NATIONAL BANK OF SERBIA Financial Statements Year …NATIONAL BANK OF SERBIA . Financial Statements Year Ended December 31, 2008 and Independent Auditors’ Report . NATIONAL BANK

NATIONAL BANK OF SERBIA Financial Statements Year Ended December 31, 2008 and Independent Auditors’ Report

NATIONAL BANK OF SERBIA

CONTENTS

Page

Independent Auditors' Report 1 - 2 Financial Statements:

Income Statement 3 Balance Sheet 4

Statement of Changes in Equity 5

Cash Flow Statement 6

Notes to the Financial Statements 7 - 47

INDEPENDENT AUDITORS’ REPORT To the Governor and Council of the National Bank of Serbia We have audited the accompanying financial statements (page 3 to 47) of the National Bank of Serbia (the “Bank”), which comprise the balance sheet as of December 31, 2008 and the related income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. The financial statements of the Bank as of, and for the year ended December 31, 2007, were audited by another auditor whose report dated May 15, 2008 expressed an unqualified opinion on those statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

(Continued)

Deloitte d.o.o. Makenzijeva 24 11000 Belgrade Serbia Tel: +381 11 3812 100; + 381 11 3812 200 Fax: +381 11 3812 101; + 381 11 3812 201 www.deloittece.com Business Registry Agency, registry number 4290 Raiffeisenbank a.d., Bulevar AVNOJ-a no. 64a Business account no. 265-1040310000266-36 Tax identification number 100048772 Inscribed and paid capital 150.750,06 EUR

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INDEPENDENT AUDITORS’ REPORT

To the Governor and Council of the National Bank of Serbia (Continued) Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the National Bank of Serbia as of December 31, 2008, and its financial performance, changes in equity and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Deloitte d.o.o. Belgrade May 26, 2009


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BALANCE SHEET As of December 31, 2008 (Thousands of RSD) Notes 2008 2007 АSSETS Cash and cash equivalents 11 42,296,491 19,953,449 Deposits with foreign banks 12 57,408,568 267,191,565 Gold and other precious metals 13 22,635,905 17,822,446 Financial assets at fair value through profit and loss 14 601,949,954 454,332,529 Securities available-for-sale 15 9,787,046 17,527,167 Loans 16 2,488,525 956,590 International Monetary Fund membership quota 17 45,447,682 39,751,891 Property, plant, equipment, investment property and

intangible assets 18

16,673,593

16,522,261 Other assets 19 2,835,412 1,784,266 Total assets 801,523,176 835,842,164 LIABILITIES Liabilities to other banks and financial institutions 20 504,722,787 576,203,527 Liabilities to the Government and other depositors 21 79,867,037 123,663,950 Liabilities to the International Monetary Fund 22 50,813,631 44,549,118 Securities issued 23 12,615,357 9,929,577 Provisions 24 379,899 - Tax payables 34,169 324 Other liabilities 25 3,357,214 2,591,772 Money in circulation 26 90,074,613 76,999,891 Total liabilities 741,864,707 833,938,159 EQUITY 27 State-owned capital 14,750,324 14,750,324 Revaluation reserves 9,399,174 7,692,158 Retained earnings/(Accumulated loss) 35,508,971 (20,538,477) Total equity 59,658,469 1,904,005 Total Liabilities and Equity 801,523,176 835,842,164 OFF-BALANCE-SHEET ITEMS 28 1,486,105,473 1,521,341,440

The accompanying notes form an integral part

of these financial statements


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STATEMENT OF CHANGES IN EQUITY Year Ended December 31, 2008 (Thousands of RSD) 2008 2007 STATE-OWNED CAPITAL Balance, beginning of year 14,750,324 14,750,324 Balance, end of year 14,750,324 14,750,324 RESERVES Balance, beginning of year - 10,000,000 Loss absorption - (10,000,000) Balance, end of year - - REVALUATION RESERVES Balance, beginning of year 7,692,158 7,683,772 Adjustment 1,712,179 - Adjusted Balance, beginning of year 9,404,337 - Appraisal of fixed assets 165 3,058 Effects of remeasurement of available-for sale securities to their fair value (5,328) 5,328 Balance, end of year 9,399,174 7,692,158 RETAINED EARNINGS Balance, beginning of year (20,538,477) (22,345,960) Adjustment (2,022,191) - Adjusted Balance, beginning of year (22,560,668) - Loss absorption - 10,000,000 Profit/(loss) for the year 58,069,639 (8,192,517) Balance, end of year 35,508,971 (20,538,477) TOTAL EQUITY 59,658,469 1,904,005

The accompanying notes form an integral part of these financial statements


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CASH FLOW STATEMENT Year Ended December 31, 2008 (Thousands of RSD)

2008 2007 CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from operating activities 41,053,490 39,330,815 Interest receipts 29,073,084 32,282,299 Fee and commission receipts 4,839,271 3,527,091 Receipts from other operating income 7,141,135 3,521,417 Receipts from dividends and equity investments - 8 Cash used in operating activities (43,348,962) (34,698,552) Interest payments (33,625,721) (26,909,463) Fee and commission payments (988,632) (713,819) Payments of other operating expenses (8,734,609) (7,075,270) Net cash (used in)/provided by operating activities

prior to increases or decreases in placements and deposits (2,295,472) 4,632,263 CASH FLOWS FROM FINANCING ACTIVITIES Decrease in placements and increase in deposits received 107,612,107 81,985,965 Decrease in loans and placements - 18,477,055 Increase in deposits 107,612,107 63,508,910 Increase in placements and decrease in deposits received (129,183,935) (63,301,906) Increase in loans and placements (7,477,492) - Increase in securities and other trading placements and short-term securities held to maturity (121,706,443) (63,301,906) Net cash (used in)/provided by financing activities (21,571,828) 18,684,059 CASH FLOWS FROM INVESTING ACTIVITIES Cash provided by investing activity 130 - Proceeds from the sale of intangible assets and fixed assets 130 - Cash used in investing activities (1,254,078) (197,188) Purchase of intangible assets and fixed assets (1,254,078) (197,188) Net cash used in investing activities (1,253,948) (197,188) NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (25,121,248) 23,119,134 Cash and cash equivalents beginning of year (Note 11 ) 19,953,449 10,847,854 Foreign exchange differences, net 47,464,290 (14,013,539)

Cash and cash equivalents, end of year (Note 11)

42,296,491 19,953,449

The accompanying notes form an integral part of these financial statements

NATIONAL BANK OF SERBIA NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts expressed in thousands of RSD, unless otherwise stated.

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1. ESTABLISHMENT AND ACTIVITY

The National Bank of Serbia (hereinafter: the “Bank”) originates in the establishment and commencement of operations of the Privileged National Bank of the Kingdom of Serbia dating from 1884. In 1920, the Privileged National Bank of the Kingdom of Serbs, Croats and Slovenes was established, and in 1929, the Bank changed its official name into the National Bank of Yugoslavia. Since 1946, the Bank performed its functions under the name of the National Bank of Yugoslavia (hereinafter: the “NBY”), as the central monetary institution of the FNRY, first, which was later renamed into the Socialist Federative Republic of Yugoslavia (hereinafter: the “FNRY”), until its dissolution in 1991. The Bank continued to operate in Belgrade as the Central Bank of SFRY, comprised of two republics of the former Yugoslavia – Serbia and Montenegro, which formed the Federal Republic of Yugoslavia (hereinafter: the “FRY”). The FRY Parliament adopted the Law on the National Bank of Yugoslavia on June 25, 1993, where the Bank was defined as the unique and independent issuance bank of the FRY monetary system. All intangible and fixed assets used by the Bank are in the ownership of FRY which guaranties for all debts incurred by the Bank. In accordance with the Law on the Implementation of the Constitutional Charter of the State Union of Serbia and Montenegro, that came in effect on February 4, 2003, the Bank continued perform its function of the Central Bank of the Republic of Serbia, additionally regulated by the Law on the National Bank of Serbia adopted on July 19, 2003. The National Bank of Serbia is the Central Bank of the Republic of Serbia and its role is regulated by the Law on the National Bank of Serbia (“Official Gazette of RS,” no. 72/2003 and 55/2004). The primary objective of the NBS shall be achieving and maintaining price stability. In addition to its primary objective, the NBS shall also strive towards maintaining financial stability. Without prejudice to its primary objective, the NBS shall support the pursuance of economic policy of the Government of the Republic of Serbia. The Bank, inter alia, is to perform the following functions: • determine and implement monetary policy; • autonomously pursue the dinar exchange rate policy and determine the dinar exchange rate

regime with the consent of the Government; • hold and manage foreign currency reserves; • issue banknotes and coins; • regulate, control and promote unhindered functioning of internal and external payment

operations; • issue and revoke operating licenses, carry out supervision of banks and other financial

institutions and enact regulations in this field; • issue and revoke licenses, i.e. authorization for carrying out the insurance operations,

performs control i.e. supervision over such operations and also carry out other duties in line with legal regulation governing the field of insurance;

• issue and revoke licenses, i.e. authorization for carrying out the finance lease operations, performs control i.e. supervision over such operations and also carry out other duties in line with legal regulation governing finance lease operations;

• issue and revoke licenses, i.e. authorization for carrying out the operations of a voluntary pension fund, perform control i.e. supervision over such operations and also carry out other duties in line with legal regulation governing operations of a voluntary pension fund;


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1. ESTABLISHMENT AND ACTIVITY (Continued) The bodies of the NBS are the Monetary Board, the Governor and the Council. The Monetary Board, including the Governor and the Vice Governors, determine the monetary policy of the Republic of Serbia. The Governor represents and is the agent of the Bank, s/he manages the Bank and is responsible for the implementation of decisions of the Monetary Board and the Council, organization and operation of the NBS, preparation of regulations and decisions within the scope of authority of the NBS, for the adoption of regulations and decisions within the scope of authority of the NBS which, in accordance with the law, are not within the scope of authority of the Monetary Board or the Council. The Governor shall be nominated by the National Assembly's Finance Committee and appointed by the National Assembly, for a term of five years, with the right to reelection. The Council shall, at the proposal of the Governor adopt the financial plan and the annual financial statement of the NBS. The Council shall have a Chairman and four members appointed by the National Assembly, for a five-year term, with the right to reelection. The Bank is a legal entity headquartered in Belgrade at number 12, Kralja Petra Street. It comprises a Branch Office in Belgrade, branch offices in Novi Sad, Niš, Kragujevac and Užice and a specialized organization: the Institute for Banknotes and Coins – Topčider (hereinafter: the “ZIN”). At December 31, 2008, the Bank had 2,523 employees (December 31, 2007: 2,521 employees).

