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CREDIT AGRICOLE BANKA SRBIJA A.D. NOVI SAD

STAND ALONE FINANCIAL STATEMENTS

FOR THE YEAR ENDED ON 31 DECEMBER 2016

AND INDEPENDENT AUDITOR’S REPORT

CREDIT AGRICOLE BANKA SRBIJA A.D.NOVI SAD

Stand Alone Financial Statements for the year ended on 31 December 2016

_________________________________________________________

Table of Contents

Stand Alone Independent Auditor’s Report 1

Stand Alone Balance Sheet

Stand Alone Income Statement

Stand Alone Other Comprehensive Income Statement

Stand Alone Statement of Changes in Equity

Stand Alone Cash Flow Statement

Notes to the Stand Alone Financial Statements 2-86

pwc

INDEPENDENT AUDITOR'S REPORT

To the Shareholders of Credit Agricole banka Srbija a.d. Novi Sad

We have audited the accompanying stand alone financial statements of Credit Agricole banka Srbija a.d. Novi Sad (the "Bank") which comprise the balance sheet as of 31 December 2016 and the income statement, statement of other comprehensive income, 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.

Management's Responsibility for the stand alone Financial Statements

Management is responsible for the preparation and fair presentation of these stand alone financial statements in accordance with International Financial Reporting Standards and for such internal control as management determines is necessary to enable the preparation of stand alone financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these stand alone financial statements based on our audit. We conducted our audit in accordance with Law on Auditing and auditing regulation effective in the Republic of Serbia. This regulation requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the stand alone financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the stand alone financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the stand alone 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 stand alone 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 stand alone financial statements.

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

Opinion

In our opinion, the accompanying stand alone financial statements present fairly, in all material respects, the financial position of Credit Agricole banka Srbija a.d. Novi Sad as of 31 December 2016, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

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Todorovic RaideitAA.7 m„.1.1.L.ted P . etrl (24.14

PricewaterhouseCoopers d.o.o. Beograd Licensed Auditor

Belgrade, 25 April 2017

PricewaterhouseCoopers d.o.o., Omladinskih brigada 88a, 11070 Belgrade, Republic of Serbia T: +381 11 3302 100, F:+381 11 3302 101, www.pwc.rs

This version of our report/ the accompanying documents is a translation from the original, which was prepared in Serbian. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation.

Novi Sad 31 March 2017

Head of Accounting

CREDIT AGRICOLE BANKA SRBIJA AD NOVI SAD

STANDALONE BALANCE SHEET ON 31' DECEMBER 2016

ASSETS Note 31.12.2016

(in Ihcusancis RSD)

31.12.2015

Cash and cash funds held with the central bank 14 11,068,675 9,450,342 Financial assets initially recognized at fair value through profit or loss.

2,767

Financial assets held to maturity 15 462,001 2,456.429

Loans and receivables due from banks and other financial institutions 16 5,532,187 6.559.633

Loans and receivables due from customers 17 58.144,509 50,771.068

Investments in subsidiaries 18 78,667 78,667

Intangible assets 19 121,458 148.788

Property, plant and equipment 20 1,482.051 1.437.565

Investment property 21 157,945 155.538

Deferred tax assets 13 90,664 125942

Other assets 22 389,914 364.908

TOTAL ASSETS 77,530,848 71,548,880

LIABILITIES

Deposits and other liabilities due to banks, other financial institutions and the central bank

23 17,322.214 17.873,085

Deposits and other liabilities due to customers 24 48,158.207 41.833.494

Subordinated liabilities 25 2,483.767 2.447,899

Provisions 26 139.976 117,320

Current tax liabilities 13 458 633

Other liabilities 27 672,911 700,243

TOTAL LIABILITIES 68,777,533 62.977,674

Equity

Share capital 28 8,420,500 8 420.500

Profit 28 302,999 129,018

Loss

Reserves 28 29,816 21.688

TOTAL CAPITAL 28 8,753,315 8,571,206

TOTAL LIABILITIES 77,530,848 71.548,880

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17


STANDALONE INCOME STATEMENT FOR THE YEAR ENDING 31st DECEMBER 2016

Note 2016

(in thousands RSD)

2015

INCOME AND EXPENSES

Interest income 5 3,725,636 3,771,278

Interest expenses 5 (566,657) (901,772)

Net interest income 5 3,158,979 2,869,506

Fees and commissions income 6 1,623,796 1,617,302

Fees and commissions expense 6 (415,237) (434,466)

Net fees and commissions income 6 1,208,559 1,182,836

Net losses from risk protection (18) (8,310)

Net gains on financial assets that are initially recognized at fair value through profit or loss

2,767

Net foreign exchange losses and the foreign currency clause effects

7 (48,488) (18,843)

Other operating income 8 107,813 81,307

Net losses from impairment of financial assets and credit risk-weighted off-balance sheet items

9 (411,688) (285,139)

TOTAL NET BUSINESS INCOME 4,017,924 3,821,357

Salaries, wages and other personal expenses 10 (1,916,191) (1,807,938)

Depreciation 11 (236,337) (208,284)

Other expenses 12 (1,628,715) (1,614,216) PROFIT BEFORE TAXATION

236,681 190,919

Income tax 13 458 633

Deferred tax expenses 13 (35,278) (61,268)

PROFIT 200,945 129,018

Profit attributable to the parent entity 200,945 129,018

Earnings per share

Basic earnings per share (in RSD) 28 31 20


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STANDALONE OTHER COMPREHENSIVE INCOME STATEMENT FOR THE YEAR ENDING ON 31' DECEMBER 2016

2016

(in thousands RSD)

2015 PROFIT FOR THE PERIOD 200,945 129,018 Other comprehensive income: Components of other comprehensive income that cannot be reclassified to profit or loss: Increase of revaluation reserves 2,067 Actuarial gains 6,061 7,961 Other comprehensive income for the period 8,128 7,961 COMPREHENSIVE INCOME FOR THE PERIOD 209,073 136,979

Comprehensive income attributable to the parent entity 209,073 136,979


Zeljko Obradovio eailos De Cordoue

22


STATEMENT OF CHANGES IN EQUITY FOR THE PERIOD FROM 1st JANUARY TO 31st DECEMBER 2016

Share capital Share premium Other reserves Revaluation reserves

Retained earnings I

(Accumulated loss)

(in thousands RSD)

Total

Balance at 1st January 2015 13.122.105 1.523.079 111.500 13.546 (6.339.539) 8.430.691 Profit for the year 129.018 129.018 Accumulated other comprehensive income 7.961 7.961 Profit distribution — loss coverage (4.701.605) (1.523.079) (114.855) 6.339.539 Other - increase 3.355 181 3.536

Balance at 31st December 2015 8.420.500 21.688 129.018 8.571.206

Balance at 31st December 2016 8.420.500 21.688 129.018 8.571.206 Profit for the year 200.945 200.945 Accumulated other comprehensive income 8.128 8.128 Other— reduction (26.964) (26.964)

Balance at 31st December 2016 8.420.500 29.816 302.999 8.753.315

Novi Sad 31st March 2017

Head of Accounting

Member of the Executive Board

Chairman of the Executive Board

Vera Tas vska Zeljko Obradovie Carlos De Cordoue


STANDALONE CASH FLOW STATEMENT FOR THE YEAR ENDING ON 31' DECEMBER 2016

2016 (in thousands RSD)

2015

OPERATING ACTIVITIES Cash inflows from operating activities

5,535,096 5,537,478 Inflows from interests 3,796,075 3,612.086 Inflows from fees and commissions 1,629,183 1,636,591

Inflows from other operating activities 72,476 263,253

Inflows from dividends and profit sharing 37,362 25,548

Cash outflows from operating activities (4,622,394) (4,973,545)

Outflows from interests (653,622) (903,104) Outflows from fees and commissions (412,347) (433,062) Outflows from gross salaries, wages and other personal expenses (2,020,687) (1,734,656)

Outflows from taxes, contributions and other duties charged (78,532) (69,556) Outflows from other operating expenses (1,457,206) (1.833,167) Net cash inflow from operating activities before increase or decrease in loans and deposits

912,702 563,933

Decrease in loans and increase in deposits and other liabilities 8,464,132 5,953,701

Decrease in loans and receivables from banks and other financial institutions, the central bank and customers

1,409,456 103,410

Increase in deposits and other liabilities due to banks, other financial institutions, central banks and customers

7,054,676 5,850,291

Increase in loans and decrease in deposits and other liabilities (11,790,742) (3,806,968)

Increase in loans and receivables from banks and other financial institutions, the central bank and customers

(11,599,506) (3,806,968)

Decrease in deposits and other liabilities due to banks, other financial institutions, central banks and customers

(191,236)

Net (outflow)/inflow from operating activities before income tax (2,413,908) 2,710,666 Paid income tax (71,360) Net (outflow)/inflow from operating activities (2,413,908) 2,639,306 INVESTMENT ACTIVITIES Inflows from investment activities 2,914,072

Inflows from securities investment 2,914,072 Outflows from investment activities (1,175,556) (1,706,719) Outflows from securities investment (922,411) (1,456,429) Outflows from the purchase of intangible assets, property plant and equipment (253,145) (250,290)

Net cash inflow/outflow from financing activities 1,738,516 (1,706,719) FINANCING ACTIVITIES Inflows from financing activities 10,198 560,156 Inflows from borrowings 10,198 560,156 Outflows from financing activities (1,005,294) (481,367) Outflows from subordinated liabilities (87,435) (90,838) Outflows from borrowings (917,859) (390,529) Net outflows/inflows from financing activities (995,096) 78,789 TOTAL NET CASH INFLOWS 16,923,498 12,051,335 TOTAL NET CASH OUTFLOWS (18,593,986) (11,039,959) NET CASH INCREASE 1,011,376 NET CASH DECREASE (1,670,488) Cash and cash equivalents at the beginning of the year 9,277,089 8,284,556 Foreign exchange gains 3,846,544 6,986,124 Foreign exchange loss (3,895,032) (7,004,967) Cash and cash equivalent at the end of the year (Note 34) 7,558,113 9,277,089


Head of Accounting

Member of the Executive Board

Chairma tho Executive Board


NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in RSD thousand unless otherwise stated)

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1. THE ESTABLISHMENT OF THE BANK AND ITS OPERATIONS

Credit Agricole Banka Srbija a.d. Novi Sad (hereinafter referred to as: The Bank) was established on 15 August 1991 as Yuco – Bank a.d. Novi Sad in accordance with the Founding Act and the National Bank of Serbia Decision dated 19 February 1992 . The Bank was registered with the Commercial Court in Novi Sad on 3 March 1992. As of 20 September 2001, the Bank has been operating under the name of Meridian Bank A.D. Novi Sad in accordance with the Commercial Court of Novi Sad Decision no. Fi. 2766/07. As of 13 March 2006 by the Republic of Serbia Business Registers Agency’s Decision no. 110567-2006, the Bank changed its name into Meridian Bank – Credit Agricole Group Akcionarsko društvo, Novi Sad, and its short form into MEBA – CA GROUP AD, NOVI SAD. Based on Decision No. BD 137033/2009 issued by the Serbian Business Registers Agency dated 04.09.2009, the Bank changed its name from MERIDIAN BANK – CREDIT AGRICOLE GROUP into CREDIT AGRICOLE BANKA SRBIJA. The Bank’s full business name reads: CREDIT AGRICOLE BANKA SRBIJA AKCIONARSKO DRUŠTVO NOVI SAD, BRAĆE RIBNIKARA 4-6. Through the sale of the eighteenth issue of shares that took place in June 2005 the Bank became part of Credit Agricole S.A. Paris, one of the largest bank groups in Europe. As at 31/12/2016, a 100% shareholder of the Bank was Credit Agricole S.A. Paris. Under the Law on Banks, the Bank’s Founding Act and its Articles of Association, the Bank is registered to perform the following activities:

1. Deposit activities (accepting and placing deposits); 2. Credit activities (lending and borrowing arrangements); 3. Foreign exchange, foreign exchange-currency transactions and exchange operations; 4. Activities relating to payment operations; 5. Issuing payment cards; 6. Activities relating to securities (issuing securities, custody bank activities etc.); 7. Broker-Dealer operations, 8. Issuing guaranties, sureties and other types of warranties (guarantee operations); 9. Purchase, sale and collection of receivables (factoring, forfeiting, etc.); 10. Insurance agency activities, previously approved by the National Bank of Serbia; 11. Activities for which it is authorised by law; 12. Other activities that are by nature similar or connected to the activities specified in herein items 1

to 11 and are in compliance with the Founding Act and the Articles of Association of the Bank. The bodies of the Bank are: The Bank’s Assembly, the Board of Directors, the Executive Board and other committees of the Bank. The Bank establishes a Committee for monitoring business activities of the Bank (Audit Committee), the Benefits and Compensation Committee, the Credit Committee, the Committee for Managing Assets and Liabilities, as well as a special unit called Risk Management. The President and the members of the Board of Directors are appointed for a term of four years, having previously obtained approval of the National Bank of Serbia. The Board of Directors appoints and dismisses from duty the President and the members of the Executive Board of the Bank. The Bank operates through its Head Office located in Novi Sad, at 4-6 Braće Ribnikara street and a network of 82 branches located in major cities throughout Serbia (31 December 2015; 82 branches). As at 31 December 2016, the Bank had 928 employees (31 December 2015; – 917 employees). The Bank’s tax identification number is 101697525. The Bank’s identification number is 08277931. The Bank's financial statement for the year ended 31 December 2016, were approved by the Managing Board at the meeting held on 24 February 2017.



3

2. BASIS OF PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS 2.1 Basis of preparation and presentation of financial statements The Bank's financial statement for the year 2016 have been prepared in accordance with the International Financial Reporting Standards (IFRS) and the NBS regulations governing the system of financial reporting for banks. These are standalone financial statements comprising receivables, payables, income, movements within other comprehensive income, changes in equity, as well as the Bank’s cash flows. The Bank has prepared these standalone financial statements to file with the National Bank of Serbia in accordance with the Serbian regulation. The Bank has also prepared consolidated financial statements in accordance with the International Financial Reporting Standards for the Bank and its subsidiary (the “Group”). Users of these standalone financial statements should read them together with the Group’s consolidated financial statements as at and for the year ended 31 December 2016 in order to obtain full information on the financial position, results of operations and changes in financial position of the Group as a whole. The financial statements have been prepared under the historical cost convention, except for items measure at fair value such as: securities available-for-sale, derivatives, other financial assets and liabilities held for trading, financial assets and financial liabilities at fair value through profit and loss. The Bank’s financial statements are presented in RSD thousand unless otherwise stated. The Serbian dinar (RSD) is the functional currency of the Bank. All transactions in currencies other than the functional currency are treated as foreign currency transactions. The financial statements are prepared in accordance with the going concern concept, which assumes that the Bank will continue its operations for the foreseeable future. The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of current events and actions, actual results ultimately may differ from those estimates. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 4. In preparing these financial statements the Bank applied the accounting principles disclosed in Note 3. 2.2. Comparative information Comparative information represents audited financial statements of the Bank for the year ending 31 December 2015.



4

2. BASIS OF PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS (continued) 2.3. New and amended Standards and Interpretations

The following amended standards became effective for the Bank from 1 January 2016, but did not have any material impact on the Bank.

IFRS 14, Regulatory Deferral Accounts (issued in January 2014 and effective for annual periods beginning on or after 1 January 2016).

Accounting for Acquisitions of Interests in Joint Operations - Amendments to IFRS 11 (issued in May 2014 and effective for the periods beginning on or after 1 January 2016).

Clarification of Acceptable Methods of Depreciation and Amortisation - Amendments to IAS 16 and IAS 38 (issued in May 2014 and effective for the periods beginning on or after 1 January 2016).

Agriculture: Bearer plants - Amendments to IAS 16 and IAS 41 (issued in June 2014 and effective for annual periods beginning 1 January 2016).

Equity Method in Separate Financial Statements - Amendments to IAS 27 (issued in August 2014 and effective for annual periods beginning 1 January 2016).

Annual Improvements to IFRSs 2014 (issued in September 2014 and effective for annual periods beginning on or after 1 January 2016).

Disclosure Initiative Amendments to IAS 1 (issued in December 2014 and effective for annual periods on or after 1 January 2016).

Investment Entities: Applying the Consolidation Exception Amendment to IFRS 10, IFRS 12 and IAS 28 (issued in December 2014 and effective for annual periods on or after 1 January 2016).

2.4. Standards that have been issued but are not yet effective

IFRS 9 “Financial Instruments” (issued in July 2014 and effective for annual periods beginning on or after 1 January 2018). Key features of the new standard are:

o Financial assets are required to be classified into three measurement categories: those to be measured subsequently at amortised cost, those to be measured subsequently at fair value through other comprehensive income (FVOCI) and those to be measured subsequently at fair value through profit or loss (FVPL).

o Classification for debt instruments is driven by the entity’s business model for managing the financial assets and whether the contractual cash flows represent solely payments of principal and interest (SPPI). If a debt instrument is held to collect, it may be carried at amortised cost if it also meets the SPPI requirement. Debt instruments that meet the SPPI requirement that are held in a portfolio where an entity both holds to collect assets’ cash flows and sells assets may be classified as FVOCI. Financial assets that do not contain cash flows that are SPPI must be measured at FVPL (for example, derivatives). Embedded derivatives are no longer separated from financial assets but will be included in assessing the SPPI condition.

o Investments in equity instruments are always measured at fair value. However, management can make an irrevocable election to present changes in fair value in other comprehensive income, provided the instrument is not held for trading. If the equity instrument is held for trading, changes in fair value are presented in profit or loss.·

o Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income.



5

2. BASIS OF PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS (continued) 2.4. Standards that have been issued but are not yet effective (continued)

o IFRS 9 introduces a new model for the recognition of impairment losses – the expected credit losses (ECL) model. There is a ‘three stage’ approach which is based on the change in credit quality of financial assets since initial recognition. In practice, the new rules mean that entities will have to record an immediate loss equal to the 12-month ECL on initial recognition of financial assets that are not credit impaired (or lifetime ECL for trade receivables). Where there has been a significant increase in credit risk, impairment is measured using lifetime ECL rather than 12-month ECL. The model includes operational simplifications for lease and trade receivables.

o Hedge accounting requirements were amended to align accounting more closely with risk management. The standard provides entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 and continuing to apply IAS 39 to all hedges because the standard currently does not address accounting for macro hedging.

The Bank is currently assessing the impact of the new standard on its financial statements.

IFRS 15, Revenue from Contracts with Customers (issued on 28 May 2014 and effective for the periods beginning on or after 1 January 2018). The new standard introduces the core principle that revenue must be recognised when the goods or services are transferred to the customer, at the transaction price. Any bundled goods or services that are distinct must be separately recognised, and any discounts or rebates on the contract price must generally be allocated to the separate elements. When the consideration varies for any reason, minimum amounts must be recognised if they are not at significant risk of reversal. Costs incurred to secure contracts with customers have to be capitalised and amortised over the period when the benefits of the contract are consumed. The Bank is currently assessing the impact of the new standard on its financial statements.

IFRS 16, Leases (issued on 13 January 2016 and effective for annual periods beginning on or after 1 January 2019). The new standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. All leases result in the lessee obtaining the right to use an asset at the start of the lease and, if lease payments are made over time, also obtaining financing. Accordingly, IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. Lessees will be required to recognise: (a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and (b) depreciation of lease assets separately from interest on lease liabilities in the income statement. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. The Bank is currently assessing the impact of the new standard on its financial statements.



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2. BASIS OF PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS (continued) 2.4. Standards that have been issued but are not yet effective (continued)

Disclosure Initiative - Amendments to IAS 7 (issued on 29 January 2016 and effective for annual periods beginning on or after 1 January 2017). The amended IAS 7 will require disclosure of a reconciliation of movements in liabilities arising from financing activities. The Bank will present this disclosure in its 2017 financial statements.

The following other new pronouncements are not expected to have any material impact on the Group when adopted:

Sale or Contribution of Assets between an Investor and its Associate or Joint Venture - Amendments to IFRS 10 and IAS 28 (issued on 11 September 2014 and effective for annual periods beginning on or after a date to be determined by the IASB).

Recognition of Deferred Tax Assets for Unrealised Losses - Amendments to IAS 12 (issued on 19 January 2016 and effective for annual periods beginning on or after 1 January 2017).

Amendments to IFRS 15, Revenue from Contracts with Customers (issued on 12 April 2016 and effective for annual periods beginning on or after 1 January 2018).

Amendments to IFRS 2, Share-based Payment (issued on 20 June 2016 and effective for annual periods beginning on or after 1 January 2018).

Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts - Amendments to IFRS 4 (issued on 12 September 2016 and effective, depending on the approach, for annual periods beginning on or after 1 January 2018 for entities that choose to apply temporary exemption option, or when the entity first applies IFRS 9 for entities that choose to apply the overlay approach).

Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Bank’s Financial Statements.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3.1. Functional and reporting currency The principal accounting policies applied in the preparation of these financial statements are set out below. The policies have been consistently applied to all the years presented, unless otherwise stated. The Bank’s financial statements are presented in RSD thousand unless otherwise stated. The Serbian dinar (RSD) is the functional currency of the Bank. All transactions in currencies other than the functional currency are treated as foreign currency transactions. 3.2. Foreign currency translation Items included in the financial statements of the Bank are measured using the currency of the primary economic environment in which the Bank operates (the 'functional currency'). The financial statements are presented RSD thousand which is the functional currency of the Bank. Foreign currency transactions are translated into RSD using the interbank middle exchange rate prevailing at the date of transaction. Foreign exchange gains and losses arising from foreign currency transactions and translations of foreign currency items included in the balance sheet are credited or charged to the Income statement within “net foreign exchange gains/losses and currency clause effects“. The exchange rates defined at the Foreign Exchange Interbank Market as at 31 December 2016 , as at 31 December 2015 were as follows:

31.12.2016 31.12.2015

EUR 123,4723 121,6261

USD 117,1353 111,2468

CHF 114,8473 112,5230 3.3. Interest income and expense Interest income and expenses, including default interest and other income and expenses relating to interest-bearing assets and liabilities, are calculated on accrual basis and in accordance with the terms and conditions contracted between the Bank and the client. For all financial instruments measured at amortized cost and interest bearing financial instruments classified as available–for–sale, interest income or expense is recorded using the EIR, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. 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 Bank 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.



8

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.4. Fee and commission income and expense Fee and commission income and expense from rendering and using bank services are recognised on accrual basis at the time when the service is provided. Fee and commission mainly comprise fees for payment operations services, issued guarantees and other banking services. 3.5. Dividend income Dividend income is recognised when the right to receive payment is established. 3.6. Financial instruments Initial recognition of financial instruments Financial instruments are initially measured at fair value plus transaction costs (other than financial assets and liabilities, which are measured at fair value through profit and loss), which are directly attributable to the acquisition or issuance of a financial asset or liability. Financial assets and financial liabilities are recognised in the Bank's Balance Sheet when the Bank contractually commits to purchase or sell the instrument. Regular purchases and sales of financial assets are recognised at the settlement- the date when the asset is delivered to the other contracting party.

Subsequent measurement of financial instruments Subsequent measurement of financial instruments depends on their classification (Note 3.7). Derecognition of financial assets and financial liabilities Financial assets A financial asset (or part of a financial asset or group of financial assets) shall be derecognised if: • the contractual rights to the cash flows from the financial asset expire; or

• The bank has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass–through’ arrangement; and

• Either the bank has transferred substantially all the risks and rewards of the asset, or the bank has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Bank has transferred their rights to cash flows from the asset or has concluded a transfer agreement but has neither transferred of retained all the risks and rewords of the ownership of the asset and has not transferred control over the asset, the asset is recognised to the extent of the Bank’s continuing involvement. Where a guarantee causes the Bank's continuing involvement, the asset is measured at the lower of the carrying amount of the asset and the maximum amount of the consideration that the Bank would be required to pay.

Financial liabilities A financial liability is derecognised when the obligation specified in the contract is discharged or cancelled, or expired. When an existing financial liability is replaced by another towards the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the income statement.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.7 Classification of financial instruments The Management of the Bank determines the classification of its financial instruments at initial recognition. The classification of financial assets upon initial recognition depends on the purpose for which the financial instrument has been acquired and its characteristics. The Bank has classified its financial assets in the following categories: loans and receivables, financial assets available for sale, financial assets held to maturity and financial assets carried at fair value through profit and loss. Subsequent measurement of financial instruments depends on their classification:

a) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and advances to banks and customers approved by the Bank are recognised in the balance sheet as of the moment the funds have been transferred to the loan beneficiary. All loans and borrowings are initially recognized at fair value. As at the balance sheet date, loans are stated at amortised cost using the effective interest rate, less any impairment allowance. Amortized cost is calculated by taking into account any discount or premium on acquisition and includes fees and costs that are an integral part of the effective interest rate. Amortisation is included in the income statement within Interest income. Impairment losses are recognized in the income statement within Impairment losses on financial assets (net). Loan contracts entered into between the Bank and and its clients include a foreign currency clause. RSD loans with a currency clause linked to Euro are revalued in accordance with the provisions of each loan contract. Gains and losses arising on this basis are shown in the income statem ent as income/expenses arising from foreign exchange translation differences and currency clause effects. b) Financial assets available for sale Securities 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, are classified as available for sale. After initial recognition, available for sale securities are carried at fair value. The fair values of quoted available for sale securities are based on current bid prices. Unrealized gains and losses on available for sale securities are recognized as a part of other comprehensive income until the security is sold, collected or otherwise realized, or until the security is impaired. When securities available-for-sale are sold or impaired, the accumulated fair value adjustments recognized in other comprehensive income are transferred to the income statement. Interest income on debt securities is calculated using the effective interest method and recognised in the income statement within Interest income. Equity investments of other legal entities that do not have a quoted market price in an active market and for which other reasonable assessment methods are inadequate, are measured at cost less any allowance for impairment instead of at market value. Dividends on available-for-sale securities are included in other operating income and shares in equity when the right on their payment is established.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.7 Classification of financial instruments (continued) b) Financial assets available for sale (continued) For equity investments and other available for sale securities, the Bank assesses at the balance sheet date whether there is objective evidence that an investment or a group of investments is impaired. In the event of equity investments of other legal entities classified as available-for-sale, objective evidence shall be considered as significant or prolonged decline in the fair value of an investment below its cost. Where there is objective evidence of impairment, the cumulative gain - measured as the difference between the cost and current fair value, less any impairment losses that have been previously recognised in the income statement - is transferred from equity to the income statement. Provisions for impairment of equity investments are not reversed through profit and loss account; instead, fair value increase is subsequently directly credited to equity. Provisions for impairment of equity investments that are not quoted on an active market and the fair value of which cannot be reliably determined are measured as the difference between their carrying amounts and the present value of estimated future cash flows and charged to the Income statement, and are not reversed until assets are derecognised. c) Financial assets held to maturity Securities held-to-maturity are financial assets with fixed or determinable payments, which the Bank has the intention and ability to hold until their maturity date. After initial recognition, securities held to maturity are measured at amortized cost using the effective interest method, less any provision and impairment losses. Amortized cost is calculated by taking into consideration all purchase discount or premium during the period of maturity. The related interest income is calculated using the effective interest method and recognized as Interest income. Fees which are part of effective yield on these instruments are recognized in the income statement over the duration of the instrument. The Bank assesses whether objective evidence of impairment exists individually for investment in securities held-to-maturity. If objective evidence of impairment exists, the amount of loss on impairment of securities held to maturity is calculated as the difference between the net book value of investments and the present value of expected cash flows discounted at original interest rate for investment, and it is presented in the income statement as an expense arising from indirectly written-off investments and impaired financial assets. If, in subsequent years, the estimated impairment loss decreases as a result of an event occurring after the impairment was recognized, the previously recognized impairment loss is reduced and the related effects are recognized in the income statement. d) Financial assets at fair value through profit and loss

This category comprises: financial assets held for trading and financial assets at fair value through profit and loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term or for which there is a recent pattern of short-term profit taking, or if they are derivatives. These assets are recorded in the balance sheet at fair value.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.7 Classification of financial instruments (continued) d) Financial assets at fair value through profit and loss (continued) Gains and losses arising on the measurement and sale of financial assets at fair value through profit or loss are recorded the income statement. In the ordinary course of business, the Bank enters into agreements on derivative financial instruments in order to manage currency risk, liquidity risk, and interest rate risk; therefore, these financial instruments are primarily held for trading. As at 31 December 2016, the Bank did not have financial derivatives in its portfolio. Impairment of financial asstes and provision for risks Under its internal policy, the Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired 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. Evidence of impairment may include indications that a borrower or group of borrowers are experiencing significant financial difficulty, default or delinquency in interest or principal payments, probability that the borrower will enter bankruptcy or other financial reorganization, observable data indicating that there is a measurable decrease in the estimated cash flows, including movements in unsettled liabilities or economic conditions that correlate with defaults on the terms contracted. When assessing impairment of loans and advances to banks and customers measured at amortised cost, the Bank 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 Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, 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 recognized are not included in the collective assessment of impairment. The Bank defines the objective evidence for impairment as follows:

Significant financial difficulties experienced by the borrower

Breach of contract/loan covenants or conditions, default or delinquency in contractual payments of principal or interest

The Bank granting an otherwise unlikely concession to the borrower for economic or legal reasons relating to the borrower’s financial difficulty

A growing likelihood that the borrower will enter bankruptcy

The elimination of an active market for the asset because of financial difficulties

Observable data regarding a measurable decrease in the estimated future cash flow from a group of financial assets since their initial recognition, even if the decrease cannot yet be identified with the individual financial assets in the group, including adverse changes in the payment status of the borrowers in the group or national or local economic indicators that correlate with defaults on the assets in the Bank.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.7 Classification of financial instruments (continued) d) Financial assets at fair value through profit and loss (continued) Impairment of financial investments and provision for risks (continued) If objective evidence of impairment exists, the amount of loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding expected credit losses that have not been incurred) discounted at the asset’s original effective interest rate. In the event of a floating-rate loan, the effective interest rate is used. The calculation of the present value of the estimated future cash flows of a collateralized financial asset, as well as cash inflow from operating activities, reflects the cash flows that may result from foreclosure. The methodology and assumptions used for estimating future cash flows are monitored and adjusted annually so as to reflect the actual assessment of credit risk and reduce any differences between loss estimates and actual loss experience. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the impairment loss on loans and receivables, as well as other financial assets measured at amortised cost cost and off-balance sheet credit exposures are recognised as Impairment losses on financial assets. Loans together with the related allowance are written off when there is no realistic prospect of future recovery and all collaterals have been realized or transferred to the Bank. If, in subsequent years, the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account.

Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of 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 currently (as at the balance sheet date) exist. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. For the purpose of the impairment testing at a group level, financial assets are grouped on the basis of the Bank’s internal classification of credit risk that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors. Restructured loans Whenever possible, the Bank chooses to restructure loans rather than to activate a loan collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, the loan is no longer considered past due. The Bank continuously reviews restructured loans to ensure that future payments are likely to occur, however, these loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original effective interest rate.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.8. Financial liabilities The Bank’s financial liabilities comprise liabilities for deposits and other liabilities to banks, other financial organizations and clients, as well as other operating liabilities. a) Bank and customer deposits Bank and customer deposits and other interest bearing financial liabilities are initially recognized at fair value less transaction costs incurred, exclusive of the financial liabilities which are measured at fair value through profit and loss. Subsequent to their initial recognition interest bearing deposits and loans are recognized at amortised cost. b) Borrowings

Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the 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. Borrowings are classified as current liabilities unless the Bank has an unconditional right to settle the liability for at least 12 months after the reporting date.

Fees paid on the establishment of loan facilities are recognized as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalized as a pre-payment for liquidity services and amortized over the period of the facility to which it relates.

c) Operating liabilities Trade payables and other short term liabilities are recognised at nominal value. 3.9. Offsetting financial instruments Financial assets and liabilities are offset and the difference between their amounts is reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 3.10. Investments in subsidiaries Subsidiary is an entity under the Bank’s control. Control is established when the Bank is exposed or has the right to variable returns based on its involvement with the investee and has the ability to affect these returns through its power over the investee. As at 31 December 2016, the Bank had a 100% ownership in the company CA Leasing d.o.o. Beograd. The share in the subsidiary’s equity is recognized at cost. 3.11. Sale and repurchase agreements (‘Reverse Repos’) Securities purchased under a contract to be resold at a specific future date are recognized in the balance sheet as loans and advances to banks and other financial organizations. The difference between the sale and the repurchase price is treated as interest income generated during the contract term.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.12. Leases a) Financial lease - the Bank as Lessee A lease is classified as finance lease when it is contractually stipulated that: the power to hold and use the subject matter of the lease is transferred to the Bank, as lease beneficiary, during the lease period; the right to asset ownership is transferred to the lease beneficiary under contractually defined terms and conditions; the lease term approximates the asset's useful life; and the value of the lease agreement is a close approximation to the cost of asset The Bank as lessee recognizes financial lease within Property, plant and equipment together with a corresponding liability to lessor included in Other liabilities. Capitalised assets held under lease are depreciated over the lease term. Lease payments are allocated between finance charges and reduced lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in the income statement within Finance costs.

b) Operating lease - the Bank as Lessee and Lessor Leased out assets where the risks and rewards of ownership remain with the lessor are recorded as operating lease. The leases entered into by the Bank are primarily operating leases. The total payments made under operating leases are charged to expenses in the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment to be made to the lessor by way of penalty is recognized as an expense in the period in which the termination takes place. 3.13. Cash and cash equivalents In the Cash Flow Statement, cash and cash equivalents comprise cash held with the Bank’s drawing account, Cash in hand (in RSD and FX), as well as FX amounts deposited with local and foreign banks with maturities of less than three months. 3.14. Intangible assets Intangible assets are stated at cost less accumulated depreciation and any losses on impairment of assets. The Bank's intangible assets mainly comprise computer software licenses with finite useful life. Computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives and the periods for which licences are granted. Costs associated with developing or maintaining computer software programmes are recognized as an expense when incurred. Development costs that are directly attributable to identifiable and unique software products controlled by the Bank and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Amortization is calculated at cost of intangible assets using the straight-line method, by applying the amortization rates defined in a manner that allows for their full amortization over their useful lives. Intangible assets’ amortization charge begins in the month following their being brought to use.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.14. Intangible assets (continued) Useful life in 2016 : Software 5 years Licences and other intangible assets 5 years The amortisation period and the amortisation method for intangible assets with finite useful life are reviewed at least annually.

3.15. Property, plant and equipment and investment property a) Property, plant and equipment Property, plant and equipment comprise buildings, equipment, other fixed assets, as well as leasehold improvements for operating purposes. Property, plant and equipment is stated at cost less accumulated depreciation and any losses on impairment. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other maintenance costs are charged to the income statement during the financial period in which they are incurred. Depreciation of property, plant and equipment is calculated using the straight-line method by which the cost is written-off over the assets’ estimated useful lives. The assets’ depreciation charge begins in the month following the one in which the assets have being brought into use. Useful life in 2016 : Description Buildings 40 years Computer equipment 3 - 7 years Furniture and other equipment 5 - 7 years Vehicles 5 years PPE is derecognised after disposal, due to technical obsolescence or when no future economic benefit is expected from its use. Gains and losses on disposals or write-off of a fixed asset (determined as the difference between the net realizable value and the net carrying amount) are recognized in the income statement for the period. b) Investment property

Investment property is a property, or part of property, that is held by the Bank for rental yields or for capital appreciation or both. Investment property is measured initially, during the acquisition, at cost. At the initial measurement, the related acquisition costs are included in the cost. Following the initial recognition, investment property is subsequently measured using the cost method less the total calculated depreciation and impairment. Depreciation is calculated at the rates that ensure the compensation of the investment properties’ value during their useful lives.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.15. Property, plant and equipment and investment property (continued) b) Investment property (continued) The difference between the carrying amount and the realizable value of the investment property being sold is recognized in the income statement as incurred, whereas receivables arising from the disposal or the exchange of investment property are initially recognized in the amount of its fair value. If any indication exists that investment property may be impaired, the Bank estimates the recoverable amount as the higher of the value in use and the fair value less costs to sell. The carrying amount of an investment property is written down to its recoverable amount through profit or loss. An impairment loss recognised in prior years is reversed if there has been a subsequent change in the estimates used to determine the asset’s recoverable amount. Subsequent expenditure is capitalized only when it is probable that future economic benefits associated with it will flow to the Bank and the cost can be measured reliably. All other repairs and maintenance costs are expensed when incurred. If an investment property becomes owner-occupied by the Bank, it is reclassified to property, plant and equipment, and its carrying amount at the date of reclassification becomes its deemed cost to be subsequently depreciated. 3.16. Impairment of non-financial assets In accordance with its accounting policy, the management of the Bank analyses at each reporting date the carrying values of intangible assets and property, plant and equipment. If any indication exists that an asset has been impaired, the recoverable amount of the property is assessed to determine the amount of impairment. Where the recoverable amount of an asset is lower than its carrying amount, the carrying amount is reduced to its recoverable amount, which is the higher of the net realisable value and the value in use. Impairment loss is recognized as expense. Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. 3.17. Provisions, contingent liabilities and contingent assets Provisions are recognised and made when the Bank has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. The Bank makes provisions for potential losses arising from commitments and contingent liabilities, potential outflow with respect to legal claims, payment of employee benefits i.e. retirement benefits and other contingent liabilities, provided they meet the recognition requirements. Provisions are reviewed, established and, where necessary, adjusted at each balance sheet date to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the legal or constructive obligation, the provision is reversed and recognized as income. Provisions are monitored by type and can be used only for expenditures for which they were initially recognized. Provisions are not recognised for future operating losses. Contingent liabilities are not recognized in the Bank’s financial statements. Contingent liabilities are disclosed in the Notes to the Financial Statements (Note 33), unless there is a low probability of outflows relative to benefit generating resources.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.17. Provisions, contingent liabilities and contingent assets (continued) Contingent assets are not recognized in the Bank’s financial statements. Contingent assets are disclosed in the Notes to the Financial Statements where an inflow of economic benefit is probable. The Bank makes provisions, which are recognized as an expense, with respect to off-balance sheet credit exposures up to the level of required reserves by applying the same methodology that applies to loans and investments. 3.18. Employee benefits a) Taxes and contributions for mandatory social insurance In accordance with the regulations applicable in the Republic of Serbia, the Bank calculates and pays contributions for pension and medical insurance and unemployment insurance at the rates prescribed by law and based on employee gross salaries. The Bank has a legal obligation to perform the transfer of withheld contributions to relevant state funds. The Bank is not obliged to pay reimbursements to employees which is the responsibility of the Republic of Serbia Pension Fund. Contribution costs are recognized in the income statement in the same period as related salary expenses. The Bank has no further liabilities for contributions in this respect. b) Retirement benefits The Bank does not operate its own pension funds, therefore the Bank had no identified costs as at 31 December 2016. Under the Labour Law and the Bank’s internal Employment Handbook, the Bank is obliged to pay retirement benefits or termination benefits to employees in the event of loss of working ability amounting to three gross salaries in the business sector in the Republic of Serbia, according to the latest information published by the competent statistical body. The entitlement to these benefits is usually conditional on the employee remaining in service up to retirement age or the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment. The Bank does not have a commitment with respect to payment of jubilee awards. Provisions for retirement benefits were created based on an independent actuary's report and stated as present value of expected future payments (Note 26). Actuarial gains arising from the effects of changes in demographic, financial and experience assumptions used for calculation of provision for future liabilities for retirement benefits, are recognized in Other Comperhensive Income.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.19. Current and deferred income tax a) Current taxes The current income tax charge is calculated and paid in accordance with the provisions of the Serbian Law on Corporate Income Tax. During the year, the Bank pays the income tax charge in monthly instalments estimated on the basis of Tax Return for determining the advance payment / the final payment of CIT base for the previous year. The final tax base, to which a prescribed 15% tax rate is applied, is established based on the taxpayer's Tax Balance Sheet. The Law on Corporate Income Tax of the Republic of Serbia provides a taxpayer who invested in fixed assets up to and including 2013 with a 20% tax credit. However, the tax credit may not be higher than 33% of the calculated tax charge for the year in which the investment occurred. The unused portion of the tax credit may be carried forward to the future income tax account up to the limit of 33% for a period not longer than ten years. Tax regulations in the Republic of Serbia do not allow for a current period tax loss to be used as a basis to recover the income tax paid in the previous period. However, current period losses may be used to reduce the future tax base for up to 5 years (tax losses incurred by 2009 may be carried forward over the period of 10 years, i.e. by 2019) . b) Deferred taxes The deferred income tax charge is calculated using the liability method on all temporary differences (as at the balance sheet date) between the present value of assets and liabilities in the financial statements and their taxable values. For deferred tax calculation purposes, current tax rates have been used at the balance sheet date. Deferred tax liabilities are recognised for all taxable temporary differences, except where: the deferred tax asset arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss); and and in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures where the timing of the reversal of a temporary difference may be controlled and where it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized except where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss and where in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.19. Current and deferred income tax (continued) b) Deferred taxes (continued) The carrying value of deferred assets is reviewed at each balance sheet date and reduced to the extent that it is probable that future taxable profit will be available against which the whole deferred tax asset or its part can be utilised. Deferred tax assets that have not been recognised are assessed at each balance sheet date and recognised to the extent that it is probable that future taxable profit will be available against which deferred tax assets can be utilised. Deferred tax assets and liabilities are measured at the income tax rate that is expected to apply to the year when the tax benefit is realised, or the liability settled, based on the official tax rates and tax regulations that have been enacted or substantively enacted at the balance sheet date. Current and deferred taxes are recognized as income and expense and are included in the net profit for the period. Deferred income tax relating to items recognized directly within Other comprehensive income is also charged or credited to Other comprehensive income. c) Taxes and contributions not related to performance Taxes and contributions not related to performance comprise property tax, value added tax, taxes and contributions on salaries paid by the employer, and other taxes and contributions paid under national and local tax regulations. These taxes and contributions are presented within Other expenses. 3.20. Earnings per share Basic earnings per share is calculated by dividing the net profit attributable to equity holders, holders of ordinary shares, by the weighted average number of ordinary shares outstanding during the reporting period. 3.21. Fiduciary services Assets and revenues arising from fiduciary activities where the Bank acts as an agent are not included in the Bank’s balance sheet. 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation and presentation of the financial statements requires management to use the best estimates and reasonable assumptions that affect the presented amounts of assets and liabilities, the disclosure of contingent receivables and payables as at the reporting date as well as the disclosure of income and expenses during the reporting period. These estimates and assumptions are based on the information available as at the date of the financial statements. The actual results may differ from these estimates. Estimates and related assumptions are reviewed on an ongoing basis, and where adjustments are required they are recognized in the income statement for the periods in which they have become known.

Critical estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are presented below.



