Annual Report Annual Report

Annual Report Survey of key data Raiffeisen BANK d.d. Bosna i Hercegovina Monetary values in EUR million 2012 2011 Change Net interest income af...
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Annual Report

Survey of key data Raiffeisen BANK d.d. Bosna i Hercegovina Monetary values in EUR million

2012

2011

Change

Net interest income after value adjustment and provisioning

47.4

55.8

(15.0)%

Net fee and commission income

28.8

28.6

1.0%

5.8

2.4

145.2%

General administrative expenses

56.7

60.3

(5.9)%

Profit before tax

21.9

25.2

(12.9)%

Profit after tax

18.7

22.4

(16.7)%

Income Statement

Trading income

Balance Sheet Loans and advances to banks

120.5

115.5

4.3%

1,106.6

1,179.4

(6.2)%

181.0

239.3

(24.4)%

1,406.2

1,505.5

(6.6)%

254.3

256.2

(0.7)%

1,884.1

2,053.2

(8.2)%

1,390.2

1,500.5

(7.4)%

15.7%

16.0%

(0.3) PP

Return on equity before tax

8.6%

11.3%

(2.7) PP

Return on equity after tax

7.3%

10.0%

(2.7) PP

58.3%

59.9%

(1.6) PP

1.1%

1.3%

(0.2) PP

1,552

1,576

(1.5)%

92

92

0.0%

Loans and advances to customers Deposits from banks Deposits from customers Equity (incl. profit) Total assets Regulatory information Risk-weighted assets Capital adequacy ratio Performance

Cost/income ratio Return on assets before tax Resources Number of employees Business outlets

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Raiffeisen at a Glance

Report of the Supervisory Board Preface by the CEO Macroeconomic overview Raiffeisen Bank International Raiffeisen BANK d.d. Bosna i Hercegovina The Management Board Organisational Structure Balance Sheet Income Statement Key Financial Ratios

6 7 8 12 14 16 18 20 21 22

Raiffeisen at a Glance

5

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Report of the Supervisory Board Ladies and Gentlemen, from an overall economic perspective, 2012 was a challenging year in both the Eurozone and Central and Eastern Europe (CEE), but for completely different reasons. After the ongoing sovereign debt crisis, the Eurozone slid into a deep systemic crisis. This crisis extends from political disagreements over the means to overcome debt burden to the growing social unrest in the European peripheral countries. The political elite's inability at both the national and European level to communicate their decisions to the public in a transparent and comprehensible manner also contributes to the crisis. CEE, in part, also suffers from the consequences of the euro crisis, reflected for example in declining exports due to lower demand in the West. While countries in CEE also faced declines in real GDP growth, they were still significantly over the average of the ones recorded in the Eurozone. However, with only few exceptions the countries in the CEE region have done their homework: they are less dependent on external financing due to relatively low balance of payments deficits, their productivity has improved thanks to moderate wage increases, and, with the exception of Hungary, the region has considerably less debt than Western Europe. Moreover, the region continues to benefit from the catching-up process, which remains the engine for economic development and thus the development for entire Europe. Despite a year dominated by renewed economic decline and tighter capital regulations, the RBI Group can be proud of posting a profit before tax of EUR 1.0 billion. However, I have to mention the significant one-off effects that were recorded in the first quarter: Among other things, we sold high-quality securities to achieve the capital ratio required by the European Banking Authority (EBA). While the sale cost us a portion of our net interest income in subsequent quarters, it also resulted in significant net proceeds. I am very pleased that we succeeded in fulfilling the higher capital ratio requirements with a core tier 1 ratio of well over 10 per cent, which makes us even more resilient to adverse economic conditions. As far as Raiffeisen BANK dd Bosna i Hercegovina is concerned, I am glad to state that it has posted very good business results. The overall profit, the lending volumes in the corporate and retail business areas as well as the bank's market position convey a strong message on the success and functionality of the Raiffeisen business strategy. Bosnia and Herzegovina's economy was hit by the crisis in the Eurozone and this, in combination with political instability and uncertainty, affected business conditions and prevented a strong positive impetus for domestic demand and investment. Although foreign direct investment grew in comparison with 2011, the inflow in 2012 was not enough to achieve a significant positive effect on the country's overall economy. This made business operations and access to the required level of financing even more difficult and affected the banking sector, which was nevertheless the soundest part of the national economy. However, although the results of some banks remained at the same or even better levels in the past year, the banking sector in Bosnia and Herzegovina, when viewed as a whole, registered a decline in profitability compared to 2011. Raiffeisen BANK dd Bosna i Hercegovina, can be proud that it achieved the mentioned results despite the prevailing market environment and all of the challenges related to it, making it a pillar of its sector. Its business model will remain focused on optimizing costs and efficiency as well as on increasing customer satisfaction and business results. I would like to take this opportunity to express our gratitude to the management and all employees for their dedicated work, commitment and contribution towards achieving our business goals. On behalf of the Supervisory Board,

