssetsCash and balances with theNBRMTreasury and other eligible billsFinancial assets at fair valuethrough profit or lossLoans and advances to banksLoans and advances toCustomersInvestment securitiesInvestments in associatesProperty and equipmentInvestment propertyIntangible assetsDeferred tax assetOther financial assetsCollected collateralOther assets

Total assets

LiabilitiesDeposits from banksOther depositsBorrowingsCurrent tax liabilityProvisionsOther liabilities

Total liabilities

Net on-balance sheetfinancial position

Contingencies andcommitments


Total assetsTotal liabilities

Net on-balance sheetfinancial position

Contingencies andcommitments

EUR USD MKD Other

4,495,503

22,274,98221,547,435

727,547

538,996 7,660,795

3,456,3923,375,534

80,858

27,845,00823,200,213

4,644,795

1,522,984716,892

806,092

3,968,777 726,959 7,830,604

Total

3,671,423-

2,0464,389,859

16,473,257428,713

-----

237,378-

1,499

25,204,175

469,56623,400,5031,444,227

-17,2512,640

25,334,187

(130,012)

396,699-

-4,152,281

420,835385

-----

42,193-

112

5,012,505

22,6165,027,481

540-4

21,146

5,071,787

(59,282)

3,661,060696,573

28,546179,933

21,503,76273,77788,799

1,637,12141,03756,864

31353,769

1,139,60199,140

29,260,295

1,329,92520,507,399

142,4685,303

152,214371,033

22,508,342

6,751,953

383,379-_

394,418

454,075--------

531

1,232,403

7,022832,917

---

1,871

841,810

390,593

8,112,561696,573

30,5929,116,491

38,851,929502,87588,799

1,637,12141,03756,864

313333,340

1,139,601101,282

60,709,378

1,829,12949,768,3001,587,235

5,303169,469396,690

53,756,126

6,953,252

12,695,294

55,099,36648,840,074

6,259,292

36,500 12,562,840The table below summarises the sensitivity analysis for foreign currency risk andthe effect on the profit or loss:

Increase 2009 Increase 2008

EUR

USD

Other

0.5%

5.0%

1.0%

0.5%

3.0%

1.0%

Effect on profit or loss

31 December 31 December2009 2008

(650) 3,638

(2,964) 2,426

3,906 8,061

38


C Interest rate risk

The Bank's operations are subject to the risk of interest rate fluctuations to theextent that interest-earning assets (including investments) and interest-bearingliabilities mature or reprice at different times or in differing amounts. In the case offloating rate assets and liabilities, the Bank is also exposed to basis risk, which isthe difference in reprising characteristics of the various floating rate indices, suchas the savings rate, and three or six months EURIBOR/LIBOR and different typesof interest. Risk management activities are aimed at optimizing net interest income,given market interest rate levels consistent with the Bank's business strategies.Assets-liability risk management activities are conducted in the context of theBank's sensitivity to interest rate changes. In general, the Bank is asset sensitivebecause of the majority of the interest-earning assets and liabilities; the Bank hasthe right simultaneously to change the interest rates. In decreasing interest rateenvironments, margins earned will narrow as liabilities interest rates will decreasewith a lower percentage compared to assets interest rate. However the actualeffect will depend on various factors, including stability of the economy,environment and level of the inflation.

Non-Up to 1 3-12 OverS interestmonth 1-3 months months 1-5 years years bearing


AssetsCash and balances with theNBRMTreasury and other eligible billsFinancial assets at fair valuethrough profit or lossLoans and advances to banksLoans and advances toCustomersInvestment securitiesInvestments in associatesProperty and equipmentInvestment propertyIntangible assetsDeferred income tax assetOther financial assetsCollected collateralOther assets

Total assets

LiabilitiesDeposits from banksOther depositsBorrowingsCurrent tax liabilityProvisionsOther liabilities

Total liabilities

Total interest repricing gap

As at 31 December 2008Total assetsTotal liabilities

Total interest repricing gap

Total

6,939,705696,573

1,0008,429,739

3,390,898-------

19,457,915

714,54228,623,240

59,721---

29,397,503

(9,939,588)

14,588,37529,958,472

(15,370,097)

--

-506,059

3,063,687-------

3,569,746

262,2678,626,578279,400

---

9,168,245

(5,598,499)

2,698,4477,258,354

(4,559,907)

--

915180,461

11,353,990360,549

------

11,895,915

689,8639,665,471559,960

---

10,915,294

980,621

11,933,6648,192,830

3,740,834

--

1,117-

15,004,75860,871

-----

15,066,746

103,971754,024471,934

---

1,329,929

13,736,817

11,695,858970,631

10,725,227

--

_-

5,076,3264,532

------

5,080,858

352,963201,287

---

554,250

4,526,608

4,820,04873,032

4,747,016

1,172,856-

27,560232

962,27076,92388,799

1,637,12141,03756,864

313333,340

1,139,601101,282

5,638,198

58,4861,746,024

14.9335,303

169,469396,690

2,390,905

3,247,293

9,362,9742,386,755

6,976,219

8,112,561696,573

30,5929,116,491

38,851,929502,87588,799

1.637,12141,03756.864

313333,340

1,139,601101,282

60,709,378

1,829,12949,768,3001,587,235

5,303169,469396,690

53,756,126

6,953,252

55,099,36648,840,074

6,259,292

39


The interest rate sensitivity analysis has been determined based on the exposure tointerest rate risk at the reporting date. At 31 December 2009, if interest rates hadbeen 200 basis points (2008: 100 basis points) higher/lower with all other variableswere held constant, the Bank's profit or loss for the twelve month period ended 31December 2009 would respectively increase/decrease by approximately MKD74,119,000 (2008: MKD 7,169,000) and other equity components wouldrespectively decrease/increase by 6,117,000 MKD (2008: 3,061,000).

3.3. Liquidity risk

Liquidity risk is the risk that the Bank is unable to meet its payment obligationsassociated with its financial liabilities when they fall due and to replace funds whenthey are withdrawn. The consequence of liquidity risk may be the failure to meetobligations to repay depositors and fulfil commitments to lend.