2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL

STATEMENTS 2.1. Statement of Compliance with International Financial Reporting Standards

The accompanying financial statements of the Bank have been prepared in accordance with the International Accounting Standards (“IAS”), i.e. International Financial Reporting Standards (“IFRS”), as well as interpretations being the integral part of these standards, as approved by the International Accounting Standards Board (IASB). The preparation of financial statements in accordance with International Financial Reporting Standards (“IFRS”) requires the use of certain accounting estimates. In addition, the Bank’s management is required to use certain assessments in the application of accounting policies of the Bank. The fields to which the most significant assessments and estimates in the Bank’s financial statements relate are presented in Note 3.13. b) Basis for the Preparation The financial statements were prepared using the historical cost principle, unless otherwise stipulated in the accounting policies presented hereunder. In the preparation of the accompanying financial statements, the Bank adhered to the accounting policies described in Note 3. These accounting policies have been consistently applied to all presented reporting periods. c) Functional and Reporting Currency The Bank’s financial statements are stated in thousands of dinars (RSD). The dinar is the official reporting currency in the Republic of Serbia.


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

2.1. Statement of Compliance with International Financial Reporting Standards (Continued)

d) Use of estimates The presentation of the financial statements requires from the Bank’s management to make best estimates and reasonable assumptions that effect the: assets and liabilities amounts, the disclosure of contingent liabilities and receivables as of the date of preparation of the financial statements, as well as the income and expenses arising during the accounting period. These estimations and assumptions are based on information available to us, as of the date of preparation of the financial statements. However, actual results may vary from these estimates.

e) Standards and Interpretations Issued, but not yet in Effect

As of the financial statements issuance date, the following standards, amendments and interpretations were issued by the Board and Committee, but were not in effect for the accounting periods commencing on or after January 1, 2008: - IAS 1 Presentation of Financial Statements (effective for financial periods starting January

1, 2009); - IAS 23 Borrowing costs (effective for financial periods starting January 1, 2009); - IFRS 8 Operating Segments (effective for financial periods starting January 1, 2009); - IFRS 3 Business Combinations and IAS 27 Consolidated and Separate Financial Statements

(effective for financial periods starting July 1, 2009); - Amendments to IFRS 2 Share-Based Payment - Vesting Conditions and Cancellations

(effective for financial periods starting January 1, 2009); - Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of

Financial Statements (effective for financial periods starting January 1, 2009); - Amendments to IAS 39 Financial Instruments: Recognition and Measurement – Eligible

Hedged Items (effective for financial periods starting July 1, 2009); - Amendments to IFRS 1 First-time adoption of International Financial Reporting Standards

and IAS 27 Consolidated and Separate Financial Statements (effective for financial periods starting January 1, 2009);

- Improvements to International Financial Reporting Standards 2008 (most changes are effective for financial periods starting January 1, 2009);

- IFRIC 15 Agreements for the Construction of Real Estate (effective for financial periods starting January 1, 2009);

- Improvements to IFRS 1 First-time Adoption of International Financial Reporting Standards (in effect from July 1, 2009);

- IFRIC 17 Distributions of Non-cash Assets to Owners (in effect from July 1, 2009). The Bank’s management assesses that the aforementioned standards will be adopted by the Bank and applied to the reporting periods starting on or after January 1, 2009, as well as that the first time adoption of the aforementioned standards will not have material effects on the Bank’s financial statements.

2.2. Comparative Information

In order to conform the presentation of figures to the current reporting period, certain reclassifications have been made to the amounts reported in the financial statements for the year ended December 31, 2007.


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

Interest income and expense, including penalty interest and other operating income and expenses arising on the interest-bearing assets and/or interest-bearing liabilities, are recorded in the income statement on an accrual basis, by applying effective interest rate.

Fee and commission income and expense arising from banking services are recognized in full when due, i.e., when earned.

3.2. Foreign Exchange Translation

Business transactions performed in foreign currencies whose exchange rates are officially published by the Bank, are translated in dinars by applying the official medium exchange rate effective as of the transaction date, whereas for the currencies whose exchange rates are not officially published by the Bank, the recalculation is performed by applying the adequate exchange rate of the Bank effective as of the transaction date. Assets denominated in foreign currency as of the balance sheet date are translated at the official medium exchange rate prevailing as of the given date (if the exchange rates for the currency at issue are officially published by the Bank), i.e. by applying the respective exchange rate determined by the Bank (for currencies whose exchange rates are not officially published by the Bank).

Foreign exchange gains or losses resulting from the translation of transactions, and the assets and liabilities denominated in foreign currencies are credited or charged to the income statement as foreign exchange gains/(losses).

3.3. Financial Instruments Financial Assets at Fair Value through Profit and Loss

Financial assets at fair value through profit and loss relate to trading securities and other financial assets initially recognized at fair value.

Loans and Receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market.

Securities Held-to-Maturity

Securities held-to-maturity entail investments in debt securities that an entity has the positive intention and ability to hold to maturity. These securities are carried at amortized value net of any reduction for impairment.

Financial Assets Available-for-Sale

Available-for-sale financial assets are those non-derivative financial assets that are either designated as available for sale or are not classified into any other category. These assets are classified into non-current assets except when the management has intention to sell these placements within the period of 12 months from the balance sheet date when these assets are classified as trading securities. Equity investments in international financial institutions are stated at nominal value denominated in foreign currency. The effects of fluctuations in foreign exchange are included in the income statement within foreign exchange gains and losses. Equity investments in legal entities are stated at fair value if it is determinable, or at cost net of allowance for impairment, if fair value cannot be reasonably determined.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.3. Financial instruments (Continued)

Financial Assets Available-for-Sale (Continued) Securities available for sale for which there is an active market are reconciled with the market value of at the end of each month. The changes in the market value of equity investments available-for-sale are stated within equity as a reserve arising from securities available-for-sale. Gains and losses arising from the sale of these securities are credited/charged to income statement. Impairment of Financial Assets Financial assets, except for assets carried at fair value through profit and loss, are assessed for impairment at each balance sheet. A financial asset is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset and that loss event has an impact on the estimated future cash flows of the financial asset. For the shares that are not quoted on the market and are classified as available-for-sale, a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is also objective evidence of impairment. For all other financial assets, objective evidence that a financial asset includes the following loss events: - significant financial difficulty of the issuer or obligor; or - a breach of contract, such as a default or delinquency in interest or principal payments; or - it becoming probable that the borrower will enter bankruptcy or other financial reorganization; For financial assets stated at amortized cost, the amount of impairment is the difference between the carrying value of such assets and the present value of estimated future cash flows, discounted by applying the original interest rate linked to that financial asset. The carrying value of financial assets is decreased for the impairment losses directly for all financial assets except for receivables where the carrying value is reduced either directly or through the use of an allowance account. When receivables cannot be collected, these are written off and charged to the account of allowance for impairment. The changes in the carrying value of provisions formed against impairment are recoded within the income statement. With the exception of equity instruments available-for-sale, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized in the income statement in an amount that will not result in a carrying amount of the financial asset that exceeds what the amortized cost would have been had the impairment not been recognized at the date the impairment is reversed. As for the equity instruments – investments available-for-sale, impairment losses previously recognized through profit and loss are not reversed through the income statement. Any increase in the fair value subsequent to loss is recognized directly in equity.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.3. Financial instruments (Continued)

Financial Liabilities at Amortized Cost Financial liabilities carried at amortized cost are comprised of treasury and savings bills issued by the Bank with fixed maturity. Also, liabilities arising from repurchase transactions are carried at amortized cost. The difference between cost and repurchase value is recognized in the income statement over the borrowing maturity period based on the effective interest method. Recognition Date and Fair Value Regular purchases and sales of placements are recognized as of the transaction date – date when the Bank makes payments or collects funds based on the purchase or sale of assets. All placements, except for financial assets at fair value through profit and loss, are initially recognized at fair value increased for the cost of transaction. Financial assets at fair value through profit and loss are initially recognized at fair value, while the costs of such transactions are include in the income statement. Placements are derecognized when the rights to the economic benefits arising from these investments have expired or have been ceded and when the Bank has substantially transferred all risks and rewards arising from ownership. Financial assets available-for-sale and financial assets at fair value through profit and loss are subsequently carried at fair value. Loans and receivables and investments held-to-maturity are measured at amortized cost based on the effective interest method. Gains and losses arising from the change in the fair value of financial assets at fair value through profit and loss, including interest income, are recorded within income statement of the period to which they belong. Dividends from shares available-for-sale are recorded in the income statement when the right to such receivable has been established. The fair value of financial instruments listed on the stock exchange is determined based on the effective selling prices. If such instruments are not quoted on an active marker (they are not listed on a stock exchange), the Bank determines their fair value in an assessment which implies the use of information on most recent market transactions involving such instruments, using the method of discounted cash flows or reliance on the option pricing model. Upon the preparation of each balance sheet, the Bank makes assessments whether there is objective evidence of impairment in financial assets. In case of shares available-for-sale, a significant or prolonged decline in the fair value of an instrument below its cost is also objective evidence of impairment. Derecognition Financial assets cease to be recognized when the Bank loses control of the contractual rights governing such instruments, which occurs when the rights of use of such instruments have been realized, expired, abandoned, and/or ceded. Financial liabilities are derecognized when they cease to exist. Impairment Financial assets are annually assessed for impairment. If an asset is indicative of impairment, the recoverable value of the assets is estimated and the net book value of the instrument is decreased to the amount of recoverable value through the account of allowance for impairment.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.4. Cash and cash equivalents

Cash and cash equivalents imply cash and cash and balances on current accounts with commercial banks.

3.5. Gold and Other Precious Metals

As of the balance sheet date, gold and other precious metals are measured at market value, being their average price determined on the London Gold Exchange. Effects of changes in the market values are presented within foreign exchange gains and losses arising from trading.

3.6. Deposits

Originated deposits include deposits placed with banks for the purpose of loan approval, special purpose deposits originated in accordance with the relevant regulations, as well as time deposits on the accounts opened with foreign banks with excellent credit rating that are stated at nominal value as increased by the effects of deferred interest.

3.7. Trading Securities

Trading securities mostly relate to bonds issued by the Organization for Economic Cooperation and Development (OECD) member countries and in the balance sheet, these securities stated at market value as of the balance sheet date, officially published on the financial market. The effects of changes in market values, as well as gains and losses earned or incurred in selling these bonds are presented within net trading income.

While holding a trading security, the Bank defers income and records income from coupon collection. This income is stated within the position of interest income.

3.8. Inventories

The Bank’s inventories are comprised of materials, work in progress and finished products, of ZIN and Treasury mostly. These inventories are stated at the lower of cost and net relizable value.