Peter Lennkh, Chairman

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Preface by the CEO The environment in which we currently operate is very complex and has a strong impact on all business entities. The challenges and obstacles we meet increasingly defy control and responsibility by individuals and business entities alike, while strongly shaping the latters' business operations and results. Although the past year brought many challenges, there were also some positive developments. These developments gave us additional motivation and strength to achieve the best possible results. In order to meet the dynamic needs of our customers, we launched new products and services and enhanced our existing product scope, adjusting it to the prevailing market conditions.

The results we achieved prove that the joint efforts of our employees have not been in vain and that we coped with the challenges in the best possible manner. However, economic activity both in Bosnia and Herzegovina and the European Union is still not strong enough to provide fresh impetus to business processes and drive the economic growth needed in the country, while the complex social and political framework makes the country’s position even more complicated. Although the situation is very difficult challenging, we – both as a responsible corporate entity and as responsible individuals – will continue to do our best to improve the environment and provide our corporate and personal customers with optimum solutions to their financial needs. Throughout the past year, our employees gave their maximum contribution towards achieving our goals and, judging from past experience, I am positive that this attitude will continue in the future. Our results would not have been possible without the great expertise and dedication of both our managers and staff, and I am very grateful and proud of their customer-oriented work attitude. I also would like to thank our customers and partners for their business and trust and hope that our mutually profitable relationship will continue in the years to come.

Michael Müller, CEO

Raiffeisen at a Glance

Our business was successful in many respects. First and foremost, we continued our investment activities despite the current economic situation. The development of a responsive branch network with optimal coverage is an ongoing process that we are strongly committed to. We improved our network through the addition of two newly refurbished branch buildings in Prijedor and Doboj. Both buildings are owned by Raiffeisen BANK, which further demonstrates our commitment to a lasting presence in this market.