A Liquidity risk management process

Liquidity risk management policy of the Bank defines the method of managing theBank's liquidity.

Perception and monitoring of Bank's liquidity is a postulate of its stability andsuccessful working. Implementation of the liquidity risk management policy is doneusing defined risk management process which includes planning and managingwith cash flows, maintaining adequate structure of assets and liabilities, financialinstruments for liquidity risk management, adequate diversification of deposits andother liabilities by maturity and client, procedures for identification and monitoringthe deposit's stability, monitoring the maturity of assets and liabilities, monitoringthe off-balance sheet items, monitoring liquidity ratios, liquidity stress testing andcontinuity plan in irregular conditions reporting to Bank's bodies and adequatemanagement information system and responsibilities of Bank's organizational unitsin liquidity risk management process. The aim of the Bank is maximizing theprofitability, by applying the optimum combination of maturity and foreign currencystructure of the assets and liabilities.

However, as a result of the ongoing financial crisis, the Bank strives to useadequate term structure of funds adjusted to term structure of placements,based on contractual and expected maturity of the deposit base. In such conditions,the primary strategy of the Bank is to maintain its liquidity on the highest level andnot to promote significant increase of loan portfolio and increase of profit. In thatdirection the Bank increased the interest rates of deposits and introduced attractivedeposit products.

The table below analyses assets and liabilities of the Bank into relevant maturitybuckets based on the remaining period at the date of the statement of financialposition to the contractual maturity date for assets and liabilities.

Although the Bank has shortage of short-term assets over short-term liabilitiesmaturing within one month, one to three months, the Bank's managementconsiders its deposit base as being stabile and liquidity not jeopardized. This isbased on statistical data and calculations of expected maturity in order to determinethe funding and stability of the deposit base.

40


Maturities of assets and liabilities

As at 31 Up to 1December 2009 m°n. *??...

LiabilitiesDeposits from

banksOther depositsBorrowingsProvisionsOther liabilities incl.current tax liability 401,816

1-3months

3-12months 1-5 years

OverSyears Total

764,09229,680,796

66,84562,896

262,8668,659,439

84,98720,508

391,2009,868,164

226,83555,193

429,5911,052,5911,017,250

23,066

1,847,749700,723 49,961,713242,537 1,638,454

7,806

177

169,469

401,993

Total liabilities(contractual

maturity dates)

Total assets(contractualmaturity dates)

30,976,445 9,027,800 10,541,569 2,522,498 951,066 54,019,378

17,631,360 2,474,823 11,418,373 19,797,878 6,423,209 57,745,643

As at 31December 2008

LiabilitiesDeposits from

banksOther depositsBorrowingsProvisionsOther liabilities incl.current tax liability

Total liabilities(contractual

maturity dates)

Total assets(contractualmaturity dates)

Up to 1month

1-3months

3-12months

949,582 102,433 94,68330,647,382 6,981,381 7,537,510

47,411 28,482 171,35361,327 18,553 66,374

197,218 133,130 202

1 -5 years

486,621634,468557,73923,318

1,710

OverSyears

250,47311,808

Total

1,633,31945,800,741

1,055,458181,380

332,260

31,902,920 7,263,979 7,870,122 1,703,856 262,281 49,003,158

7,815,877 52,650,86715,625,896 2,585,208 10,759,143 15,864,743

B Assets held for managing liquidity risk

The Bank holds a diversified portfolio of cash, highly marketable assets and highly-liquid securities to support payment obligations in stressed market environment. TheBank's assets held for managing liquidity risk comprise:

• Cash and balances with the National Bank of Republic of Macedonia;

• Treasury bills;

• Government bills that are readily acceptable in repurchase agreements withcentral bank;

• Short-term Loans and advances to banks.

41


C Off-balance sheet items (uncollateralized)

(a) Guarantees

The maturity buckets are based on the remaining contractual maturity date of theguarantees i.e. the earliest period in which the guarantees could be called.

(b) Letter of credit

The maturity groupings based on the remaining contractual maturity date of letter ofcredit are also included in the table below:

(c) Other

This item includes approved undistributed overdrafts on current accounts and cardsand loans in MKD for out limiting of the condition of the funds on the current accountsof legal entities in domestic payment operation. The maturity buckets based on theremaining contractual maturity date are summarized in the table below:


GuaranteesLetter of creditOther

Total

Up to 1 year

6,750,9031,466,0323,269,295

1-5 years

1,127,637

Over 5 years

250,896

11,486,230 1,127,637

Total

8,129,4361,466,0323,269,295

250,896 12,864.763


GuaranteesLetter of creditOther

Total

Up to 1 year

7,718,916853,353

3,679,837

12,252,106

1-5 years

492,114

492,114

Over 5 years Total

8,211,030853,353

3,679,837

12,744,220

42

^M*ss^»»ffi£3wa»W*#^^ '


3.4. Financial Instruments

A Fair value

Fair value represents the amount at which an asset could be replaced or a liabilitysettled on an arms length basis. Fair values have been based on managementassumptions according to the profile of the asset and liability base.

The following table summarizes the carrying amounts and fair values to thosefinancial assets and liabilities not presented on the statement of financial position attheir fair value.

Carrying value Fair value2009 2008 2009 2008^

Financial assetsLoans and advances to banks 9,116,491 5,550,640 9,116,491 5,550,640Loans and advances tocustomers 38,851,929 35,048,476 38,849,163 34,855,501- Retail customers(individuals) 6,954,311 6,888,851 6,954,311 6,888,851- large corporate customers 10,205,667 8,862,131 10,205,667 8,862,131-SMEs 21,691,951 19,297,494 21,689,185 19,104,519Investment securities 196,201 251,151 218,860 259,695

Financial liabilitiesDeposits from banks 1,829,129 1,572,461 1,829,129 1,572,461Other deposits 49,768,300 45,769,870 49,768,300 45,769,870Borrowings 1,587,235 984,103 1,587,235 984,103

Loans and advances to banks

Loans and advances to other banks comprise inter-bank placements. The fair valueof placements and overnight deposits is their carrying amount due to their short-term nature.