3.9. Property, Plant, Equipment, Investment Property and Intangible Assets

Equipment and intangible assets are stated as of December 31, 2008 at cost net of accumulated depreciation and amortization and impairment losses, if any. The Bank applied the allowed alternative method of subsequent measurement of property. The appraisal of property was performed as of December 31, 2004 based on the market information available, provided by an independent appraiser. The revaluation surplus from property is recorded through the straight-line increase in cost and accumulated depreciation of property. The amounts of calculated revaluation of property are credited to equity under the heading of revaluation reserves for positive revaluation effects or charged to the income statement in case of negative revaluation effects. Investment property is measured at fair value. The rental income derived from issuing investment property under lease is recorded within other operating income, pursuant to the income deferral principle.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.9. Property, Plant, Equipment, Investment Property and Intangible Assets (Continued)

The carrying value of property, plant and equipment and intangible assets is analyzed annually, for the purpose of determining any possible impairment. If there is any indication that such assets have been impaired, the recoverable amount of the asset is estimated and the net book value is reduced to its recoverable value. The calculation of depreciation of fixed assets commences once such assets have been placed in use. Depreciation and amortization charge is calculated on a straight-line basis by applying the following annual rates in order to write off the assets over their estimated useful lives: Buildings 2% Computer equipment 25% Furniture and other equipment 14.2% Motor vehicles 20% Intangible assets 25%

Repairs and maintenance of property, plant and equipment ensuring future benefits are expensed as incurred. The expenses are capitalized only if they increase the usefulness or extend the useful life of assets.

Gains and losses arising on the disposal or retirement of an asset are credited or charged to other income and expenses. Losses arising on the disposal or retirement of an asset are determined as the difference between the estimated net sales proceeds and the carrying amount of the asset, and are recognized in the income statement. The revaluation surplus included in equity in respect of an item of property is transferred directly to retained earnings when the asset is derecognized.

3.10. Managed Funds

The funds managed by the Bank on behalf of, and for the account of third parties, for which the Bank charges fees, are not included in the Bank’s balance sheet.

3.11. Income Taxes/Deferred Taxes

The Bank is excused from paying income taxes. 3.12. Employee Benefits

In accordance with the regulations effective in the Republic of Serbia, the Bank has an obligation to pay contributions to various state social security funds. These obligations involve the payment of contributions on behalf of the employee, by the employer in an amount calculated by applying the specific, legally-prescribed rates. The Bank is also legally obligated to withhold contributions from gross salaries to employees, and on their behalf to transfer the withheld portions directly to the appropriate government funds. These contributions payable on behalf of the employee and employer are charged to expenses in the period in which they arise.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.12. Employee Benefits (Continued)

In accordance with the Labor Law, the Bank is under obligation to pay retirement benefits to employees. Long-term liabilities arising from provisions for retirement benefits payable to employees once they have vested in respective rights, stated as of December 31, 2008, represent the present value of future payments to employees defined in accordance with the following assumptions. 2008

Discount rate 6.69% Expected salary growth rate 4.50%

The discount rate of 6.69% is associated with the bonds of the Republic of Serbia maturing in 2016. In the course of 2008, the Bank performed initial recognition of liabilities thereof so that costs of provisions relating to prior years were recorded through the account of accumulated losses.

3.13. Summary of Significant Accounting Estimates

The presentation of the financial statements requires the Bank’s management to make best estimates and reasonable assumptions that influence the assets and liabilities amounts, as well as the disclosure of contingent liabilities and receivables as of the date of preparation of the financial statements, and the income and expenses arising during the accounting period. These estimations and assumptions are based on information available to us, as of the date of preparation of the financial statements. Actual amounts may vary from these estimates. Estimates and assumptions are subject to constant review. Changes to accounting estimates are recognized in the period when they are made if their impact is limited to that period or in the future periods in cases where the change impacts future periods as well.

Depreciation and Amortization Charge and Rates Applied

The calculation of depreciation and amortization, as well as depreciation and amortization rates are based on the economic useful life of property, equipment and intangible assets. Once a year, the Bank assesses the economic useful life based on the current estimates.

Allowance for Impairment of Loans and Placements

The Bank assesses the collectability of loans, placements and other receivables and thereupon, it forms an allowance for impairment of placements assessed as fully or partially uncollectible. The Bank’s assessment is founded on the analysis of placements in accordance with the internal methodology of analyzing risks to which the Bank’s placements are exposed. The Bank’s management assessed that allowance for impairment in addition to the amount of provisions already recognized in the financial statements is not necessary.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.13. Summary of Significant Accounting Estimates (Continued) Fair Value

It is the policy of the Bank to disclose the fair value information on those financial assets and financial liabilities for which published market information is readily available or such value may be calculated by applying some alternative valuation techniques, and whose fair value is materially different from their recorded amounts. As per the Bank’s management, amounts expressed in the financial statements reflect the fair value which is most reliable and useful for the needs of the financial reporting in accordance with International Financial Reporting Standards. The fair value of financial instruments for which an active market does not exist is determined by applying adequate methods of estimating future cash flows of assets that are discounted by applying adequate discount rate to their fair value. The Bank applies its professional judgment in the selection of adequate methods and assumptions.

4. INTEREST INCOME AND EXPENSE

Year Ended December 31, 2008 2007 Interest income arising from: Loans originated in dinars 110,724 5,282 Reverse repurchase transactions 1,740,350 1,738,997 Deposits originated - in dinars 74,359 1,442,468 - in foreign currency 5,615,211 8,833,523 Securities - available-for-sale securities 1,026,662 1,415,345 - trading securities (Note 14) 20,069,572 18,491,469 Other placements - in dinars 17,448 1,379 - in foreign currency 182,569 8,998 28,836,895 31,937,461 Interest expenses arising from: Deposits (6,126,622) (6,820,898) Repurchase transactions with domestic banks (29,660,673) (15,596,294) Issued treasury bills (1,426,152) (3,341,592) Borrowings (676,171) (841,020) Amounts owed to IMF (129,422) (351,434) Other (406) - (38,019,446) (26,951,238) (Loss)/profit arising from interest (9,182,551) 4,986,223


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5. FEE AND COMMISSION INCOME AND EXPENSE

Year Ended December 31, 2008 2007 Fee and commission income: - in dinars, arising from domestic payment transfers 2,416,374 1,978,159 - in foreign currency: - positive arbitrage effects 324,279 284,670 - trading in currency and purchase of foreign exchange cash from foreign banks for foreign exchange 1,942,784 1,022,307 - other 96,376 87,956 4,779,813 3,373,092 Fee and commission expense: - in dinars, arising from domestic payment transfers (18,817) (20,837) - in foreign currency: - negative arbitrage effects (493,373) (182,103) - trading in currency and purchase of foreign exchange cash from foreign banks for foreign exchange (428,641) (41,561) - other (54,446) (46,937) - compensation of expenses to exchange offices, stimulations - 420,640 (995,277) (712,078)

3,784,536 2,661,014

Fee and commission income in local currency amounting to RSD 2,416,374 thousand earned in 2008 mostly relates to fees charged in RTGS operations and clearing (RSD 1,300,588 thousand), income from forced collection (RSD 564,833 thousand), i.e. income from supervision over insurance business operations (RSD 182,448 thousand), whereas the balance of RSD 368,505 thousand is associated with other fees and commissions.

6. NET TRADING INCOME

Year Ended December 31, 2008 2007 Net trading income: - trading securities (Note 14) 3,383,836 768,334 - securities held-to-maturity - 4,488 - equity investments (interests) - 45 3,383,836 772,867 Net foreign exchange gains/(losses) 47,445,305 (14,013,539) Dividends and other income from equity investments - 8 Net gains on the valuation of assets and liabilities 16,429,724 1,517,976 67,258,865 (11,722,688)


18

6. NET TRADING INCOME (Continued)

Structure of net gains on the valuation of assets and liabilities:

2008 2007 Gains: Housing loans to employees 5,614 8,631 Securities at fair value through profit and loss (Note 14) 16,374,047 1,492,207 Foreign currency funds managed externally 50,063 119,661 16,429,724 1,620,499 Losses: Housing loans to employees - (6) Securities at fair value through profit and loss - (102,517) - (102,523) 16,429,724 1,517,976

7. OTHER OPERATING INCOME

Year Ended December 31, 2008 2007 Other income from operations – ZIN 2,430,586 1,554,690 Income from the sale of blank bills of exchange 180,181 193,235 Rentals 54,739 37,087 Increase in the value of inventories (Note 19) 365,700 64,228 Write-off of liabilities 426,321 23,190 Income from settlement agreements - 82,678 Income from penalties collected 77,455 - Other 825,388 342,251 4,360,370 2,297,359


19

8. OTHER OPERATING EXPENSES

Year Ended December 31, 2008 2007 Cost of material - ZIN 1,231,928 986,354 Cost of production material: - transportation services 8,979 7,370 - telecommunications 69,047 80,709 - automatic data transfer 36,231 35,726 - maintenance 223,433 216,256 - rental expenses 11,114 24,377 - marketing and advertizing 4,887 6,913 - official gazettes and magazines 16,533 18,423 - cost of finishings – ZIN 148,897 3,892 - other services 4,071 1,583 Non-material expenses: - business trip expenses 45,959 43,475 - cost of employee transport 70,443 70,176 - commissions paid to voluntary pension funds 63,189 56,609 - professional training of employees 22,685 30,146 - intellectual services 62,732 39,618 - guarding property and money security 45,655 64,284 - public utilities 13,206 12,413 - entertainment 24,440 29,374 - insurance premiums 48,144 41,547 - cost of insuring cash in transport 7,483 12,206 - other non-material expenses 60,197 85,978 Tax expenses: - fees for the use of city construction land 45,005 47,625 - VAT payable 91,750 124,129 - other taxes payable 26,473 6,267 Contributions paid 4,213 4,177 Other costs 78,103 32,673 Losses on the sale, disposal and write-off of fixed and intangible assets 9,951 16,243 Transfer of fixed assets to the Ministry of Finances (Note 18) 92,458 19,620 Other expenses 172,990 153,768 2,740,196 2,271,931

Expenses arising from the transfer of fixed assets to the Ministry of Finances totaling RSD 92,458 thousand pertain to the rights of use, free of charge, over the portions of property comprised of business premises which the Bank used to perform exchange operations (counters), occupying an area of 1,588.64 m², pursuant to the Decision of the Republic of Serbia Government as of June 12, 2008.