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Macroeconomic overview The year behind us will be remembered for the strong efforts taken by economic policy makers in the Eurozone to stop the devastating effects of the debt crisis in the European peripheral countries. The debt crisis continued in 2012 with new escalations, posting a serious threat to the sustainability of the Eurozone's single currency area and causing a new wave of recession that hit most European economies. Although finding proper political and economic solutions to curb the debt crisis turned out to be a very slow and difficult process, viewed from a historical distance, the past year will be evaluated as a very successful year as it saw the setting of new fundamental frameworks for common economic policies. This should contribute towards a strong integration of the Eurozone countries and towards setting sound foundations for the economic integration required for the sustainability of the single euro currency area. After new escalations of the debt crisis, centred again in the peripheral countries (Greece, Spain and Italy) the leaders of the Eurozone and the European Union launched numerous anti-crisis tools and institutions to mitigate the existing crisis and prevent new ones in the future. Towards this end, the European Central Bank (ECB) presented in September 2012 a new and potentially unlimited program for purchase of bonds issued by the debt-ridden Eurozone countries, the so-called OMT (Outright Monetary Transactions). Only a month later, the European Stabilization Mechanism (ESM) was launched as a permanent tool for stability of the Eurozone. In combination with the existing European Financial Stability Fund EFSF it will be able to accumulate a lending capacity of EUR 700 billion (EUR 500 billion for EMS and around EUR 200 billion for EFSF). At the same time, the EU countries reached an agreement to set up a single supervision over European banks as a first step towards establishing a banking union. According to this agreement, the single banking supervision tool will become operative in 2013. All 6,000 banks in the Eurozone will be placed under supervision until 2014. The positive effects of the anti-crisis mechanisms are expected to show in the years ahead. In 2012, these effects remained limited to increased optimism among market participants in view of a systematic solution for the financial crisis. This resulted in lower returns on peripheral bonds and a somewhat stronger position of the euro against the dollar towards the end of the year. On the other hand, a new escalation of the debt crisis last year caused a dozen of Eurozone countries to register negative economic growth rates, while the real GDP drop for the Eurozone as a whole reached 0.5 per cent yoy. The strongest real GDP drop was recorded in the peripheral countries, namely Greece, Portugal, Italy and Cyprus. Moreover, unemployment reached a record high rate of 11.4 since the establishment of the Eurozone, with the highest rates registered in Greece (26.8 per cent), Spain (26.1 per cent) and Portugal (16.5 per cent). On the other hand, Germany as the strongest economy in the Eurozone recorded economic growth of 0.7 per cent with a historically low unemployment rate of 5.3 per cent. The anti-crisis mechanisms and the fight against recessionary trends did not leave the USA untouched. In September 2012 the Federal Reserve launched its third round of quantitative easing (Q3), buying 40 billion dollars in mortgage loans each week in order to improve the economic conditions, while continuing to implement its previously adopted policy of selling short-term securities and buying long-term ones, the so-called Operating Twist. The end of the year was particularly uncertain for the USA, marked by political uncertainty in respect of the negotiations between the Democrats and the Republicans about the fiscal verge. This led to a depreciation of the dollar and an increase in the return on ten-year Federal bonds. Despite all challenges, the USA recorded a real GDP growth of 2.2 per cent yoy in 2012, leading to strong economic recovery and a drop of unemployment to 8.1 per cent. It is also important to note that both the ECB and the FED continued their expansive monetary policy, retaining their prime interest rates at record low levels of 0.75 per cent and 0.25 per cent respectively. As a result of the expansive monetary policy, the main inter-bank interest rate in the Eurozone, the three-month EURIBOR, fell in 2012 to a historically low value of 0.58 per cent (average for 2012). The economic developments in Bosnia and Herzegovina over the course of 2012 have to be viewed in the context of the financial crisis and the continuing recession in the Eurozone. The continual drop of most key macroeconomic indicators during the year, primarily those economic indicators that rely strongly on the external environment, clearly show that Bosnia and Herzegovina faced a new recession (for the first time after the global financial crisis in 2009), although statistic confirmation of the vehemence of the economic downturn will not be available before mid 2013. The recessionary trends in 2012 followed virtually the same curve as in 2009, as shown by the dramatic slow-down in the growth of local exports and the import-oriented industrial output, which used to be the key drivers of economic recovery in the period from 2010 to 2011. Official data shows that Bosnia and Herzegovina recorded a drop in exports of goods of 4.4 per cent in 2012 with negative growth rates in all key export markets (Germany, Italy, Croatia and Serbia). Weakened demand for domestic products led cyclically to a decrease in export-oriented industrial output, above all in the processing industry, which recorded a negative growth trend of high 4.7 per cent yoy. Imports of goods fell in the same period by 1.8 per cent yoy, as illustrated by the drop in private demand as a result of the further loss of general purchasing power. The official unemployment rate reached a record high level of 28 per cent in 2012 (accor-

