ANNUAL REPORT 2005 - TBI Bank

ANNUAL R E P O R T

2005

SOFIA

Photographer - Georgy Velichkov

Rila Monastery, Bulgaria

2�

A N N U A L R E P O R T 2005

WEST-EAST BANK ADFINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS31 DECEMBER 2005

CORPORATE GOVERNANCE 5

STATEMENT OF THE MANAGEMENT BOARD 7

REPORT OF THE AUDITORS 15

CONSOLIDATED ANNUAL REPORT AS OF 31 DECEMBER 2005 17

CONTACT LIST 63

Contents

5A N N U A L R E P O R T 2005

WEST-EAST BANK ADCORPORATE GOVERNANCE

SHAREHOLDERS STRUCTURE

Aktiva Holdings Holding BV, Holland 72.51 %LB Maxima Ltd, Slovenia 24.50 %Factor Banka DD, Slovenia 2.99 %

SUPERVISORY BOARD

Boris Pesjak President of Supervisory BoardDarko Horvat Deputy President of Supervisory BoardJanez Sencar Member of Supervisory BoardAles Okorn Member of Supervisory BoardAndrej Hazanbent Member of Supervisory Board

MANAGEMENT BOARD AND PROCURATOR

Dusan Valencic President of Management Board and Executive DirectorNabil K. Issa Member of Management Board and Executive DirectorMargarita Gencheva Member of Management Board and Executive DirectorSafi Harb Ph. D. Procurator

Piran, Slovenia

�

Photographer - Alexander Walter

STATEMENT OF THE MANAGEMENT BOARD OF THE BANK

Dear all,

The second fully operational year of West-East Bank AD has given to us a firm base to talk about the main mission that we, Management and all employees of the Bank, are trying to follow: value creation.

Value creation to our shareholders:

The profit in 2005 reached EUR 1 million that gives return on equity of 13,7%. This number has to be accompanied by increased level of provisions for more than EUR 1 million in 2005 that gives us 3,5% coverage of our loan portfolio with provisions. This number corresponds to our policy of aggressive provisioning in order to have long term sustainable profits of the bank.

The balance sheet size of the Bank has reached nearly EUR 55 million, representing 53% growth comparing the year 2004, despite the fact that the bank has been heavily constrained by restriction in loans growth imposed by the Central Bank to all the banks in Bulgaria.

Practically, the entire profit from the year 2005 should strengthen the capital position of the Bank. Namely, the Bank has to cover the remaining part of the pre-operating loss from the year 2003 (cost of establishing the bank) as well as we are obliged to create legal reserves in the amount of 20% of yearly profit. After expected confirmation of such a distribution on General Meeting we should have capital base of EUR 8,3 million, supported by EUR 3 million of long term subordinated debt that we received in 2005.

Other figures about value creation to our Shareholders are visible from figures and graphs that follow in this annual report.

�A N N U A L R E P O R T 2005

Baalback, Lebanon

�

-667,00

627,83

2 323,00

-770,01

69,54

1 010,00

-64,32

-37,02

31.12.200331.06.2004

31.12.2004 31.12.2005

Period-1 000,00

-500,00

0,00

500,00

1 000,00

1 500,00

2 000,00

2 500,00

Am

ount

(thou

sand

sof

EUR

)

PROFITABILITY

Net operating profit

Net profit

Value creation to our clients:

In 2005 we have continued to serve our clients according to our initial strategy: flexible, tailor made banking products prepared mainly to corporate clients. To acquire wide range of clients with aggressive pricing policy has never been our real intention. We are actually selecting clients that are proving themselves in loyalty and reliability. Once we establish this mutual relationship they have our full support not only in financing their activities but also in using our know-how and experience in international financial world. At the moment we are having around 700 clients.

And the most important thing from the client point of view: safeness and stability of the Bank; we were aware that for many of our potential clients and business partners there was a problem - a new, relatively small Bank. Most probably in 2006, the 97% owner of the Bank is becoming Nova Ljubljanska banka d.d., Ljubljana. The International Banking Group with assets size exceeding the size of the entire Bulgarian banking system. By many criteria, Nova Ljubljanska banka d.d., Ljubljana is one of the leading banking groups in Central and Eastern Europe. This will for sure bring new broad value creation to our clients.

Value creation to the bank itself:

With the graphic design of this Annual report we try to explain another approach to the value creation: images from three different countries, Bulgaria, Slovenia and Lebanon, quite different from many aspects. We incorporated these differences in our business and Management philosophy, the structure of our clients reflects this as well. It was not easy but we are pretty sure about this value creation that you cannot find in every financial institution.

Dusan ValencicPresident of Management BoardExecutive Director�

ANNUAL REPORT

2005

�A N N U A L R E P O R T 2005

Agriculture19%

Manufacturing16%

Tourism8%

Services10%

Construction18%

Individuals2%

Commerce28%

LOAN PORTFOLIO BY SECTORS AS OF 31.12.2005

0,00

10 000,00

20 000,00

30 000,00

40 000,00

50 000,00

60 000,00

Am

ount

(thou

sand

sof

EUR

)

2003 2004 2005Year

GROWTH IN BALANCE SHEET SIZE AND LOAN PORTFOLIO

Asset Size

Balance Sheet

Loan Portfolio

10ANNUAL REPORT

2005


STRUCTURE OF TOTAL ASSETS AS OF 31.12.2005

FUNDING STRUCTURE AS OF 31.12.2005

Other assets2%

Loans to customers71%

Capital15%

Banks40%

Non-banking Clients45%

Securities4%

Cash and balanceswith Cental Bank

10% Placements with banks13%

STRUCTURE OF TOTAL ASSETS AS OF 31.12.2005

FUNDING STRUCTURE AS OF 31.12.2005

Other assets2%

Loans to customers71%

Capital15%

Banks40%

Non-banking Clients45%

Securities4%

Cash and balanceswith Cental Bank

10% Placements with banks13%

12ANNUAL REPORT

2005

1�A N N U A L R E P O R T 2005


Rodopy Mountain, Bulgaria

1�15


REPORT OF THE AUDITORS TO THE SHAREHOLDERS OF WEST EAST BANK AD

24 March 2006Sofia, Bulgaria

We have audited the accompanying consolidated balance sheet of West-East Bank (Bulgaria) AD (the Bank) and its subsidiary (the Group) as of 31 December 2005 and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the year then ended. These financial statements set out on pages 17 to 61 are the responsibility of the Group’s management. 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 plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2005, the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union.