20

9. LOSSES ON IMPAIRMENT AND PROVISIONS, NET

a) Structure of Income and Expenses Year Ended December 31,

2008 2007 Losses on impairment and provisions: - balance sheet positions 330,147 256,364 - employee benefits (Note 24) 69,885 - 400,032 256,364 Reversal of impairment losses and provisions: - balance sheet positions 172,285 1,013,231

Net (expenses)/income

(227,747) 756,867

b) Structure of Allowance for Impairment

December 31,

2008 December 31,

2007 Allowance for impairment of: - cash and cash equivalents 547,012 469,640 - deposits with foreign banks 1,890,787 1,615,035 - loans originated 5,029,153 4,568,936 - securities 730,839 731,580 - other assets 3,099,075 2,733,104 11,296,866 10,118,295

c) Movements on the Accounts of Allowance for Impairment of Receivables

Cash and Cash Equivalents

(Note 11)

Loans and Deposits

Originated (Note 12,16)

Securities Held-

to-Maturity (Note 14)

Other Assets (Note 19)

Total

Balance, beginning of year 469,640 6,183,971 731,580 2,733,104 10,118,295 Charge for the year 3,249 326,452 - 446 330,147 Reversal of allowance for Impairment (2,243) (102,660) (741) (66,641) (172,285) Foreign exchange gains and Losses 76,366 531,562 - 435,659 1,043,587 Write-off of receivables previously provided for - 1,266 - (2,215) (949) Other - (20,651) - (1,278) (21,929) Balance, end of year 547,012 6,919,940 730,839 3,099,075 11,296,866


21

10. GENERAL AND ADMINISTRATIVE EXPENSES

Year Ended December 31, 2008 2007 Staff costs Net salaries, taxes on salaries, contributions to salaries and benefits 3,885,921 3,739,062 Severance pays 150,792 182,388 Temporary and seasonal employees 72,114 84,137 Jubilee awards 60,582 91,004 Financial assistance to employees 28,690 32,166 Retirement benefits 9,939 5,024 Remunerations to the members of the Bank’s Council 6,144 6,083 Other staff costs 5,707 6,499 4,219,889 4,146,363 Depreciation and amortization charge 963,749 752,998 5,183,638 4,899,361

11. CASH AND CASH EQUIVALENTS

December 31, 2008

December 31, 2007

Cash on hand: - in dinars 98 107 - in foreign currency 38,544,552 14,233,770 38,544,650 14,233,877 Current accounts: - with domestic banks 787,723 3,195,500 - with foreign banks 3,509,820 2,992,546 4,297,543 6,188,046 Other cash funds in foreign currency 1,310 1,166 42,843,503 20,423,089 Allowance for impairment (547,012) (469,640)

42,296,491 19,953,449

12. DEPOSITS WITH FOREIGN BANKS December 31,

2008 December 31,

2007 Time deposits in foreign currency 59,299,355 180,854,418 Reverse repurchase transactions - 87,952,182 59,299,355 268,806,600 Allowance for impairment (1,890,787) (1,615,035)

57,408,568 267,191,565


22

12. DEPOSITS WITH FOREIGN BANKS (Continued)

Time deposits in foreign currency were placed with foreign banks for the period from several days to three months at an annual interest rate ranging from 0.01% to 7.10% in 2008. Time deposits in foreign currency stated in the amount of RSD 59,299,355 thousand include call deposits that do not have a specified maturity but are withdrawn or increased in accordance with the Bank’s needs. The interest rates applied to these deposits range from 0.01% to 5.25% annually. Out of the total allowance for impairment of originated deposits as of December 31, 2008, matured deposits with foreign branch offices of domestic banks in bankruptcy amounted to RSD 1,447,342 thousand (December 31, 2007: RSD 1,236,262 thousand), whereas deposits with banks abroad that do not comply with the criteria specified by the Bank for risk hedge amounted to RSD 443,445 thousand (December 31, 2007: RSD 378,773 thousand).

13. GOLD AND OTHER PRECIOUS METALS December 31,

2008 December 31,

2007

Standard ingots of gold 18,018,429 13,850,259 Non-standard ingots of gold 195,752 161,695 Wrought gold 2,296,056 1,896,583 Golden coins 2,321 2,041 Gold – deposits with foreign banks 1,760,356 1,454,085 Other precious metals: - silver 241,962 282,680 - platinum 120,610 174,246 - other 419 857 22,635,905 17,822,446

14. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT AND LOSS

December 31, 2008

December 31, 2007

Trading securities: - coupon bonds 537,292,299 446,038,683 - discount bonds 54,134,766 - Placements entrusted to external management 10,522,889 8,293,846 Securities held-to-maturity: - treasury bills, bonds and bills of exchange issued by banks in bankruptcy and liquidation

730,839

731,580

- allowance for impairment (730,839) (731,580)

601,949,954 454,332,529

Coupon securities being traded are associated with the bonds issued by the governments and central banks OECD member countries and by international financial institutions amounting to RSD 537,292,299 thousand and maturing within 1 to 7 years. These bonds are denominated in EUR, USD, GBP and CAD.


23

14. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT AND LOSS (Continued) The annual interest rates applied to coupon securities ranged between 2.5% and 5.75% for bonds denominated in EUR, between 1.5% and 6.5% for bonds denominated in USD, between 3.25% and 9.0% for bonds denominated in GBP and between 2.75% and 6% for bonds denominated in CAD. In the course of 2008, the Bank earned interest income on coupon bonds in the amount of RSD 20,069,572 thousand (Note 4) as well as net gain on the sale and collection of coupon securities of RSD 2,318,025 thousand (Note 6). During 2008, the Bank realized income on remeasuring coupon securities to their market value in the amount of RSD 15,674,036 thousand (Note 6). Discounted securities held for trading pertain to the treasury bills issued by the governments of Germany, France and Holland amounting to RSD 54,134,766 thousand and represent the short-term securities denominated in EUR at an interest rate ranging from 1.29% to 4.68% annually and those denominated in USD at an interest rate ranging from 0.34% to 1.88% annually. In 2007, a portion of these securities was accounted for as available-for-sale (December 31, 2007: RSD 7,889,549 thousand), until 2008 when the Bank’s management decided to reclassify these securities into trading securities. In 2008, the Bank realized gains on remeasurement of discounted securities to their fair value totaling RSD 700,011 thousand (Note 6). The Agreement dating from 2005 that was signed between the Bank and the Deposit Insurance Agency (hereinafter: the “Agency”) regulates the Bank’s management of foreign exchange funds of the Agency’s Deposit Insurance Agency. Pursuant to the Agreement, the Bank manages these assets in its own name and for the account and at the orders of the Agency. The assets are carried on a special foreign currency account opened with the Bank, and the Agreement sets forth that these assets can be invested in foreign securities and time deposits. At December 31, 2008, the value of coupon securities of the Agency included in the Bank’s portfolio amounted to RSD 2,167,025 thousand (with the par value of RSD 2,094,528 thousand), and those discounted of RSD 2,085,189 thousand (with the par value of RSD 2,093,642 thousand). Assets entrusted to the external management pertain to securities managed by Western Assets Management Company Ltd, New York. These assets were invested in the securities of USA federal agencies directly supported by the state (Ginnie Mae).

15. SECURITIES AVAILABLE FOR SALE

December 31, 2008

December 31, 2007

RS bonds 10,701,120 10,701,120 - allowance for impairment (1,498,157) (1,603,832) 9,202,963 9,097,288 German Government treasury bills - 7,889,549 Equity investments in dinars: - Recreatours d.o.o., Beograd 229,498 229,498 - Other 759 759 Equity investments in foreign currency: - Bank for International Settlements, Basel 353,623 309,891 - S.W.I.F.T. scrl 203 182 9,787,046 17,527,167


24

15. SECURITIES AVAILABLE FOR SALE (Continued)

Securities available-for-sale in the amount of RSD 9,202,963 thousand are associated with the third issue of long-term bonds issued by the Republic of Serbia bearing interest at the rate of 8.5% annually that are due for collection on December 31, 2010. The Republic of Serbia issued long-term interest bearing loans in accordance with the Law on Settlement of Liabilities of the Republic of Serbia towards the National Bank of Serbia (“Official Gazette of RS” number 135/2004), which came in effect on December 29, 2004. These bonds were issued for the purpose of settling the liabilities of the Republic of Serbia, the Public Enterprise – Electrical Power Industry of the Republic of Serbia and the Republic Directorate for Commodity Reserves in the nominal amount of RSD 19,701,120 thousand maturing in three series – December 31, 2006, 2007 and 2010. The effect of reconciling the fair value of bonds of the Republic of Serbia is recorded as a decrease on the allowance for impairment and within the accounts of interest income.

Based on the division of the property of the former SFRY (the then National Bank of Yugoslavia) became the holder of 2,920 shares issued by the Bank for International Settlements, to which the SRY was entitled according to the Agreement on Succession Issues. The par value of shares is expressed in the special drawing rights and amounts to SDR 5,000, where at December 31, 2008, 25% related to the paid in capital and the portion of 75% represented the capital at call. The initial equity investment in the Bank for International Settlements, Basel was made by the National Bank of the Kingdom of Yugoslavia.

The “Agreement between the Republic of Serbia and the Republic of Montenegro Governing the Membership in the International Financial Organizations and Deferral of Financial Assets and Liabilities,” closed on July 10, 2006, stipulates the allocation of shares issued by the Bank for International Settlements along with the corresponding dividend belonging to the former National Bank of Yugoslavia. In accordance with the aforementioned agreement, out of the total of 2,920 shares, the portion of 94.12% was allocated to the Bank, whereas the balance of 5.88% was allocated to the Central Bank of Montenegro. The same percentages apply to allocated dividends. As of December 31, 2008, the amounts owed to the Central Bank of Montenegro arising from shares of the International Settlement Bank and dividends thereof, in accordance with the aforementioned agreement amounted to RSD 41,123 thousand (Note 21).

16. LOANS

December 31, 2008

December 31, 2007

Loans originated: - loans to banks in bankruptcy and liquidation 2,385,525 2,162,822 - loans from primary issue 4,222,742 2,449,089 - other loans – the Republic of Serbia 373,911 373,911 - housing loans to employees 506,208 510,434 - other special purpose deposits 29,292 29,270 7,517,678 5,525,526 Allowance for impairment of loans originated:

- loans to banks in bankruptcy and liquidation (2,385,525) (2,162,822) - loans from primary issue (2,578,795) (2,341,281) - other loans – the Republic of Serbia (64,769) (64,769) - housing loans to employees (64) (64) (5,029,153) (4,568,936)

Total 2,488,525 956,590


25

16. LOANS (Continued)

Loans from the primary issue were approved in 1998 to commercial banks pursuant to the Law on Converting Short-Term Receivables from the Primary Issue into Long-Term Loans (“Official Gazette of RS” number 12/98), for the period of 15 years and a grace period of 5 years at an interest rate of 0.5% annually. These loans are greatly provided for. Within loans from the primary issue stated as of December 31, 2008 in the amount of RSD 4,222,742 thousand, the most significant amount is associated with the loan for preserving liquidity in the amount of RSD 1,800,000 thousand approved to domestic bank for the period of 12 months at an interest rate of 150% of interest reference rate. For the needs of resolving housing issues of its employees, the Bank approves loans for construction or purchase of apartments or improvement of housing conditions to employees. Most loans for the construction or purchase of apartments (RSD 359,122 thousand) were approved in the period ended December 31, 2006 pursuant to the Rules on Addressing the Housing Issues of Employees Working with the National Bank of Serbia from October 12, 2006. In accordance with the Rules, loans for the construction or purchase of apartments were approved to employees in the amount of 30% of the market value of an apartment for the period of 30 years. The outstanding portion of the apartment value, employees financed from the loans approved by commercial banks that have signed cooperation agreements with the Bank.