Loans and advances to customers

Loans and advances are net of provisions for impairment. The estimated fair valueof loans and advances represents the discounted amount of estimated future cashflows expected to be received. Expected cash flows are discounted at currentmarket rates to determine fair value.

Investment securities

Investment securities include interest-bearing assets held to maturity and assetsclassified as available for sale are measured at fair value. Fair value for held-to-maturity assets is based on market prices or broker/dealer price quotations. Wherethis information is not available, fair value is estimated using quoted market pricesfor securities with similar credit, maturity and yield characteristics.

Other financial assets

The fair value of monetary assets that includes cash and cash equivalents isconsidered to approximate their respective carrying values by definition and due totheir short-term nature.

43


Deposits and borrowings

The estimated fair value of deposits with no stated maturity, which includes non-interest-bearing deposits, is the amount repayable on demand.

The fair value of the term deposits at variable interest rates approximates theircarrying values as of the statement of financial position date. Term deposits over 12months represent insignificant part of the total deposits and do not have materialimpact on the fair value of the total deposits.

Borrowed funds carry predominantlyjloating rates and due to the interest rate re-pricing carrying value is not materially different from their fair value.

B Fair value hierarchy

Fair values are determined according to the following hierarchy:

• Level 1- Quoted Market PriceFinancial instruments with quoted prices in active markets.

• Level 2 - Valuations Techniques Using Observable InputsFinancial instruments with quoted prices for similar instruments in activemarket or quoted prices for identical or similar instrument in inactive marketand financial instruments valued using models where all significant inputs areobservable,

• Level 3- Valuations Techniques with Significant Non-observable inputsFinancial instruments valued using models where one or more significantinputs are not observable.

For financial instruments carried at fair value, the level in the fair value hierarchy intowhich the fair values are categorised are as follows:

31 December 2009 Level 1 Level 2 Level 3 Total

Financial assets at fair value through profitand lossFinancial assets held for trading- Debt securities 3,092 - - 3,092- Equity securities 27,500 - - 27,500Available-for-sale financial assets- Investment securities - debt securities 306,674 306,674

Total assets 30,592 306,674 - 337,266

44


3.5 Capital management

The Bank's objectives regarding capital managements are:• To comply with the capital requirements by the regulators;• To safeguard the Bank's ability to provide returns to shareholders;• To maintain a strong capital base to support the development of its business.

Capital adequacy and the use of regulatory capital are regularly monitored by theBank's management, using techniques prescribed by national regulatory authority(National Bank of Republic of Macedonia). The required information is submitted toregulatory authority on a quarterly basis.

The regulatory authority requires that each Bank has to maintain capital adequacyratio above 8%.

The Bank's regulatory capital is divided in two groups:• Tier 1 that includes: ordinary and non-cumulative non-voting shares and

share premium, statutory reserves and retained earnings or loss, items asresult of consolidation, less: intangible assets;

• Tier 2 that includes: cumulative non-voting shares and share premium,hybrid capital liabilities and subordinated liabilities.

Investments in other Banks or financial institutions over 10% and investments ininsurance and re-insurance companies and pension fund management companiesare deducted from Tier 1 and Tier 2 capital to arrive at the regulatory capital.

According to national regulations, the risk-weighted assets (on-balance and off-balance) are measured by means of a hierarchy of five risk weights classifiedaccording to nature of assets, taking into consideration the collateral or guarantees.

Calculation of capital adequacy ratio includes regulatory capital and total of creditrisk-weighted assets and FX risk-weighted assets.

The table below summarizes the compositions of regulatory capital and the capitaladequacy ratio of the Bank for the years ended 31 December regarding therequirement of regulatory authority. During these two years, the Bank complied withall of the regulatory imposed capital requirements to which the Bank is subject.

45


Tier 1 capitalOrdinary and non-cumulative non-voting shares and share premiumStatutory reserves and retained earnings or lossItems as result of consolidationDeductions from Tier 1 capitalTotal qualifying Tier 1 capital

Tier 2 capitalCumulative non-voting shares and share premiumHybrid capital liabilitiesSubordinated liabilitiesTotal qualifying Tier 2 capital

Deductions from regulatory capital

Total regulatory capital

Credit risk-weighted assetsOn-balance sheetOff-balance sheet

Total credit risk-weighted assetsFX risk-weighted assetsCapital adequacy ratio

20092,106,7793,759,230

(15,058)5,850,951

16,315

16J315

135,760

5,731,506

44,072,3918,020,064

52,092,4551,774,992

10.6

Tier 1 capitalOrdinary and non-cumulative non-voting shares and share premiumStatutory reserves and retained earnings or lossItems as result of consolidationDeductions from Tier 1 capitalTotal qualifying Tier 1 capital

Tier 2 capitalCumulative non-voting shares and share premiumHybrid capital liabilitiesSubordinated liabilitiesTotal qualifying Tier 2 capital

Deductions from regulatory capital

Total regulatory capital

Credit risk-weighted assetsOn-balance sheetOff-balance sheet

Total credit risk-weighted assetsFX risk-weighted assetsCapital adequacy ratio

20082,214,2062,653,136

(4,937)4,862,405

18,563

18,563

(96,267)

4,784,701

38,940,2707,696,428

46,636,6981,711,792

9.9%

The increase of the regulatory capital in 2009 is mainly result of including a part ofthe profit realized in 2008 in the Bank's reserves. The increase of risk-weightedassets reflects the expansion of lending and off-balance activities.

46


4 Critical accounting estimates, and judgments in applying accounting policies

The Bank makes estimates and assumptions that affect the reported amounts ofassets and liabilities within the next financial year. Estimates and judgments arecontinually evaluated and are based on historical experience and other factors,including expectations of future events that are believed to be reasonable under thecircumstances.