In addition, in our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2005, and of the results of its operations and cash flows for the year then ended in accordance with International Financial Reporting Standards as issued by International Accounting Standards Board.

Photographer - Pankaj Shah



Consolidated income statement

NotesYear ended 31 December

2005 2004

Interest and similar income 4 8,004 3,024Interest expense and similar charges 4 (1,616) (393)Net interest income �,�� 2,��1

Fee and commission income 5 699 599Fee and commission expense 5 (113) (136)Net fee and commission income 5��

Net trading income 6 156 176Operating expenses 7 (3,146) (2,419)Provisions for loan impairment 13 (2,008) (715)

Profit before income tax 1,�� 1��

Income tax expense 9 (122) -

Profit for the year 1,�5� 1��

Beirut, Lebanon

1�

31 December 2005All amounts in thousand of BGN; 1 EUR =1.95583 BGN

The notes set out on pages 24 to 61 form an integral part of these consolidated financial statements.

Notes31 December

2005 31 December

2004

SHAREHOLDERS’ EQUITY

Share capital 23 15,800 15,800Retained earnings/(accumulated deficit) 457 (1,370)Other reserves 27 -

Total shareholders’ equity 1�,2�� 1�,��0

Total shareholders’ equity and liabilities 10�,0�� 0,00�


Consolidated balance sheet

1�ANNUAL REPORT

2005


Consolidated balance sheet (continued)

Notes31 December

2005 31 December

2004

ASSETSCash and balances with Central Bank 10 10,417 5,286Loans and advances to banks 11 13,725 9,836Trading securities 300 -Investment securities: - available-for-sale 12 20 20 - held-to-maturity 12 4,335 3,491Loans and advances to customers 13 76,026 49,733Other assets 16 813 164Intangible assets 14 584 586Equipment and other tangible fixed assets 15 819 893

Total assets 10�,0�� 0,00�

LIABILITIESDeposits from banks 17 36,738 18,846Due to customers 18 29,184 19,508Other borrowed funds 19 23,850 16,766Other liabilities 20 908 459Current income tax 75 -

Total liabilities �0,�55 55,5��


31 December 2005All amounts in thousand of BGN; 1 EUR =1.95583 BGN 31 December 2005All amounts in thousand of BGN; 1 EUR =1.95583 BGN

20ANNUAL REPORT

2005

Consolidated statement of changes in equity


Consolidated cash flow statement

Note

For the year ended

31 December 2005

31 December 2004

Cash flows from/(used in) operating activitiesInterest received 7,626 2,817Interest paid (1,377) (343)Fees and commissions received 575 599Fees and commissions paid (113) (136)Cash payments to employees and suppliers (2,231) (1,939)Income tax paid (47) -Cash flows from operating profits before changes in operating assets and liabilities

4,433 998

Changes in operating assets and liabilities- net increase in reserve with Central Bank (461) (2,324)- net (increase)/decrease in trading securities (322) 442- net (increase)/decrease in loans to banks (5,235) (1,164)- net increase in loans and advances to customers (28,148) (48,125)- net increase in other assets (649) (91)- net increase in deposits from banks 17,893 16,323- net increase in due to customers 9,633 16,893- net increase in other liabilities 524 388

Net cash from/(used in) operating activities (2,��2) (1�,��0)

Cash used in investing activitiesProceeds from available-for-sale investments - 1,953Purchase of held-to-maturity investment securities (816) (3,441)Purchase of intangible fixed assets (207) (15)Purchase of equipment and other tangible fixed assets (341) (401)

Net cash used in investing activities (1,��) (1,�0�)

Sharecapital

Additional paid-in capital

Statutory reserves

Retained earnings/

(accumulated deficit)

Total

Balance at 1 January 200� 1�,��1 2,10� - (1,50�) 1�,2��Net profit for the period - - - 136 136Capital increase 2,109 (2,109) - - -

Balance at �1 December 200� 15,�00 - - (1,��0) 1�,��0

Balance at 1 January 2005 15,�00 - - (1,��0) 1�,��0Transfer to reserves 27 (27) -Net profit for the period - - - 1,854 1,854

Balance at �1 December 2005 15,�00 - 2� �5� 1�,2��


The notes set out on pages 24 to 61 form an integral part of these consolidated financial statements.The notes set out on pages 24 to 61 form an integral part of these consolidated financial statements.

Triglav, Slovenia

2�

Note

For the year ended

31 December 2005

31 December 2004

Cash flows from financing activities

Proceeds from other borrowed funds 7,020 16,753

Net cash from financing activities �,020 1�,�5�

Net increasing in cash and cash equivalents �,�2� (1,�11)Cash and cash equivalents at beginning of period 9,357 11,168

Cash and cash equivalents at end of period 2� 12,��1 �,�5�

22ANNUAL REPORT

2005

Consolidated cash flow statement (continued)


The notes set out on pages 24 to 61 form an integral part of these consolidated financial statements.Photographer - Joco Žnidarčič

2�ANNUAL REPORT

2005

Notes to the consolidated financial statements


Notes to the consolidated financial statements (continued)

a Basis of presentation (continued)

Consolidated financial statements are prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities held at fair value through profit or loss.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 3. Although these estimates are based on management’s best knowledge of current events and actions, actual results ultimately may differ from those estimates.

Where necessary corresponding figures have been adjusted to conform with changes in presentation of the current year.

Standards, interpretations and amendments to published standards that are not yet effective

Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group’s accounting periods beginning on or after 1 January 2006 or later periods but which the Group has not early adopted.

IFRS �, Financial Instruments: Disclosures, and a complementary Amendment to IAS 1, Presentation of Financial Statements - Capital Disclosures (effective from 1 January 2007). IFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, including sensitivity analysis to market risk. It replaces IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and disclosure requirements in IAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under IFRS. The amendment to IAS 1 introduces disclosures about the level of an entity’s capital and how it manages capital. The Group assessed the impact of IFRS 7 and the amendment to IAS 1 and concluded that the main additional disclosures will be the sensitivity analysis to market risk and the capital disclosures required by the amendment of IAS 1. The Group will apply IFRS 7 and the amendment to IAS 1 from annual periods beginning 1 January 2007.