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ding to a labor force survey conducted by the B&H Statistics Bureau), while the growth of net average salaries remained below the average inflation rate (plus 2.2 per cent yoy). This illustrates that the official data for 2012 will re-affirm a decline in private consumption, which is the largest category in the country's GDP structure with a share of 70 per cent. Most of the year 2012 was strongly shaped by a political crisis, which stopped both reforms in the local economy and the country’s progress on its path to EU and NATO integrations. Bosnia and Herzegovina had a period of political stability at all levels of only four months (February 2013 to May 2013), in which two crucial laws regarding the country’s accession to the EU were adopted (the state aid law and the census law). In spite of that, the country has not yet met all preconditions required to apply for EU membership. In this regard, Bosnia and Herzegovina fell further behind its neighbouring countries. The political crisis that has caused not only a delay in the adoption of the state budget in 2012 but also a procedural incident in the regular repayment of foreign debt consequently led to a downgrade of the country’s credit rating to B3 by Moody’s in the first half of the year. The downgrade in the credit rating had a particularly negative effect on the inflow of foreign direct investments, which remained at a negligible low level of 3.5 per cent of GDP, which is still insufficient to provide stronger momentum to economic activity or reverse the trend in the labour market. The recessionary trends, combined with the national economy’s vulnerability to unfavourable trends in the Eurozone, caused fiscal income to decline, subsequently weakening the country's fiscal stability. Consequently, faced with difficulties in meeting its fiscal obligations, the country signed a new stand-by arrangement with the IMF worth 800 million BAM in September 2012. Strict compliance with the terms of the stand-by arrangement (SBA) soon resulted in stronger financial discipline, especially if considering that this was the first time for the country to enter a new calendar year with adopted budgets at all levels (both state and entity budgets). As a result, the entities’ fiscal deficits and the consolidated deficit at state-level should remain at an acceptable level of minus 2 per cent of GDP. The signing of the SBA with the IMF caused the country’s foreign debt to increase to 7.15 billion BAM (plus 7.4 per cent yoy), which is still a moderate share of debt in GDP of 27.8 per cent.

Despite the adverse economic environment, the country's banking sector managed to post respectable results and remain the healthiest and soundest part of the overall national economy. However, due to the recessionary trends that have hit exporters particularly hard, the credit growth in the corporate business recorded somewhat slightly lower growth rates compared with 2011. The average monthly growth rate in the corporate business was 1.8 per cent yoy, compared with 7.3 per cent in 2011. At the same time, the drop in the general purchasing power created room for stronger retail lending, which became the key driver of credit growth in 2012. The average monthly growth rate of retail loans was 5.3 per cent yoy in 2012, compared with 2.4 per cent yoy in 2011. On the other hand, overall banking sector deposits were again dominated by private saving, which recorded remarkable growth rates that were just slightly below the rates for the year before (the average monthly growth rate in 2012 was plus 8.9 per cent). The growth of non-performing loans, as the key problem in the banking sector, was strongly pronounced in 2012. The share of non-performing loans in overall loans in 2012 reached a record high value of 13.5 per cent, driven mainly by the corporate segment that suffered most strongly from the financial crisis. The banking sector liquidity, which is measured by the share of cash and cash equivalents in total banking sector assets, also dropped, to 25.4 per cent from the 27.2 per cent recorded in 2011. On the other hand, the capitalization level of the country’s banking sector, as measured by the capital adequacy ratio, reached 17 per cent in 2012 and again remained far above the regulatory minimum of 12 per cent. Therefore, the country’s banking sector remains one of the best capitalized banking sectors in the region. Despite the unfavourable environment and high exposure to credit risk, the local banks managed to maintain a respectable level of profitability. A total of 23 banks achieved a positive net result of 177.3 million BAM in 2012, while five banks ended the year with an aggregate net loss of 50 million BAM. The overall net result for the entire banking sector was positive at 127.3 million BAM and slightly below the result for 2011 (minus 9 per cent yoy). There was just one M&A transaction in 2012. This, together with the liquidation of one bank, caused the number of banks in the country to decline to 28. As there were no other significant changes or consolidations in the banking sector, the concentration of the three leading banking groups in the market remained above 50 per cent of aggregate assets in the banking sector. As at 31 December 2012, the number of employees in the local banking sector was 10,366, or 1.5 per cent of the working population.