(a) Impairment losses on loans and advances

The Bank reviews its loan portfolios to assess impairment on a monthly basis. Indetermining whether an impairment loss should be recorded in the profit or loss, theBank makes judgments as to whether there is any observable data indicating thatthere is a measurable decrease in the estimated future cash flows from a portfolio ofloans before the decrease can be identified with an individual loan in that portfolio.This evidence may include observable data indicating that there has been anadverse change in the payment status of borrowers in a group, or national or localeconomic conditions that correlate with defaults on assets in the Bank. The Bankuses estimates based on historical loss experience for assets with credit riskcharacteristics and objective evidence of impairment similar to those in the portfolio.Where the net present value of estimated cash flows to differ by +/-1%, theimpairment loss is to be estimated MKD 85,366,000 lower or MKD 85,366,000higher.

(b) Held to maturity investments

The Bank holds debt securities issued by the Republic of Macedonia, received inexchange for the settlement of certain non-performing loans, bearing interest at arate of 2% per annum. The principal of bonds for frozen deposits is repayable in 20equal semi annual instalments commencing from April 2002 to October 2011, theprincipal of bonds for denationalization IV issue is repayable in 10 equal annualinstalments commencing from June 2006 to June 2015, and, the principal of bondsfor denationalization V issue is repayable in 10 equal annual instalmentscommencing from June 2007 to June 2016. As at 31 December 2009 theoutstanding balance of these receivables amounts to MKD 120,784,000 (2008: MKD176,476,000).

c) Collected collateral

Collected collateral is classified as assets held for sale. Collected collateral includeapartments, equipment and business premises which are not used by the Bank forits core operations. These assets are stated at the lower of carrying amount and fairvalue less costs to sell. The Bank plans to dispose the collected collateral within oneyear of forced acquisition however the market for certain types of collateral inMacedonia is in an early stage of development. Management has made an estimateof the expected recoverable amount net of costs to realise the assets, based on anumber of factors, including independent assessment. However, given theforegoing, actual amounts realised may differ from the estimates made. Where therecoverable amount net of costs to realise the assets had been 3% lower thecarrying amount of the collected collateral would have been MKD 34,188.000 lower(2008:MKD 23,016,000 lower).

47


5

6

7

Net interest income

Interest and similar incomeLoans and advances:- To banks- To customersCash and short term fundsInvestment securitiesOther

Interest expense and similar chargesDeposits from banksDue to customersOther borrowed fundsOther

Interest income on impaired financial assets54,466,000).

Net fee and commission income

Fee and commission incomePayment operations-in the country-abroadLetters of credit and guaranteesCredit cardsBrokerage feesOther

Fee and commission expensePayment operations-in the country-abroadBrokerage feesOther

Dividend income

Investment securities

2009

57,6523,826,860

30,53064,44725,028

4,004,517

38,4241,494,755

31,49048,074

1,612,743

is MKD 63,997,000

2009

286,172223,960174,20442,562

5,453100,483

832,834

36,73769,315

45738,692

145,201

2009

12,903

12,903

2008

58,8043,088,928

441,299285,692

12,185

3,886,908

26,3301,228,187

39,01015,928

1,309,455

(2008: MKD

2008

347,209258,253176,81923,12814,42979,546

899,384

31,64565,343

53537,668

135,191

2008

20,119

20,119

48


8 Other operating income2009 2008

Released provisions for Bonuses to theSupervisory Board, Board of Directors,management and the employees 70,251Recoveries on loans and advances previouslywritten-off 22,328 151,670Gain on sale of Property Plant and Equipment 6,095 11,593Rental income 4,088 11,658Other 79,927 126,756

—c

182,689 301,677

9 Personnel expenses2009 2008

Salaries and wages 631,715 442,362Pension costs 143,769 136,381Other staff costs 6,979 73,153Taxes and contributions 71,101 70,286

853,564 722,182

10 Other operating expenses2009 2008

Insurance premiums 241,313 222,214Services 185,958 196,241Depreciation of property and equipment (Note 21) 173,598 171,953Administration and marketing costs 103,514 115,309Materials 92,734 107,113Bonuses to the Supervisory Board, Board ofDirectors, management and the employees 89,986 130,000Decrease in value of assets acquired throughforeclosure procedure - 12,677Amortisation of intangible assets (Note 23) 20,020 15,274Loss on sale of collateral 8,864 18,953Tax and contributions 1,188 5,466Penalties 5,313 3,777Depreciation of investment property (Note 22) 961 546Other 18,383 2,307

941,832 1,001,830

49


11 Impairment charge for credit losses2009 2008

Cash and bank balances with the NBRM (Note 14) (280) (67,549)Loans and advances to banks (Note 17) (435) (288)Loans and advances to customers (Note 18) 527,552 549,056Contingencies and commitments (Note 31) (11,911) 5,785

514,926 487,004

12 Income tax expense2009 2008

Current tax - 172,515Deferred tax (Note 30) 125 170

125 172,685

Further information about deferred income tax is presented in Note 30.The tax on the Bank's profit before tax differs from the amount that would ariseusing the basic tax rate of the Bank as follows:

Profit before tax 1,075,255 1,551,352

Tax calculated at a tax of 0% (2008: 10%) - 155,135

Increase for:- expenses non tax deductible according tolocal regulations 46,855 23,529

Decrease for:- dividends - (2,004)- tax credits (46,855) (4,1.45)

Current income tax expense - 172,515Deferred income tax expense 125 170

Income tax expense 125 172,685

Commencing from 1 January 2009 the Government of the Republic of Macedoniahas introduced modifications and changes in the Profit Tax Law. According tothese changes the profit tax shall apply at the moment of the distribution of theprofits in a form of dividends. In addition, official amendments were made inincome tax Manual, published on 18 December 2009. According to thesechanges the base for computation of profit tax is non-deductible expensesincurred during the fiscal year. Subsequently, as long as the undistributed profitsare retained within the company the profit tax would not be applied. If the Bankpays all the net profit earned in 2009 in form of dividends, the potential currentincome tax excluded from the impact of the non-deductable expenses would beMKD 107,513,000. The tax credit for 2009 is MKD 65,447,000 and according tothe local tax regulations it can only be utilized to the amount of non-deductibleexpenses.The tax authorities may at any time inspect the books and records up to 5 to 10years subsequent to the reported tax year, and may impose additional taxassessments and penalties. The Bank's management is not aware of anycircumstances, which may give rise to a potential material liability in this respect.