IAS �� and IFRS � (Amendment), Financial Guarantee Contracts (effective from 1 January 200�). This amendment requires issued financial guarantees, other than those previously asserted by the entity to be insurance contracts, to be initially recognised at their fair value, and subsequently measured at the higher of (a) the unamortised balance of the related fees received and deferred, and (b) the expenditure required to settle the commitment at the balance sheet date.

1 General information and summary of significant accounting policies

West-East Bank (the “Bank”) was established on 11 November 2002 as a result of the foundation meeting held by the following shareholders: Activa Holding B.V., Factor Bank Pls and LBMaxima D.O.O. The Bank was registered as a Bulgarian joint stock company on 28 August 2003 with the Sofia Court after receiving a license from the Bulgarian National Bank on 13 August 2003. The Bank started its operations on 1 October 2003. The Bank is managed through a Supervisory Board consisting of 5 members and a Management Board consisting of 3 members elected for a period of 3 years.

The Bank’s principal business activity is lending to micro, small and medium-sized businesses within Bulgaria. The Bank’s activities are conducted through its headquarters in Sofia.

The subsidiary WEB Services AD (the ‘Company’) was established on 15 August 2005 as a result of management decision to segregate non- core administrative activities from the core banking activities. The Company is 100% owned by West-East Bank. The subsidiary is fully consolidated from the date on which control is transferred to the Bank, i.e. the date of its establishment. The Company’s total assets as at 31 December 2005 are BGN 399 thousand.

These financial statements have been approved by the Management Board with decision ¹ 0301/ 0005 from 22.02.2006 .

The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

a Basis of presentation

The consolidated financial statements of the Bank and its subsidiary (the Group) have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS) and International Financial Reporting Standards issued by the IASB. All International Financial Reporting Standards issued by the IASB and effective at the time of preparing these consolidated financial statements have been adopted by the EU through the endorsement procedure established by the European Commission, with the exception of the International Accounting Standard IAS 39 “Financial Instruments: Recognition and Measurement”. Following recommendations from the Accounting Regulatory Committee, the Commission adopted the Regulations 2086/2004 and 1864/2005 requiring the use of IAS 39, minus certain provisions on portfolio hedging of core deposits, by all listed companies from 1 January 2005.Since the Group is not affected by the provisions regarding portfolio hedging that are not required by the EU-endorsed version of IAS 39, the accompanying financial statements comply with both International Financial Reporting Standards as adopted by the European Union and International Financial Reporting Standards issued by the IASB.


2�ANNUAL REPORT

2005




c Foreign currencies (continued)

(b) Transactions and balancesForeign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Translation differences on non-monetary items, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation differences on non-monetary items, such as equities classified as available-for-sale financial assets, are included in the fair value reserve in equity.

At 31 December 2005, monetary assets and liabilities denominated in foreign currency are translated into Bulgarian Leva at the official Central Bank exchange rate - BGN 1.95583 for EURO 1 and BGN 1.6579 for USD 1 (31 December 2004: BGN 1.95583 for EURO 1 and BGN 1.43589 for USD 1).

d Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or realize the asset and to settle the liability simultaneously.

e Interest income and expense

Interest income and expense are recognised in the income statement for all instruments measured at amortised cost using the effective interest method.

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

Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

a Basis of presentation (continued)

There are a number of other new standards or amendments to existing ones but the management concluded they are not relevant to the Group’s operations. These amendments and standards include:

• IAS 19 (Amendment), Employee Benefits (effective from 1 January 2006)• IAS 39 (Amendment), Cash Flow Hedge Accounting of Forecast Intragroup Transactions (effective

from 1 January 2006)• IAS 39 (Amendment), The Fair Value Option (effective from 1 January 2006)• IFRS 1 (Amendment), First-time Adoption of International Financial Reporting Standards and IFRS 6

(Amendment), Exploration for and Evaluation of Mineral Resources (effective from 1 January 2006)• IFRS 6, Exploration for and Evaluation of Mineral Resources (effective from 1 January 2006)• IFRIC 4, Determining whether an Arrangement contains a Lease (effective from 1 January 2006)• IFRIC 5, Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation

Funds (effective from 1 January 2006)• IFRIC 6, Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic

Equipment (effective from 1 December 2005)

b Consolidation

Inter-company transactions, balances, and unrealised gains on transactions between the Bank and the Company are eliminated. Accounting policies of the subsidiary are consistent with the policies adopted by the Bank.

c Foreign currencies

(a) Functional and presentation currencyItems included in the financial statements of the Group are measured and presented in BGN, which is the Group’s functional and presentation currency.





f Fees and commission income

Fees and commissions are generally recognised on an accrual basis when the service has been provided. Fee and commission income consist mainly of fees for local and foreign currency money transfers, cash operations and are generally recognised on an accrual basis or at the date of transaction, as appropriate. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the loan. Loan syndication fees are recognised as revenue when the syndication has been completed and the Group retained no part of the loan package for itself or retained a part at the same effective interest rate for the other participants. Fees and commission expense relates to fees incurred by the Group in dealings with other banks, and are recognized at the date of the transaction.

g Financial assets

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

(a) Financial assets at fair value through profit or lossThis category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management.

(b) Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable.

(c) Held-to-maturityHeld-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. Were the Group to sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified as available for sale.

(d) Available-for-saleAvailable-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices.

Studen Kladenetz dam, Bulgaria

2�


�0ANNUAL REPORT

2005


�1A N N U A L R E P O R T 2005


g Financial assets (continued)

Purchases and sales of financial assets at fair value through profit or loss, held to maturity and available for sale are recognised on trade-date - the date on which the Group commits to purchase or sell the asset. Loans are recognised when cash is advanced to the borrowers. Financial assets are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership.

Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Equity securities for which fair values cannot be measured reliably are carried at cost less impairment. Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Gains and losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are included in the income statement in the period in which they arise. Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised directly in equity, until the financial asset is derecognised or impaired at which time the cumulative gain or loss previously recognised in equity should be recognised in profit or loss. However, interest calculated using the effective interest method is recognised in the income statement.

The fair values of quoted investments in active markets are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques.

h Impairment of financial assets

(a) Assets carried at amortised costThe Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets 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 (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Group about the following loss events:

(i) significant financial difficulty of the issuer or obligor;(ii) a breach of contract, such as a default or delinquency in interest or principal payments;

h Impairment of financial assets (continued)

(iii) the Group granting to the borrower, for economic or legal reasons relating to the borrower’s financial difficulty, a concession that the lender would not otherwise consider;

(iv) it becoming probable that the borrower will enter bankruptcy or other financial reorganisation;

(v) the disappearance of an active market for that financial asset because of financial difficulties; or

(vi) observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including:

- adverse changes in the payment status of borrowers in the group; or- national or local economic conditions that correlate with defaults on the assets in the group.