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4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) 4.1. Determining the fair value of financial instruments The fair value of financial instruments traded in an active market is based on quoted bid and offer prices at the balance sheet date, without any deduction of transaction costs. The fair value of financial instruments that are not quoted in an active market is determined using appropriate valuation techniques, which include net present value techniques, comparison to similar instruments for which market prices are available, as well as other relevant valuation models. Where market inputs are not available, they are determined based on estimates that include a certain degree of judgement in estimating the "fair" value. The valuation models reflect current market conditions at the measurement date which may not be representative of market conditions either before or after the measurement date. Therefore, valuation techniques are revised periodically in order to appropriately reflect current market conditions. 4.2. Impairment of financial assets carried at amortised cost The Bank assesses, at each reporting 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 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 has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. This evidence may include observable data indicating that there has been an adverse change in the payment status of the borrowers in the Bank in respect of payment obligations to the Bank, or national or local economic conditions that correlate with defaults in payment. The Bank considers evidence of impairment on an individual and group basis. All individually significant financial assets are tested for impairment on an individual basis. All significant assets not found to be impaired on an individual basis, are assessed on a group basis so as to determine the impairment that occurred but has not yet been identified. Assets that are not individually significant, but which are carried at amortized cost, are grouped based on similar risk characteristics. With respect to the assessment of impairment losses on loans, the Bank reviews its loan portfolio, in the event of group provisions (irrespective of whether or not loans are in default status), at least once a month to assess impairment. Individual assessment of impairment losses is performed in accordance with changes in the assumptions for the calculation of future cash flows, and the Bank should review them at least quarterly. When assessing impairment on a group basis, the Bank uses statistical models for analysing historical trends regarding the probability of loss, recovery and collection of incurred losses. The Bank’s 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 that existed at the time when future cash flows were projected. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between estimated and actual losses.

The impairment of financial assets carried at amortised cost is calculated as the difference between the carrying amount of the financial asset and the present value of expected future cash flows discounted at the asset’s original effective interest rate. Losses are recognised in the income statement and reflected in the movements within the allowance account for impaired loans. When a subsequent event leads to a reduction in the amount of impairment, previously recognized impairment loss is reversed through the income statement.



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4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) 4.3. Provisions for litigations The Bank is involved in a number of lawsuits arising from daily operations, including commercial, contractual and employment issues which are resolved or considered in the ordinary course of business. The Bank routinely assesses the likelihood of adverse outcomes of these matters as well as ranges of probable and reasonable estimated losses. Reasonable estimates include judgement made by the management after considering information such as notifications, settlements, estimates performed by legal department, available facts, identification of other potentially responsible parties and their ability to contribute, as well as prior experience. A provision is recognized when it is probable that there is an obligation the amount of which can be reliably estimated based on a careful analysis (Note 26). The required provision may change in the future due to new developments or additional information. Contingent liabilities and items that do not meet the provisioning criteria are disclosed, unless the probability of an outflow of resources embodying economic benefits is low. 4.4. Deferred tax assets Deferred tax assets are recognized for all unused tax losses and/or tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and/or tax credits can be utilized. Significant estimate by the management is necessary to determine the amount of deferred tax assets that can be recognized based on the period of occurrence and the amount of future taxable income and tax policy planning strategy (Note 13). 4.5. Retirement and other post-employment benefits to employees The costs of defined employee benefits payable upon the termination of employment, i.e. retirement in accordance with legal requirements are determined based on the actuarial valuation. The actuarial valuation includes an assessment of the discount rate, future movements within salaries, mortality rates and employee turnover. As these plans are by their nature long-term, the estimates are affected by significant uncertainties. Additional information is disclosed in Note 26. 4.6. Impairment of intangibles and property, plant and equipment The assessment of the useful lives of intangible assets and property and equipment is based on historical experience with similar assets as well as any anticipation of technological development and changes that are affected by broad economic or industry factors. The appropriateness of the estimated useful lives is reviewed annually, or whenever there is an indication of significant changes in the underlying assumptions. The impact of any change in these assumptions could be material to the Bank’s financial position and performance.

The Bank’s management reviews intangible assets and property, plant and equipment at each balance sheet date. If any indication exists that an asset has been impaired, the recoverable amount of the property is assessed to determine the amount of impairment. Where the recoverable amount of an asset is lower than its carrying amount, the carrying amount is reduced to its recoverable amount. An impairment review requires from the management to make subjective judgement concerning cash flows, growth rates and discount rates of the cash generating units which are subject to consideration.



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5. INTEREST INCOME AND EXPENSE

2016 2015

Interest income Banks and other financial institutions 153,997 173,601 Public companies 50,088 40,648 Other companies 906,145 1,043,598 Entrepreneurs 82,437 93,878 Public sector 67,251 104,944 Retail 2,281,614 2,291,442 Foreign entities 25 228 Other customers 184,079 22,939

Total 3,725,636 3,771,278

Interest expense Banks and other financial institutions 212,556 224,818 Public companies 2,562 12,210 Other companies 188,407 311,102 Entrepreneurs 2,502 7,577 Public sector 1,478 10,248 Retail 146,243 284,642 Foreign entities 6,445 21,260 Other customers 6,464 29,915

Total 566,657 901,772

Net income from provisions: 3,158,979 2,869,506



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5. INTEREST INCOME AND EXPENSE (continued) Interest income and expense by classes of financial instruments: 2016 2015

Interest income Loans and advances to customers 3,505,187 3,491,008 Loans and advances to banks and other financial institutions 16,176 8,865 Reverse Repos 68,290 49,985 Securities 63,349 96,355 RSD mandatory reserve 60,635 92,737 Surplus of liquidity assets deposited with the NBS 7,444 22,014 Interest on other loans and advances 4,555 10,314

Total 3,725,636 3,771,278

Interest expense Deposits of clients 354,101 676,954 Loans from banks and other financial institutions 172,458 192,768 Loans and advances to banks and other financial institutions 40,098 32,050

Total 566,657 901,772

Net interest income 3,158,979 2,869,506

Total recognised interest income from impaired loans as at 31 December 2016 amounted to RSD 92,998 thousand. 6. FEE AND COMMISSION INCOME AND EXPENSE Fee and commission income and expense comprise:

2016 2015

Fee and commission income Domestic payment operations 713,438 688,199 Foreign payment operations 129,463 129,403 Sale and purchase of foreign exchange 239,274 295,567 Lending operations 70,918 69,693 Payment cards operations 266,125 247,089 Commission for issued guarantees and other warranties 121,689 130,051 Insurance agency activities 82,359 56,118 Other fee and commission income 530 1,182

Total 1,623,796 1,617,302

Fee and commission expense Sale and purchase of foreign exchange 105,297 163,823 Domestic payment operations 28,049 27,024 Foreign payment operations 61,282 46,718 Lending operations 25,826 17,176 Fees paid to the Association of Serbian Banks 20,949 19,301 Commission - F/X guarantees and sureties 60,714 59,417 Payment cards operations fee 100,860 84,172 Insurance agency activities 6,202 6,976 Other fee and commission expense 6,058 9,859

Total 415,237 434,466

Net fee and commission income 1,208,559 1,182,836



24

7. NET EXPENSE ARISING FROM FOREIGN EXCHANGE DIFFERENCES AND CURRENCY CLAUSE EFFECTS

2016 2015

Foreign exchange gains - foreign currency receivables and payables 2,093,011 4,188,190 - foreign currency clause 1,753,533 2,797,934

Total foreign exchange gains 3,846,544 6,986,124

Foreign exchange losses - foreign currency receivables and payables (2,671,253) (4,390,978) - foreign currency clause (1,223,779) (2,613,989)

Total foreign exchange losses (3,895,032) (7,004,967)

Net expense from foreign exchange differences and currency clause effects (48,488) (18,843)

8. OTHER OPERATING INCOME

2016 2015

Income form liability decreases 9,426 4,318 Dividend and interest income 37,362 25,548 Income from costs recharged 3,749 7,505 Income from technical assistance for CA Leasing – related party 7,322 8,505 Rental income 7,009 8,285 Legal charges collected 10,362 10,422 Gains on disposal of fixed assets 12,243 4,220 Reversal of unused provisions for litigation (Note 26) 4,783 91 Disposal of foreclosed property - 2,067 Other operating income 15,557 10,346

Total other operating income 107,813 81,307



25

9. NET EXPENSE ARISING FROM IMPAIRMENT OF FINANCIAL ASSETS AND OFF BALANCE SHEET CREDIT EXPOSURES

2016 2015

Reversal of impairment of financial assets: - Loans and receivables from banks and other financial organisations (Note 16) 47 46 - Loans and receivables from customers (Note 17) 635,403 1,090,475 - Other assets (Note 22) 34,608 20,474

Total reversal of impairment of financial assets: 670,058 1,110,995

Impairment of financial assets - Loans and receivables from banks and other financial organisations (Note 16) - - - Loans and receivables from customers (Note 17) (1,042,357) (1,492,935) - Other assets (Note 22) (42,209) (27,345)

Total impairment of financial assets: (1,084,566) (1,520,280)

Net impairment charge of financial assets: (414,508) (409,285)

Reversal of provision for off-balance sheet credit exposures: - (Note 26) 16,538 134,027

Provision charge for off-balance sheet credit exposures: (Note 26) (19,194) (10,601)

Total reversal / provision for off-balance sheet credit exposures: (2,656) 123,426

Collected written-off receivables 6,015 794 Write-off of uncollectible receivables ( 539) (74)

Net impairment charge of financial assets and off balance sheet credit exposures: (411,688) (285,139)

10. COST OF SALARIES, FRINGE BENEFITS AND OTHER PERSONAL EXPENSES

2016 2015

Wages and salaries 1,239,555 1,166,576 Taxes and contributions 635,991 600,282 Other personal expenses and temporary worker fees 37,184 33,063 Expense/(Income) from movements within provisions for employee benefits (Note 26) 3,461 4,661 Expense from movements within provisions for other employee benefits - 3,356

Wages and salaries and other personal expenses - total 1,916,191 1,807,938

11. DEPRECIATION/AMORTISATION EXPENSE

2016 2015

Amortisation of intangible assets (Note 19) 103,655 97,820 Depreciation of property, plant and equipment (Note 20) 128,102 106,332 Depreciation of investment property (Note 21) 4,580 4,132

Total depreciation and amortisation 236,337 208,284



26

12. OTHER EXPENSES

2016 2015

Lease 283,965 296,611 Insurance premiums 216,191 209,158 Cost of material 184,366 178,372 Maintenance of fixed assets 113,056 128,307 Maintenance of software and licences 118,436 99,935 Postal and telecommunication services 92,078 93,761 Technical assistance - parent bank 85,102 89,862 Advertising and marketing 85,315 77,606 Legal and advocacy services 47,562 44,660 Provision for litigations (Note 26) 34,906 43,238 Transportation costs and daily allowances 43,039 41,383 Taxes and charges 36,289 36,014 Professional services 28,407 30,542 Legal costs 37,519 28,088 Money transport & surveillance 19,657 23,655 Office cleaning 23,618 23,270 Project design and documentation development 26,756 20,808 Training costs 24,766 19,848 Security services 15,967 15,568 Contributions and taxes payable by the employer 16,383 15,151 Entertainment 16,407 12,936 ATM maintenance cost 9,721 9,393 Cost of general and technical liability insurance 8,215 9,273 Salaries of disabled persons and subsistance allowance 5,393 6,065 Employee expense 6,669 6,951 Telecommunications costs – Reuters 6,850 6,294 Property tax and building land charges 7,680 6,124 Shortages and damages 162 5,984 Food and hotel accommodation (business travel) 4,839 5,336 Cost of official gazettes and publications 5,542 5,021 Other taxes 9,811 4,326 Donation and sponsorship 3,167 3,306 Utility services and electrical installation services 3,166 3,009 Membership fees 2,085 2,464 Transportation services 966 1,197 Revaluation of financial liabilities 952 1,069 Disposal or write-off of fixed assets 5 889 Contract termination penalties - 701 SW ATM software reinstallation 540 690 Other expenses 3,166 7,351

Other expenses - total 1,628,715 1,614,216



27

13. INCOME TAX AND DEFERRED TAX (a) Items of income tax expense

Total tax expense comprises:

31.12.2016 31.12. 2015

Current income tax (458) (633) Deferred tax (35,278) (61,268)

Total (35,736) (61,901)

(b) Reconciliation of the total income tax presented in the income statement and profit before taxation to which the prescribed tax rate is applied

31.12.2016 31.12. 2015

Profit before tax 236,681 190,919

Tax calculated at a 15% rate (35,502) (28,638)

Tax effects of income not recognized for tax purposes 27,838 25,803 Tax effects of expenses not recognized for tax purposes (21,586) (17,251) Utilisation of previously unrecognised tax loss carry forward 28,568 19,142 Deferred tax expense (35,278) (61,268) Tax relief on capital investments 226 311

Income tax presented in the income statement (35,736) (61,901)

The above mentioned disclosures are based on the current expectations of the Bank with respect to the 2016 income tax return . These expectations can be adjusted by 28 June 2017, the deadline for submitting the final tax balance under the Corporate Income Tax Law. Deferred tax assets relate to taxable temporary differences between the carrying value of fixed assets and intangible assets and their 2016 tax base; in the previous period the Bank presented deferred tax assets in relation to tax loss and tax credits.

31.12.2016 31.12.2015

Deferred tax assets 90,664 125,942 Deferred tax liabilities - -

Deferred tax assets - net 90,664 125,942



28

13. INCOME TAX AND DEFERRED TAX (continued) (b) Reconciliation of the total income tax presented in the income statement and profit before taxation

to which the prescribed tax rate is applied (continued) Movements within deferred tax assets and liabilities are presented in the table below:

Tax losses/credit carryforward

Temporary difference on

PPE Total deferred

tax assets

As at 1 January 2015 141,272 45,938 187,210

Charged (credited) to income statement (56,614) (4,654) (61,268) Charged to other comprehensive income

As at 31 December 2015 84,658 41,284 125,942

Charged (credited) to income statement (31,538) (3,740) (35,278) Credited to other comprehensive income

As at 31 December 2016 53,120 37,544 90,664

The Bank has tax loss and tax credit carry-forwards incurred in previous years which may be used in future fiscal years, as presented in the analysis below: 31.12.2016 31.12. 2015

Tax losses carry-forward - up to 1 year 1,003,372 - - 1 to 5 years 3,040,466 4,243,155 - over 1 year - -

Total tax losses carryforward: 4,043,838 4,243,155

31.12.2016 31.12. 2015

Tax credit carryforward - up to 1 year 141,172 249,788 - 1 to 5 years 26,954 55,113 - over 5 years 11,236 13,941

Total tax credit carryforward: 179,362 318,842



29

14. CASH AND DEPOSITS HELD WITH THE CENTRAL BANK Cash and deposits held with the Central Bank comprise:

31.12.2016 31.12. 2015

In RSD Drawing account 4,190,236 4,036,952 Cash in hand - RSD 814,118 908,405

5,004,354 4,945,357

In FX Mandatory reserve held with the NBS 4,878,424 3,487,881 Cash in hand - foreign currency 1,185,897 1,017,104

6,064,321 4,504,985

Cash and deposits held with the Central Bank - total 11,068,675 9,450,342

A mandatory RSD reserve represents the minimum RSD reserve deposit set aside in accordance with the National Bank of Serbia Decision on Banks' Required Reserves Held with the National Bank of Serbia (Official Gazette of RS, No. 3/2011, 31/12, 57/12, 78/12, 87/12, 107/12, 62/13, 125/14, 135/14, 4/15, 78/15 and 102/15). Under this decision, banks shall calculate the mandatory RSD reserve at the rates of:

- 5% for the portion of RSD base comprising payables with an agreed maturity of up to two years, i.e. 730 days;

- 0% for the portion of RSD base comprising payables with an agreed maturity of more than two years, i.e. over 730 days.

During the accounting period the Bank is obliged to maintain daily average RSD mandatory reserve deposits on its drawing account. The mandatory reserve calculated in RSD is earmarked in RSD currency and placed on the Bank’s drawing account. Calculated mandatory RSD reserve for the accounting period from 18 December 2016 to 17 January 2017 amounted to RSD 3,591,113 thousand. The average interest rate on the amount of allocated mandatory RSD reserves during 2016 was 1.75% p.a.

A mandatory foreign currency reserve represents the minimum foreign currency reserve deposits set aside in accordance with the National Bank of Serbia Decision on Banks' Required Reserves Held with the National Bank of Serbia (Official Gazette of RS, No. 3/2011, 31/12.57/12, 78/12, 87/12, 107/12, 62/13,125/14, 135/14, 4/15, 78/15 and 102/15). Under this decision, banks shall calculate the mandatory RSD reserve at the rates of:

- 20% for the portion of foreign currency base comprising payables with an agreed maturity of up to two years, i.e. 730 days;

- 13% for the portion of foreign currency base comprising payables with an agreed maturity of more than two years, i.e. over 730 days;

- 100% for RSD payables indexed in accordance with foreign currency clause for all maturity dates.

Calculated mandatory foreign currency reserve for the accounting period from 18 December 2016 to 17 January 2017 amounted to EUR 39,510 thousand (RSD 4,878,424 thousand). The National Bank of Serbia does not pay interest on earmarked mandatory foreign currency reserve deposits.



30

15. FINANCIAL ASSETS HELD TO MATURITY Financial assets held to maturity comprise: 31.12.2016 31.12.2015

Long-term coupon bonds of the Ministry of Finance 450,000 1,400,000 Treasury bills of the Ministry of Finance - 1,001,207 Accrued interest on financial assets 12,001 55,222

Total financial assets held to maturity 462,001 2,456,429

As at 31.12.2016, the Bank had long-term coupon bonds of the Republic of Serbia Ministry of Finance with a variable interest rate (NBS reference interest rate of +1.15%) 16. LOANS AND RECEIVABLES FROM BANKS AND OTHER FINANCIAL ORGANISATIONS 31.12.2016 31.12.2015

In RSD Repurchase agreements with the NBS 4,002,232 2,801,361 Loans granted 1,672 2,783

4,003,904 2,804,144

In FX Deposits on foreign currency accounts held with other banks 1,367,862 3,314,627 Loans maturing within one day (overnight loans) - 289,245 Loans granted 3,296 3,009 Special purpose deposits for the sale/purchase of securities 161,679 153,209

1,532,837

3,760,090

Loans and receivables – gross

5,536,741 6,564,234

Provision as at (4,554) (4,601)

Loans and receivables from banks and other financial organisations - total 5,532,187

6,559,633

Movements within allowance for impairment were as follows: 31.12.2016 31.12.2015

As at 1 January 4,601 4,647 Reversal of allowance for impairment (note 9) (47) (46)

Provision as at 4,554

4,601

Receivables from repurchase agreements amounting to RSD 4,000,000 thousand as of 31.12.2016. relate to purchase of treasury bills from the National Bank of Serbia with maturity of 7 days and interest rate 2.87% p.a. and the amount of RSD 2,232 thousand relates to accrued interest during the period from 30 to 31 December 2016 .


NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2016 (All amounts are in RSD thousand unless otherwise stated)

31

17. LOANS AND RECEIVABLES FROM CUSTOMERS a) Breakdown by type of customer loans

31.12.2016 31.12.2015

In RSD Short-term Long-term Total Short-term Long-term Total

Public companies 12,045 1,598,642 1,610,687 12,408 - 12,408 Other companies 3,294,239 2,353,538 5,647,777 1,326,444 3,067,298 4,393,742

Entrepreneurs 262,255 128,426 390,681 115,162 191,523 306,685

Public sector 384 974 1,358 519 - 519

Retail 2,240,202 8,111,474 10,351,676 1,595,606 6,706,183 8,301,789

Other clients 411,590 798,762 1,210,352 195,380 459,009 654,389

Total in RSD 6,220,715 12,991,816 19,212,531 3,245,519 10,424,013 13,669,532

In FX Public companies 105,817 - 105,817 145,358

709,574,86 854,933

Other companies 3,368,382 12,287,775 15,656,157 3,258,573 12,024,939 15,283,512

Entrepreneurs 73,005 543,018 616,023 16,732 620,492 637,224

Public sector

- 107,206 107,206 - 220,767 220,767

Retail 84,942 26,255,622 26,340,564 59,846 23,033,312 23,093,158

Other clients 196,580 671,239 867,819 407,454 1,137,972 1,545,426

Total in foreign currency 3,828,726 39,864,860 43,693,586 3,887,963 37,747,057 41,635,020

As at 31 December 10,049,441 52,856,676 62,906,117 7,133,482 48,171,070 55,304,552

Allowance for impairment of receivables - - (4,761,608) - - (4,533,484)

As at 31 December

5,287,833 52,856,676 58,144,509 7,133,482 48,171,070 50,771,068

b) Movements within allowance for impairment were as follows:

31.12.2016 31.12.2015

As at 1 January 4,533,484 4,147,112 New allowances (note 9) 1,042,357 1,492,935 Reversal of allowance for impairment (note 9) (635,403) (1,090,475) Write-off (118,585) (27,897) Unwinding (92,998) - Net foreign exchange differences 32,753 11,809

Provision as at 4,761,608 4,533,484



32

18. INVESTMENTS IN SUBSIDIARIES Investments in subsidiaries comprise investment in subsidiary CA Leasing Srbija d.o.o. Beograd representing a 100% share in capital of the subsidiary. 31.12.2016 31.12.2015

Equity investment in subsidiary CA Leasing d.o.o. Beograd 78,667 78,667

Investments in subsidiaries - total 78,667 78,667

19. INTANGIBLE ASSETS

Licences and

software

In course of

construction

Total

As at 1 January 2015

Cost 496,009 408 496,417

Accumulated amortization (345,635) - (345,635)

Net book value 150,374 408 150,782

Year ended 31 December 2015

Opening net book value 150,374 407 150,781

Additions - 95,826 95,826

Transfers 95,826 (95,826) -

Amortization (97,820) - (97,820)

Closing net book value 148,380 408 148,788

At 31 December 2015

Cost 591,149 408 591,556


Net book value 148,380 408 148,788


Opening net book value 148,381 408 148,788

Additions - 76,325 76,325

Transfers 76,325 (76,325) -

Amortization (103,655) - (103,655)

Closing net book value 121,050 408 121,458

At 31 December 2016

Cost 620,764 408 621,171


Net book value 121,058 408 121,458

The net present value of intangible assets as at 31 December 2016 comprises mainly software and licences.