50


13 Earnings per share

Basic earnings per share

The calculation of basic earnings per share at 31 December 2009 was based onthe net profit attributable to ordinary shareholders of MKD 1,073,322,000 (2008:MKD 1,377,014,000) and a weighted average number of ordinary sharesoutstanding during the year ended 31 December 2009 of MKD 1,997,719 (2008:1,995,551), calculated as follows:

Net profit attributable to ordinary shareholders 2009 2008

Net profit for the year 1,075,130 1,378,667

Dividends on non-redeemable preference shares (1..8.P.8) (.1.653)Net profit attributable to ordinary shareholders 1,073,322 1,377,014

Weighted average number of ordinary shares 2009 2008

in number of sharesIssued ordinary shares at 1 January 1,997,135 1,992,590Effect of conversion of preference shares inJanuary - 63Effect of conversion of preference shares inFebruary 283 107Effect of conversion of preference shares in April - 2,398Effect of conversion of preference shares in May 29 135Effect of conversion of preference shares in June 226 83Effect of conversion of preference shares in July - 64Effect of conversion of preference shares inAugust 5Effect of conversion of preference shares inSeptember - 55Effect of conversion of preference shares inOctober 32 55Effect of conversion of preference shares inNovember 9Effect of conversion of preference shares inDecember - 1

At 31 December 1,997,719 1,995,551

51


Diluted earnings per share

The calculation of diluted earnings per share at 31 December 2009 was based onthe net profit attributable to ordinary shareholders of MKD 1,075,130 (2008: MKD1,378,667) and the weighted average number of ordinary shares outstandingduring the year ended 31 December 2009 of 2,013,582 MKD (2008: 2,012,483MKD ), calculated as follows:

Net profit attributable to ordinary shareholders(diluted) 2009 2008

-*Net profit attributable to ordinary shareholders 1,075,130 1,378,667Net profit attributable to ordinary shareholders 1,075,130 1,378,667

Weighted average number of ordinary shares(diluted)

2009 2008In number of sharesIssued ordinary shares at 1 January 1,997,719 1,995,551Effect of issued potential ordinary shares 15,863 16-932

At 31 December 2,013,582 2,012,483

14 Cash and bank balances with the National Bankof Republic of Macedonia

2009 2008

Cash in hand 959,242 1,098,663Current accounts with local banks 6,092 7,229Current accounts with foreign banks 1,029,770 1,949,561Other short term highly liquid investments 9,455 9,135

Included in cash and cash equivalents (Note 36) 2,004,559 3,064,588

Restricted accounts 146,551 53,619Current accounts with foreign banks - 10Balances with NORM 5,961,451 4,591,036Less: Provision for impairment - (280)

8,112,561 7,708,973

Cash and bank balances with the National Bank of Republic of Macedonia includeaccrued interest of MKD 3,671,000 (2008: 2,569,000).

The Bank is obliged to provide mandatory reserve and mandatory deposit in MKDand mandatory reserve in foreign currency at the National Bank of the Republic ofMacedonia.

52


The Bank has to set aside MKD mandatory deposit in an amount which equalsthe difference between the actual loan retail balance at the end of each monthand the balance determined in accordance with the prescribed limits for growthfor each month. This mandatory deposit was for the first time set aside on 18August 2008. The National Bank of Republic of Macedonia pays 1% interest rateper annum and as at 31 December the mandatory deposit is nil (2008: MKD150,533,000).

Starting from 1 June 2009, a new Decision on Mandatory reserve is applied andaccording this Decision, the rate for mandatory reserve of the banks is as follows:

10% for the obligations in domestic currency;20% for the obligations in domestic currency indexed to foreign exchangecurrency and13% for obligations in foreign currency.

The mandatory reserve in denars is calculated as sum of the amounts acquiredwith the application of the appropriate rate for the obligations in domesticcurrency and in domestic currency with foreign exchange clause and 23% of theamount acquired with the application of the appropriate rate of the obligation inforeign currency.

The mandatory reserve in foreign currency is 77% of the amount acquired withthe application of the appropriate rate for the obligations in foreign currency. TheBank is obliged to keep the amount of the calculated foreign currency mandatoryreserve at a foreign Bank on a separate account of the National Bank of Republicof Macedonia.NBRM pays 2% interest rate per annum for the obligation for mandatory reservein denars and starting from 16 October 2009, and 0.10% interest rate per annumon the mandatory reserve in foreign currency.

Restricted accounts represent deposits for opened letters of credit, on behalf ofthe Bank's customers, collateral for Visa International and MasterCard andcollateral for custody account.

Movement in provisions for impairment are as follows:

Cash and bank balances with the National Bankof Republic of Macedonia

2009 2008

Balance at 1 January 280 67,829

Net release to statement of comprehensive income(Note 11) (280) (67,549)

Balance at 31 December - 280

53


15 Treasury and other eligible bills2009 2008

Treasury bills 696,573 3,186,502Government bills with maturity up to 90 days - 167,336

Included in cash and cash equivalents (Note 36) 696,573 3,353,838

696,573 3,353,838

Treasury bills are debt securities issued by the National Banjj of Republic ofMacedonia with maturity due of 28 days. Treasury bills are categorized as assetsheld to maturity bearing interest at rate of 8.5% per annum.

16 Financial assets at fair value through profit and loss2009 2008

Debt and other fixed-income investmentsGovernment bonds 3,092 159,334Government treasury bills - 41,263

3,092 200,597

Listed 3,092 200,597

Equity investments and other non-fixed-incomeinstrumentsEquity investments

Listed

30,592 222,781

27,500

27,500

27,500

22,184

22,184

22,184

Current 30,592 222,781

17 Loans and advances to banks2009 2008

Placements with foreign banks 8,903,976 5,152,706Placements with domestic banks 213,610 399,464Less: Provision for impairment (1,095) (1,530)

9,116,491 5,550,640

Current 7,987,845 4,409,764Non-current 1,128,646 1,140,876

Loans and advances to banks include accrued interest of MKD 231,000 (2008:MKD 8,494,000).