The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument’s fair value using an observable market price.

The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.


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��A N N U A L R E P O R T 2005


h Impairment of financial assets (continued)

For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (ie, on the basis of the Group’s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated.

Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the Group and historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently.

When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the income statement.

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 recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the income statement.

(b) Assets carried at fair valueThe Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available for- sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss - is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the income.

i Equipment and other fixed assets

Equipment and other fixed assets are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement when the expenditure is incurred.

Depreciation is calculated on the straight-line method to allocate the cost of each asset to its residual value over its estimated useful life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

The following depreciation rates have been used:

Computer hardware 25% Vehicles 20% Other fixed assets 15%

Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and value in use.

Gains and losses on disposal of property and equipment are determined by comparing proceed with carrying amount. These are included in the income statement.

j Intangible fixed assets

Intangible assets comprise mainly computer software and are stated at cost less accumulated amortisation and impairment. Amortisation is calculated on the straight-line method to write off the cost of each asset to their residual values over their estimated useful life of four years.

k Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months’ maturity from the date of acquisition including: cash, balances with the Bulgarian National Bank (BNB) excluding the statutory minimum required reserve, and amounts due from other banks.


Saida, Lebanon

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ANNUAL REPORT

2005


l Deferred income taxes

Taxation has been provided for in the financial statements in accordance with Bulgarian legislation currently in force. Current tax is calculated on the basis of the taxable profit for the year, using the tax rates enacted at the balance sheet date. Taxes other than on income are recorded within operating expenses.

Deferred income tax is provided using the balance sheet liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes.

Income tax payable on profits, based on the applicable tax law in the jurisdiction, is recognised as an expense in the period in which profits arise. The tax effects of income tax losses available for carry forward are recognised as an asset when it is probable that future taxable profits will be available against which these losses can be utilised.

m Provisions

Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.

n Borrowings

Borrowings are recognised initially at fair value, being their issue proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between proceeds net of transaction costs and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

o Share capital

Incremental external costs directly attributable to the issue of new shares are deducted from equity net of any related income taxes.

p Operating leases

Payments made under operating leases are charged against income in equal instalments over the period of the lease.


Photographer - Roger Moykarzel

��ANNUAL REPORT

2005




2 Financial risk management

a Strategy in using financial instruments

By their nature the Group’s activities are principally related to the use of financial instruments. The Group accepts deposits from customers and seeks to earn above average interest margins by investing these funds in high quality assets. The Group seeks to increase these margins by consolidating short-term funds and lending for longer periods at higher rates whilst maintaining sufficient liquidity to meet all claims that might fall due.

The Group also seeks to raise its interest margins by obtaining above average margins, net of provisions, through lending to commercial borrowers with a range of credit standing. Such exposures involve not just on-balance sheet loans and advances but the Group also enters into guarantees and other commitments.

The Board places trading limits on the level of exposure that can be taken in relation to both overnight and intra-day market positions.

b Credit risk

The Group takes on exposure to credit risk which is the risk that a counterparty will be unable to pay amounts in full when due. Impairment provisions are provided for losses that have been incurred at the balance sheet date. Significant changes in the economy, or in the health of a particular industry segment that represents a concentration in the Group’s portfolio, could result in losses that are different from those provided for at the balance sheet date. Management therefore carefully manages its exposure to credit risk.

The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and the geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. Limits on the level of credit risk by product and industry sector are approved by the Management Board.

The exposure to any one borrower including banks is further restricted by sub-limits covering on and off-balance sheet exposures and daily delivery risk limits in relation to trading items. Actual exposures against limits are monitored daily.

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees.

b Credit risk (continued)

Credit related commitments

The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees, which represent irrevocable assurance that the Group will make the payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans.

Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans and guarantees. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total commitments since commitments to extend credit are contingent upon customers maintaining specific credit standards. The Group monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments.

c Geographical concentration of assets, liabilities and off balance sheet items

The following note incorporate IAS 32 credit risk disclosure, IAS 30 geographical concentration of assets, liabilities and off balance sheet items disclosures. The majority of Group’s customers are Bulgarian citizens and local legal entities. The Group’s correspondent banks are Bulgarian and Slovenian banks with investment rating. The Group is exposed to many sectors of the Bulgarian economy. However, credit risk is well spread over a diverse range of individual and commercial customers.

Total assets Total liabilities

2005 2004 2005 2004

Bulgaria 94,076 61,228 36,003 31,184Slovenia 12,169 6,200 30,367 20,077Other countries 794 2,581 24,385 4,318Total 10�,0�� 0,00� �0,�55 55,5��

d Market risk

The Group takes on exposure to market risks. Market risks arise from open positions in interest rate and currency products, all of which are exposed to general and specific market movements. The Group estimates the market risk of positions held and the maximum losses expected, based upon a number of assumptions for various changes in market conditions. The Management Board sets limits on the value of risk that may be accepted.


��ANNUAL REPORT

2005




e Currency risk

The Group takes on exposures to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Management Board sets limits on the level of exposure by currency which is monitored daily. As a principle, the Group does not maintain open currency positions. The table below summarizes the Group’s exposure to foreign currency exchange rate risk at 31 December 2005 and 2004. Included in the table are the Group’s assets and liabilities at carrying amounts, categorized by currency.