17. IMF MEMBERSHIP QUOTA

December 31, 2008

December 31, 2007

IMF Membership quota 45,312,173 39,708,478 SDR 135,509 43,413 45,447,682 39,751,891

At December 31, 2008, the quota of the Republic of Serbia in the International Monetary Fund amounted to RSD 45,312,173 thousand (December 31, 2007: RSD 39,708,478 thousand). The membership quota is stated as the placement denominated in special drawing rights and at December 31, 2008 it amounted to SDR 467,700 thousand (December 31, 2007: SDR 467,700 thousand), and was collateralized by the bill of exchange issued by the Government of the Republic of Serbia.


26

18. PROPERTY, PLANT AND EQUIPMENT, INVESTMENT PROPERTY AND

INTANGIBLE ASSETS

The movements on fixed and intangible assets are presented in the following table:

Land Buildings Equipment

Other PP&E

Property under

Construction

Investment

Property

Total

PP&E

Intangible

Assets Cost Balance at December 31, 2007 21,047 22,099,422 4,420,705 116,268 100,276 570,809 27,328,527 605,017 Additions - - 26,872 990 1,070,312 - 1,098,174 104,866 Transfer from property under construction - 36,191

1,004,486

3,629

(1,044,306)

-

-

-

Other additions - - 14,345 93 23,330 - 37,768 13,688 Transfer to the Ministry of Finances (78) (180,327)

(608)

-

-

-

(181,013)

-

Sale, disposal and shortages - (15,385) (360,534) (1,643) (10,550) - (388,112) (7,402) Balance at December 31, 2008 20,969 21,939,901 5,105,266 119,337 139,062 570,809 27,895,344 716,169 Accumulated Depreciation and Amortization

Balance at December 31, 2007 - 8,605,367 2,619,584 17,979 - - 11,242,930 168,353 Charge for the year - 438,516 403,833 1,063 - - 843,412 120,337 Transfer to the Ministry of Finances

- (87,947)

(608)

-

-

-

(88,555)

-

Sale, disposal and shortages - (1,641) (338,763) (1,378) - - (341,782) (6,775) Balance at December 31, 2008 - 8,954,295 2,684,046

17,664

-

-

11,656,005

281,915

Net Book Value December 31, 2008 20,969 12,985,606 2,421,220 101,673 139,062 570,809 16,239,339 434,254 December 31, 2007 21,047 13,494,055 1,801,121 98,289 100,276 570,809 16,085,597 436,664

19. OTHER ASSETS

December 31, 2008

December 31, 2007

Receivables from banks in bankruptcy and liquidation 1,584,879 1,371,386 Fee and commission receivables 178,556 238,013 Receivables from the sale of finished products and services 303,284 152,072 Advances paid 1,401,196 1,096,399 Inventories 2,118,739 1,367,047 Other operating receivables 252,107 207,158 Other receivables 39,285 30 Less: Allowance for impairment (3,099,075) (2,733,104) Deferred fees and commissions 9,975 6,889 Deferred other expenses 45,931 22,511 Other prepayments 535 6,727 Value added tax - 49,138

2,835,412 1,784,266


27

20. LIABILITIES TO OTHER BANKS AND FINANCIAL INSTITUTIONS

Year Ended December 31, 2008 2007

Transaction deposits in dinars: - required reserves of banks 194,777,381 21,658,107 - central deposits 588,530 3,002,800 - other transaction deposits in dinars 467,807 712,316 195,833,718 25,373,223 Transaction deposits in foreign currency - required reserve held in foreign currency 193,453,284 269,918,643 - other transaction deposits in foreign currency 15,814 11,462 193,469,098 269,930,105 Total transaction deposits 389,302,816 295,303,328

Other deposits in dinars: - liquidity surpluses 4,815,539 40,382,105 - deposits based on reconciliation of placements made by retail customers with core capital in banks 681,321 4,465,061 - dinars in bank treasuries and Treasury 19,379,880 15,972,834 24,876,740 60,820,000 Other deposits in foreign currency 33,231 26,980 Total other deposits 24,909,971 60,846,980 Borrowings received in foreign currency - State administration of Foreign Exchange, China 1,573,867 2,691,051 - Export - Import Bank of China, China 10,746,087 8,659,412 12,319,954 11,350,463 Loans per repurchase transactions 77,955,421 208,426,778 Liabilities arising from the membership in the International Bank for Reconstruction and Development (IBRD) 125,080 580 Liabilities arising from the membership in the International Development Association (IDA) 2,857 2,857 Liabilities arising from the membership in the Multilateral Investment Guarantee Agency, MIGA 1,354 1,354 Other financial liabilities 105,334 271,187 Total liabilities to other banks and financial institutions 504,722,787 576,203,527

Transaction deposits represent transaction accounts of the Bank’s customers and required reserve in dinars carried on the current accounts with commercial banks which are under obligation to maintain the average balance of their dinar current accounts above the level of calculated required reserve in dinars.

The Bank pays interest at an interest rate of 2.5% annually in instance that it does not meet the average daily balance of dinar required reserve in the accounting period, interest is accrued on monthly basis.

The liabilities arising from borrowings of RSD 1,572,500 thousand are associated with the Bank’s liabilities originating in a loan initially approved in 1997 by the Bank of China. The loan obtained from the Bank of China of USD 100 million was initially approved for the period of a year, while the repayment period was extended annually until December 2007 when the Bank of China ceded all its rights, entitlements to interest and benefits from this loan to the State Administration of Foreign Exchange, China. Upon the cession, the Bank’s liabilities towards the Bank of China amounted to USD 75 million. At December 31, 2008, the amounts due to the State Administration of Foreign Exchange, China amounted to USD 25 million. The outstanding liabilities fully mature on December 20, 2009, as delineated in the Agreement on the Maturity Extension of an Interbank Placement. Interest accrued based on this loan was calculated semi-annually at an annual interest rate of six-month LIBOR + 1%.


28

20. LIABILITIES TO OTHER BANKS AND FINANCIAL INSTITUTIONS (Continued)

The borrowing from Export - Import Bank of China, of USD 100 million was initially approved in December 1999 with a grace period lasting until July 2002 and it was agreed that the borrowing is to be repaid in semi-annual installments until January 2005. The loan was approved for the purpose of recovery and reconstruction of the Federal Republic of Yugoslavia, at an interest rate of 6.925% (penalty interest amounted to 7.925%). These liabilities fully matured in 2005. The financial statements of the Bank account for the regular and penalty interest accrued on this borrowing. The liabilities arising from regular and penalty interest, as well as principal installments are accrued and recorded, but have not been settled since January 2001. The Bank’s management is currently negotiating to reschedule this loan with the creditor, as well as debt write-off. Loans per repurchase transactions of RSD 77,805,000 thousand are associated with the Bank’s liabilities towards domestic banks based on debts incurred through the agreements on repurchase of treasury bills. These are short-term liabilities with fixed maturities and during 2008, the Bank was charged interest at the rate ranging from 10% to 17.75% annually (2007: 9.5% to 14%).

21. LIABILITIES TO THE GOVERNMENT AND OTHER DEPOSITORS

Year Ended December 31, 2008 2007 Transaction deposits in dinars: - deposits of the Ministry of Finances – Treasury 30,712,331 38,524,970 - other transaction deposits in dinars 515,239 151,170 31,227,570 38,676,140 Transaction deposits in foreign currency 3,542,656 3,863,581 Total transaction deposits in dinars 34,770,226 42,539,721 Other deposits in foreign currency: - Revolving Loan Fund deposit 300,926 509,185 - CSD special purpose deposits 779,473 710,707 - special purpose deposits – donation accounts 1,186,490 784,551 - securities managed for Deposit Insurance Agency (Note 14 ) 4,296,232 952,961 - other special purpose deposits 304,604 177,916 - deposits based on foreign currency cash taken over 1,790,538 1,469,129 - time deposits 36,301,997 74,498,095 - other deposits in foreign currency 95,428 1,987,090 Total other deposits 45,055,688 81,089,634 Amounts owed to Montenegro based on shares and dividends arising from the Bank for International Settlements 41,123 34,595 Total liabilities 79,867,037 123,663,950


29

21. LIABILITIES TO THE GOVERNMENT AND OTHER DEPOSITORS (Continued)

The amounts owed to the Ministry of Finances – Treasury, amounting to RSD 30,712,331 thousand pertain to the funds from the consolidated Treasury account opened with the Bank in its RTGS system. To the daily balance of assets maintained on the consolidated Treasury account, the Bank calculates and pays interest at an interest rate of 2.5% annually. Interest is accrued on monthly basis.

To other transaction deposits, with the exception of the consolidated Treasury account, the account of Share fund of Republic of Serbia and the account of the Deposit Insurance Agency, the Bank does not accrue and pay interest.

Liabilities arising from time deposits in foreign currency are stated as of December 31, 2008 in the amount of RSD 36,301,997 thousand and are associated with the Bank’s liabilities towards the Deposit Insurance Agency (RSD 1,786,635 thousand) and the Ministry of Finances – Treasury (RSD 34,515,362 thousand) as arising from foreign currency funds placed with foreign banks for the set time period. The Bank pays interest to the funds of the Ministry of Finances – Treasury, as well as to the funds of the Deposit Insurance Agency that are placed in the form of EUR deposits (overnight pool), at the rate of EONIA decreased by 25 basis points (0.25%), whereas for all other currencies the Bank accrues interest at LIBOR rate decreased by 25 basis points (0.25%).

22. LIABILITIES TO THE INTERNATIONAL MONETARY FUND

December 31, 2008

December 31, 2007

Securities and other liabilities related regulating the Bank’s relationship with IMF 45,198,891 39,609,207 SDR allocation 5,604,464 4,911,368 Accrued interest 10,276 28,543

50,813,631 44,549,118 23. SECURITIES ISSUED

December 31,

2008 December 31,

2007

Treasury bills issued to domestic banks 12,615,328 8,766,777 Savings bonds issued to retail customers - 852,880 Shares with BIS Basel – Liabilities arising from other securities in foreign currency -

309,891

Other liabilities arising from securities 29 29

12,615,357 9,929,577

Treasury bills issued to domestic banks are short-term securities denominated in dinars with fixed semi-annual maturities. The interest rate increased throughout the year from the initial 10.10% to 19.50% annually (2007: from 9.59% to 13.67%).

The Bank uses treasury bills in repurchase transactions performed with domestic banks and such practice started in 2006. The par value of treasury bills as of December 31, 2008 amounted to RSD 13,140,000 thousand (2007: RSD 9,000,000 thousand).


30

23. SECURITIES ISSUED (Continued)

Savings bonds issued to retail customers are also short-term securities denominated in dinars with fixed maturities. In 2008, there were no new issues of savings bonds. Instead, bonds issued in 2007 were sold. The interest rate applied to the issued savings bonds in 2007 that were collected in 2008 ranged between11% to 14% annually.