54

•isj^gimaBW'fi^


Movement in provisions for impairment are as follows:Loans and advances to banks

2009 2008

Balance at 1 January 1,530 1,818

Net release to statement of comprehensive income(Note 11) (435) (288)

Balance at 31 December 1,095 1,530

18 Loans and advances to customers2009 2008

Individuals (retail customers):-Overdrafts 1,366,673 1,156,031-Credit cards 1,013,846 823,963- Term loans 5,590,651 5,504,902-Other 15,077

7,971,170 7,499,973

Corporate entities:- Large corporate customers 10,829,686 10,000,379-SMEs 24,503,873 21,482,616

35,333,559 31,482,995

Gross loans and advances 43,304,729 38,982,968Less: allowance for impairment (4,452,800) (3,934,492)

Net 38,851,929 35,048,476

Current 17,221,571 14,743,823Non-current 21,630,358 20,304,653

Loans and advances to customers include accrued interest and other receivablesof MKD 259,275,000 (2008: MKD 217,812,000).

55


Movement in provisions for impairment for 2009 are as follows:Retail customers

Overdrafts Credit cards Loans Other Total

111,504

48,940(876)

159,568

87,973

210,567

298,540

410,704

148,179(132)

558,751

941

(941)

-

611,122

406,745(1,008)

1,016,859

Balance at 1 January2009

Provision for loanimpairment (Note 11)Write offBalance at 31December

Movement in provisions for impairment for 2009 are as follows:Corporate entities

Large corporatecustomers SMEs Total

Balance at 1 January 2009 1,138,248 2,185,122 3,323,370Provision for loan impairment (Note 11) (505,993) 626,800 120,807Write off (8,236) - (8,236)

Balance at 31 December 624,019 2,811,922 3,435,941

Movement in provisions for impairment for 2008 are as follows:Retail customers

Overdrafts Credit cards Loans Other Total

Balance at 1 January2008 82,385 53,680 305,473 862 442,400

Provision for loanimpairment (Note 11) 34,223 34,334 105,612 79 174,248Writeoff (5,104) (41) (381) - (5,526)Balance at 31December 111,504 87,973 410,704 941 611,122

Movement in provisions for impairment for 2008 are as follows:Corporate entities

Large corporatecustomers SMEs Total

Balance at 1 January 2008 1,139,062 1,828,329 2,967,391Provision for loan impairment (Note 11) (814) 375,622 374,808Writeoff - (18,829) (18,829)

Balance at 31 December 1,138,248 2,185,122 3,323,370

Loans and advances to customers are all domestic.

56

^^


19 Investment securities2009 2008

Debt and other fixed-income investments held -to - maturityGovernment bonds 120,784 176,476

120,784 176,476

Listed __J2pJ784____176,476_

Equity investments and other debt investmentsavailable-for-sale "*

Debt non-fixed income investments available forsale

Bonds issued by banks 306,674 306,071

Equity investments available-for-saleEquity investments

Unlisted

CurrentNon-current

Investments securities include accrued interest and other receivables of MKD1,506,000 (2008: 3,384,000 MKD).

Government Bonds comprise MKD 120,784,000 (2008: MKD 176,476,000)received as a collection of certain non-performing loans, bearing interest at a rateof 2% per annum (2008: 2%). The principal is payable in 20 equal semi-annualinstalments commencing from April 2002 up to October 2011.

Equity investments before allowance are carried at cost. There is no activemarket for these investments and there are no recent transactions, which wouldprovide evidence for their current market value. Income from debt instrumentsheld-to-maturity is recognized as interest income. Income from equityinvestments is recognized in dividend income.

Corporate bonds issued by domestic Banks classified as available for sale ofMKD 306,674,000, represent bonds denominated in EUR, with variable interestrate, six months EURIBOR +1.2% annual. The corporate bonds were issued byNLB Tutunska Banka AD Skopje, with maturity of three years and semi-annualpayment of interest. The bonds were acquired through Public announcementfrom NLB Tutunska banka AD Skopje- NLB TB1 and were registered in theCentral depository for securities of Republic of Macedonia on 17 November 2008.The corporate bonds are not quoted on an official market. Income from debtsecurities available for sale is recognised in interest income.

75,417

382,091

382,091

502,875

56,189446,686

74,675

380,746

380,746

557,222

54,461502,761

57


20 Investments in associates

KB Prvo Penzisko Drustvo AD SkopjeShare of results for the year ended 31 DecemberAdditionsDividends received

2009 2008

KB Publikum Invest AD SkopjeShare of results for the year ended 31 December

Summary financial information on the associate is presented below:

45,13824,8818,990

(2,428)

76,582

2009

15,293(3,076)

45,1384,555

49,693

2008

-

12,217

Interest2009

KB Prvo PenziskoDrustvo AD Skopje

KB PublikumInvest AD Skopje

2008Interest

Assets Liabilities Equity Revenues Profit heldKB Prvo PenziskoDrustvo AD Skopje 135,823 34,418 101,405 105,387 28,926

Assets

190

24

214

,282

,515

,797

Liabilities

34

34

,002

82

,084

Equity

156

24

180

,280

,433

,713

Revenues

130

1

131

,174

,694

,868

Profit

41

(6,

35

,482

153)

,329

held

49%

50%

49%

135,823 34,418 101,405 105,387 28,926

There are no significant restrictions on the ability of the associates to transfer funds tothe Bank in the form of cash dividends or repayment of loans and advances.