33

20. PROPERTY, PLANT AND EQUIPMENT

Buildings

Equipment and other

assets Leasehold

improvements Construction

in progress Total PPE


Cost 1,552,248 1,202,300 138,900 - 2,893,448 Accumulated depreciation (335,108) (999,286) (132,128) - (1,466,522)

Net book value 1,217,140 203,014 6,772 - 1,426,927


Opening net book value 1,217,140 203,014 6,772 - 1,426,927 Additions - - - 117,634 117,634 Transfers - 117,634 - (117,634) - Disposals (139) (449) (76) - (664) Depreciation (38,822) (64,982) (2,528) - (106,332) Impairment - - - - -

Closing net book value 1,178,179 255,217 4,169 - 1,437,565

At 31 December 2015

Cost 1,552,036 1,186,369 135,168 - 2,873,573 Accumulated depreciation (373,857) (931,152) (130,999) - (1,436,008)

Net book value 1,178,179 255,217 4,169 - 1,437,565


Opening net book value 1,178,179 255,217 4,169 - 1,437,565 Additions - - - 181,578 181,578 Transfers 4,320 166,717 10,541 (181,578) - Disposals - (8,980) - - (8,980) Depreciation (38,846) (87,272) (1,984) - (128,102)

Closing net book value 1.143.653 325.682 12.726 - 1.482.061

At 31 December 2016

Cost 1.556.356 1.174.567 144.649 - 2.875.572 Accumulated amortization (412.703) (848.885) (131.923) - (1.393.511)

Net book value 1.143.653 325.682 12.726 - 1.482.061

As at 31 December 2016 the Bank did not have relevant title deeds for buildings, the present value of which amounts to RSD 211,633 thousand (2015: RSD 241,412 thousand). The Bank’s management and the administrative and technical services are taking all the necessary measures to complete the title deeds registration. Rent expenses amounting to RSD 229,840 thousand relating to the lease of property are included in the income statement. As at 31 December 2016, the Bank’s property, plant and equipment were without any encumbrances. The net book value of equipment as at 31 December 2016, primarily comprised computer and telecommunications equipment, office furniture.



34

21. INVESTMENT PROPERTY

Total Investment

property


Cost 143,513

Accumulated depreciation (21,335)

Net book value 122,178


Opening net book value 122,178

Depreciation 69,448

Impairment (31,956)

Closing net book value (4,132)

155,538

At 31 December 2015

Cost

Accumulated depreciation 180,805

Net book value (25,267)

155,538


Opening net book value

Additions 155,538

Disposals 13,197

Depreciation (6,210)

Closing net book value (4,580)

157,945

At 31 December 2016

Cost 185,403

Accumulated amortization (27,458)

Net book value 157,945

Investment properties comprise residential and commercial property that generated in 2016 revenues from the lease amounting to RSD 5,525 thousand (2015: RSD 7,005 thousand).The market value does not deviate significantly from the values recorded in the Bank's books.



35

22. OTHER ASSETS 31.12.2016 31.12.2015

Foreclosed assets 241,284 225,720 Other receivables from operations 57,178 53,196 Temporary accounts 71,314 38,957 Accrued receivables for other expenses 25,390 34,153 Fee and commission receivables 38,625 38,074 Advances paid 7,758 16,992 Other accruals 8,276 8,068 Transactions in progress 3,724 5,655 Other equity investments. 569 569 Accrued interest expense 10 223 Receivables from employees 64 103 Receivables based on overpaid tax 5 7

Total other assets 454,197 421,718

Allowance (64,283) (56,810)

Total other assets 389,914 364,908

Movements in allowance for impairment of other receivables were as follows: 31.12.2016 31.12.2015

As at 1 January 56,810 50,501 New allowances (note 9) 42,209 27,345 Reversal of allowance for impairment (note 9) (34,608) (20,474) Write-off (158) (572) Net foreign exchange differences 30 10

Provision as at 64,283

56,810


NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 December 2016 (All amounts are in RSD thousand unless otherwise stated)

36

23. DEPOSITS AND OTHER LIABILITIES TOWARDS BANKS, OTHER FINANCIAL INSTITUTIONS AND THE CENTRAL BANK 31.12.2016 31.12.2015

Deposits and other financial liabilities:

Demand deposits

Short-term deposits

Long-term deposits Total

Demand deposits

Short-term deposits

Long-term deposits

Total

Local banks - - - - 225 608,131 - 608,356 Other financial institutions 670,237 1,376,039 - 2,046,276 360,393 1,023,849 8,514 1,392,756 Parent Bank 88,991 4,947,370 311,841 5,348,202 66,658 5,473,176 307,178 5,847,012 Fee and interest liabilites 100 - - 100 2,231 - - 2,231

TOTAL 759,328 6,323,409 311,841 7,394,578 429,507 7,105,156 315,692 7,850,355

Borrowings Overnight

Short-term deposits

Long-term deposits

Total Overnight

Short-term deposits

Long-term deposits

Total

Local banks - - - - - - - - The European Investment Bank - - 4,225,112 4,225,112 - - 4,401,397 4,401,397 Other financial institutions - - - - 9,471 - - 9,471 Parent Bank - - 5,679,728 5,679,728 - - 5,594,802 5,594,802 Fee and interest liabilites - 22,796 - 22,796 - 17,060 - 17,060

TOTAL - 22,796 9,904,840 9,927,636 9,471 17,060 9,996,199 10,022,730

Total Deposits and other liabilities towards banks 759,328 6,346,205 10,216,681 17,322,214 438,978 7,122,216 10,311,891 17,873,085

Short-term RSD deposits of financial institutions that have been deposited for a period of three months, six months, as well as those deposited for a period of one year, with interest rates ranging between 2.25% and 3.50% for RSD deposits and ranging between 0.40% and 0.50% for foreign currency deposits depending on their maturities. Within FX liabilities towards the Parent Bank, Credit Agricole SA Paris, the largest share have liabilities arising from FX deposits received for a period between 181 and 365 days amounting to EUR 22,000 thousand or RSD 2,716,391 thousand at interest rates ranging between -0.23% and -.30% per annum, and deposits received for a period between 91 and 180 days amounting to EUR 18,000 thousand or RSD 2,222,501 thousand, at interest rates ranging between -0.22% and 0.31% per annum, and deposits received for a period between 31 and 90 days amounting to AUD 100 thousand or RSD 8,478 thousand, at interest rates 2% per annum.



37

23. DEPOSITS AND OTHER LIABILITIES TOWARDS BANKS, OTHER FINANCIAL INSTITUTIONS AND THE CENTRAL BANK (continued)

In 2013 and 2014 the Group entered into cooperation with the European Investment Bank, and as at 31 December 2016 it had borrowings amounting to EUR 38,003 thousand or RSD 4,692,375 thousand with interest rates ranging between -0.314% and 1.44% and maturity dates ranging between 2018 and 2023 . As at 31 December 2016 the Group had borrowings from the Parent, Credit Agricole S.A. amounting to EUR 82,000 thousand or RSD 10,124,751 thousand. The Group took the borrowings in 2013, 2014, 2015 and 2016 at interest rates ranging between -0.28% and 1.807% with maturity dates between 2017 and 2026 . 24. DEPOSITS AND OTHER LIABILITIES TOWARDS OTHER CUSTOMERS The Bank does not pay interest on RSD and EUR Demand deposits. RSD Term deposits - Legal entities deposited for a period up to one year had annual interest rates ranging between 0.50% and 2.75%, while those in FX were deposited at annual interest rates ranging between 0.00% and 0.90% depending on both the term period and the currency. Short term and long term deposits of retail customers denominated in RSD and F/X were placed at annual interest rates ranging between 0.50% and 1.00% and between 0.10% and 1.00% respectively, depending on the currency and the term period.



38

24. DEPOSITS AND OTHER LIABILITIES TOWARDS OTHER CUSTOMERS (continued)

31.12.2016

31.12.2015

Deposits and other financial liabilities in RSD:

Demand deposits Short-term deposits Long-term deposits Total

Demand deposits Short-term deposits

Long-term deposits

Total

Public companies 201,205 28,642 - 229,847

312,868 27,642 - 340,510

Other companies 6,596,662 3,896,446 103,515 10,596,623

3,829,107 3,667,042 109,370 7,605,519

Entrepreneurs 1,109,283 28,735 3,542 1,141,560

888,137 11,970 7,685 907,792

Public sector 43,179 14,000 - 57,179

32,554 57,482 - 90,036

Retail 2,063,925 142,330 15,345 2,221,600

1,444,612 129,965 37,543 1,612,120

Foreign clients 34,887 709 - 35,596

47,964 - 200 48,164

Other clients 280,607 108,766 400 389,773

287,694 424,329 1,250 713,273

TOTAL in RSD 10,329,748 4,219,628 122,802 14,672,178

6,842,936 4,318,430 156,048 11,317,414

Deposits and other financial

liabilities in FX: Demand deposits Short-term deposits Long-term deposits Total

Demand deposits Short-term

deposits Long-term

deposits Total

Public companies 232,958 - - 232,958

131,100 - - 131,100

Other companies 4,221,958 4,115,870 626,838 8,964,666

2,792,650 1,535,244 906,711 5,234,605

Entrepreneurs 148,012 5,570 24,377 177,959

90,822 22,802 3,832 117,456

Public sector 23,615 - - 23,615

101,047 - - 101,047

Retail 8,622,404 2,936,396 7,333,307 18,892,107

5,986,193 1,543,945 10,422,366 17,952,504

Foreign clients 2,051,528 312,293 438,800 2,802,621

3,053,890 73,035 722,691 3,849,616

Other clients 129,570 - 2,577 132,147

65,811 - 3,736 69,547

TOTAL in FX 15,430,045 7,370,129 8,425,899 31,226,073

12,221,513 3,175,026 12,059,336 27,455,875

31.12.2016 31.12.2015

Overnight loans

In RSD

In FX

Total

In RSD

In FX

Total

Public companies

39,275 - 39,275

4,617

-

4,617

Other companies

2,011,364 156,881 2,168,245

2,755,677

200,324

2,956,001

Entrepreneurs

18,351 - 18,351

20,228

-

20,228

Public sector

10,204 - 10,204

1,357

-

1,357

Retail

- - -

-

-

-

Foreign clients

- - -

-

-

-

Other clients

23,881 - 23,881

83,002

-

83,002

TOTAL

2,103,075 156,881 2,259,956

2,864,881

200,324

3,065,205

Total Deposits and other liabilities toward clients

-

-

48,158,207

-

-

41,838,494



39

25. SUBORDINATED DEBT 31.12.2016 31.12.2015

Subordinated debt 2,483,767 2,447,899

Total subordinated debt 2,483,767 2,447,899

The Bank has a subordinated loan from the parent bank Credit Agricole SA received in 2009, with the following initial terms and conditions: EUR 40,000 thousand with an interest rate of EURIBOR 3M plus 3.805% and maturity date as at 31 March 2017. By contract Annex dated 06.12.2013, the terms and condition of the subordinated loan where changed in the manner that the maturity date is as at 28.04.2023 and the EURIBOR interest rate is 3M plus 3.679%. The subordinated loan is not collateralised. All liabilities arising from the contract are considered subordinated. In the event of a liquidation or bankruptcy, the liabilities shall be settled only after settling the obligations towards other creditors.

26. PROVISIONS 31.12.2016 31.12.2015

Provision for off-balance sheet credit risk losses 11,346 8,618 Provision for litigations 94,781 71,923 Provision for operational risk 8,645 8,850 Provision for long-term employee benefits 25,204 27,929

Total provisions 139,976

117,320

Movements in provisions were as follows:

31.12.2016

31.12.2015

Opening balance 1 January 8,618 132,791 New provisions (note 9) 19,194 10,601 Provision reversed (Note 9) (16,538) (134,027) Net foreign exchange differences 72 (747)

As at 11,346 8,618

Provision for litigations 31.12.2016

31.12.2015

As at 1 January 71,923 30,284 New provisions (Note 12) 34,906 43,238 Provision reversed (Note 8) (4,783) (91) Provision used – payables (7,265) (1,508)

As at 94,781

71,923

Provision for operational risk 31.12.2016 31.12.2015

Opening balance 1 January 8,850 9,237 Provision used – payables (205) (387)

As at 8,645

8,850



40

26. PROVISIONS (continued) Provision for long-term employee benefits 31.12.2016 31.12.2015

As at 1 January 27,929 31,463 New provisions (Note 10) 3,461 4,661 Provision used - payables (125) (234) Actuarial gains (6,061) (7,961)

As at 25,204 27,929

The actuarial assumptions used when calculating retirement benefits were as follows:

- Employee data: - Total years of service as at 31.05.2016. - Year of birth and gender - Number of years of remaining working lives (old-age pension, normal retirement age) - RS mortality tables (2010-2012) - 6% discount rate - average gross salary paid per employee in the Republic of Serbia during the period Jan-May 2016 - an assumed annual salary increase of 2%.

Movements within Provisions for Retirement Benefits are presented in the table below: Present value of employee benefits as at 31.12.2015 27,929

Cost of Service a. Current service cost 1,372 b. Past service cost - c. Interest cost 2,089 d. Payables (125) Actuarial gains/losses arising from: a. changes in demographic assumptions - b. changes in financial assumptions (4,589) c. changes in experience assumptions (1,472)

Present value of employee benefits as at 31.12.2016 25,204



41

27. OTHER LIABILITIES 31.12.2016 31.12.2015

Trade payables 53,206 109,235 Net salaries and fringe benefits payable 150,236 136,885 Tax 9,982 11,900 Transactions in progress 8,192 6,244 Advances received 6,802 5,204 Other liabilities 43,442 38,130 Temporary accounts 25,125 19,250 Accrued expenses Accrued other expenses 59,065 64,435 Accrued interest income 279,532 271,022 Accrued other income 34,560 36,895 Other accrued expenses 2,769 1,043

Total, Other liabilities 672,911 700,243

28. EQUITY 31.12.2016 31.12.2015

Share capital – ordinary shares 8,420,500 8,420,500

Equity 8,420,500 8,420,500

Reserves 29,816 21,688 Retained earnings 102,054 - Profit for the year 200,945 129,018

Total equity 8,753,315

8,571,206

a) Share capital

The Bank’s share capital includes initial investments of its principal shareholders and subsequent issues of new shares. As at 31 December 2016, the Bank’s paid in and subscribed capital amounted to 6,477,307 ordinary shares with nominal value of RSD 1,300 per share, or RSD 8,420,500 thousand (2015: 6,477,307 ordinary shares with nominal value of RSD 1,300 per share, or RSD 8,420,500 thousand). As at 31 December 2016, based on the Central Securities Depository and Clearing house, the Bank’s share capital was as follows:

Number of ordinary

shares % of share

Credit Agricole S.A. 6,477,307 100.00% The Bank has no treasury shares.



42

28. EQUITY (continued) b) Earnings per share Basic earnings per share are calculated by dividing the net profit attributable to equity holders of the Bank by the weighted average number of ordinary shares in issue during the year.

2016 2015

Profit attributable to equity holders of the Bank 200,945 129,018

Weighted average number of ordinary shares in issue 6,477,307 6,477,307

Basic earnings per share (expressed in RSD per share) 31.02 19.92

c) Reserves Reserves amounting to RSD 29,816 thousand as at 31 December 2016 (2015: RSD 21,688 thousand) comprise actuarial gains arising from the effects of changes in demographic, financial and experience assumptions used for calculation of provision for future liabilities for retirement benefits. 29. OFF-BALANCE SHEET ITEMS

31.12.2016 31.12.2015

a) Fiduciary services 521,697 555,788 Guarantees and other irrevocable commitments 24,159,153 23,532,874

As at 31 December 24,680,850 24,088,662

a) Fiduciary activities

31.12.2016 31.12.2015

Short-term receivables 7,655 8,779 Long-term receivables 514,042 547,009

As at 31 December 521,697 555,788

Fiduciary fund resources mainly comprise short term and long term loans granted from funds received from the Fund for Agricultural Development amounting to RSD 6,140 thousand (2015: RSD 43,630 thousand ), whereas RSD 514,459 thousand relates to the funds received from the National Corporation for Housing Loans.(2015: RSD 510,961 thousand) and RSD 1,097 thousand (2015: RSD 1,187 thousand), which is relative to received bills of exchange.



43

29. OFF-BALANCE SHEET ITEMS (continued) b) Guarantees and other future commitments

31.12.2016 31.12.2015

Guarantees Issued financial guarantees for loan repayment 3,401,529 3,154,040 Performance guarantees 3,988,889 4,808,361

Total financial guarantees and performance guarantees 7,390,418 7,962,401

Uncovered letters of credit and avals 1,374,521 961,370

Unused commitments 15,394,214 14,609,103

As at 31 December 24,159,153 23,532,874

Unused commitments relate to unused granted loans that cannot be unilaterally cancelled, such as: overdrafts, revolving loans to companies, multi-purpose revolving loans, and other irrevocable commitments. Irrevocable commitments usually have fixed maturity dates or maturity related clauses. As irrevocable commitments may expire before they are withdrawn by customers, the total agreed amount is not necessarily presented as future cash ouflows. The Bank monitors the maturity of irrevocable commitments arising from unused granted loans because long term commitments bear greater credit risk than short term commitments. 30. RECONCILIATION OF RECEIVABLES Based on Article 18, of the Law and Accounting, the Bank performed the reconciliation of receivables by sending statements of open items to all legal entities and entrepreneurs on 30 November 2016. The total value of verified statements of open items confirming the Bank’s receivables amounts to RSD 18,781,900 thousand. Based on the Statements of Open Items exchanged between the Bank its clients, there remained the following unreconciled receivables and payables: Total value of unresolved Statements of Open Items amounts to RSD 500,681 thousand. The main problem relating to unresolved statements of open items lies in the inaccurate address of customers (RSD 127,299 thousand); a number of Statements of Open Items have been declared void without providing any justification; statements of open items bearing no signature. The Bank is of an opinion that the value of unresolved statements of open items is immaterial.



44

31. RELATED PARTY TRANSACTIONS Effects of related party transactions In the normal course of business, the Bank enters into various business relationships with Credit Agricole S.A Paris and other Credit Agricole Grup members. The tables below summarise receivables and payables and related income and expenses arising from business relationships with other related parties as at the balance sheet date:

2016 Credit Agricole S.A. Paris

CA CIB CA CIB Sweden

CA CIB India Cariparma CA Cards & Payments

Silca

Progica

Lesica

CA Leasing d.o.o. Beograd

CA CIB London

CA DU Morbihan

Loans and receivables 1,231,754 - - - - -

-

25 - -

Investments in subsidiaries - - - - - -

-

78,667 - -

Other assets 2,078 510 - - - -

-

5,368 - -

Total assets 1,233,832 510 - - - -

-

84,060 - -

Deposits and other liabilities 11,019,505 - - 5 -

-

- 13,513 -

Subordinated debt 2,483,767 - - - -

-

379,721 - -

Other liabilities 52,742 1,944 - - - 370

-

436

50 - 5

Total liabilities 13,556,014 1,944 - - 5 370

-

436

379,771 - 5

Interest income 8,212 - - - - -

-

54 - -

Fee and commission income 3,941 31,734 1,001 25 54 -

-

6,266 25 -

Net income from foreign exchange gains and losses

- 1,706 - - - -

-

- - -

Other income 214 - - - - -

-

47,929 - -

Total income 12,367 33,440 1,001 25 54 -

-

54,249 - -

Interest expense 167,713 - - - - -

-

- - -

Fee and commission expense 116,838 40,272 - - - -

-

- - 24

Net expense arising from foreign exchange differences

185,340 - - - - 7

5

11

6

2,711 - -

Other expenses 90,535 - - - - 5,409

4,349

2,909

3,078

12 - -

Total expenses: 560,426 40,272 - - - 5,416

4,354

2,920

3,084

2,723 - 24



45

31. RELATED PARTY TRANSACTIONS (continued) Effects of related party transactions

2015

Credit Agricole S.A. Paris

CA CIB CA CIB Sweden CA CIB Indija Cariparma CA Cards &

Payments Silca

Progica

Lesica CA Leasing d.o.o.