As at 31 December 2005 BGN EUROOther

currenciesTotal

AssetsCash and balances with BNB 6,259 3,457 701 10,417Trading securities 300 - - 300Loans and advances to banks - 12,039 1,686 13,725Investment securities -held-to-maturity 1,859 2,476 - 4,335Investment securities-available-for-sale - 20 - 20Loans to customers 23,826 48,289 3,911 76,026Other assets 185 628 - 813Tangible and intangible assets 1,403 - - 1,403

Total assets ��,��2 ��,�0� �,2�� 10�,0��

LiabilitiesDeposits from banks - 32,818 3,920 36,738Due to customers 9,218 17, 580 2,386 29,184Other borrowing funds 14,001 9,849 - 23,850Other liabilities 381 588 14 983

Total liabilities 2�,�00 �0,��5 �,�20 �0,�55

Net on-balance sheet position 10,2�2 �,0�� (22) 1�,2��

Credit commitments 5,463 15,287 1,862 22,612

e Currency risk (continued)

As at 31 December 2004 BGN EUROOther

currenciesTotal

AssetsCash and balances with BNB 2,122 404 2,760 5,286Loans and advances to banks 500 4,870 4,466 9,836Investment securities -held-to-maturity 516 2,975 - 3,491Investment securities-available-for-sale - 20 - 20Loans to customers 18,873 25,360 5,500 49,733Other assets 105 57 2 164Tangible and intangible assets 1,479 - - 1,479

Total assets 2�,5�5 ��,�� 12,�2� �0,00�

LiabilitiesDeposits from banks - 10,886 7,960 18,846Due to customers 9,904 4,999 4,605 19,508Other borrowing funds 10,890 5,876 - 16,766Other liabilities 171 81 207 459

Total liabilities 20,��5 21,��2 12,��2 55,5��

Net on-balance sheet position 2,��0 11,�� (��) 1�,��0

Credit commitments 2,973 12,122 9,227 24,322


�0ANNUAL REPORT

2005




f Cash flow and fair value interest rate risk

Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Group takes on exposures to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. The Management Board sets limits on the level of mismatch of interest rate repricing that may be undertaken, which is monitored daily. The Management Board is satisfied that the Group’s position is such that exposure to movements in interest rates is minimized.

The table below summarizes the effective interest rate by major currencies for monetary financial instruments carried at fair value through profit or loss.

As at 31 December 2005 % BGN USD EUR

AssetsDeposits 2.01 3.50 2.95Held to maturity securities 6.30 - 6.00Loans to customers 9.26 5.92 8.26

Liabilities Deposits from banks 2.03 3.38 2.38Due to customers (time deposit) 2.92 4.18 2.96Due to customers (current account) 0.58 0.24 0.54Other borrowed funds 2.00 - 3.45

As at 31 December 2004 % BGN USD EUR

AssetsLoans and advances to banks 1.30 2.23 2.76Held to maturity securities 6.57 - 6.08Loans to customers 8.90 6.90 7.70

LiabilitiesDeposits from banks 1.97 2.55 3.29Due to customers (time deposit) 3.05 0.57 3.00Due to customers (current account) 0.55 0.25 0.56Other borrowed funds 2.00 - 4.70

f Cash flow and fair value interest rate risk (continued)

Interest sensitivity of assets, liabilities and off balance sheet items

The table below and on the next page summarizes the Group’s exposure to interest rate risks. Included in the table are the Group’s assets and liabilities at carrying amounts, categorized by the earlier of contractual repricing or maturity dates.

Expected repricing and maturity dates do not differ significantly from the contract dates, except for the maturity of BGN 2,600 thousand of due to customers up to 1 month, of which 84% represent balances on current accounts considered by the Group as a relatively stable core source of funding of its operations.

As at 31 December 2005Up to 1 month

1- 3 months

3 -12 months

1 - 5 years

Over 5 years

Non-interest bearing

Total

Assets Cash and BNB balances - - - - - 10,417 10,417Trading securities - - - - - 300 300Loans and advances to banks 2,968 293 10,464 - - - 13,725Investment securities-held-to-maturity - - - 4,335 - - 4,335Investment securities-available-for-sale - - - - - 20 20Loans to customers 12,159 10,496 18,667 34,704 - - 76,026Other assets - - - - - 813 813Tangible and intangible assets - - - - - 1,403 1,403

Total assets with interest 15,12� 10,�� 2�,1�1 ��,0�� - 12,�5� 10�,0��

Liabilities Deposits from banks 22,085 8,019 6,634 - - - 36,738Due to customers 25,807 1,871 306 1,200 - - 29,184Other borrowed funds - - 9,849 14,001 - - 23,850Other liabilities - - - - - 983 983

Total liabilities with interest ��,��2 �,��0 1�,�� 15,201 - �� 0,�55

Interest sensitivity gap (�2,��5) �� 12,��2 2�,�� - 11,��0 1�,2��


�2ANNUAL REPORT

2005


f Cash flow and fair value interest rate risk (continued)

As at 31 December 2004Up to 1 month

1- 3 months

3 -12 months

1 - 5 years

Over 5 years

Non-interest bearing

Total

Assets Cash and BNB balances - - - - - 5,286 5,286Due from other banks 6,544 - 3,292 - - 9,836Investment securities-held-to-maturity - - - 3,491 - - 3,491Investment securities-available-for-sale - - - - - 20 20Loans to customers 1,884 10,868 10,657 26,324 - - 49,733Other assets - - - - - 164 164Tangible and intangible assets - - - - - 1,479 1,479

Total assets with interest �,�2� 10,�� 1�,�� 2�,�15 - �,�� 0,00�

Liabilities Due to other banks 18,846 - - - - - 18,846Due to customers 14,314 1,355 3,393 446 - - 19,508Other borrowed funds - - - 16,766 - - 16,766Other liabilities - - - - - 459 459

Total liabilities with interest ��,1�0 1,�55 �,�� 1�,212 - �5� 55,5��

Interest sensitivity gap (2�,��2) �,51� 10,55� 12,�0� - �,��0 1�,��0

Bled, Slovenia

��


Photographer - Joco Žnidarčič

��ANNUAL REPORT

2005




g Liquidity risk

The Group is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan draw-downs, and guarantees. The Group does not maintain cash resources to meet all of these needs as experience shows that a minimum level of reinvestment of maturing funds can be predicted with reasonable certainty. The Management Board sets limits on the minimum proportion of maturing funds available to meet such calls and on the minimum level of interbank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand. The Group is trying to maintain balance between maturity terms of attracted funds and flexibility in the usage of funds of various maturity structures.

The table below and on the next page analyses assets and liabilities of the Group into relevant maturity groupings based on the remaining period to the contractual maturity date at balance sheet date.