58

lSW^


21 Property and equipment

Assets inLand and Furniture & course of Leasehold

Year ended December 2008Opening net book amountAdditionsTransfersTransfer to intangible assetsTransfer from investmentpropertyDisposals and write offDepreciation charge (Note 10)

Closing net book amount

At 31 December 2008CostAccumulated depreciation

Net book amount

Year ended December 2009Opening net book amountAdditionsTransfersTransfer to intangible assetsTransfer to investment propertyDisposals and write offDepreciation charge (Note 1 0)

Closing net book amount

At 31 December 2009CostAccumulated depreciation

Net book amount

Buildings

1,084,5871,089,756

5926,840

5,977(461)

(37,584)

1,084,587

1,482,408(397,821)

1,084,587

1,084,5871,084,587

167,585

(33,510)(10,051)(39,638)

1,168,973

1,603,108(434,135)

1,168,973

Equipment construction improvements

313,608319,405

61126,407

(2.575)(129,690)

313,608

1,000,967(687,359)

313,608

313,608313,608

98,376

(6,167)(128,834)

276,983

1,044,278(767,295)

276,983

170,90322,301

317,831(154,990)(14,239)

-

170,903

170,903

170,903

170,903170,903285,601

(270,470)(6,491)

179,543

179,543

179,543

13,39016,689

1,743

(363)(4,679)

13,390

28,344(14,954)

13,390

13,39013,390

4,509(1,000)

(151)(5,126)

11,622

31,642(20,020)

11,622

Total

1,582,4881,448,151

317,951

(14,239)

5,977(3,399)

(171,953)

1,582,488

2,682,622(1,100,134)

1,582,488

1,582,4881,582,488

285,601

(7,491)(33,510)(16,369)

(173,598)

1,637,121

2,858,571(1,221,450)

1,637,121

59


22 Investment property2009 2008

At 1 JanuaryCost 10,525 71,909Accumulated depreciation (2,037) (14,054)

Net book amount 8,488 57,855Year ended December

Opening net book amount 8,488 57,855Transfer to property and equipment (Note 21) - (5,977)Transfer from property and equipment (Note 21) ~* 33,510Disposal and write-off - (42,844)Depreciation charge (Note 10) (961) (546)

Closing net book amount 41,037 8,488

At 31 DecemberCost 44,035 10,525Accumulated depreciation (2,998) (2,037)

Net book amount 41,037 8,488

Fair value of investment property is MKD 62,720,000 (2008: MKD 26,664,000).

23 Intangible assets2009 2008

CostBalance at 1 January 133,783 118,434Transfer from property and equipment (Note 21) 7,491 14,239Additions 29,564Disposals and write off (362) (79)

Balance at 31 December 170,476 132,594

Accumulated amortisationBalance at 1 January 93,592 77,201Charge for the year (Note 10) 20,020 15,274Disposals and write off - (72)

Balance at 31 December 113,612 92,403Net book value at 31 December 56,864 40,191Net book value at 1 January 40,191 41,233

60


24 Other financial assets2009 2008

Credit card receivables 255,882 49,286Receivable for sold collateral previously collected 53,108 38,013Receivable from KB Prvo Penzisko Drustvo 24,350 24,087

333,340 111,386

Current 294,011 87,575Non-current 39,329 _ iMI

25 Collected collateral2009 2008

Buildings 1,036,154 701,117Residential buildings and apartments 79,258 57,535Other 24,189 8,549

1,139,601 767,201

Current 1,139,601 Z6_L201_

Included in collected collateral in amount of MKD 468,464,000 is an administrativebuilding acquired through foreclosed procedures based on an effective courtdecision. As at 31 December 2009 the Real Estate Cadastre has still not issuedproperty certificate for this building. The Bank has already initiated both court andadministrative proceeding for realizing its ownership rights as determined in theeffective court decision.

26 Other assets2009 2008

Inventory of office materials 15,594 19,780Inventory of numismatic collections 15,078 15,850Advances for property and equipment 10,894 31,353Other assets 59,716 30,568

101,282 97,551

Current 69,199 70,165Non-current 32,083 _ 27,386

Other assets include assets leased out to customers under operating leaseagreements for which the instalments fall due as follows:

2009 2008

Not later than one year 4,958 2,592Later than one year and not later than five years 16,561 7,751Later than five years 4,740 5,61 1

26,259 _ l _

61


The Bank has operating leases on an indefinite lease term and management cannot estimate the exact lease term. The minimum lease payments for theseoperating leases not later than one year are MKD 2,437,000 (2008: MKD676,000). No contingent rent was recognized as income in 2009 (2008: nil).

27 Deposits from banks and other financialinstitutions

2009 2008Demand deposits:

Banks and other financial institutions 405,361 299,763Insurance companies 96,479 149,764

Time deposits:Banks and other financial institutions 1,326,920 1,021,538

Restricted deposits:Banks and other financial institutions 369 101,396

1,829,129 1,572,461

Current 1,418,158 1,146,698Non-current 410,971 425,763

Deposits from banks and other financial institutions include accrued interestpayable of MKD 11,108,000 (2008: MKD 5,384,000).

28 Other deposits2009 2008

Public institutions- Current/settlement accounts 267,424 384,243- Term deposits 135,639 89,933

Companies- Current/settlement accounts 9,475,550 10,053,815- Term deposits 2,269,547 1,816,174

Retail customers- Current/demand accounts 11,328,748 12,008,485- Term deposits 24,533,039 20,281,837

Restricted depositsCitizens 954,442 856,649Companies 803,911 278,734

49,768,300 45,769,870

Current 48,208,399 45,166,273Non-current 1,559,901 603,597

Other deposits include accrued interest payable of MKD 335,163,000 (2008:MKD 234,274,000).Restricted deposits represent deposits made by companies for payments to bemade abroad by the Bank on their behalf, to facilitate the issuance of letters ofcredit, and the purchase of foreign currencies as well as collateral for loans andguarantees extended by the Bank to certain customers.

62

W-WiW^^


23 Borrowings

Domestic borrowings

Macedonian Bank forDevelopment PromotionAgency for Managing

AccountsNBRMMinistry of Finance

2009Short- Long-

term term

64,247 320,285

115,9708,809

16,360 249^73

2008Short-

term

-

--

36,381

Long-term

284,566

115,9708,809

144,764

Foreign borrowings administered throughdomestic financial and government institutions

Macedonian Bank forDevelopment PromotionICDF TaiwanMinistry of finance- Public

debt (former lender Councilof Europe SocialDevelopment Fund

Ministry of finance -Agriculture Credit DiscountFund (former lenderEuropean Investment Bank-EIB)

CurrentNon-current

Borrowings include accrued

95,289 545,267121 419

15,428 91,977

23,698 39,492

215,143 1,372,092

378,667- 1,208,568

interest payable of MKD

39,790179

15,820

30,716

122,886

247,246-

135,543748

107,663

63,154

861,217

736,857

6,124,000 (2008: MKD6,428,000). The Bank's borrowings are secured with promissory notes.