Beograd

Loans and receivables

3,487,847 - 152 - - -

-

-

- 13

Investments in subsidiaries - - - - - - - - - 78,667

Other assets 105 734 - - - - - - - 8,030

Total assets

3,487,952 734 152 - - -

-

-

- 86,710

Deposits and other liabilities: 11,448,121 402 - - - - - - - 178,664

Subordinated debt 2,447,899 - - - - - - - - -

Other liabilities 56,849 307 - - - 331 541 881 - 36

Total liabilities

13,952,869 709 - - - 331

541

-

0 178,700

Interest income 810 - - - - - - - - -

Fee and commission income 2,986 32,918 1,174 - 59 - - - - 10,518

Net income arising from foreign exchange differences

- - - - - 6,615

4

-

3 -

Other income 197 - - - 9 - - - - 37,256

Total income

3,993 32,918 1,174 - 68 6,615

-

-

- 47,774

Interest expense 170,324 - - - - - - - - -

Fee and commission expense 100,681 33,344 - 48 - - - - - -

Net expense arising from foreign exchange differences

136,323 26,123 - - 1 -

-

13

- 2,944

Other expenses 95,385 - - - - 6,501 3,243 2,965 2,790 7

Total expenses:

502,713 59,467 - 48 1 6,501

3,243

2,978

2,790 2,951



46

31. RELATED PARTY TRANSACTIONS (continued) Business relationships with members of the Executive Board and other key employees In the normal course of business, the Bank enters into various business relationships and arrangements with members of the Executive Board and other key employees and their related parties under regular market conditions. Balances at the end of the year are presented in the table below:

As at 31

December 2016

As at 31

December 2015

Loans and receivables 16,518 15,214 Deposits 112,385 72,575 Fees to members of the Managing and Executive boards (gross) paid in 2016 and 2015 financial assets are presented in the table below:

As at

31.12.2016 As at

31.12.2015

Salaries of the members of the Executive Board 108,302 106,657 Fees paid to members of the Managing Board 5,369 4,580 Other benefits 40,134 23,390

Total 153,805 134,627



47

32. FINANCIAL RISK MANAGEMENT 32.1. Introduction Risk is inherent in the Bank’s activities but it is managed through a process of ongoing identification, measurement and monitoring, setting risk limits and other controls. This process of risk management is critical to the Bank’s continuing profitability and each individual within the Bank is accountable for the risk exposure relating to his or her responsibilities. The Bank is exposed to credit risk, liquidity risk and market risk. The Bank is also exposed to operational risk. The independent risk management process does not include business risks such as changes in the environment, technology and industry. They are monitored through the Bank’s strategic planning process. The Bank is exposed to the following risks: credit risk, liquidity risk, interest rate risk, currency risk, operating risk, risks of exposure to one entity or a group of related parties (excessive risk concentration), investment risk, and risk related to the country of origin Risk management structure The Board of Directors and the Executive Board are ultimately responsible for identifying and controlling risks. However, the Bank established separate independent bodies responsible for managing and monitoring risks. Board of Directors and Executive Board The Board of Directors and the Executive Board are responsible for the overall risk management approach and for approving the risk management strategies and principles. The Audit Committee The Audit Committee is responsible for monitoring the overall risk management process within the Bank. Risk Management Department The Risk Management Department is responsible for the implementation and maintenance of risk related procedures which ensure independent process control. Credit Committee The Credit Committee decides on loan applications within the framework of the bank's acts and performs other tasks stipulated by acts of the bank.



48

32. FINANCIAL RISK MANAGEMENT (continued) 32.1. Introduction (continued) Risk Control Department The Risk Control Department is responsible for monitoring compliance with principles, policies and limits set by the Bank. Within each business group there is a decentralized unit which is responsible for independent risk control, including risk monitoring in accordance with the set limits, as well as for monitoring risks arising from the introduction of new products and complex transactions. This unit also ensures that risk is incorporated in the risk measurement and reporting system. Assets and Liabilities Committee (ALCO) The committee for liquidity management is responsible for managing the Bank’s assets and liabilities and the overall financial structure. Also, the committee is primarily responsible for sources of funding and the Bank’s liquidity. Internal Audit The process of risk management in the Bank is controlled at least once a year by the internal audit function which examines procedure adequacy as well as the Bank’s compliance with the adopted procedures. The internal auditors discuss the results of their work with the Bank’s management and reports on their findings and recommendations to the Audit Committee.

a) Risk management and reporting systems The Bank’s risks are measured using a method that reflects both the expected losses likely to arise in normal circumstances and unexpected losses, which are an estimate of the ultimate actual losses based on statistical models. The models use probability derived from historical data, adjusted to reflect the current economic environment. The Bank also runs the worst case scenarios that would arise in the event that extreme events which are unlikely to occur, in fact, occur. Monitoring and controlling risks is primarily based on limits setting. The limits reflect the Bank’s business strategy and market environment, as well as the level of risk the Bank is willing to accept. The Bank also monitors and measures the overall risk bearing capacity taking into account the aggregate risk exposure across all risks types and activities. Information compiled from all business activities are examined and processed in order to identify, analyse and control early risks. This information is presented and explained to the Board of Directors, the Executive Board, the Risk Management Committee and managers of all business units., The reports include: aggregate credit exposure, credit metric forecasts, hold limit exceptions, market risk measuring, liquidity ratios and risk profile changes. The Bank’s senior management quarterly assess the adequacy of loan impairment. An extensive report on risks that includes all relevant information needed to assess and make conclusions on the Bank’s risk exposure is presented to the Audit Committee at least quarterly. For each new level in the Bank separate risk management reports are prepared so that all business units may have access to detailed, necessary and updated information. Daily reports on the utilization of market limits, liquidity and foreign exchange risk as well as other important information are submitted to all Executive Directors and relevant members of the Bank’s Executive Board.



49

32. FINANCIAL RISK MANAGEMENT (continued) 32.1. Introduction (continued)

b) Excessive risk concentration Risk concentration arises when a significant number of counterparties are engaged in similar business activities or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political and other conditions. Risk concentration indicates the relative sensitivity of the Bank’s performance to changes affecting a particular industry of geographical location. In order to avoid excessive risk concentration, the Bank’s policies and procedures include specific guidelines for development and maintenance of a diverse portfolio. Identified concentrations of credit risks are controlled and managed accordingly. 32.2. Credit risk Credit risk is the risk that certain receivables of the Bank will not be fully collected in view of the conditions under which they were initially approved, i.e. the risk that the debtors will be unable or unwilling to fulfil their contractual obligations. Debtor means any natural or legal person who has an on- and/or off-balance sheet obligation towards the Bank. The only debtors the Bank have are related parties according to the terms of Article 2 of the Law on Banks. The process of credit risk management is based on general principles:

1) The application of a consistent approach and unique standards in the process of making decisions on the Bank’s loans and advances;

2) The Bank sets the limit of total exposure to one debtor, where debtor means a group of related parties in accordance with provisions of the Law on Banks;

3) The Bank monitors and manages the level of the debtor’s total exposure in accordance with the Bank adopted credit policy;

4) All individual decisions on loans and advances and all material amendments to contracts concluded are approved by relevant authorities only;

5) The competency of individuals in the process of making decisions on the Bank’s loans and advances is determined in accordance with their qualifications, expertise and experience which are subject to periodic assessment.

The key element of the credit risk minimization is the loan classification criteria developed internally by the Bank. These criteria are in accordance with the National Bank of Serbia regulations and they are harmonized with the standards and criteria of the Credit Agricole Group. Debtor evaluation methods are based on the analysis of: (1) client’s prior period financial statements (not less than three years); (2) present and future plans and expectations with respect to client’s operations; (3) client’s credit history; (4) quality of collaterals; (5) non-financial parameters (client’s organization structure, quality of management, competitive advantage and image); quality and number of guarantors-payers who ensure repayment of loans, etc. first when reviewing and analysing the loan application and then while monitoring repayment of the loan. All guarantor-payers with respect to each of the Bank’s receivables are subject to the same process of evaluation of creditworthiness as the principal debtor. In accordance with the National Bank of Serbia Decision on Risk Management by Banks, the Bank set up organizational units that are responsible for risk protection and the Client Support Department responsible for informing clients of: their obligations towards the Bank, current portions, possible delays in payment and open issues. This department carries out forced collection where clients fail to fulfil their contractual obligations within agreed deadlines and submits data to the law office that initiates debt collection proceedings.



50

32. FINANCIAL RISK MANAGEMENT (continued) 32.2. Credit risk (continued) Contingent liability risks related to credit risk The Bank issues guarantees and letters of credit to its customers which may require that the Bank make payments in favour of third parties. In this way the Bank is exposed to risks relating to credit risk which can be mitigated by the same control processes and procedures. Excessive risk concentration Excessive risk concentration is a risk arising from the Bank’s large exposure to a group of debtors or a single party. Risk concentration arises when a significant number of counterparties are engaged in similar business activities or activities in the same geographic region, have similar economic features, or are exposed to similar factors that reflect on the client's income and expenses, which would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political and other conditions. In order to achieve, maintain and secure their credit portfolio and minimize concentration risks, security measures are established by defining maximum levels of exposure and credit limits as well as by regular monitoring compliance with the established limits. Under the Decision on Risk Management by Banks (RS Official Gazette, Nos. 112/08, 45/11, 94/11, 119/12, 123/12, 23/13, 43/13, 92/13, 33/15 and 61/15) ), large exposure of the Bank to a single borrower or a group of related parties relates to exposure of at least 10% of the bank’s capital.



51

32. FINANCIAL RISK MANAGEMENT (continued)

32.2. Credit risk (continued)

Maximum credit risk exposure

The maximum exposure to credit risk is presented in the balance sheet as gross amount of financial assets. For guarantees and commitments for loan extension purposes, the maximum exposure equals the value of the obligation.

31.12.2016 31.12.2015

Financial asset classes

Maximum balance

sheet exposure to credit risk a

Allowance for

impairment

Out of which group

assessment

Net balance sheet

exposure to credit risk

Maximum balance

sheet exposure to credit risk a

Allowance for

impairment

Out of which group assessment

Net balance sheet

exposure to credit risk

Balance on the account held with the Central Bank

9,068,662 - - 9,068,662 7,524,832 - - 7,524,832

Financial assets initially recognized at fair value through profit and loss

2,767 - - 2,767 - - - -

Financial assets held to maturity 462,001 - - 462,001 2,456,429 - - 2,456,429

Loans and receivables from banks and other financial organisations

5,536,741 4,554 4,554 5,532,187 6,564,234 4,601 4,601 6,559,633

Loans and receivables from customers 62,906,117 4,761,608 1,596,075 58,144,509 55,304,552 4,533,484 1,577,813 50,771,068

Investments in subsidiaries 78,667 - - 78,667 78,667 - - 78,667

Other assets 335,299 64,283 45,996 271,016 324,231 56,810 35,684 267,421

As at 31 December 78,390,254 4,830,445 1,646,624 73,559,809 72,252,945 4,594,895 1,618,098 67,658,050

Financial guarantees and performance guarantees

7,390,418 9,213 5,052 7,381,205 7,962,401 4,310 46 7,958,091

Uncovered letters of credit and avals 1,374,522 10 10 1,374,512 961,370 6 6 961,364

Unused commitments 15,394,214 2,122 2,122 15,392,092 14,609,103 4,301 4,301 14,604,802

As at 31 December 24,159,154 11,345 7,184 24,147,809 23,532,874 8,617 4,353 23,524,257

TOTAL

102,549,408 4,841,790 1,653,808 97,707,618 95,785,819 4,603,512 1,622,451 91,182,307

The Bank’s maximum exposure to credit risk as at 31 December 2016 and as at 31 December 2015, prior to taking into account collaterals, can be analysed by geographical areas and financial asset classes.



52

32. FINANCIAL RISK MANAGEMENT (continued) 32.2. Credit risk (continued) Maximum credit risk exposure


Total 2016

Serbia Other

Belgrade

Vojvodina Other parts

of Serbia European

Union Other parts

of the world

Balances with the Central Bank

9,068,662

-

-

-

-

9,068,662


- - - 2,767 - 2,767

Financial assets held to maturity 462,001 - - - - 462,001 Loans and receivables from banks and other financial organisations

4,008,026 - 4,114 1,231,754 292,847 5,536,741

Loans and receivables from customers

25,623,427 24,700,306 12,582,384 - - 62,906,117

- of which: Corporate 9,153,953 9,597,789 2,552,191 - - 21,303,933

- of which: Retail 13,824,972 14,512,212 9,361,711 - - 37,698,895

- of which: Public sector 1,610,082 107,456 107,539 - - 1,825,077 - of which: Other clients 1,034,420 482,849 560,943 - - 2,078,212

Investments in subsidiaries 78,667 - - - - 78,667

Other assets 31,291 274,203 29,317 437 51 335,299

Balance sheet assets 39,272,074 24,974,509 12,615,815 1,234,958 292,898 78,390,254 Contingent liabilities and commitments 12,703,665 7,415,784 3,190,358 848,034 1,313 24,159,154

- of which: Financial and payment guarantees

3,917,973 1,764,577 1,228,938 477,617 1,313 7,390,418

- of which: Uncovered letters of credit 290,034 697,172 16,899 370,417 - 1,374,522

- of which: Unused commitments 8,495,658 4,954,035 1,944,521 - - 15,394,214

Maximum exposure to credit risk as at 31 December 2016

51,975,739 32,390,293 15,806,173 2,082,992 294,211 102,549,408

Categories of balance sheet assets and off-balance sheet items where the Bank was exposed to credit risk as at 31 December 2015 are presented in the table below:


Total 2015

Serbia Other

Belgrade

Vojvodina Other parts

of Serbia European

Union Other parts

of the world

Balances with the Central Bank 7,524,832

-

-

-

-

7,524,832

Financial assets held to maturity 2,456,429 - - - - 2,456,429 Loans and receivables from banks and other financial organisations 2,807,925

14

4,077

3,485,801

266,417

6,564,234

Loans and receivables from customers 22,092,632

21,754,492

11,457,428

-

-

55,304,552

- of which: Corporate 8,062,309 9,214,514 2,461,948 - - 19,738,771 - of which: Retail 12,230,807 11,775,160 8,322,602 - - 32,328,569 - of which: Public sector 862,210 221,290 167,522 - - 1,251,022 - of which: Other clients 937,306 543,528 505,356 - - 1,986,190 Investments in subsidiaries 78,667 - - - - 78,667 Other assets 42,410 254,285 27,221 291 24 324,231

Balance sheet assets 35,002,895

22,008,791

11,488,726

3,486,092

266,441

72,252,945

Contingent liabilities and commitments 13,777,580

6,062,307

2,942,432

746,813

3,742

23,532,874

- of which: Financial and payment guarantees 4,377,206

2,128,292

1,071,226

381,935

3,742

7,962,401 - of which: Uncovered letters of credit 462,343 11,669 122,480 364,878 - 961,370 - of which: Unused commitments 8,938,031 3,922,346 1,748,726 - - 14,609,103

Maximum exposure to credit risk as at 31 December 2015 48,780,475

28,071,098

14,431,158

4,232,905

270,183

95,785,819



53



The analysis of the Bank’s balance sheet assets and off-balance sheet items as at December 2016, classified by industry sectors prior to taking collaterals into consideration, is presented in the table below:

Financial asset classes Finance Retail Process

industries Trade Mining Agriculture Construction

industry Transport Service

industries Other Total

Balances with the Central Bank

9,068,662 -

-

-

- -

- -

-

- 9,068,662


2,767 -

-

-

- -

- -

-

- 2,767

Financial assets held to maturity

462,001 -

-

-

- -

- -

-

- 462,001

Loans and receivables from banks

5,536,741 -

-

-

- -

- -

-

- 5,536,741


- 36,658,640 10,254,715 7,182,830 27,658 3,166,502 930,616 3,019,991 91,536 1,573,629 62,906,117

- of which: Corporate - - 8,962,865 6,073,806 21,981 3,132,084 537,960 1,334,168 40,458 1,200,611 21,303,933

- of which: Retail - 36,658,640 253,042 586,943 1 24,408 27,915 28,404 40,297 79,245 37,698,895

- of which: Public sector - - 105,988 12 10 - 41 1,610,036 29 108,961 1,825,077

- of which:Other Clients - - 932,820 522,069 5,666 10,010 364,700 47,383 10,752 184,812 2,078,212

Investments in subsidiaries 78,667 -

-

- - -

-

-

- - 78,667

Other assets 248,128 31,474 13,256 14,687 2,502 1,234 3,967 7,250 4,683 8,118 335,299

Balance sheet assets 15,396,966 36,690,114 10,267,971 7,197,517 30,160 3,167,736 934,583 3,027,241 96,219 1,581,747 78,390,254

Contingent liabilities and commitments 1,149,101 1,344,131 6,373,552 8,773,218 112,176 966,148 2,358,123 1,716,165 43,132 1,323,408 24,159,154

- of which: Financial and performance guarantees

547,454 21,371 1,066,962 3,266,772 6,504 53,132 1,120,908 782,829 4,034 520,452 7,390,418

- of which: uncovered letters of credit and avals

370,417 - 708,344 111,039 - - - 184,722 - - 1,374,522

- of which: Unused commitments

231,230 1,322,760 4,598,246 5,395,407 105,672 913,016 1,237,215 748,614 39,098 802,956 15,394,214

As at 16,546,067 38,034,245 16,641,523 15,970,735 142,336 4,133,884 3,292,706 4,743,406 139,351 2,905,155 102,549,408



54

32. FINANCIAL RISK MANAGEMENT (continued) 32.2. Credit risk (continued) The analysis of the Bank’s balance sheet assets and off-balance sheet items as at December 2015 classified by industry sectors prior to taking collaterals into consideration is presented in the table below:

Financial asset classes Finance Retail Process

industries Trade Mining Agriculture Construction

industry Transport Service

industries Other Total

Balances with the Central Bank 7,524,832 - - - - - -

-

-

- 7,524,832

Financial assets held to maturity 2,456,429 - - - - - -

-

-

- 2,456,429

Loans and receivables from banks 6,564,234 - - - - - -

-

-

- 6,564,234 Loans and receivables from customers 162,396 31,394,951 9,318,791 7,633,466 47,730 2,547,325 817,450 2,170,142 94,058 1,118,243 55,304,552 - of which: Corporate - - 7,935,898 6,709,904 42,067 2,499,212 434,391 1,445,920 43,966 627,413 19,738,771

- of which: Retail - 31,394,951 292,939 513,819 1 1,402 15,879

32,605

37,357

39,616 32,328,569

- of which: Public sector 162,396 - 165,842 - 5 34,179 89

665,498 243

222,770

1,251,022

- of which:Other Clients - - 924,112 409,743 5,657 12,532 367,091

26,119

12,492

228,444

1,986,190

Investments in subsidiaries 78,667 - - - - - -

-

-

- 78,667 Other assets 235,975 28,206 11,765 12,381 2,497 1,176 1,903 4,567 4,479 21,282 324,231

Balance sheet assets 17,022,533 31,423,157 9,330,556 7,645,847 50,227 2,548,501 819,353 2,174,709 98,537 1,139,525 72,252,945

Contingent liabilities and commitments 515,405 1,613,967 5,145,155 9,958,642 104,299 1,355,842 2,334,203 1,163,114 41,430 1,300,817 23,532,874

- of which: Financial and performance guarantees 457,486 32,184 1,222,909 3,664,259 2,363 101,069 1,299,971

453,349

4,080

724,731

7,962,401

- of which: Uncovered letter of credit - - 364,878 154,641 - - -

440,882

969

-

961,370

- of which: Unused commitments 57,919 1,581,783 3,557,368 6,139,742 101,936 1,254,773 1,034,232

268,883

36,381

576,086

14,609,103

As at 17,537,938 33,037,124 14,475,711 17,604,489 154,526 3,904,343 3,153,556 3,337,823 139,967 2,440,342 95,785,819



55

32. FINANCIAL RISK MANAGEMENT (continued) 32.2. Credit risk (continued) Collateral and other assets pledged as collateral Both the amount and the type of required collateral depend on the estimated credit risk pertaining to each client. The main types of collateral include:

For commercial loans: cash deposits, guarantees, mortgages, pledges on movable property and receivables, deposits, guarantees of private individuals,

For retail loans: For retail loans – cash deposits, mortgages, pledges on movable property, whereas for housing loans the National Mortgage Insurance Corporation insurance is an additional requirement.

The management monitors the market value of collateral and requires additional collateral in accordance with underlying contracts. The management also takes into account the market value of collateral obtained during the review of the adequacy of loan provision. Restructuring loans and advances to customers Restructuring of loans to customers include: redefining debtor-creditor relations between bank and borrower ie. granting of additional concessions to the client due to the deterioration of its financial situation that would not have been granted to the borrower is not in trouble, regardless of whether it is a certain amount of receivables due, whether the claim is impaired and whether it is for him status of default occurred. Restructuring of loans and advances to customers include all activities undertaken by the Bank, leading to changes in all relevant conditions under which amounts due from customers were originally approved. This includes changes in: maturity date, interest rate, instalment due date, amount of instalment, adopted plan of reorganization and other changes that facilitate the position of the debtor in relation to the conditions which were at the time of changing the conditions granted to another debtor with the same or similar levels of risk. In the event of deterioration of debtor’s financial ability, restructuring of such receivables may be carried out only under the conditions and in the manner described in the Bank’s Credit Standards. In such cases, the restructuring of receivables is feasible only if it enables the client to regularly settle their obligations towards the Bank and on condition that the client continues to generate income with a view to regularly servicing its debt, irrespective of its deteriorated financial position. Whether the customer is a natural person, an entrepreneur, a farmer or a legal entity, before making the restructuring decision it is necessary to visit the client and prepare a financial monitoring report on the client’s operations or income. The renegotiation of receivables is subject to pre-approval by the Bank’s Credit Risk Department. Restructuring of loans is done with the application of appropriate restructuring measures that involve the change of the original contractual terms and receivables repayment method in which the new conditions and method of repayment are adapted to the emerging risk profile of the client. When analyzing the file to assess whether the restructuring of loans to the debtor economically sustainable and justified for the debtor and the bank which includes a detailed analysis of the reasons that led to the financial difficulties of the debtor, the projection of future cash flows, in accordance with the internal procedures for approval of loans to customers of the Bank .