Maturities of assets and liabilities As at 31 December 2005

Up to 1 month

1- 3 months

3 -12 months

1 - 5 yearsNot

definedTotal

Assets Cash and BNB balances 10,417 - - - - 10,417Trading securities 300 - - - - 300Loans and advances to banks 2,913 2,285 8,527 - - 13,725Investment securities held-to-maturity - - - 4,335 - 4,335Investment securities available-for-sale 20 - - - - 20Loans to customers 12,159 10,496 18,667 34,704 - 76,026Other assets 813 - - - - 813Tangible and intangible assets - - - - 1,403 1,403

Total assets 2�,�22 12,��1 2�,1�� ,0�� 1,�0� 10�,0��

Liabilities Deposits from banks 22,085 8,019 6,634 - - 36,738Due to customers 25,807 1,871 306 1,200 - 29,184Other borrowed funds - - - 23,850 - 23,850Other liabilities 983 - - - - 983

Total liabilities ��,��5 �,��0 �,��0 25,050 - �0,�55Net liquidity gap (22,25�) 2,��1 20,25� 1�,�� 1,�0� 1�,2�2Cumulative net liquidity gap (22,25�) (1�,��2) ��2 1�,��1 1�,2�� -

g Liquidity risk (continued)

Maturities of assets and liabilities As at 31 December 2004

Up to 1 month

1- 3 months

3 -12 months

1 - 5 yearsNot

definedTotal

Assets Cash and BNB balances 5,286 - - - - 5,286Loans and advances to banks 6,544 - 3,292 - - 9,836Investment securities held-to-maturity - - - 3,491 - 3,491Investment securities available-for-sale 20 - - - - 20Loans to customers 1,884 10,868 10,657 26,324 - 49,733Other assets 164 - - - - 164Tangible and intangible assets - - - - 1,479 1,479

Total assets 1�,�� 10,�� 1�,�� 2�,�15 1,�� 0,00�

Liabilities Deposits from banks 18,846 - - - - 18,846Due to customers 14,314 1,355 3,393 446 - 19,508Other borrowed funds 8 - - 16,758 - 16,766Other liabilities 459 - - - - 459

Total liabilities ��,�2� 1,�55 �,�� 1�,20� - 55,5��

Net liquidity gap (1�,�2�) �,51� 10,55� 12,�11 1,�� 1�,��0

Cumulative net liquidity gap (1�,�2�) (10,21�) ��0 12,�51 1�,��0 -

The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks to be completely matched, as transacted business is often of uncertain term and of different types. An unmatched position potentially enhances profitability, but also increases the risk of losses.


��ANNUAL REPORT

2005




g Liquidity risk (continued)

The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates and exchange rates.

Liquidity requirements to support calls under guarantees and standby letters of credit are considerably less than the amount of the commitment because the Group does not generally expect the third party to draw funds under the agreement. The total outstanding contractual amount of commitments to extend credit does not necessarily represent future cash requirements, as many of these commitments will expire or terminate without being funded.

h Fair values of financials assets and liabilities

Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price. The estimated fair values of financial instruments have been determined by the Group using available market information, where it exists, and appropriate valuation methodologies. However, judgment is necessarily required to interpret market data to determine the estimated fair value. While Management has used available market information in estimating the fair value of financial instruments, the market information may not be fully reflective of the value that could be realized in the current circumstances.

The table below summarizes the carrying amounts and fair values of the Group’s assets and liabilities.

Carrying value Fair value

2005 2004 2005 2004

Financial assetsLoans and advances to banks 13,725 9,836 13,725 9,836Loans to customers 76,026 49,733 76,208 49,733Held -to-maturity investments 4,335 3,491 4,445 3,508

Financial liabilitiesDeposits from banks 36,738 18,846 36,729 18,846Due to customers 29,184 19,508 29,184 19,508Other borrowed funds 23,850 16,766 23,836 16,766

h Fair values of financials assets and liabilities (continued)

a) Loans and advances to banksLoans and advances to banks include inter-bank placements and items in the course of collection. The fair value of floating rate placements and overnight deposits is their carrying amount. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and remaining maturity.

b) Loans to customersLoans are carried at amortised cost and are net of provisions for impairment. The estimated fair value of fixed rate loans and advances to customers represents the discounted amount of estimated future cash flows, expected to be received. To determine fair value estimated future cash flows are discounted at market interest rates prevailing at the balance sheet dates. Fair value incorporates expected future losses, while amortized cost and related impairment include only incurred losses at the balance sheet date.

c) Held-to maturity investmentsThe fair value of investments held-to-maturity is estimated using their market quotations as at the year end.

d) Deposits from banks and due to customersThe fair value of deposits from banks and customer current accounts and term deposits approximates their carrying amount due to their short-term nature.

e) Other borrowed fundsThe estimated fair value of other borrowed funds without quoted market price is based on discounted cash flows using interest rates for new debts with similar remaining maturity.



Plovdiv, Bulgaria

��



� Critical accounting estimates and judgements in applying accounting policies

The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

(a) Impairment losses on loans and advancesThe Group reviews its loan portfolios to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in the income statement, The Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in The Group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

(b) Held-to-maturity investmentsThe Group follows the guidance of IAS 39 on classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. This classification requires significant judgement. In making this judgement, The Group evaluates its intention and ability to hold such investments to maturity. If The Group fails to keep these investments to maturity other than for the specific circumstances - for example, selling an insignificant amount close to maturity - it will be required to reclassify the entire class as available-for-sale. The investments would therefore be measured at fair value not amortised cost.


4 Net interest income 2005 2004

Interest incomeLoans and advances to customers 7,490 2,596Banks and financial institutions 280 284Investment securities 234 144

Total interest income �,00� �,02�

Interest expenseBanks and customers 950 281Other borrowed funds 666 112

Total interest expense 1,�1� ��

5 Net fee and commission income 2005 2004

Fee and commission incomeFee income on guarantees and letters of credit 315 355Fee income on transfers 246 189Other fee and commissions 138 55

Total fee and commission income �� 5��

Fee and commission expenseFee for confirmation of guarantees and letters of credit 59 99Fee for bank transfers 21 25Other fees and commissions 33 12

Total fee and commission expense 11� 1��

6 Net trading income 2005 2004

Gain / (loss) from foreign currency, net 178 124Gain / (loss) from trading securities, net (22) 52

Net trading income 15� 1��Photographer - Joco Žnidarčič

Kras, Slovenia

5051




52ANNUAL REPORT

2005




7 Other operating expenses 2005 2004

Administrative expenses 1,881 1,329Staff costs (Note 8) 589 487Depreciation and amortisation (Notes 15 and 16) 422 360Operating lease rentals 197 194Materials 57 49

Total operating expenses �,1�� 2,�1�

8 Staff costs 2005 2004

Wages and salaries 470 384Social security costs 119 103

Total staff costs 5��

The number of the employees at the end of 2005 was 2� (200�: 2�).