Raiffeisen at a Glance

Driven by the decline in exports and industrial output, the expected growth rates in private and public consumption (minus 4 per cent and minus 0.1 per cent yoy respectively), as well as by the decline in gross investments (minus 5 per cent yoy), the real GDP rate in the country for 2012 dropped by 1.3 per cent yoy (at the time of writing, the data was still inofficial), which is at the same time the first negative economic growth rate in the country since 2009.

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Key economic data 2009

2010

2011

2012e

2013f

2014f

Nominal GDP (EUR billion)

12.3

12.5

13.0

13.1

13.5

14.1

Real GDP (% yoy)

(2.9)

0.7

1.3

(1.0)

0.5

2.0

GDP per capita (EUR)

3,195

3,254

3,390

3,411

3,502

3,671

GDP per capita (EUR in PPP)

7,400

7,500

7,500

7,450

7,600

7,700

(3.9)

(1.3)

2.0

0.0

0.0

2.0

Private consumption (real growth % yoy) Gross investment (real growth % yoy)

(27.6)

(8.1)

7.0

(5.0)

3.0

7.0

Industrial output (% yoy)

(3.3)

1.6

5.6

(5.2)

2.5

4.0

Production prices (avg % yoy)

(3.2)

0.9

3.7

1.5

1.9

1.8

Consumer prices – inflation (avg % yoy)

(0.4)

2.1

3.7

2.1

2.0

2.0

Average gross salaries in industry (% yoy)

5.6

2.1

5.0

2.0

2.5

3.5

24.1

27.2

27.6

28.0

27.8

27.4

Unemployment rate (avg %) Budget deficit (% GDP)

(4.5)

(2.2)

(1.3)

(2.0)

(2.0)

(1.0)

Public foreign debt (% GDP)

35.1

38.4

39.2

42.0

42.1

39.6

(27.8)

(26.0)

(28.4)

(28.4)

(28.0)

(28.3)

Current account deficit (% GDP)

(6.6)

(5.6)

(9.6)

(8.2)

(8.2)

(8.5)

Net foreign investments (% GDP)

1.4

1.5

2.1

3.1

3.3

5.0

Trade deficit (% GDP)

Foreign reserves (EUR billion)

3.2

3.3

3.3

3.3

3.5

3.7

Gross foreign debt (% GDP)

54.2

58.3

67.6

63.4

62.5

61.0

EUR/BAM (eop)

1.96

1.96

1.96

1.96

1.96

1.96

EUR/BAM (avg)

1.96

1.96

1.96

1.96

1.96

1.96

USD/BAM (eop)

1.37

1.46

1.51

1.49

1.45

1.50

USD/LCY (avg)

1.40

1.47

1.41

1.52

1.48

1.47

Source: Central Bank of B&H, Statistics Agency of B&H, Raiffeisen RESEARCH

11

Overview of developments in the banking sector 2012

2011

2010

2009

2008

2007

11,415.66

11,196.32

10,827.99

10,742.04

10,797.62

10,022.96

2.0%

3.4%

0.8%

(0.5)%

7.7%

32.9%

8,153.11

7,828.44

7,435.9

7,183.7

7,418.6

6,059.5

4.1%

5.3%

3.5%

(3.2)%

22.4%

28.8%

6,813.6

6,643.2

6,406.5

6,182.6

6,071.6

6,180.1

Aggregate balance sheet data Total assets, EUR million growth in % yoy Total loans, EUR million growth in % yoy Total deposits, EUR million growth in % yoy Loan/deposit ratio

2.6%

3.7%

3.6%

1.8%

(1.8)%

37.9%

119.7%

117.8%

116.1%

116.2%

122.2%

98.0%

Structural information Number of banks

28

29

29

30

30

32

Market share of state-owned banks, in %

1.0

0.9

0.8

0.8

0.9

2.0

Market share of foreign-owned banks, in %

91.4

92.0

92.8

94.6

95.0

93.7

Return on assets (RoA)

0.8

0.7

(0.6)

0.1

0.4

0.9

Return on equity (RoE)

6.4

5.8

(5.5)

0.8

4.3

8.9

12.7

11.8

11.4

5.9

3.1

3.0

Profitability and efficiency

Non-performing loans (% of total loans)