24. PROVISIONS

The calculated amount of provisions as of December 31, 2008 amounting to RSD 379,899 thousand entirely relates to the accrued employee retirement benefits payable by the Bank and provided in accordance with IAS 19 “Employee Benefits.”

25. OTHER LIABILITIES December 31,

2008 December 31,

2007 Accounts payable: - domestic 773,392 713,330 - foreign 764,260 316,980 Advances received: - in dinars 22,813 18,367 - in foreign currency 7,070 - Liabilities arising from letters of credit 178,118 109,498 Liabilities arising from deposits placed by foreign legal entities in dinars - 36,083 Suspense and temporary accounts 303,639 19,720 Salaries 269,516 185,199 Accruals of estimated liabilities – business building on Slavija Square 15,000 750,650 Payables to the EIB 105,477 15,820 Liabilities arising from short-term deposits – City Finance Administration - 62,083 Foreign exchange liabilities to domestic banks arising from the conversion of foreign currency cash 858,477 - Foreign currency liabilities accrued - 295,647 Liabilities arising from inheritance 31,133 29,772 Other accruals 17,979 19,856 Other operating liabilities 10,340 18,767 3,357,214 2,591,772

26. MONEY IN CIRCULATION

Money in circulation of RSD 90,074,613 thousand (December 31, 2007: RSD 76,999,891 thousand) represent the Bank’s liability towards transactors. This amount does not include the money in circulation held in the vaults of commercial banks and Treasury Department within the Ministry of Finance.


31

27. CAPITAL

The structure of capital is presented in the following table:

December 31, 2008

December 31, 2007

State-owned capital 14,750,324 14,750,324 Revaluation reserve 9,399,174 7,692,158 Retained earnings 35,508,971 (20,538,477) 59,658,469 1,904,005

28. OFF-BALANCE SHEET ITEMS

December 31, 2008

December 31, 2007

a) Managed funds - in dinars 546,080 2,911,651 - in foreign currency 756,920,319 675,601,976 757,466,399 678,513,627 b)Guarantees, other contingent liabilities and

commitments Guarantees and other sureties in foreign currency 2,220,164 - Securities and other funds under pledge 31,890,325 129,633,633 Other irrevocable commitments: - in dinars 18,329 18,361 - in foreign currency 9,648,515 237,709 43,777,333 129,889,703 c) Other off-balance sheet items Suspended interest receivables 11,318,053 8,400,492 Other off-balance sheet items 506,447,178 550,000,000 517,765,231 558,400,492 d)Money in circulation and money not in circulation Cash in circulation 109,454,493 92,972,731 Inventories of banknotes 57,154,978 59,918,759 Inventories of hard money 393,007 428,585 Other 94,032 1,217,543 167,096,510 154,537,618 Total off-balance sheet items 1,486,105,473 1,521,341,440

a) Out of the total amount of managed funds, the portion amounting to RSD 252,667,278

thousand is associated with the transactions performed in the name and for the account of the Republic of Serbia in respect of the settlement of SRY public debt arising from foreign currency savings of retail customer and regulating the public debt of SRY arisen from the agreements on foreign currency deposits of retail customers placed with Dafiment banka ad., Beograd in liquidation and from foreign currency funds placed with Banka Crne Gore dd, Podgorica. The Bank acts as an agent in these operations.


32

28. OFF-BALANCE SHEET ITEMS (Continued)

An amount of RSD 208,355,445 thousand is associated with managed funds based on the consolidation borrowings approved to the SRY by the IBRD, as well as with the restructuring of RS debt arising from unsettled refinanced liabilities arising on the New Financial Agreement dated September 20, 1988 and deposit arising from the Agreement on Trade and Depositary Facility dated September 20, 1988 by issuing long-term bonds of RS. An amount of RSD 765,342 thousand is associated with the transactions performed in the name and for the account of the Republic of Serbia in respect of the Loan for economic development.

b) An amount of RSD 2,220,164 thousand is associated with the guarantees extended to

Muhlabauer ID Services and the counter-guarantee of Deutsche Bank AG, obtained as collateral for the business of passport design. Out of the total amount of securities and other funds under pledge based on the Lombard loans approved to banks, as well as mortgages and pledges instituted as collaterals for the regular repayment of liquidity loans to banks. An amount of irrevocable commitments denominated in foreign currency is comprised of bills of spot sale of currencies at the meeting of interbanking foreign currency market.

c) Out of the total amount of other off-balance sheet items, an amount of RSD 422,195,000

thousand is associated with treasury bills intended for repurchase.

d) Out of the total amount of money in circulation and money not in circulation of RSD 109,454,493 thousand relates to money in circulation representing the funds paid by the check book money of the parties in transaction. Inventories of banknotes of RSD 57,154,978 thousand are associated with the money not covered by the check book money of parties in transactions located in the Bank’s Treasury.

29. RISK MANAGEMENT

Basic financial risks to which the National Bank of Serbia is exposed to in its everyday operations are the following: • credit risk, • liquidity risk, • interest rate risk, • currency risk.

Given that the primary purpose of the National Bank of Serbia is to preserve stability of prices and financial stability in the Republic of Serbia, its financial risk management framework is different from those of other commercial financial institutions. The majority of financial risks in the Bank occur based on the management of foreign currency reserves and based on the operations on the financial market.

Managing foreign currency reserves is performed following the Guidances for managing foreign currency reserves of the National Bank of Serbia determined on the annual basis by the Monetary Board. These Guidances define the criteria for investing foreign currency reserves, targets for the use of foreign currency reserves, global frameworks for placements and the like. Based on these Guidances, the Investment Committee of the National Bank of Serbia prepares the Proposal of the Operational Guidances regarding the management of foreign currency reserves on quarterly basis and submits them to the Monetary Board for the adoption. The implementation of Operational Guidances regarding foreign currency reserve management is performed within the Sector for Foreign Currency Operations within the National Bank of Serbia. This Sector also includes the Division for Risk Control and Management that is in charge of design and maintenance of the framework for financial risk management in the Bank. This Division monitors risks on a daily basis and reports to the Monetary Board on the risk analysis. All organizational parts of the Bank are also subject to periodic audits. As with the majority of central banks, the very nature of the Bank’s business operations and its function makes it susceptible to a set of operational and reputational risks.


33

29. RISK MANAGEMENT (Continued)

Credit Risk

The basic exposure of the Bank to credit risk is inherent principally in managing foreign currency reserves. When investing foreign currency reserves, the Bank relies on the following principles:

1. safety, 2. liquidity, 3. profitability.

The analysis and measurement of credit risk inherent in the NBS portfolio is performed in accordance with the generally accepted methods, including the requirements of minimum credit rating. Securities subject to investments must be rated as Аа1, according to the Moody’s Investor Service or АА+ rating according to Standard&Poor’s. The banks keeping the deposits placed by the NBS that are not collateralized, must have: - minimum long-term credit rating of А1 according to Moody’s Investor Service, i.e. rating of А+

according to Standard&Poor’s, - minimum Financial Strength of C+ according to Moody’s, - minimum share capital of USD 5 billion.

For each bank, individual credit limit is determined based on the bank’s credit rating, prior experience in operations with these banks and by analyzing data on their business performance. Individual credit limits are determined quarterly, by means of Operational Guidances. The banks keeping the deposits that are placed by the NBS and collateralized (REPO deposits) must have: - minimum long-term credit rating of А2 according to Moody’s Investor Service or А according

to the rating of Standard&Poor’s, - collateral of adequate quality, i.e. the collateral must be comprised of securities included in the

NBS investment guidances. The placements with central banks and international institutions are not limited. The exception to the previous paragraphs make the funds held on the regular accounts of the NBS opened with banks without the required credit rating, used for payment transaction performed abroad.


34


Credit Risk (Continued)

Financial Instruments (Assets and Liabilities)

The following table presents the net exposure of the Bank inherent in financial assets and liabilities as of December 31, 2008 and 2007.

2008 2007 Financial assets

Cash and cash equivalents 42,296,491

19,953,449 Loans and deposits 59,897,093

268,148,155

Gold and other precious metals 22,635,905

17,822,446 Financial assets at fair value through profit and loss 601,949,954

454,332,529

Securities available-for-sale 9,787,046

17,527,167 IMF membership quota 45,447,682

39,751,891

Other assets 426,775

268,901

782,440,946

817,804,538 Financial liabilities

Liabilities to other banks, financial institutions, Government and other depositors 584,589,824

682,941,682

Liabilities to the International Monetary Fund 50,813,631

44,549,118 Securities issues 12,615,357

10,882,538

Other liabilities 3,054,616

1,329,751 Money in circulation 90,074,613

92,972,725

741,148,041

832,675,814

Maximum Exposure to Credit Risk

The following table shows the maximum exposure of the Bank to credit risk, net:

2008 2007 Financial assets

Loans and deposits 59,897,093


8,293,846


16,986,837 Other assets 426,775

268,901

80,049,720

293,697,739


35


Credit Risk (Continued) Maximum Exposure to Credit Risk (Continued)

The following table shows the structure of Bank’s maximum exposure to credit risk:

Not Matured and Impaired

Impaired

Total Gross

Total Allowance

for Impairment

Total Net Loans and deposits 59,897,093

6,919,940

66,817,033

(6,919,940)

59,897,093

Financial assets at fair value through profit and loss 10,522,889

-

10,522,889

-

10,522,889

Securities held to maturity -

730,839

730,839

(730,839)

- Securities available-for-sale 9,202,963 1,498,157 10,701,120 (1,498,157) 9,202,963 Other assets 426,775 1,709,280 2,136,055 (1,709,280) 426,775

December 31, 2008 80,049,720

10,858,216

90,907,936

(10,858,216)

80,049,720 А

Loans and deposits 268,148,155 6,183,971 274,332,126 (6,183,971) 268,148,155 Financial assets at fair value through profit and loss 8,293,846

-

8,293,846

-

8,293,846

Securities held to maturity - 731,580 731,580 (731,580) - Securities available-for-sale 16,986,837 1,603,832 18,590,669 (1,603,832) 16,986,837 Other assets 268,901 1,535,428 1,804,329 (1,535,428) 268,901

December 31, 2007

293,697,739

10,054,811

303,752,550

(10,054,811)

293,697,739

The total allowance for impairment of financial assets as of December 31, 2008 amounts to RSD 10,858,216 thousand (December 31, 2008: RSD 10,054,811 thousand).

The Bank did not reschedule its receivables during 2008 and 2007.