56

32. FINANCIAL RISK MANAGEMENT (continued) 32.2. Credit risk (continued) Gross restructured receivables as at 31 December 2016 and 31 December 2015 are presented in the tables below, as well as the market value of the collateral to the level of receivables that serve as collateral for these loans. Data on restructured receivables also show their movement during the period of one year as well as the structure by restructuring measures. Table below shows restructured receivables as at 31 December 2016.

Financial asset classes Total receivables – gross

Accumulated allowance for

total receivables impairment

Total restructured receivables –

gross

Of which:

Nonperforming loans

Accumulated allowance for restructured receivables impairment

% restructured receivables

Restructured receivables

collateral amount

Loans and receivables from banks and other financial organisations

5,536,741

4,553

-

-

-

-

-

Loans and receivables from customers 62,906,117 4,761,608 2,595,556 2,509,436 1,306,355 - 886,501

- of which: Corporate 21,303,933 1,926,467 1,893,838 1,880,718 826,514 8,93% 522,617

- of which: Retail 37,698,895 1,353,537 56,599 43,708 2,018 0,15% 51,282

- of which: Public sector 1,825,077 41,793 106,841 106,841 41,108 5,85% 105,817

- of which:Other Clients 2,078,212 1,439,811 538,278 478,169 436,715 25,90% 206,785

Other assets 335,299 64,283 110 110 94 0,03% 55

Balance sheet assets 68,778,157 4,830,444 2,595,666 2,509,546 1,306,449 - 886,556

Guarantees 7,390,418 9,213 - - - - -

Letters of credit 1,374,521 10 - - - - -

Unused commitments 15,394,214 2,122 - - - - -

Contingent liabilities and commitments 24,159,153 11,345 - - - - -

As at 31.12.2016 92,937,310 4,841,789 2,595,666 2,509,546 1,306,449 - 886,556

Table below shows changes in restructured receivables as at 31 December 2016.

Financial asset classes Gross amount – opening balance


during the year

Forborne Foreign

currency effect

Other changes

Gross amount – closing balance

Net amount – closing balance

Loans and receivables from customers 2,598,167 146,064 145,075 50,865 (54,467) 2,595,556 1,289,201

- of which: Corporate 1,969,261 72,313 96,383 40,854 (92,207) 1,893,838 1,067,324

- of which: Retail 3,148 12,619 1,297 1 42,127 56,599 54,581

- of which: Public sector 145,357 1,023 34,160 2,977 (8,357) 106,841 65,733

- of which:Other Clients 480,401 60,109 13,235 7,033 3,970 538,278 101,563

Other assets 104 5 5 - 6 110 16

As at 31.12.2016 2,598,271 146,069 145,080 50,865 (54,461) 2,595,666 1,289,217

Table below shows structure of restructured receivables according to restructuring measures as at 31 December 2016.

Financial asset classes Interest rate decrease

The extension of the

repayment period

Moratorium Capitalization Refinancing Partial write-off

Conversion of debt

Other measures

Total in 2016


658,730 1,148,409 - - 778,091 - - 10,326 2,595,556

- of which: Corporate 275,644 829,777 - - 778,091 - - 10,326 1,893,838

- of which: Retail 43,709 12,890 - - -

-

-

-

56,599

- of which: Public sector

1,024 105,817 - - -

-

-

-

106,841

- of which:Other Clients

338,353 199,925 - - -

-

-

-

538,278

Other assets 28 82 - - -

-

-

-

110

Balance sheet assets 658,758 1,148,491 - - 778,091 - - 10,326 2,595,666



57

32. FINANCIAL RISK MANAGEMENT (continued) 32.2. Credit risk (continued) Table below shows restructured receivables as at 31 December 2015.

Financial asset classes Total

receivables – gross

Accumulated allowance for total

receivables impairment

Total restructured receivables –

gross

Of which:

Nonperforming loans

Accumulated allowance for restructured receivables impairment

%

restructured receivables

Restructured

receivables collateral amount

Loans and receivables from banks and other financial organisations 152,983 4,669

-

-

- - -

Loans and receivables from customers 55,147,698 4,538,415 2,598,167 2,535,889 971,139 - 786,968

- of which: Corporate 19,744,593 1,841,536 1,969,261 1,908,172 487,073 9,97% 496,431

- of which: Retail 32,328,289 1,346,530 3,148 1,959 503 0,01% 1,002

- of which: Public sector 1,088,626 69,397 145,357 145,357 49,898 13,35% 145,357

- of which:Other Clients 1,986,190 1,280,952 480,401 480,401 433,665 24,19% 144,178

Other assets 324,231 51,810 104 104 93 0,03% 56

Balance sheet assets 55,624,912 4,594,894 2,598,271 2,535,993 971,232 - 787,024

Guarantees 7,962,401

4,310

-

-

- - -

Letters of credit 960,401

6

-

-

- - -

Unused commitments 14,609,103

4,301

-

-

- - -

Avals 969

-

-

-

- - -

Contingent liabilities and commitments

23,532,874

8,617

-

-

- -

-

As at 31.12.2015 79,157,786 4,603,511 2,598,271 2,535,993 971,232 - 787,024

Table below shows changes in restructured receivables as at 31 December 2015.

Financial asset classes Gross amount – opening balance


during the year

Forborne Foreign

currency effect

Other changes*

Gross amount – closing balance

Net amount – closing balance

Loans and receivables from customers 1,382,576 1,566,591 110,080 6,846 (247,767) 2,598,167 1,627,027

- of which: Corporate 860,743 1,532,048 58,911 4,589 (369,208) 1,969,261 1,482,187

- of which: Retail 8,101 383 3,448 (51) (1,837) 3,148 2,645

- of which: Public sector 158,308 34,160 47,721 576 35 145,357 95,459

- of which:Other Clients 355,424 - - 1,733 123,244 480,401 46,736

Other assets 105 - 2 - - 104 11

As at 31.12.2016 1,382,682 1,566,591 110,082 6,846 (247,767) 2,598,271 1,627,038

Table below shows structure of restructured receivables according to restructuring measures as at 31 December 2015.

Financial asset classes Interest

rate decrease

The extension of the

repayment period

Moratorium Capitalization Refinancing Partial write-off

Conversion of debt

Other measures**

Total in 2015

Krediti i potraživanja od komitenata

631.449 1.126.144 - - 829.403 - - 11.171 2.598.167

- of which: Corporate 310.863 818.023 - - 829.203 - - 11.171 1.969.261

- of which: Retail 1.094 1.855 - - 200

-

-

-

3.148

- of which: Public sector 34.160 111.197 - - -

-

-

-

145.357

- of which:Other Clients 285.332 195.069 - - -

-

-

-

480.401

Other assets 34 68 - - - - - 2 104

Balance sheet assets 631.483 1.126.212 - - 829.403 - - 11.173 2.598.271

Regarding changes in restructured receivables within other changes restructured parties are shown that have occured due to payment and exposure decrease. Regarding data on the structure of restructured receivables according to the restructuring measures within other measures is the extension of the grace period within the same maturity of restructured receivables.



58

32. FINANCIAL RISK MANAGEMENT (continued) 32.2. Credit risk (continued) The Bank manages the quality of financial assets by using the internal credit ratings. The table below shows the quality of loans and advances by financial asset classes exposed to credit risk as at 31 December 2016. The amounts are presented gross without a deduction for impairment allowance however: Neither past due nor impaired

High grade

quality

Standard grade

quality

Sub-standard

grade quality

Past due but not impaired Impaired

Total 2016

Balances with the Central Bank 9,068,662 -

- - - 9,068,662 Financial assets initially recognized at fair value through profit and loss 2,767 -

- - - 2,767

Financial assets held to maturity 462,001 -

- - - 462,001

Loans and receivables from banks and other financial organisations 5,375,458 156,769 4,514 5,536,741 Loans and receivables from clients 10,138,477 43,089,664 674,357 1,881,647 7,121,972 62,906,117 -of which: Corporate 3,573,813 13,654,717 401,410 138,209 3,535,784 21,303,933 - of which: Retail 6,564,664 27,713,644 171,860 1,469,527 1,779,200 37,698,895 - of which: Public sector - 1,718,997 - 12 106,068 1,825,077 - of which: Other clients - 2,306 101,087 273,899 1,700,920 2,078,212 Investments in subsidiaries 78,667 - - - - 78,667 Other assets 241,786 25,728 1,499 8,114 58,172 335,299

Balance sheet assets 25,367,818 43,272,161 675,856 1,889,761 7,184,658 78,390,254


12,355,832 10,592,878 1,092,735 58,850 58,859 24,159,154

- of which: Financial and payment guarantees

822,349 5,780,213 686,189 45,210 56,457 7,390,418

- of which: uncovered letters of credit and avals

376,144 998,378 - - - 1,374,522

- of which: Unused commitments

11,157,339 3,814,287 406,546 13,640 2,402 15,394,214

As at 31 December 37,723,650 53,865,039 1,768,591 1,948,611 7,243,517 102,549,408

The table below shows loans and advanced individually and collectively impaired

Financial asset classes Impaired

Individually Collectively Total impaired

Loans and receivables from Banks and other financial institutions - 4,514 4,514

Loans and receivables from customers 5,263,857 1,858,115 7,121,972

of which: Corporate 3,191,756 344,028 3,535,784

of which: Retail 354,369 1,424,831 1,779,200

of which: Public sector 105,859 210 106,068

Of which:Other Clients 1,611,874 89,046 1,700,920

Other assets 18,432 39,740 58,172

Balance sheet assets 5,282,289 1,902,369 7,184,658 Contingent liabilities and commitments 50,444 8,414 58,859

- of which: Financial and payment guarantees 50,444 6,013 56,457 - of which: Unused commitments - 2,402 2,402 Total 5,332,733 1,910,784 7,243,517



59

32. FINANCIAL RISK MANAGEMENT (continued) 32.2. Credit risk (continued) The table below shows the quality of loans and advances by financial asset classes exposed to credit risk as at 31 December 2015 : Neither past due nor impaired

High grade

quality

Standard grade

quality

Sub-standard

grade quality

Past due but not impaired Impaired

Total 2015

Balances with the Central Bank 7,524,832 - - - - 7.524.832 Financial assets held to maturity 2,456,429 - - - - 2.456.429 Loans and receivables from banks and other financial organisations 6,411,264 148,369 - - 4,601 6.564.234 Loans and receivables from clients 8,900,220 35,703,523 1,053,227 2,343,905 7,303,678 55.304.552 of which: Corporate 3,008,306 12,052,243 592,928 256,763 3,828,531 19.738.771 - of which: Retail 5,654,243 22,898,337 189,479 1,816,259 1,770,252 32.328.569 - of which: Public sector 162,396 666,102 221,204 944 200,376 1.251.022 - of which: Other clients 75,275 86,841 49,616 269,939 1,504,519 1.986.190 Investments in subsidiaries 78,667 - - - - 78.667 Other assets 226,059 34,859 8 9,727 53,578 324.231

Balance sheet assets 25,597,470 35,886,751 1,053,235 2,353,632 7,361,857 72.252.945

Contingent liabilities and commitments 13,386,121 9,082,912 992,707 20,474

50,660

23,532,874

- of which: Financial and payment guarantees 2,018,243 5,418,323 465,776 12,076

47,983

7,962,401

- of which: Uncovered letters of credit 364,878 583,854 11,669 -

-

961,370

- of which: Unused commitments 11,002,031 3,080,735 515,262 8,398

2,677

14,609,103

As at 31 December 38,983,591 44,969,663 2,045,942 2,374,106 7,412,517 95,785,819

The table below shows loans and advanced individually and collectively impaired

Financial asset classes Impaired

Individually Collectively Total impaired

Loans and receivables from banks and other financial organisations - 4,601 4,601 Loans and receivables from customers 5,484,925 1,818,753 7,303,678

of which: Corporate 3,469,757 358,774 3,828,531 of which: Retail 405,743 1,364,509 1,770,252

of which: Public sector 199,868 508 200,376 Of which:Other Clients 1,409,557 94,962 1,504,519 Other assets 16,284 37,294 53,578

Balance sheet assets 5,501,209 1,860,648 7,361,857

Contingent liabilities and commitments 47,589 3,071 50,660

- of which: Financial and payment guarantees 47,589 394 47,983 - of which: Unused commitments - 2,677 2,677

Total 5,548,798 1,863,719 7,412,517



60

32. FINANCIAL RISK MANAGEMENT (continued) 32.2. Credit risk (continued) Financial assets neither due nor impaired presented in the table above refer to performing receivables, which are not past due and which have the following qualities:

High level quality (receivables that are neither past due, impaired, nor bad and doubtful);

Standard level quality (receivables that are neither past due, collectively impaired, nor bad and

doubtful);

Substandard level quality (receivables that are not past due, but are collectively impaired; they are

not bad and doubtful, but are under watch);

Pastdue but not impaired financial assets comprise receivables 1 - 90 days past due, collectively impaired

but not bad and doubtful, as well as individually bad and doubtful receivables but not impaired.

Impaired loans and advances are bad and doubtful receivables over 90 days past due, individually or

collectively impaired. The table below shows financial assets past due but not impaired, classified on the basis of past due interval in accordance with the Bank's internal method of calculating impairment allowance as at 31 December 2016 and 31 December 2015. Financial assets past due but not impaired classified on the basis of past due interval as at 31 December 2016 :

1 to 30

days 31 to 60

days 61 to 90

days Over 91

days Total in

2015

Loans and receivables from customers 1,265,528 248,712 93,712 273,695 1,881,647

- of which: Corporate 135,652 1,849 708 - 138,209

- of which: Retail 1,129,672 246,863 92,992 - 1,469,527

- of which: Public sector - - 12 - 12

- of which: Other clients 204 - - 273,695 273,899

Other assets 4,566 3,476 72 - 8,114

Balance sheet assets 1,270,094 252,188 93,784 273,695 1,889,761 Contingent liabilities and commitments 56,582 2,268 - - 58,850

- of which: Financial and payment guarantees 45,210 - - - 45,210 - of which: Unused commitments 11,372 2,268 - - 13,640 Total 1,326,676 254,456 93,784 273,695 1,948,611



61

32. FINANCIAL RISK MANAGEMENT (continued) 32.2. Credit risk (continued) Financial assets past due but not impaired classified on the basis of past due interval as at 31 December 2015 :

1 to 30

days 31 to 60

days 61 to 90

days Over 91

days Total in

2015

Loans and receivables from customers 1,679,915 289,235 104,826 269,929 2,343,905 - of which: Corporate 232,898 22,797 1,068 - 256,763 - of which: Retail 1,447,017 265,494 103,748 - 1,816,258 - of which: Public sector - 944 - - 944 - of which: Other clients - - 10 269,929 269,940

Other assets 9,318 151 193 65 9,727 Balance sheet assets 1,689,233 289,386 105,019 269,994 2,353,632 Contingent liabilities and commitments 17,337 2,771 366 - 20,474

- of which: Financial and payment guarantees 11,971 106 - - 12,077 - of which: Unused commitments 5,366 2,665 366 - 8,397 Total 1,706,570 292,157 105,385 269,994 2,374,106

Impairment assessment In determining the existence of objective evidence of impairment, the Bank uses the following list of potential objective evidence of impairment defined by the internal guidelines for the calculation of the allowance for impairment of receivables of the Bank:

The internal rating of the debtor indicates that the borrower is in the status of default

The borrower is late in meeting obligations to the state, other creditors, employees (this is objective evidence of impairment is monitored by blockages client accounts).

It is evident that the reduction in operating income in the past two years or a shorter period of > 50%

Debtor’s capital is significantly reduced due to the loss in the two previous reporting periods - > 50%

Current ratio of debt service capacity (DSCR ratio) is below a satisfactory level of <1.1

Delay in materially significant amount> 90 days based on any placements

Placement of the status of default under the criteria defined in the Decision on classification

The Bank has substantially changed the conditions of repayment of loans due to financial difficulties of the debtor in relation to the initially agreed

The debtor has initiated bankruptcy proceedings

The debtor has bankrupt

The debtor has initiated liquidation

The debtor has been deleted from ABR..

There is evidence that the claim is placed on forced maturity

The Bank determines the allowances for impairment on an individual basis for all individually significant customers / groups of affiliated entities for which there is objective evidence of impairment of receivables whose total exposure of more than 4 million RSD on the day of valuation, as well as for all exposures are recorded off-balance, and based on the present value of estimated future cash flows using the original effective interest rate (EIR).



62

32. FINANCIAL RISK MANAGEMENT (continued) 32.2. Credit risk (continued) Impairment assessment (continued) When calculating impairment allowance, the Bank takes into consideration expected future collection either from the clients ongoing operating activities or from collateral.

Where the client is experiencing financial difficulties, the Bank also examines the sustainability of client’s business plan, the client’s ability to improve performance, the realisable value of collateral and its timing, the availability of alternative financial support to customers, the collectibility of receivables due, and the timing of expected cash flows. The impairment losses are evaluated at each balance sheet date, unless unforeseen circumstances require more careful attention and more frequent assessment. Collective assessment of allowance for impairment

The calculation of impairment losses on group level (collective assessment) applies to:

Clients / group of related entities with a total exposure of less than 4 million RSD

Clients / groups of related entities whose exposure is greater than 4 MRSD and for which there is no objective evidence of impairment and are not included in the calculation of the individual value adjustment.

The calculation of the collective allowance for impairment is made for individuals and SBE clients based on division into groups of receivables with similar characteristics and days of delay which are grouped into buckets. Receivables of Corporate customers are taken into account as a combination of days of delay and ANADEFI reviews. The percentages which are applied to the exposure in each bucket are obtained on the basis of historical data for certain groups with similar characteristics, wherein the analysis is used vintage.

The formula for determining the % of corrections values for each bucket:

% Collective economic commission = average value PD% * average value of LGD% Groups with similar characteristics are defined for each segment as follows:

Corporate (LC, SME, Agro SME):

1. Overdraft (Overdraft (the used part) + unused part of the overdraft) 2. Loans (Short-term borrowings + Long-term borrowings + Other loans + Treasury line) 3. Guarantees on the expense of the Bank 4. Agro Loans 5. Revolving loans 6. Credit cards (credit cards (used part) + unused part).

SBE (SBE Small, SBE Enterpreneurs, SBE Micro, Agro SBE, Agro PI):

1. Overdraft (Overdraft (the used part) + unused part of the overdraft) 2. Loans (Short-term borrowings + Long-term borrowings + Other loans + Treasury line) 3. Guarantees on the expense of the Bank 4. Agro Loans 5. Revolving loans 6. Credit cards (credit cards (used part) + unused part).