30 Other liabilities

Credit card liabilities

2009

213,747

2008

24,721Bonuses to the Supervisory Board, Board of

Directors, management andDividend payables

the employees

Liabilities to Ministry of FinanceSuppliers payableFee and commissionOther liabilities

CurrentNon-current

89,98620,44315,24414,3734,726

38,171

396,690396,690

-

130,00021,87219,42218,8663,900

50,830

269,611267,901

1,710

63


31 Deferred tax assets and liabilities

Deferred tax is calculated on all temporary differences under the liability methodusing an enacted tax rate of 10% (2008:10%).

The movement on the deferred tax is as follows:

2009 2008

At 1 January 438 608

Statement of comprehensive income charge(Note 12) (125) (170)

At 31 December 313 438

Deferred tax assets are attributable to the following items:

2009 2008Deferred tax assets

Property and equipment 313 438

At 31 December 313 438

32 Contingencies and commitments

The following table indicates the contractual amounts of the Bank's contingenciesand commitments by category:

2009 2008

Guarantees- in domestic currency 4,727,107 4,416,484- in foreign currency 3,402,329 3,794,546

8,129,436 8,211,030

Letters of credit 1,466,032 853,353Limits on credit cards 898,565 788,651Un-drawn overdraft facilities 2,177,806 2,262,602Credit limits to legal entities for salary 192,924 628,584Less: provision for impairment (169,469) (181,380)

12,695,294 12,562,840

64

T4^


Movement in provisions for impairment are as follows:

Balance at 1 January

Net (release)/charge to statement ofcomprehensive income (Note 11)

Balance at 31 December

2009

181,380

(11,911)

169,469

2008

175,595

5,785

181,380

33 Related party transactions

A number of banking transactions are entered into with related parties in thenormal course of business. These include loans, deposits and borrowings. Thesetransactions were carried out on commercial terms and at market rates. The Bankhas transactions with Companies which executive Directors are members of theBoard of Directors of the Bank. The volumes of related party transactions,outstanding balances at the year-end, are as follows:

Companies withmembers in the Bank' s

Board of Directors

Associatedcompanies

Statement of comprehensiveIncome

Interest and commission incomeInterest and fee expense


Loans

Loans outstanding at 1 JanuaryLoans issued during the yearLoan repayments during the year

Loans outstanding at 31December

2009

4,310169

52,382105,185110,309

47,258

2008

7,346180

346.08899,561

393,267

52,382

2009

843,953

2008

1,6242,045

30

30

22

(22)

Other assets

Receivables 24,350 24,087

The above loans to related parties represent short and long term loans in the normalcourse of the business and carry variable interest rates.

65


Companies with membersin the Bank' s Associated Companies

Board of Directors

Deposits 2009 2008 2009 2008

Balance at 1 January 53,964 63,314 314,363 238,773Deposits received during theyear 2,245,327 2,579,669 781,149 3,418,034Deposits repaid during theyear 2,243,741 2,589,019 1,043,193 3,342,444

Balance at 31 December 55,550 53,964 52,319 314,363

The above deposits to related parties represent current accounts, sight and termdeposits and are with variable interest rates.

Key management compensation 2009 2008

Salaries and other short - term benefits 166,713 137,808

166,713 137,808

34 Funds managed on behalf of third parties2009 2008

Banks and other financial institutions 27,020 118,154Companies 57,840 66,463Individuals 28,224 40,309

113,084 224,926

Fee and commission income received for assets managed on behalf of thirdparties is MKD 12,996,000 (2008: MKD 83,127,000).

The Bank manages assets on behalf of third parties which are in the form ofloans to companies for various investments. The Bank receives fee income forproviding these services. Funds managed on behalf of third parties are notassets of the Bank and are not recognized on the statement of financial position.The Bank is not exposed to any credit risk relating to such placements, as it doesnot guarantee these investments, however, has a fiduciary responsibility toproperly handle and invest these client monies.

Income and expenses of the Funds managed on behalf of third parties areaccrued to the account of the respective third party and the Bank has no liabilityin connection with these transactions.

66

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35 Share capital and share premium

Ordinary shares Non-voting shares2009 2008 2009 2008

In number of shares

At 1 January 1,997,135 1,992,590 16,932 21,477Conversion of Non-voting shares 1,069 4,545 (1,069) (4,545)

At 31 December 1,998,204 1,997,135 15,863 16,932

Ordinary shares have a par value of MKD 1,000 (2008: MKD 1,000) and Non-votingshares have a par value of MKD 1,000 (2008: MKD 1,000). The holders of ordinaryshares are entitled to receive dividends as declared from time to time and are entitledto one vote per share at meetings of the Bank. Non-voting shares give right to priority inthe dividend payment, but do not carry the right to vote. All shares rank equally withregard to the Bank's residual assets.

The below stated shareholders have more than 5% ownership of the Bank's ordinaryshares:

% of voting share capital

Shareholder 2009 2008

European Bank for Reconstruction andDevelopment 5.98 5.98

36 Other reserves2009 2008

Other reserves 109,717 109,717

109,717 109,717

Other reserves represent non distributable reserves.

Statutory reserves

The Bank's statutory reserves represent the Bank's own capital serving as a losscovering resource, which comes as a result of the risk exposure during the usualactivities of the Bank.

67

KOMERCIJALNA BANKA AD - SKOPJENotes to the financial statements for the year ended 31(All amounts in MKD thousands unless otherwise stated)

37 Cash and cash equivalents

Cash and balances with the NBRM (Note 14)Treasury bills (Note 15)Government bills (Note 15)

December 2009

2009

2,004,559696,573

2,701,132

2008

3,064,5883,186,502

167,336

6,418,426

38 Events after the date of the statement of financial position

No material events subsequent to the statement of financial position date haveoccurred which require disclosure in the financial statements.

68

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KOMERCIJALNA BANKA AD SKOPJE - nbrm.mk