The Bank did not receive tangibles in lieu of debt settlement during 2008 and 2007. Concentration of Credit Risk in Financial Assets

a) Regional concentration

Serbia

European Union

America and

Canada

Other

Total Financial assets


44,448,051

3,792,870

9,093,763

59,897,093 Financial assets at fair value through profit and loss -

451,808,377

150,141,577

-

601,949,954


-

-

-

9,202,963 Other assets 426,775

-

-

-

426,775

December 31, 2008 12,192,147

496,256,428

153,934,447

9,093,763

671,476,785 December 31, 2007 10,905,145

218,529,549

33,341,233

30,921,812

293,697,739


36


Credit Risk (Continued) Maximum Exposure to Credit Risk (Continued)

b) Concentration per Industries

Banks

Public Sector (State and

Other Public Enterprises)

Other Financial

Institutions

Retail Customers

Sector of Other

Entities Financial assets


309,143

-

506,144

59,897,093 Financial assets at fair value through profit and loss -

451,808,377

150,141,577

-

601,949,954

Securities available-for-sale -

9,202,963

-

-

9,202,963 Other assets 123,441

301,589

625

1,120

426,775

December 31, 2008 59,205,247 496,256,428

153,934,447

507,264

671,476,785 December 31, 2007 267,796,264

17,093,249

8,293,914

514,312

293,697,739

Maturities of Off-Balance Sheet Items

Up to 1 Year

From 1 to 5 Years

Over 5 Years

Indefinite Maturity

Total

Managed funds in dinars

3,757

-

542,323

-

546,080 Managed funds in foreign currency

196,553

1,508,655

743,043,611

12,171,500

756,920,319

Guarantees and other sureties issued in foreign currency

-

2,220,165

-

-

2,220,165

Securities and other assets under pledge

28,594,000

-

-

3,296,324

31,890,324

Other irrevocable commitments in dinars

-

-

-

18,329

18,329

Other irrevocable commitments in foreign currency

9,648,515

-

-

-

9,648,515

Receivables arising from suspended interest

-

-

-

11,318,053

11,318,053

Other off-balance sheet items

500,000,000

-

-

6,447,178

506,447,178 Cash in circulation

-

-

-

109,454,493

109,454,493

Inventories of banknotes

-

-

-

57,154,978

57,154,978 Inventories of hard money

-

-

-

393,007

393,007

Other

-

-

-

94,032

94,032

December 31, 2008

538,442,825

3,728,820

743,585,934

200,347,894

1,486,105,473


37


Credit Risk (Continued) Maturities of Off-Balance Sheet Items (Continued)

Up to 1 Year

From 1 to 5 Years

Over 5 Years

Indefinite Maturity

Total

Managed funds in dinars

2,672

-

472,925

2,436,054

2,911,651

Managed funds in foreign currency

373,957

2,168,583

665,020,167

8,039,269

675,601,976 Securities and other assets under pledge

40,016,500

85,313,371

4,303,762

129,633,633

Other irrevocable commitments in dinars

-

-

-

18,361

18,361

Other irrevocable commitments in foreign currency

237,709

-

-

-

237,709

Suspended interest receivables

-

-

-

-

8,400,492 Other off-balance sheet items

550,000,000

-

-

8,400,492

550,000,000

Cash in circulation

-

-

-

92,972,731

92,972,731 Inventories of banknotes

-

-

-

59,918,759

59,918,759

Inventories of hard money

-

-

-

428,585

428,585 Other

-

-

-

1,217,543

1,217,543

December 31, 2007

590,630,838

87,481,954

669,796,854

173,431,794

1,521,341,440

Liquidity Risk

Liquidity risk comprises risk from inability to finance the Bank’s assets from the sources with equal maturities and interest rates, as well as the risk from not being able to collect assets at adequate price and within the agreed timelines.

The Bank is one of significant sources of financing for commercial banks in Serbia. Its daily activities are focused to ensure the necessary liquidity, i.e. settlement of all liabilities when due. The Bank relies on numerous sources of financing (deposits, securities issued, loans and the like). In this manner, the flexibility of sources of financing is increased, the dependence on a single source is diminished and the generally the price of financing source is decreased. The Bank maintains the balance between the continuity of its financing and flexibility of sources of financing by relying on sources with different maturities. The Bank assesses liquidity risk by identifying it and by controlling the changes in the sources of financing necessary to attain business targets determined in the Bank’s strategy. In addition, as a part of liquidity risk management strategy, the Bank is in possession of a portfolio of liquid assets, including funds held on the accounts with foreign banks and bonds of the OECD member countries, in line with instructions for managing monetary reserves.

The following table represents the analysis of maturities of the Bank’s assets and liabilities according to their contractually-agreed terms of payment. The contractual maturities of assets and liabilities are determined based on the outstanding agreed maturity periods as of the balance sheet date.


38


Liquidity Risk (Continued)

Up to 1 Month

From 1 to 3 Months

From 3 Months to 1

Year

From 1 to 5 Years

Over 5 Years

Indefinite Maturity

Total


-

-

-

-

-

42,296,491


-

1,525,518

89,970

535,414

309,165

59,897,093 Gold and other precious metals 20,875,549

1,760,356

-

-

-

-

22,635,905

Financial assets at fair value through profit and loss 601,949,954

-

-

-

-

-

601,949,954

Securities available-for-sale -

-

-

9,202,963

-

584,083

9,787,046 IMF membership quota -

-

-

-

-

45,447,682

45,447,682

Other assets 426,775

-

-

-

-

-

426,775

722,985,795

1,760,356

1,525,518

9,292,933

535,414

46,340,930

782,440,946

Liabilities to other banks, financial institutions Government and other depositors 516,616,037

55,543,848

7,871,589

-

-

4,558,350

584,589,824

Liabilities to the International Monetary Fund -

10,276

-

-

50,803,355

-

50,813,631

Securities issues 2,474,279

4,868,230

5,272,848

-

-

-

12,615,357 Other liabilities 1,530,002

-

1,524,614

-

-

-

3,054,616

Money in circulation -

-

-

-

-

90,074,613

90,074,613

520,620,318

60,422,354

14,669,051

-

50,803,355

94,632,963

741,148,041

Liquidity Gap: December 31, 2008 202,365,477

(58,661,998)

(13,143,533)

9,292,933

(50,267,941)

(48,292,033)

41,292,905

December 31, 2007 79,259,815

(79,245,545)

(13,952,765)

9,205,096

(43,980,936)

33,943,239

(14,771,096)


39


Liquidity Risk (Continued)

Fair Value Information

The following table represents the comparison of carrying values (as adjusted for accumulated impairment) and the fair values of all positions of financial assets and liabilities of the Bank as of December 31, 2008 and 2007:

Carrying Value

Fair Value

2008

2007

2008

2007

Financial assets Cash and cash equivalents 42,296,491

19,953,449

42,296,491

19,953,449 Gold and other precious metals 22,635,905

17,822,446

22,635,905

17,822,446


268,148,155

59,897,093


454,332,529

601,949,954

454,332,529


17,527,167

9,787,046

17,527,167 Financial liabilities

Liabilities to other banks, financial institutions, Government and other depositors 584,589,824

682,941,682

584,589,824

682,941,682


44,549,118

50,813,631

44,549,118


10,882,538

12,615,357


1,329,751

3,054,616

1,329,751

What follows are the main methods and assumptions used in the assessment of the fair value of financial instruments presented in the table.

(a) Securities at Fair Value through Profit and Loss

Assets held for sale are associated with the bonds issued by the governments of central banks of OECD member states and international financial institutions, measures at fair value based on the prices published on financial markets.

(b) Securities Available-for-Sale

Securities available-for-sale are measured at the best available fair value assessment through discounting based on the market interest rate.

(c) Assets Held-to-Maturity, Loans and Placements

Assets held-to-maturity and loans and placements originated by the Bank are measured at their nominal value, using the effective interest method net of any losses.

(d) Deposits Received from Banks and Customers

For demand deposits and deposits with indefinite maturities, the fair value is considered to be the amount of liabilities payable at call as of the balance sheet date.


40


Interest Rate Risk

Interest rate risk comprises risk from the changes in interest rates that could cause interest bearing assets and liabilities to mature or be contractually rescheduled over in different time and in different scope. The Bank manages credit risk in the following way:

• by determining interest rates, which it further monitors and adjusts for the purpose of

achieving objectives of the adopted monetary policy (required reserve in dinars and in foreign currency, foreign currency deposits in banks are associated with foreign currency savings of retail customers);

• by holding deposits placed by the state and its institutions; • by maintaining funds on current accounts and by deposits with up to one month maturities

and with maturities from 1 to 3 months as placed with foreign banks and invests assets into highly liquid bonds of governments and central banks of member states of OECD.

The following table presents average interest rates with most significant interest-bearing financial instruments as held in the balance sheet as of December 31 with most important currencies: December 31, 2008 RSD (%) EUR (%) USD (%) SDR (%) Financial assets Current accounts with foreign banks -

0.0 - 4.11

0.0 - 4.25

-

Deposits with foreign banks - 3.58 - 4.19 2.085 - 2.64 - Financial instruments at fair value through profit and loss -

1.29 -5.75

0.34 - 6.5

-

Securities available for sale 8.5 - - - Financial liabilities Required reserves of banks in dinars 2.5 - - - Time deposits - 3.33 - 3.869 1.835 - 2.39 - Borrowings - - 4.97 - 6.925 - Liabilities arising from repurchase transactions 10 - 17.75

-

-

-

Securities issued 10.1 - 19.5 - - - Amounts owed to IMF - - - 2.57 December 31, 2007 RSD (%) EUR (%) USD (%) SDR (%) Financial assets Current accounts with banks - 0.0 -3.94 0.0 - 5.33 - Deposits with foreign banks - 3.45 - 4.3 1.49 - 6.30 - Financial instruments at fair value through profit and loss -

2.5 - 5.75

2.625 - 6.5

-

Securities available for sale 8.5 3.4 - 3.6 - - Financial liabilities Required reserves of banks in dinars 2.5 - - - Time deposits - 3.20 - 4.05 1.24 - 6.05 - Borrowings - - 6.37 - 6.925 - Liabilities arising from repurchase transactions 9.5 - 14.0

-

-

-

Securities issued 9.59 - 19.0 - - - Amounts owed to IMF - - - 4.05


41

29. RISK MANAGEMENT (Continued) Interest Rate Risk (Continued)

The change for 100 basis points in the presented interest rates, exclusive of the effect of changes in interest rates on financial instruments at fair value through profit and loss („trading portfolio“), as of the balance sheet date, would increase/decrease capital and net profit of the Bank in the amounts presented in the following table. This analysis presupposes that all other variables, particularly exchange rates, remain unchanged. The same analysis was prepared for the year 2007.