Individuals:

1. Overdraft (Overdraft (the used part) + unused part of the overdraft) 2. Loans (Short-term borrowings + Long-term borrowings + Other loans + Treasury line) 3. Mortgage Loans 4. Consumer loans (consumer loans + other loans) 5. Cash loans 6. Auto Loans 7. Guarantees on the expense of the Bank



63


32.2. Credit risk (continued) The following table shows information on the type and value of collateral and guarantee providers by sector lending and categories of receivables as at 31 December 2016:


Value of collateral

Deposit

Securities

Residental real estate

Other real estate

Stocks in the warehouse receipt and

animals

Other assets

Guarantees issued by:

Countries Banks Party related to the debtor

Other parties


1,638,321 - 17,146,151 10,815,713 91,026 - - 147,126 - 31,365

of which: Corporate 883,620 - 551,303 7,027,995 86,625 - - 147,126 - 11,525

of which: Retail 481,006 - 16,389,563 3,121,214 4,401 - - - - 19,840

of which: Public sector - - - 105,817 - - - - - -

Of which:Other Clients 273,695 - 205,285 560,687 - - - - - -

Other assets 124 - 144 1,825 - - - - - -

Balance sheet assets 1,638,445 - 17,146,295 10,817,538 91,026 - - 147,126 - 31,365

Guarantees 427,771 - 147,315 1,462,959 - - - 486,438 - -

Credentials 370,417 - - 19,845 - - - - - -

Unused commitments 415,554 - 45,333 902,217 - - - - 400,000 -


1,213,742 - 192,648 2,385,021 - - - 486,438 400,000 -

As at 31 December 2016 2,852,187 - 17,338,943 13,202,559 91,026 - - 633,564 400,000 31,365



64


32.2. Credit risk (continued) The following table shows information on the type and value of collateral and guarantee providers by sector lending and categories of receivables as at 31 December 2015:


Value of collateral

Deposit

Securities

Residental real estate

Other real estate

Stocks in the warehouse receipt and

animals

Other assets

Guarantees issued by:

Countries Banks Party related to the debtor

Other parties


1,736,740 - 14,591,879 9,239,486 88,230 - - 158,066 - 16,550

of which: Corporate 921,147 - 603,352 6,014,997 88,230 - - 158,066 - -

of which: Retail 542,717 - 13,752,590 2,549,385 - - - - - 16,550

of which: Public sector - - - 199,804 - - - - - -

Of which:Other Clients 272,876 - 235,937 475,300 - - - - - -

Other assets - - 15 66 - - - 150 - -

Balance sheet assets 1,736,740 - 14,591,894 9,239,552 88,230 - - 158,216 - 16,550

Guarantees 645,122 - 190,512 1,618,253 - - - 406,548 825,966 -

Credentials 364,878 - - 11,669 - - - - - -

Unused commitments 770,127 - 31,140 846,201 - - - -

400,000 -

Avals 969 - - - - - - - - -


1,781,096 - 221,652 2,476,123 - - - 406,548 1,225,966 -

As at 31 December 2015 3,517,836 - 14,813,546 11,715,675 88,230 - - 564,764 1,225,966 16,550



65


32.2. Credit risk (continued) The following table shows the maximum exposure to credit risk by impaired financial asset classes and the collaterals’ fair value as at 31 December 2016 :

Financial asset classes Maximum credit risk exposure

Net exposure 2016

Fair value of collaterals

Deposit Mortages Garancije Ostalo Suma

kolaterala

Loans and receivables from banks and other financial institutions 4,514 - - - - - 4,514

Loans and receivables from customers 7,121,972 2,780 2,652,580 145,427 - 2,800,787 4,321,185

of which: Corporate 3,535,784 - 1,368,412 145,427 - 1,513,839 2,021,945

of wich: Retail 1,779,200 2,780 472,488 - - 475,268 1,303,932

of which: Public sector 106,068 - 105,817 - - 105,817 251

of which: Other clients 1,700,920 - 705,863 - - 705,863 995,057

of which: Foreign clients - - - - - - -

Other assets 58,172 38 1,915 - - 1,953 56,219

Bilance sheet assets 7,184,658 2,818 2,654,495 145,427 - 2,802,740 4,381,918

Contingent liabilites and commitments 58,859 1,366 50,444 - - 51,810 7,049

of which: Financial and payment guarantees 56,457 998 50,444 - - 51,442 5,015

of which: unused commitments 2,402 368 - - - 368 2,034

As at 31 December 2016 7,243,517 4,184 2,704,939 145,427 - 2,854,550 4,388,967



66


32.2. Credit risk (continued) The following table shows the maximum exposure to credit risk by financial asset classes and the collaterals’ fair value as at 31 December 2015 :

Financial asset classes Maximum credit risk exposure

Net exposure 2015

Fair value of collaterals

Deposit Mortages Garancije Ostalo Suma

kolaterala

Loans and receivables from banks and other financial institutions 4,601 - - - - - 4,601

Loans and receivables from customers 7,303,678 7,106 2,691,019 157,514 - 2,855,639 4,448,039

of which: Corporate 3,828,531 30 1,375,390 157,514 - 1,532,934 2,295,597

of wich: Retail 1,770,252 7,076 480,751 - - 487,827 1,282,425

of which: Public sector 200,376 - 199,804 - - 199,804 572

of which: Other clients 1,504,519 - 635,074 - - 635,074 869,445

of which: Foreign clients - - - - - - -

Other assets 53,578 - 81 - - 81 53,497

Bilance sheet assets 7,361,857 7,106 2,691,100 157,514 - 2,855,720 4,506,131

Contingent liabilites and commitments 50,660 1,197 47,589 - - 48,786 1,874

of which: Financial and payment guarantees 47,983 312 47,589 - - 47,901 82

of which: unused commitments 2,677 885 - - - 885 1,792

As at 31 December 2015 7,412,517 8,303 2,738,689 157,514 - 2,904,506 4,508,011



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32.2. Credit risk (continued) The following table shows the data on receivables that are secured by real estate to the value of the LTV indicator at 31 December 2016

Value of the LTV indicator*

Value of the receivables that are secured by real estate

Below 50% 7,079,245 from 50% do 70% 7,289,847 from 70% do 90% 9,749,345 from 90% do 100% 2,976,145 from 100% do 120% 1,549,842 from 120% do 150% 1,340,837 Over 150% 3,132,805

Total 33,118,066

Average LTV idicator for 2016 74.54

The following table shows the data on receivables that are secured by real estate to the value of the LTV indicator at 31 December 2015

Value of the LTV indicator*

Value of the receivables that are secured by real estate

Below 50% 6,874,569 from 50% do 70% 6,910,778 from 70% do 90% 7,789,051 from 90% do 100% 1,644,148 from 100% do 120% 1,461,100 from 120% do 150% 1,101,262 Over 150% 3,266,294

Total 29,047,202

Average LTV idicator for 2015 80.38

* LTV indicator represents the ratio of the gross value of the receivables and the market value of the property to which secures receivables



68



Under the problematic receivables (NPE) the Bank classified all claims that meet one of the following criteria:

The party is in bankruptcy / liquidation The party is sued The party is in material significant overdue more than 90 days.

The party was NPE at the time of the restructuring, and the date of placement is not older than one year from the moment when tested NPE. The party was NPE at the time of restructuring, is located in a trial period and at the reporting date is in materially significant overdue> 30 days

The party was NPE at the time of restructuring, and during the trial period additional concessions were made. The party has a serial number of restructuring ≥ 3 The Party is marked "Real objective records" (objective evidence of impairment values in accordance with CAQ3RZ7523) There are other NPE parties of the customer – the rule of infection for corporate clients

Status problematic (NPE) is obtained at the client level, while for the retail clients, status is determined at the level of party, not the client. Retail clients are clients that belong to the following segments of the bank's internal 3, 1201, 12061 and 12064.

The following table shows the data on movement of problematic receivables at 31 December 2016


Total gross – beginning of the

year

New problematic Reduction Currency

effect

Other

changes

Total gross-

end of the year

Total net value- end of the year

Of which: Bought

Of which: Collected

Of which: Sold

Of which: Write-off

Loans and receivables from banks and other financial institutions

4,627 11 - 293 293 - - 104 65 4,514 -

Loans and receivables from customers 7,596,158 399,053 - 543,239 425,637 - 117,602 113,269 (247,843) 7,317,398 2,590,242

of which: Corporate 3,888,730 124,332 - 204,994 173,443 - 31,550 68,711 (338,200) 3,538,579 1,626,651

of wich: Retail 1,732,607 273,263 - 183,370 179,680 - 3,691 17,647 (143,037) 1,697,110 362,672

of which: Public sector 200,376 1,038 - 41,627 41,627 - - 3,804 (56,496) 107,095 65,733

of which: Other clients 1,774,445 420 - 113,248 30,887 - 82,361 23,107 289,890 1,974,614 535,186

Other assets 284,598 2,922 - 42,185 41,135 - 1,050 - (187,526) 57,809 543

Balance sheet assets 7,885,383 401,986 - 585,717 467,065 - 118,652 113,373 (435,304) 7,379,721 2,590,785

Guearantees 133,828 56,762 - - - - - 232 (122,836) 67,986 58,825

Unused commitments 572,747 754 - - - - - - (572,747) 755 754

Contingent liabilites and commitments 706,575 57,516 - - - - - 232 (695,583) 68,741 59,579

As at 31 December 2016 8,591,958 459,502 - 585,717 467,065 - 118,652 113,605 (1,130,887) 7,448,462 2,650,364



69



The following table shows the data on movement of problematic receivables at 31 December 2015


Total gross – beginning of the

year

New problematic Reduction Currency

effect

Other

changes

Total gross- end

of the year

Total net value- end of the year

Of which: Bought

Of which: Collected

Of which: Sold

Of which: Write-off

Loans and receivables from banks and other financial institutions

4,644 26 - 3 - - 3 (98) 58 4,627 26

Loans and receivables from customers 6,286,592 2,080,825 - 498,605 471,350 - 27,256 20,275 (292,929) 7,596,158 3,104,308

of which: Corporate 1,740,735 1,635,267 - 132,966 131,227 - 1,739 4,396 641,298 3,888,730 2,060,018

of wich: Retail 1,510,017 360,576 - 119,433 114,279 - 5,154 (2,938) (15,615) 1,732,607 416,368

of which: Public sector 219,555 34,177 - 21,421 21,421 - - 909 (32,844) 200,376 131,547

of which: Other clients 2,816,285 50,805 - 224,785 204,423 - 20,363 17,908 (885,768) 1,774,445 496,375

Other assets 51,033 234,584 - 2,258 1,690 - 568 - 1,239 284,598 233,127

Balance sheet assets 6,342,269 2,315,435 - 500,866 473,040 - 27,827 20,177 (291,632) 7,885,383 3,337,461

Guearantees 15,044 123,020 - - - - - - (4,236) 133,828 133,828

Unused commitments 10,835 572,747 - - - - - - (10,835) 572,747 572,677

Contingent liabilites and commitments 25,879 695,767 - - - - - - (15,071) 706,575 706,505

As at 31 December 2015 6,368,148 3,011,202 - 500,866 473,040 - 27,827 20,177 (306,703) 8,591,958 4,043,966



70



The following table shows details of movement of assets acquired through collection of receivables at 31 December 2016.

Type of asset acquired throuht collection of receivables Residential real estate Other real estate Financial assets Other assets

acquired through collection

Total

Total gross at 01.01.2016. 25,288 199,973 - 459 225,720

Acquired during the period 14,900 13,493 - - 28,393

Sold during the period - - - - -

Put into use during the period (fixed assets or investment property)

11,958 872 - - 12,830

Reclasified to assets held for sale - - - - -

of what: sold during the period - - - - -

Total gross at 31 December 2016 28,230 212,594 - 459 241,283

Accumulated provision - - - - -

of what: provision for the period - - - - -

Net value at 31 December 2016 28,230 212,594 - 459 241,283

The following table shows details of movement of assets acquired through collection of receivables at 31 December 2015.

Type of asset acquired throuht collection of receivables Residential real estate Other real estate Financial assets Other assets

acquired through collection

Total

Total gross at 01.01.2015. 2,158 124,938 - 889 127,985

Acquired during the period 59,240 80,306 - 0 139,546

Sold during the period 2,227 1,863 - 430 4,520

Put into use during the period (fixed assets or investment property)

33,883 3,408 - - 37,291

Reclasified to assets held for sale - - - - -

of what: sold during the period - - - - -

Total gross at 31 December 2015 25,288 199,973 - 459 225,720

Accumulated provision - - - - -

of what: provision for the period - - - - -

Net value at 31 December 2015 25,288 199,973 - 459 225,720



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32. FINANCIAL RISK MANAGEMENT (continued) 32.3. Liquidity risk Liquidity risk is the risk that the Bank is unable to meet its obligations when they fall due. Liquidity risk arises from the mismatch between cash inflows and outflows (structural liquidity risk), i.e. inability to sell/convert into cash financial instruments/assets within an acceptable time frame and at acceptable cost (financial instruments liquidity risk). The Bank is exposed to daily calls on its available cash resources from current accounts, maturing deposits and loan draw-downs. To reduce or limit this risk, the Bank’s management intends to diversify its sources of funding, manage assets with liquidity in mind and monitor future cash flows and liquidity on daily basis. This includes an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required. The Bank manages its assets and liabilities in the manner that ensures the Bank’s ability to meet its obligations at all times and the Bank’s clients to have assets at their disposal under agreed upon schedules. The liquidity position is presented through the liquidity ratio that shows the proportion of the sum of primary and secondary liquid assets (cash, deposits with other banks, deposits with the NBS, receivables undergoing the process of realization, irrevocable lines of credit granted to the Bank, quoted financial instruments, and other receivables of the Bank that are due within one month) and the sum of on demand liabilities with no contracted maturity and liabilities with contracted maturity within the following month. The Assets and Liabilities Committee (ALCO) is responsible for monitoring risk liquidity, managing risk liquidity and proposing to the Executive Board measures and activities aiming at maintaining the Bank ’s liquidity, reconciling maturities, as well as for the Bank’s “Reserve Funding Plan” and other measures that are important for the Bank’s financial stability. The Bank monitors a portfolio of highly liquid securities and other assets that can be easily converted into cash in the event of unforeseen fluctuations in the Bank’s cash flows. The Bank also has credit lines that are available to meet immediate liquidity needs. Additionally, the Bank maintains a mandatory reserve in RSD and foreign currency, in accordance with the requirements of the National Bank of Serbia. The Bank monitors its liquidity risk exposure at the level of externally and internally prescribed limits.

The National Bank of Serbia prescribed a minimum liquidity ratio, which represents the external liquidity risk exposure limit equal to:

- at least 1.0 – when calculated as the average liquidity ratio for all business days in a month, - no less than 0.9 for a period longer than three consecutive days, - at least 0.8 – when calculated for a single business day.

Under the Decision on Risk Management by Banks (RS Official Gazette No. 45/11. 94/11. 119/12. 123/12. 23/13. 43/13, 92/13, 33/15, 61/15, 61/16 and 103/16), the Bank is obliged to monitor the narrow liquidity ratio, which is equal to:

- at least 0.7 – when calculated as the average liquidity ratio for all business days in a month, - no less than 0.6 for a period longer than three consecutive days, - at least 0.5 – when calculated for a single business day.

The liquidity ratio: The Bank calculates the liquidity ratio on a daily and monthly basis and submits to the National Bank of Serbia, within the prescribed deadlines and in the prescribed manner, the Daily Liquidity Ratio Report and the Monthly Liquidity Ratio Report. In addition to liquidity risk exposure limits and measures defined by external regulations, the Bank defines its own internal limits of exposure to liquidity risk and monitors them through internal reports on the Bank's dinar and foreign currency liquidity which are submitted daily to the Bank's management.



72

32. FINANCIAL RISK MANAGEMENT (continued) 32.3. Liquidity risk (continued) The Bank does not limit the availability of cash for the purpose of timely servicing of the financial needs of its customers. The Bank’s management believes that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. The maturity matching, or controlled mismatching of the Bank’s assets and liabilities is fundamental to the management of the Bank in the process of liquidity risk management. It is unusual for banks to have full maturity matching of assets and liabilities, as an unmatched item may notonly increase profitability but at the same time may increase the risk of loss. In line with the Bank’s liquidity risk management policy, the following has been prescribed: the manner and the time of liquidity risk measurement and related responsibilities, setting of limits, and reporting on liquidity risk exposure, all with the aim of minimizing the liquidity risk. One of the key priorities of the Bank is to ensure that all payment obligations are settled on time and that it fully complies with regulations of the Central Bank. In view of the said, the Bank has developed an adequate system for monitoring and planning liquidity that ensures effective management of assets and liabilities in terms of financial flows, cash flows and their concentration, with the aim of matching cash inflows and outflows. Liquidity planning implies the estimate of future liquidity needs taking into account the anticipation of changes in economic, political and legal conditions. Such planning implies the development of diverse strategies of assets and liabilities management in order to ensure the liquidity needs of the Bank are met. In order to successfully manage liquidity risk, liquidity ratios and liquidity gaps are continuously monitored in accordance with adopted limits, by currency (RSD and EUR), by segments, by product, by monthly interest rates, whilst the data used for the analysis of the Bank's balance sheet structure also serve as a basis for establishing risk structure indicators and risk concentration indicators which are used to assess the level of liquidity risk.

Liquidity ratio during 2016 and 2015 was as follows:

2016 2015

Average ratio for the period 1.20 1.20 Maximum ratio for the period 1.47 1.41 Minimum ratio for the period 0.96 1.04 As at 31 December 1.40 1.20 The narrow liquidity ratio during 2016 and 2015 was as follows:

2016 2015

Average ratio for the period 1.01 1.05 Maximum ratio for the period 1.29 1.23 Minimum ratio for the period 0.79 0.89 As at 31 December 1.26 1.04



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32. FINANCIAL RISK MANAGEMENT (continued) 32.3. Liquidity risk (continued) Analysis of financial liabilities by maturity The table below summarizes the maturity profile of the Bank’s financial assets and liabilities as at 31 December 2016 based on contractual undiscounted repayment obligations. The Bank expects that the majority of customers will not require repayment of deposits at the contractual maturity date, whilst the table below does not reflect expected cash flows indicated by the Bank’s deposit retention history.

Less than one month

1 to 3 months 3 to 12 months

1 to 5 years

Over 5 years

Total 2016

Cash and deposits held with the Central Bank

3,399,314

1,468,548

2,252,633

2,115,398

709,810 9,945,703

Repurchase agreements (‘Reverse Repos’)

4,000,000

-

-

-

- 4,000,000

Financial assets held to maturity

2,119

4,238

454,238

-

- 460,595

Nostro accounts held with foreign banks

1,367,861

-

-

-

- 1,367,861


12,985,573

3,360,008

12,376,804

25,369,212

17,428,619 71,520,216

Total financial assets

21,754,867

4,832,794

15,083,675

27,484,610

18,138,429 87,294,375

Less than one month

1 to 3 months 3 to 12 months 1 to 5 years Over 5 years Total 2016

Deposits liability to banks

1,269,673

1,953,844

3,537,319

6,600,716

2,467,859 15,829,411

Deposits liability to customers

33,424,276

5,188,235

6,070,014

5,138,801

70,359 49,891,685

Subordinated debt 6,935

13,871

62,415

332,881

2,552,667 2,968,769

Total financial liabilities

34,700,884

7,155,950

9,669,748

12,072,398

5,090,885 68,689,865



74

32. FINANCIAL RISK MANAGEMENT (continued) 32.3. Liquidity risk (continued) The table below summarizes the maturity profile of the Bank’s financial assets and liabilities as at 31 December 2015 based on contractual undiscounted repayment obligations.

Less than

one month

1 to 3 months

3 to 12 months

1 to 5 years

Over 5 years

Total 2015

Cash and deposits held with the Central Bank

1,832,926

1,244,147

2,460,059

2,680,685

268,008

8,485,825

Repurchase agreements (‘Reverse Repos’)

2,800,000

-

-

-

- 2,800,000

Financial assets held to maturity 9,206 267,505 1,726,191 460,594 - 2,463,496 Nostro accounts of foreign banks 3,314,629 - - - - 3,314,629 Loans to customers 13,271,949 3,393,333 10,873,553 21,376,066 14,533,077 63,447,978

Total financial assets 21,228,710 4,904,985 15,059,803 24,517,345 14,801,085 80,511,928

Less than

one month

1 to 3 months

3 to 12 months

1 to 5 years

Over 5 years

Total 2015

Deposits liability to banks 3,326,525

3,508,603

2,699,091

5,981,409

1,996,051

17,511,680 Deposits liability to customers 27,954,343 3,151,911 6,211,419 6,140,659 73,043 43,531,375 Subordinated debt 7,318 14,636 65,861 351,256 2,608,151 3,047,222

Total financial liabilities 31,288,186 6,675,150 8,976,371 12,473,324 4,677,245 64,090,276

The table below summarises, by maturity dates, the Bank’s guarantees, letters of credit, and other irrevocable commitments as at 31 December 2016 and 31 December 2015 :

Less than one month

1 to 3 months

3 to 12 months

1 to 5 years

Over 5 years

Total 2016

Contingent liabilities 501,046 1,062,936 4,687,443 2,519,063 13,664 8,784,152 Irrevocable commitments and letters of credit 4,167,945 - 135 13,963 54,914 4,236,957

Total at 31 December 2016 4,668,991 1,062,936 4,687,578 2,533,026 68,578 13,021,109

Less than one month

1 to 3 months

3 to 12 months

1 to 5 years

Over 5 years

Total 2015

Contingent liabilities 1,083,709 1,459,085 4,323,286 2,083,047 3,649 8,952,776 Irrevocable commitments and letters of credit 3,597,146 - 284,000 15,861 29,382 3,926,389

Total at 31 December 2015 4,680,855 1,459,085 4,607,286 2,098,908 33,031 12,879,165



75

32. FINANCIAL RISK MANAGEMENT (continued) 32.4. Market risk Market risk is the risk that the fair value or expected future cash flows of financial instruments will fluctuate because of changes in market variables such as interest rates and foreign exchange rates. The Bank is not exposed to the risk of changes in equity instruments price and price of goods. Other than the concentration of foreign exchange risk the Bank has no significant concentration of market risk with respect to other items. a) Interest rate risk Interest rate risk arises from the possibility that movements in interest rates will affect future cash flows or the fair values of financial instruments. The Board of Directors has established limits on the interest rate gaps for stipulated periods. On-balance sheet items are monitored on a daily basis to ensure that they are within the established limits. Interest rate risk is determined as the level of exposure of the Bank’s on-balance sheet items to the adverse affects of movements in market interest rates, i.e. the impact on: the Bank’s current financial position (mainly net financial results) and capital adequacy. Therefore, interest rates are based on the market interest rates, and the Bank performs their matching on a regular basis taking into account market interest rates movements. As a result of changes in interest rates, interest margins may increase or decrease. The purpose of interest rate risk management, as part of assets and liabilities management, is to determine the optimal interest rate and, consequently, the Bank’s revenues taking into account the market conditions and competitive environment, while at the same time matching the interest rate with the Bank’s assets and liabilities. In view of the said, it is very important to assess the sensitivity of revenues to sudden movements in the market interest rate. For the purpose of hedging the underlying exposure to interest rate risk, the Bank sets a variable interest rate, matches the structure of interest-bearing assets with interest bearing liabilities, and uses other interest rate risk management tools. The Bank manages interest rate risk by:

a) adequately determining the level of interest margin i.e. matching the level of interest rates on interest sensitive assets and interest sensitive liabilities, with the same maturity and the timing of interest rate reset; and/or

b) ensuring the maturity match between interest sensitive assets and interest sensitive liabilities (when fixed interest rate is set), i.e. matching the timing (i.e. the interest rate reset period where variable interest rate is applied).

The summary of the Bank’s exposure to interest rate risk as at 31 December 2016 is prepared in accordance with the following practice: despite the contractual right to change the agreed interest rates on loans and advances to customers, except for EURIBOR based loans with variable interest rate, the Bank will not exercise this right before the agreed maturity date, i.e. before the new contract date.