9 Income tax expense 2005 2004

Current tax 122 -Deferred tax - -

122 -Information about deferred tax is presented in Note 25 The tax on Group’s profit before tax differs from the theoretical amount that would arise using the basic tax rate as follows:

Profit / (loss) before tax 1,976 136

Theoretical tax at a tax rate of 15% (2004: 19.5%) 296 27

Tax effect of expenses not deductible for tax purposes 21 15Tax effect of income not subject to tax (1) -Usage of tax losses brought forward (194) (42)Income tax expense 122 -

10 Cash and balances with Central Bank 2005 2004

Cash in hand 1,614 925Balances with Central Bank other than mandatory reserve 5,869 1,888

Included in cash and cash equivalents (Note 2�) �,�� 2,�1�

Mandatory reserve with Central Bank 2,934 2,473

Total cash and balances with Central Bank 10,�1� 5,2��

At 31 December 2005 the statutory minimum required reserve represented 8% of demand and time deposits, except for the deposits of local banks, through debt/capital (hybrid) instruments meet the requirements of Article 5 paragraph 2, item 3 of Ordinance ¹ 8of the BNB and subordinated term debts meet the requirements of Article 5 paragraph 2, item 4 of Ordinance ¹ 8of the BNB. Mandatory reserve deposits are not available for use in the Bank’s day to day operations. Cash in hand and balances with central banks and mandatory reserve deposits are non-interest-bearing.

11 Loans and advances to banks 2005 2004

Placements with foreign banks 3,602 3,536Placements with local banks 1,244 2,496Current accounts with foreign banks 233 294Current accounts with local banks 119 27Other due from foreign banks - 191

Included in cash and cash equivalent (Note 2�) 5,1�� ,5��

Loans and advances to other banks 8,527 3,292

Total loans and advances to banks 1�,�25 �,��

Loans with variable rates are BGN nil (2004: BGN 2,934 thousand) and with fixed rates are BGN 13,725 thousand (2004: BGN 6,902 thousand).


5�ANNUAL REPORT

2005




12 Investment securities 2005 2004

Equity securities available-for-sale 20 20Listed debt securities held-to-maturity 4,335 3,491

Total investment securities �,�55 �,511

All debt securities have fixed coupons. Included in investment securities held-to-maturity is accrued interest receivable of BGN 69 thousand (2004: 50 thousand).

Listed debt securities held-to-maturity at amortized cost of BGN 4,016 thousand (2004: BGN 3,491 thousand) had been pledged to HVB Bank Biochim to secure money market deposits received.

13 Loans and advances to customers 2005 2004

Loans to:Individuals 1,843 591Private enterprises 76,913 49,890

Total gross loans and advances ��,�5� 50,��1

Less allowance for losses on loan and advances (2,727) (748)

Total net loans and advances ��,02� ��,��

1� Loans and advances to customers (continued)

Movement in provisions is as follows: 2005 2004

Balance at beginning of period 748 33Net increase in provisions for loan impairment 2,008 715Loans written off against provision (29) -

Balance at �1 December 2,�2� ��

Economic sector risk concentrations within the customer loan portfolio before provisions were as follows:

2005 % 2004 %

Commerce 21,229 27.0 % 13,307 26.4 %Agriculture 15,121 19.2 % 9,892 19.6 %Construction 14,173 18.0 % 2,487 4.9 %Manufacturing 12,484 15.9 % 7,235 14.3 % Services 7,535 9.5 % 3,113 6.2 %Tourism 6,371 8.1 % 6,835 13.5 %Individuals 1,616 2.0 % 2,211 4.4 %Staff 224 0.3 % 199 0.4 %Energy - - 5,202 10.3 %

Total gross loans and advances ��,�5� 100.0 % 50,��1 100.0 %

As at 31 December 2005 the ten largest loans and advances to customers represented 39.68 % of the Group’s loan portfolio after provisions. As at the end of 2004 the ten largest loans and advances to customers represented 55.7 % of the Group’s loan portfolio after provisions.

Included in loans to customers is accrued interest receivable of BGN 453 thousand (2004: BGN 138 thousand).

Loans with variable rates are BGN 15,152 thousand (2004: BGN 7,758 thousand) and fixed rates are BGN 60,874 thousand (2004: BGN 41,975 thousand).


5�ANNUAL REPORT

2005




14 Intangible assets 2005 2004

Opening net book amount 586 774Additions 207 15Amortisation charge (Note 7) (209) (203)

Closing net book amount 5�� 5��

15 Åquipment and other tangible fixed assets 2005 2004

Opening net book amount 893 649Additions 341 401Disposals (202) -Depreciation charge (Note 7) (213) (157)

Closing net book amount �1� ��

16 Other assets 2005 2004

Prepayments and deferred expenses 745 118 Other receivables 57 40 Materials 11 6

Total other assets �1� 1��

17 Deposits from banks 2005 2004

Deposits from other banks 36,729 18,836Current accounts of other banks 9 10

Total deposits from banks ��,�� 1�,��

Deposits from banks include accrued interest of BGN 151 thousand at the end of 2005. (2004: BGN 23 thousand). All deposits from banks have variable interest rates.

18 Due to customers 2005 2004

Corporate customers - Current/settlement accounts 18,339 8,043 - Term deposit 7,512 8,968

Retail customers - Current/demand accounts 3186 391 - Term deposits 147 2,106

Total due to customers 2�,1�� 1�,50�

Due to customers includes accrued interest of BGN 62 thousand at the end of 2005 (2004: BGN 15 thousand).

As at 31 December 2005 the ten largest deposits from customers represent 56.65 % of the Group’s total due to customers (2004: 49%) and 18.22 % of total liabilities (2004: 17%).

Included in the customer accounts were deposits of BGN 898 thousand (2004: BGN 196 thousand) held as collateral for irrevocable commitments under import letter of credits.

19 Other borrowed funds 2005 2004

From fund “Zemedelie” 14,001 10,890Subordinated loan from Nova Ljubljanska Banka 5,931 -Other borrowed funds 3,918 5,876

Total other borrowing funds 2�,�50 1�,��

Other borrowed funds include accrued interest of BGN 77 thousand (2004: 13 thousand).