Capital

Net Profit

100 bp

100 bp

100 bp

100 bp

December 31, 2008 Increase

Decrease

Increase

Decrease Financial Assets

Cash and cash equivalents 28,767

(30,487)

28,767

(30,487) Loans and deposits 550,373

(596,320)

550,373

(596,320)

Securities 94,378

(119,644)

94,378

(119,644)

673,518

(746,451)

673,518

(746,451)

Financial Liabilities Liabilities to other banks,

financial institutions, Government and other depositors (3,214,577)

3,710,831

(3,214,577)

3,710,831

Liabilities to the International Monetary Fund (8,884)

9,542

(8,884)

9,542

Securities issues (100,222)

152,085

(100,222)

152,085

(3,323,683)

3,872,458

(3,323,683)

3,872,458

Net effect

(2,650,165)

3,126,007

(2,650,165)

3,126,007

Capital

Net Profit

100 bp

100 bp

100 bp

100 bp

December 31, 2007 Increase

Decrease

Increase

Decrease Financial Assets

Cash and cash equivalents 25,684

(27,152)

25,684

(27,152) Loans and deposits 2,096,374

(2,368,094)

2,096,374

(2,368,094)

Securities 169,762

(202,732)

169,762

(202,732)

2,291,820

(2,597,978)

2,291,820

(2,597,978)

Financial Liabilities Liabilities to other banks, financial

Institutions, Government and other depositors (3,171,923)

3,837,019

(3,171,923)

3,837,019

Liabilities to the International Monetary Fund (7,619)

8,528

(7,619)

8,528

Securities issues (79,108)

104,979

(79,108)

104,979

(3,258,650)

3,950,526

(3,258,650)

3,950,526

Net effect

(966,830)

1,352,548

(966,830)

1,352,548


42


Interest Rate Risk (Continued)

Two basic methods which the Bank used to quantify market risks in respect to monetary reserves include Value at risk (“VaR”) and stress test. The first method is used to anticipate maximum possible loss in normal, whereas the latter one is used to foresee the losses in extreme market conditions.

VaR

VaR is the method that predicts with high probability (95% or 99%) the total loss which, in the given time interval, will not be exceeded. The Bank calculates VaR as synthetical measure of currency risk, interest rate risk, risk from changes in other prices and effects of correlations based on the matrix of variances/covariances or correlation matrix.

The interest rate exposure as of December 31, 2008 is presented in the following table:

Interest Bearing

Non- Interest Bearing

Total Positions

Positions Financial assets


39,333,837


2,562,431

59,897,093

Gold and other precious metals -

22,635,905


-

601,949,954


584,083


45,447,682

45,447,682

Other assets -

426,775

426,775

671,450,233

110,990,713

782,440,946

Financial liabilities Liabilities to other banks, financial

Institutions, Government and other depositors 346,270,365

238,319,459

584,589,824


45,209,166

50,813,631


-

12,615,357 Other liabilities -

3,054,616

3,054,616


90,074,613

90,074,613

364,490,187

376,657,854

741,148,041

Liquidity Gap as of December 31, 2008 306,960,046

(265,667,141)

41,292,905

as of December 31, 2007 407,233,827

(422,004,924)

(14,771,097)

Stress Test

In case of extreme market risks, VaR is not the most suitable tool to be used in the assessment of potential loss. Instead, the stress test is used, which represents the model that approximates the effects contingent on the movements of interest rates and other worst case scenarios on the portfolio value based on duration and convexity of the portfolio. For the Bank, the most important is the potential drastic increase in interest rates which is why the Bank needs to calculate what could happen with the portfolio if interest rates increase by 100 basis points, i.e. by 1% under the assumption that other variables remained unchanged.


43


Currency Risk

The Bank is exposed to currency risk through the transactions performed in foreign currency. The risk exposure leads to the increase in foreign exchange gains and losses recorded within the income statement. The exposure to foreign risk occurs based on the monetary assets and liabilities that are denominated in the Bank’s functional currency. The Bank manages foreign currency risk through the policy of determining the currency structure of assets in accordance with the expected future foreign currency liabilities. The 10% decline in dinar as compared with the following currencies as of December 31, 2008 would (decrease)/increase capital and net profit of the Bank in the amounts presented in the table below. This analysis presupposes that all other variables, in particular interest rates, remain unchanged. The analysis for the year 2007 is prepared in the same manner. In addition, this analysis excludes the effect of currency risk on financial instruments at fair value through profit and loss („trading portfolio“). Capital Net Profit December 31, 2008 EUR (16,599,433) (16,599,433) USD (465,76) (465,76) CHF 594,099 594,099 SDR 1,118,179 1,118,179 Capital Net Profit December 31, 2007 EUR (12,727,635) (12,727,635) USD 3,658,827 3,658,827 CHF 294,142 294,142 SDR 970,408 970,408

The dinar growth of 10%, when compared with the currencies presented in the table, would have the exact opposite effect on the amounts presented in the table, on the same assumption that all other variables remain unchanged.


44


Currency Risk (Continued)

The analysis of assets and liabilities per currencies as of December 31, 2008 was as follows:

EUR USD SDR

Other Currencies

Total Foreign

RSD Total

Currencies Financial assets


1,854,096

-

6,040,645

41,508,669

787,822


5,544,587

-

19,146,585

57,796,171

2,100,922

59,897,093

Gold and other precious metals -

-

-

22,635,905

22,635,905

-


144,738,911

-

27,268,361

601,949,954

-

601,949,954

Securities available-for-sale 203

-

353,623

-

353,826

9,433,220


-

11,212,862

-

11,212,862

34,234,820

45,447,682

Other assets 27,329

-

-

-

27,329

399,446

426,775

496,689,141

152,137,594

11,566,485

75,091,496

735,484,716

46,956,230

782,440,946

Financial liabilities Liabilities to other banks,

financial institutions, Government and other depositors 230,780,722

23,040,329

20,793

354,454

254,196,298

330,393,526

584,589,824

Liabilities to the International Monetary Fund -

-

10,276

-

10,276

50,803,355

50,813,631

Securities issues 29

-

-

-

29

12,615,328


64,360

-

176,844

1,623,636

1,430,980

3,054,616


-

-

-

-

90,074,613

90,074,613

232,163,183

23,104,689

31,069

531,298

255,830,239

485,317,802

741,148,041

Net Exposure as of December 31, 2008 264,525,958

129,032,905

11,535,416

74,560,198

479,654,477

(438,361,572)

41,292,905

as of December 31, 2007 209,454,306 132,434,172

9,704,078

55,623,049

407,233,827

(422,004,924)

(14,771,097)

30. LITIGATIONS As of December 31, 2008, there were no legal suits filed against the Bank. Based on the information available, the Bank’s management does not anticipate the adverse effects on financial statements for the year ended December 31, 2008 and, accordingly, these financial statements do not include any provisions for litigations.


45

31. RELATED PARTY TRANSACTIONS

The Bank did not identify related parties as of December 31, 2008. Transactions with the Key Management According to the Bank, the key management refers to: the President and members of the Council, Governor, Vice Governors, General Secretary and Deputy General Secretary, managers of independent and basic organizational units and their deputies, and Heads of Departments. The Bank’s management receive compensations for their services within the Bank and do not hold equity investment in the Bank. In addition to net salaries received by its management, the Bank also pays contributions on behalf the management in accordance with the legal provisions of the Republic of Serbia. The net salaries of the management are also subject to personal income tax charged annually. The Bank neither makes payments to its management subsequent to the termination of their employment nor does it compensate for their work in shares or equity. The compensations paid to the management are associated with the short-term benefits in the gross amount of RSD 385,800 thousand (2007: RSD 369,699 thousand). These benefits are included within staff costs. The summary of individual benefits to the key management of the Bank is provided in the following table: The review of individual compensations paid to the key management is provided below:

Position Headcount in 2008

Gross Salaries in

2008

Net Salaries in 2008

Headcount in 2007

Gross Salaries in 2007

Net Salaries in 2007

Governor 1 7,021 5,706 1 6,224 5,078 Vice Governor 3 14,501 11,570 3 15,707 12,634 General Secretary 1 5,758 4,594 1 5,090 4,080 General Directors and Directors of Organizational Units within the Headquarters and Directors of Branch Offices and General Direcotr of ZIN

21

69,244

52,127

22

72,559

54,772 General Secretary Deputy, Deputies and Assistents of General Directors and Directors of Organizational Units

25

70,432

50,944

27

57,295

42,360 Heads of Departments 88 209,591 152,052 91 203,663 146,963 President and members of the NBS Council 6 9,253 6,144 5 9,161 6,083 Total for the year 145 385,800 283,137 150 369,699 271,970


46

32. IMPACT OF FINANCIAL CRISIS ON THE BANK’S OPERATIONS

By the end of 2008, the foreign and financial environment of Serbia considerably deteriorated: trading flows, production, domestic demand and fiscal revenues lagged behind the projections. Pursuant to the assessments of IMF, sudden slowing of net capital inflows will probably cause the gap in foreign financing to increase over the period from 2009 through 2011 projected in the amount of EUR 3.5 billion (11,5% GDP). The industrial activity will most probably slow down during 2009 with limited outlook for recovery during 2010. In the aforementioned circumstances, the Bank’s monetary policy remains focused on inflation with the objective to the curb the expected trends. The Board of Executive Managers of the International Monetary Fund (IMF) completed in May the first review of Serbia’s results based on the stand-by arrangements and approved an increase in the financial support to be provided by IMF to SDR 2.62 million which is almost 10% of Gross Domestic Product of the Republic of Serbia. In circumstances of significant influence of the global economic crisis out of the anticipated, the revised IMF arrangement will provide support for the economic program of the Government. The excessive forecast for fiscal deficit to be incurred in the period from 2009/2010 aims to avoid overly procyclical fiscal policy with needs to adjust to lower income, so the economy could recover medium term. The state program of support to financial sector aims to contribute to the strengthening of financial stability, accompanied by the necessary support from parent foreign banks to banks operating in the Republic of Serbia that remain exposed to Serbia and provide for their subsidiaries to be sufficiently capitalized and liquid.

Due to the current global crisis in the market and its weakening effects on domestic economic activities on the local market in Republic of Serbia, the Bank will probably operate in more difficult and uncertain economic environment in 2009, and possibly beyond. The impact of this crisis on the Bank’s business operations is currently not possible to fully predict and therefore there is an element of uncertainty.

33. POST BALANCE SHEET EVENTS On May 15, 2009, the International Monetary Fund approved the Republic of Serbia`s request for funds based on the extended stand-by arrangement in the aggregate amount of SDR 2.62 billion (the equivalent of EUR 2,942 million, i.e. USD 3.98 million) until April 2011, intended solely for strengthening the foreign currency reserve of the National Bank of Serbia which should help preserve the macroeconomic stability. The aforementioned amount represents 560% of the Republic of Serbia quota with the International Monetary Fund. The arrangement will enable the Republic of Serbia to draw three tranches from the credit facility and so, in 2009, the assets of EUR 2.15 billion (USD 2.91 billion) are planned to be drawn.

Documents

NATIONAL BANK OF SERBIA Financial Statements Year …NATIONAL BANK OF SERBIA . Financial Statements Year Ended December 31, 2008 and Independent Auditors’ Report . NATIONAL BANK