76


32.4. Market risk (continued)

a) Interest rate risk (continued)

The following table breaks down the Bank’s exposure to interest rate risk as at 31 December 2016 and 31 December 2015 . Financial assets and liabilities are presented by the earlier of the interest reset date or the maturity date:

Less than one month

1 to 3 months 3 to 6 months 6 months to 1 year

Over 1 year Non-interest bearing

Total in 2016

ASSETS

Cash and deposits held with the Central Bank (Note 14) 4,190,236 - - - - 6,878,439 11,068,675

Financial assets held to maturity (Note 15) - - 462,001 - - - 462,001

Loans and receivables from banks and other financial organisations (Note 16)

4,004,414 - - - - 1,527,773 5,532,187

Loans and receivables from customers (Note 17) 441,256 195,154 92,073 7,203,714 49,899,787 312,525 58,144,509

Total financial assets 8,635,906 195,154 554,074 7,203,714 49,899,787 8,718,737 75,207,372

LIABILITIES

Deposits and other liabilities towards banks, other financial organisations and the Central Bank (Note 23)

192,301 10,878 2,826,141 3,316,390 10,216,681 759,823 17,322,214

Deposits and other liabilities towards customers (Note 24) 13,281,280 4,320,940 725,225 4,277,194 8,542,938 17,010,630 48,158,207

Subordinated debt (Note 25) - - - - 2,483,767 - 2,483,767

Total financial liabilities 13,473,581 4,331,818 3,551,366 7,593,584 21,243,386 17,770,453 67,964,188

Net exposure to interest rate risk as at 31. December 2016 (4,837,675) (4,136,664) (2,997,292) (389,870) 28,656,401 (9,051,716) 7,243,184



77


32.4. Market risk (continued)

a) Interest rate risk (continued)

Less than one

month 1 to 3 months 3 to 6 months 6 months to 1

year Over 1 year Non-interest bearing Total in 2015

ASSETS Cash and deposits held with the Central Bank (Note 14) 4,036,951 - - - - 5,413,391 9,450,342 Financial assets held to maturity (Note 15) 57,836 - - 998,593 1,400,000 - 2,456,429 Loans and receivables from banks and other financial organisations (Note 16)

3,242,674 - - - - 3,316,959 6,559,633

Loans and receivables from customers (Note 17) 975,109 96,259 178,388 4,079,813 45,052,824 388,675 50,771,068

Total financial assets 8,312,570 96,259 178,388 5,078,406 46,452,824 9,119,025 69,237,472

LIABILITIES Deposits and other liabilities towards banks, other financial organisations and the Central Bank (Note 23)

918,796 689,204 1,742,791 3,892,036 10,311,891 318,367 17,873,085

Deposits and other liabilities towards customers (Note 24) 12,022,937 1,234,980 1,375,916 1,840,606 12,212,435 13,151,620 41,838,494 Subordinated debt (Note 25) - - - - 2,447,899 - 2,447,899

Total financial liabilities 12,941,733 1,924,184 3,118,707 5,732,642 24,972,225 13,469,987 62,159,478

Net exposure to interest rate risk as at 31. December 2015 (4,629,163) (1,827,925) (2,940,319) (654,236) 21,480,599 (4,350,962) 7,077,994



78

32. FINANCIAL RISK MANAGEMENT (continued) 32.4. Market risk (continued) a) Interest rate risk (continued) The Bank takes on exposure to the effects of fluctuations in the levels of market interest rates on both its financial position and cash flows. Interest margin may increase or decrease as a result of such changes. Interest rates are based on market interest rates and the Bank performs their matching on a regular basis. The aim of the interest rate risk management is to optimize the net interest income and keep the market interest rates constant in accordance with the business strategy of the Bank. ALCO coordinates the maturity matching of assets and liabilities based on: macroeconomic analyses and forecasts, forecasts of conditions for attaining liquidity, analyses and forecasts of interest rates market trends for different elements within assets and liabilities. Interest rate risk represents an adverse change in the active interest rates price compared to passive interest rates on one hand, and the possibility of reducing the optimal difference between average active and passive interest rates on the other. In managing the interest rate risk, the Bank simulates expected and extreme changes in interest rates and makes projections on their effect on the income statement. Interest rate risk is also monitored through sensitivity analysis (scenario analysis), in other words by observing the effects of interest rate fluctuations on the Bank’s income and expenses. The table below presents the income statement sensitivity to the reasonably possible changes in interest rates (4% for RSD and 2% for EUR), with all other variables held constant. The income statement sensitivity represents the effect of predicted changes in interest rates on the net interest income in one year, on financial assets and liabilities based on interest rates as at 31 December 2016 and 31 December 2015

Currency Percentage

point change

Income statement

sensitivity 2016

Percentage point change

Income statement

sensitivity 2015

Percentage point increase RSD 4% 82,095 4% 11,923 EUR 2% 100,364 2% 121,569

Percentage point decrease RSD 4% (81,195) 4% (6,821) EUR 2% (87,611) 2% (146,986) b) Foreign exchange risk Foreign exchange risk is the risk of loss on open positions arising from fluctuations in the foreign exchange rate and, consequently, changes in the value of RSD compared to the currencies in which the Bank’s loans and advances and payables are denominated. The risk exposure results in increased foreign exchange gains and losses that are recognized in the income statement. The Bank manages its foreign exchange risk exposure by reconciling the currency structure of assets and liabilities in accordance with the expected changes in foreign exchange rate. To reduce its exposure to foreign exchange risk, the Bank has established appropriate methods for its monitoring and measuring, internally acceptable level of risk (which, needless to say, must be in accordance with relevant laws and regulations), as well as the tools for managing risk and hedging against unacceptable foreign currency positions.



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32. FINANCIAL RISK MANAGEMENT (continued) 32.4. Market risk (continued) b) Foreign exchange risk (continued) In 2016, the Bank was very active in the local interbank foreign exchange market and used the opportunities of this market to efficiently manage its foreign exchange position. To reduce the adverse effects of foreign exchange rate fluctuations on the structure of foreign currency assets and liabilities, the Bank monitored and measured the foreign exchange risk on a daily basis and performed adjustments to its foreign currency position. The table below presents the indicators of the Bank’s foreign exchange risk exposure as at 31 December 2016:

Item EUR USD CHF

Other currencies Total

Spot position - net Foreign currency assets 49,033,985 869,417 622,403 94,555 50,620,360 Foreign currency liabilities 49,021,625 870,732 621,731 82,313 50,596,401 Long open position 12,360 - 672 12,242 25,274 Short open position 1,315 1,315 Net open position 25,274 Equity 8,426,365

F/X risk indicator 31. December 2016 0.30

F/X risk indicator 31. December 2015 0.76

The foreign currency balance comprises, in addition to assets and liabilities denominated in foreign currency, RSD assets and liabilities with a currency clause. In managing the foreign exchange risk the Bank simulates expected and extreme changes in foreign exchange rates and makes projections of their effect on the income statement. The tables below present the impact of expected changes in interest rates on the Bank’s profit, with all other variables remaining unchanged: Income statement sensitivity to changes in foreign exchange rates as at 31 December 2016:

Currency F/X rate change

Impact on income

statement in RSD 000

F/X rate change

Impact on income


EUR -15% 1,854 5% (618) USD -15% (197) 5% 66 CHF 15% 101 5% (34) Income statement sensitivity to changes in foreign exchange rates as at 31 December 2015:

Currency F/X rate change

Impact on income


F/X rate change

Impact on income


EUR -15% 7,633 5% (2,544) USD -15% 384 5% (128) CHF 15% 26 5% (9)



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32. FINANCIAL RISK MANAGEMENT (continued) 32.4. Market risk (continued) c) Operational risk Operational risk is the risk of loss resulting from systems failure, human error, fraud or external events. The operational risk may cause damage to the Bank’s reputation, have legal implications, or lead to financial losses. The Bank cannot expect to eliminate all operational risks, however, by introducing a rigorous control framework and by monitoring and responding to potential risks, the Bank is able to manage these risks. Controls comprise effective segregation of duties, access, authorization and reconciliation procedures, staff education and monitoring process, including the use of internal audit. d) Investment risks Investment risks of the Bank include the risks relating to the Bank’s investments in other legal entities and in fixed assets. In accordance with the National Bank of Serbia regulations, the Bank monitors the amount of investments as well as the amount of regulatory capital. The Bank has defined the scope and the dynamics of investments in accordance with its business strategy. The Bank invests in fixed assets in accordance with its business needs. It is the Bank’s strategy to invest only in fixed assets necessary to support the Bank's operations. In addition, the Bank’s strategy is to limit these investments against the level of the Bank's capital and to comply with the requirements of the National Bank of Serbia. Other than that, the Bank has no strategy to invest in other entities in financial and non-financial sectors. e) Country risk The risk relating to the country of origin of an entity to which the Bank is exposed includes adverse effects which may impact the Bank’s financial result and capital due to the Bank's inability to collect receivables from that counterparty as a consequence of political, economic or social situation in its country of origin. With respect to the legal entities which are not financial institutions, the Bank grants funds only to those registered in the Republic of Serbia. In the event of the entities registered outside the Republic of Serbia, the Bank cannot do business with those registered in the countries with credit rating below the rating of the Republic of Serbia. f) Reputational risk Reputational risk is the risk of loss of current or future income and capital due to negative public opinion about the way the Bank is doing business. The Bank is not exposed to this risk due to the constant internal policy of managing this risk. 32.5. Capital management The Bank’s objectives when managing capital, which is a concept broader than the equity on the face of the income statement, are:

To comply with capital requirements set by the National Bank of Serbia;

To provide the level and the structure of capital that can support the expected growth of investments;

To safeguard its ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and

To maintain a strong capital base to support the further development of its business.



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32. FINANCIAL RISK MANAGEMENT (continued) 32.5. Capital management (continued) The Bank manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of its activities.The Bank’s management regularly monitors the Bank’s capital adequacy ratios and other performance indicators established by the National Bank of Serbia and quarterly reports to the NBS on the imposed ratios. Under the Law on Banks of the Republic of Serbia, banks are obliged to maintain a minimum capital amount of EUR 10 million in RSD equivalent calculated at the NBS official middle exchange rate and a minimum capital adequacy ratio of 12%, as well as to maintain the volume and the structure of their activities in accordance with performance indicators prescribed by the Decision on Risk Management by Banks (Official Gazette of the Republic of Serbia, Nos. 45/11, 94/11, 119/12 ,123/12, 23/13, 43/13, 92/13 33/15 and 61/15, 61/16 and 103/16) and the Decision on Capital Adequacy of Banks (Official Gazette of the Republic of Serbia, Nos. 46/11. 6/13 and 51/14). Capital adequacy and the use of the Bank's capital is monitored monthly by the Bank’s management This Decision of the National Bank of Serbia on the adequacy of capital determines the calculation of the Bank's capital and the capital adequacy ratio. Total capital of the Bank consists of tier 1 capital and tier 2 capital and defined deductibles, while risk-weighted assets and off-balance assets are determined in accordance with the prescribed risk ratios for all types of assets. The above Decision defines the basic capital of a bank as the amount comprising at least 50% of the bank’s capital. The capital adequacy ratio of the Bank equals the ratio of the Bank’s capital and the sum of: credit risk weighted assets, capital requirements relating to foreign exchange risk multiplied by the reciprocal value of the capital adequacy ratio (statutory 12%), capital requirements relating to other market risks multiplied by the reciprocal value indicators of capital adequacy, and capital requirements relating to operational risk multiplied by the reciprocal value of the capital adequacy ratio. The Bank implements the Internal Capital Adequacy Assessment Process (ICAAP), determines the available internal capital and performs its distribution, and develops the strategy and the plan for managing capital in accordance with the Risk Management Decision. Provision for estimated potential losses on financial assets in accordance with the National Bank of Serbia requirements Under the Decision on the Classification of Balance Sheet Assets and Off-Balance Sheet Items (RS Official Gazette, Nos. 94/11, 57/12, 123/12, 43/13,113/13, 135/14, 25/15 and 38/15, 61/16, 69/16 and 91/16), the Bank makes provisions against potential losses on balance sheet and off-balance sheet assets in accordance with the criteria defined therein. The provisions of this decision prescribe the conditions under which the Bank is obligated to set up a reserve fund for estimated losses which is calculated as a sum of:

0% of receivables classified in category A;

2% of receivables classified in category B;

15% of receivables classified in category C;

30% of receivables classified in category D;

100% of receivables classified in category E. Loans and advances and other exposures of the Bank are classified into categories A, B, C, D and E according to the estimated level of collectibility of loans and other advances depending on: the default or delinquency in payments by debtor, the analysis of his financial position, and the quality of acquired collateral instruments.



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32.5. Capital management (continued)

Provision for estimated potential losses on financial assets in accordance with the National Bank of Serbia requirements (continued)

The reserve calculated for estimated losses is reduced for adjustments of balance sheet assets and provisions for losses against the off-balance items, prescribed by internal methodology, comprising the application of IAS 39. The required reserve for balance sheet estimated losses and off-balance sheet items is deductible from the Banks capital in accordance with the Decision on the capital adequacy of banks (RS Official Gazette, Nos. 46/11, 6/13 and 51/14). The Bank is obliged to maintain at any time the level of capital required for covering the risks to which it is exposed as well as to maintain the capital adequacy ratio at a minimum level of 12%.

The special reserve for estimated losses arising from the credit risk present in the Bank’s credit portfolio is calculated in accordance with the Decision on the Classification of Balance Sheet Assets and Off-Balance Sheet Items (RS Official Gazette, Nos. 94/11, 57/12, 123/12, 113/13, 135/14, 25/15, 38/15, 61/16, 69/16 and 91/16). As at 31 December 2016 the Bank's a special provision for estimated losses amounted to RSD 2,367,372 thousand (2015: RSD 2,488,491 thousand).

The Bank is required to determine the level of the required reserves for estimated losses which stands as the sum of the differences between the reserve for estimated losses calculated in accordance with the NBS Decision and the provision for balance sheet assets and off-balance sheet losses on debtor's level.

The required reserve for balance sheet estimated losses and off-balance sheet items is deductible from the Banks capital in accordance with the Decision on the capital adequacy of banks.

The table below presents the calculated tier 1 and tier 2 capital resources, total capital and capital adequacy ratio.

31.12.2016 31.12.2015

Tier 1 capital Nominal value of paid-in shares, other than preferred cumulative shares 8,420,500 8,420,500 Prior years’ retained earnings 102,054 - Intangible assets (121,457) (148,788) Required reserves from profit for estimated losses on balance sheet assets and off-balance sheet items (2,367,372) (2,488,491)

6,033,725 5,783,221

Tier 2 capital Portion of revaluation reserves 1,860 - Subordinated debt 2,469,447 2,432,523

2,471,307 2,432,523

Deductible items: Direct or indirect investments in banks and other entities in the financial sector in the amount exceeding 10% of the capital of these entities 78,667 78,667

78,667 78,667

Equity as at 31 December (1) 8,426,365 8,137,077



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32. FINANCIAL RISK MANAGEMENT (continued) 32.5. Capital management (continued) Provision for estimated potential losses on financial assets in accordance with the National Bank of Serbia requirements (continued) 31.12.2016 31.12.2015

Risk bearing balance sheet assets and off balance sheet items Capital requirement - credit risk, counterparty risk and settlement / delivery risk based on free deliveries 5,830,636 5,169,710 Capital requirements - foreign exchange risk 3,033 7,429 Capital requirements - operational risk 630,615 595,564

Total capital requirements (2) 6,464,284 5,772,703

Capital adequacy (Capital / Total capital requirements)*12 15.64 16.91

Compliance with the indicators prescribed by the National Bank of Serbia The Bank is obliged to maintain the volume and the structure of its activities and risk-bearing loans in accordance with performance ratios prescribed by the Law on Banks and the relevant NBS Decisions based on this Law. As at 31 December 2016, the Bank had all its performance indicators in line with the prescribed values. As at 31 December 2016 and 31 December 2015 the Bank’s performance ratios were as follows:

Performance indicator Prescribed

value Achieved

value 2016 Achieved

value 2015

Investments in fixed assets and non-financial sector Maximum 60% 19.46% 19.58%

The sum of large exposures Maximum

400% 60.15% 59.93% Average monthly liquidity ratio: – in the first quarter of the reporting period Minimum 1.00 1.11 1.21 – in the second quarter of the reporting period Minimum 1.00 1.25 1.21 – in the third quarter of the reporting period Minimum 1.00 1.09 1.17 – in the fourth quarter of the reporting period Minimum 1.00 1.25 1.22 F/X risk indicator Maximum 20% 0.30% 0.76% Exposure to a single party or a group of related parties Maximum 25% 19.98% 14.65% Capital adequacy Minimum 12% 15.64% 16.91%



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32. FINANCIAL RISK MANAGEMENT (continued) 32.6. Fair value of financial assets and liabilities

The policy of the Bank is to disclose the information on the fair value on those components of assets and liabilities for which the published market information is readily and reliably available, and the fair value of which is materially different from their recorded amounts. Fair value of a financial instrument presented at nominal value is approximately equal to its bookkeeping value. This includes cash as well as liabilities and receivables without defined maturity or fixed interest rate. For other liabilities and receivables the expected future cash flow is discounted up to their present value by means of current interest rate. Bearing in mind that the variable interest rates are contractual for the majority of Bank assets and liabilities, changes in the current interest rates lead to changes in the agreed interest rates. Quoted market prices are used for trading securities. Fair value of other securities is calculated as net present value of the future expected cash flows. Fair value of irrevocable loan obligations and potential obligations is the same as their bookeeping values. The Bank applies the following hierarchy for determining and disclosing the fair value of financial instruments:

Level 1: Market quotations for identical financial instruments

Level 2: A comparative approach, which is based on the information on similar financial instruments or other market information which can be used to determine the value of a financial instrument

Level 3: Mark-to-model approach, which is based on the information not obtained from the market, but derived on the basis of a theoretical model used to determine the value of a financial instrument.

The fair values of financial instruments obtained using the above hierarchy are presented in the table below:

Financial assets as at 31 December 2016 :

Financial assets Level 1 Level 2 Level 3 Total

Cash and deposits held with the Central Bank - - 11,068,675 11,068,675 Financial assets held to maturity - - 462,001 462,001 Loans and receivables from banks - - 5,536,741 5,536,741 Loans and receivables from customers - - 51,548,941 51,548,941

Total financial assets - - 68,616,358 68,616,358

Financial liabilities as at 31 December 2016 :

Financial liabilities Level 1 Level 2 Level 3 Total

Deposits and other liabilities towards banks, other financial organisations and the Central Bank - - 17,322,214 17,322,214 Deposits and other liabilities towards customers - - 42,904,417 42,904,417 Subordinated debt - - 2,483,767 2,483,767

Total financial liabilities - - 62,710,398 62,710,398



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32.6. Fair value of financial assets and liabilities (continued)

Financial assets as at 31 December 2015 :

Financial assets Level 1 Level 2 Level 3 Total

Cash and deposits held with the Central Bank - - 9,450,342 9,450,342 Financial assets held to maturity - - 2,456,429 2,456,429 Loans and receivables from banks - - 6,564,234 6,564,234 Loans and receivables from customers - - 48,594,382 48,594,382

Total financial assets - - 67,065,387 67,065,387

Financial liabilities as at 31 December 2015 :

Financial liabilities Level 1 Level 2 Level 3 Total

Deposits and other liabilities towards banks, other financial organisations and the Central Bank - - 17,873,085 17,873,085 Deposits and other liabilities towards customers - - 32,234,995 32,234,995 Subordinated debt - - 2,447,899 2,447,899

Total financial liabilities - - 52,555,979 52,555,979

33. COMMITMENTS AND CONTINGENT LIABILITIES AND LEASES a) Operating lease liabilities The Bank has concluded agreements on operating leases.

Future minimum lease payables under operating lease agreements were as follows:

2016 2015

Less than 1 year 321,415 267,412 1 to 5 years 1,900,000 1,500,000

2,221,415 1,767,412

b) Operating lease receivables Future minimum lease receivables under operating lease agreements were as follows:

2016 2015

Less than 1 year 7,260 6,240 1 to 5 years 29,000 25,000

36,260 31,240

c) Litigations The Bank is engaged in litigation proceedings against third parties only in order to collect its receivables. As at 31 December 2016 , the Bank was engaged in 1,295 proceedings (2015: 1,584 proceedings) with the aim of collecting receivables where the amount of principal receivable did not exceed RSD 869,000 thousand (2015: RSD 869,000 thousand).



33. COMMITMENTS AND CONTINGENT LIABILITIES AND LEASES (continued)

c) Litigations (continued)

There have been 98 litigations initiated against the Bank with the total value of disputes amounting to RSD 622,979 thousand (2015: 100 disputes the value of which amounted to RSD 672,155 thousand). Provisions for litigations are presented within the Provisions (Note 26). The Bank's management estimates that significant losses arising from the remaining litigations will not be incurred, other than those provided for.

d) Tax risks

The taxation system of the Republic of Serbia is undergoing continual revision and amendment.

In the Republic of Serbia, the tax liability does not expire for a period of 5 years. In various circumstances, the tax authorities may have different approaches to certain issues, and assess additional tax liabilities, together with late payment interest and penalties. The management believes the tax liabilities in the accompanying financial statements to be fairly presented.

34. ADDITIONAL INFORMATION ON CASH FLOWS

31.12.2016 31.12.2015 Cash 2,000,015 1,925,509 Drawing account 4,190,236 4,036,952 Nostro accounts 1,367,862 3,314,628

As at 7,558,113 9,277,089

Mandatory reserve funds held with the NBS in foreign currency are not available for daily transactions and as such does not make part of cash flows (Note 14).

35. EVENTS AFTER THE BALANCE SHEET DATE

There were no significant events after the balance sheet date that would require to be disclosed in the Notes to the financial statements of the Bank for the year ended 31 December 2016 .

In Novi Sad, 31 March 2017

Member of the Executive President of the Executive Head of Accounting

Board Board

Vera Tasevs eljko Obradovio s de Cordoue

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