Financing received from State Fund ‘Zemedelie’ is at fixed interest rate of 2% p.a.

The subordinated facility is at floating interest rate of EURIBOR + 0.2% p.a.

Other borrowed funds are at floating interest rate of 6 m EURIBOR + 2.5% p.a.

The Group has not had any defaults of principal, interest or other breaches with respect to its liabilities during the period (2004: none).


5�ANNUAL REPORT

2005




20 Other liabilities 2005 2004

Ordered transfers 626 126Accruals 96 64Deferred fees on guarantees and letters of credit 38 162Taxes other than income taxes payable 7 17Sundry creditors 141 90

Total other liabilities �0� �5�

21 Contingent liabilities and commitments 2005 2004

Guarantee and standby letters of credit 12,295 12,775Commitments to extend credits 7,416 7,301Documentary and commercial letters of credit 2,901 4,246

Total contingent liabilities and commitments 22,�12 2�,�22

Operating lease commitments 2005 2004

Where the Group is the lessee the future minimum lease payments under non cancellable building operating leases are as follows:

Less than 1 year 16 16Over 1 year and less than 5 years - -Over 5 years - -

1� 1�

22 Assets pledged

Assets are pledged as collateral under money market transactions with other banks. Mandatory reserve deposits are held with the Central Bank in accordance with statutory requirements.

Asset Related liability2005 200� 2005 200�

Mandatory reserves with BNB (Note 10) 2,934 2,473 - -Investment securities held-to-maturity (Note 12) 4,016 3,491 3,129 2,740

Total �,�50 5,�� ,12� 2,��0

23 Share capital

At 31 December 2005 the total share capital represents 15,800,000 ordinary shares (2004: 15,800,000) with nominal value of BGN 1 each. All shares carry equal voting rights and are fully paid. The shareholders of the Group are:

31 December 2005 31 December 2004BGN (%) BGN (%)

Aktiva Holdings B.V. 11,456,580 72.51% 11,456,580 72.51%Factor Bank JSC 472,420 2.99% 472,420 2.99%LBMaxima Ltd. 3,871,000 24.50% 3,871,000 24.50%

Total 15,�00,000 100% 15,�00,000 100%


�0ANNUAL REPORT

2005




24 Cash and cash equivalents 2005 2004

Cash in hand and balances with Central Bank (Note 10) 7,483 2,813Loans and advances to banks (Note 11) 5,198 6,544

Total cash and cash equivalents 12,��1 �,�5�

25 Deferred income taxes

Deferred tax asset on the losses carried forward in the amount of BGN 194 thousand has not been recognized in 2004, due to the uncertainty about generating sufficient taxable profit in the foreseeable future to utilize them. In 2005 the whole amount of losses carried forward were utilized (BGN 42 thousand used in 2004 from 2003).

2� Related party transactions

The Group is controlled by Aktiva Holdings B.V. (incorporated in Netherlands), which owns 72.5% of the ordinary shares. The ultimate parent is Aktiva Capital (incorporated in Luxemburg).

A number of banking transactions are entered into with related parties in the normal course of business. These include loans, deposits and bonds purchases. These transactions were carried out on commercial terms and at market rates. The volumes of related party transactions outstanding at the year end, and relating expense and income for the year are as follows:

Factor bank: 2005 2004

Current accounts 34 78Deposits due from Factor bank 12,129 4,385Bonds bought - -Deposits due to Factor bank 4,812 5,344

Interest income 174 136Interest expense (114) (113)

LBMaxima: 2005 200�

Interest income - 19

Nova Ljubljanska Banka 2005 200�

Subordinated loan 5,931 -Loan 3,918 5,876Deposits 7,780 7,661Current accounts 5 11

Interest expense 472 83

The Group transferred loan balances amounting to BGN 46,260 thousand to Factor Bank and Nova Ljubljanska Banka without recourse during the year ended 31 December 2005 (2004: BGN 2,674 thousand). The loan balances were transferred at their fair value.

In 2005, the total remuneration of the key management personnel was BGN 237 thousand (2004: BGN 173 thousand).

2� Related party transactions (continued)


Photographer - Ursula Gahwiler

Cedars, Lebanon

�2��


CONTACT LIST OF WEST-EAST BANK AD

Name and Position Tel. number, e-mail address

MANAGEMENT BOARD

Dusan Valencic + 359 2 970 24 10(President of the Management Board, Executive Director) [email protected]

Nabil K. Issa + 359 2 970 24 10(Member of the Management Board, Executive Director) [email protected]

Margarita Gencheva + 359 2 970 24 10(Member of the Management Board, Executive Director) [email protected]

Safi Harb Ph.D. + 359 2 970 24 10(Procurator) [email protected]

GENERAL INFORMATION + 359 2 970 24 10Alexandra Petsas (Management Board Secretary) [email protected]

INTERNATIONAL DEPARTMENT + 359 2 970 24 44Goran Kreacic (Head of International Department) [email protected]

RISK DEPARTMENT + 359 2 970 24 35 Sonya Sofronova (Head of Risk Department) [email protected]

TREASURY + 359 2 970 24 18Emil Hubenov (Head of Treasury Department) [email protected]

LOAN DIVISION + 359 2 970 24 26Veska Ivanova (Head of Loan Department) [email protected]

DOCUMENTARY OPERATIONS + 359 2 970 24 25Georgi Georgiev (Head of Documentary Operations Department) [email protected]

FRONT OFFICE + 359 2 970 24 16Tzvetelina Atanasova (Front Office Manager) [email protected]

ACCOUNTING DEPARTMENT + 359 2 970 24 19Penka Docheva-Hazbun (Chief Accountant) [email protected]

BACK OFFICE, SWIFT + 359 2 970 24 50Valentina Krumova (Back Office) [email protected]

INFORMATION TECHNOLOGY DEPARTMENT + 359 2 970 24 55Zdravko Gabrovski (Head of ITDepartment) [email protected]

INTERNAL AUDIT + 359 2 970 24 29Lily Boteva (Internal Auditor) [email protected]

West-East Bank ADINTERPRED World Trade Centre - Sofia36, Dragan Tsankov Blvd., 1040 Sofia, BulgariaTel: + 359 2/ 970 24 10; Fax: + 359 2/ 970 24 42SWIFT: WEBKBGSF www.westeastbank.com

ANNUAL REPORT 2005 - TBI Bank

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Transcript of ANNUAL REPORT 2005 - TBI Bank