Raiffeisen at a Glance

Source: Central Bank of B&H, Banking Agencies of FB&H and RS

12

Raiffeisen Bank International A leading bank in Central and Eastern Europe, including Austria Raiffeisen BANK d.d. Bosna i Hercegovina is a subsidiary of Raiffeisen Bank International AG (RBI), which regards Central and Eastern Europe (including Austria), as its home market. For more than 25 years, RBI has been operating in the Central and Eastern Europe (CEE) region, where today it maintains a closely knit network of subsidiary banks, leasing companies and numerous specialized financial service providers in 17 markets. As a universal bank, RBI ranks among the leading banks in the region. The powerful role played by the bank is supported by the Raiffeisen brand, which is one of the most widely recognized brands in the region. Over time, RBI has positioned itself as a fully integrated corporate and retail banking group in CEE. The bank not only has good access to retail and corporate customers, but also boasts a comprehensive product offering. At the end of 2012 around 57,000 staff served approximately 14.1 million customers in around 3,100 business outlets in CEE. In Austria, RBI is one of the top corporate and investment banks. It primarily serves Austrian customers, but also international as well as major multinational clients operating in CEE. Moreover, RBI is represented in the world's financial centres and operates branches and representative offices in Asia. All in all, RBI employs about 60,000 staff and has total assets of around EUR 136 billion. RBI operates subsidiary banks in the following CEE markets: • Albania Raiffeisen Bank Sh.a. • Belarus Priorbank JSC • Bosnia and Herzegovina Raiffeisen BANK d.d. Bosna i Hercegovina • Bulgaria Raiffeisenbank (Bulgaria) EAD • Croatia Raiffeisenbank Austria d.d. • Czech Republic Raiffeisenbank a.s. • Hungary Raiffeisen Bank Zrt. • Kosovo Raiffeisen Bank Kosovo J.S.C. • Poland Raiffeisen Bank Polska S.A. • Romania Raiffeisen Bank S.A. • Russia ZAO Raiffeisenbank • Serbia Raiffeisen banka a.d. • Slovakia Tatra banka, a.s. • Slovenia Raiffeisen Banka d.d. • Ukraine Raiffeisen Bank Aval JSC As the parent company of these banks, RBI's shareholding in them is at or near to 100 per cent in most cases.

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RBI's development RBI was established in October 2010 through the merger of Raiffeisen International with the principal business areas of Raiffeisen Zentralbank Österreich AG (RZB). RBI's position as one of the leading banks in CEE (including Austria) was further reinforced by the merger. RBI has been listed on the Vienna stock exchange since 25 April 2005 (until 12 October 2010 as Raiffeisen International). It is represented in several leading national and international indices, including the ATX and EURO STOXX Banks. RZB remained the majority shareholder following the merger, holding approximately 78.5 per cent of the shares. The remaining 21.5 per cent of RBI's shares are in free float. RZB was formed in 1927 as “Genossenschaftliche Zentralbank” (GZB). Raiffeisen gained its first foothold in Central and Eastern Europe back in 1987, when it established its first subsidiary bank in Hungary. Other own subsidiaries have since been established; from 2000 onwards, Raiffeisen's expansion in the CEE countries has mainly been achieved by acquiring existing banks, which are combined into a holding company that from 2003 until October 2010 operated under the name Raiffeisen International. Raiffeisen International listed on the stock exchange in April 2005 in order to finance its future growth as efficiently as possible. RBI was subsequently established in 2010 through the merger of Raiffeisen International with the principal business areas of RZB.

Raiffeisen at a Glance

For more information please refer to www.rbinternational.com and www.rzb.at.

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Raiffeisen BANK d.d. Bosna i Hercegovina Raiffeisen BANK d.d. Bosna i Hercegovina is a subsidiary of Raiffeisen Bank International AG (RBI), a leading universal bank in Central and Eastern Europe (CEE) and one of the foremost providers of corporate and investment banking services in Austria. RBI originated from the merger of the spun-off business areas of Raiffeisen Zentralbank Österreich AG (RZB) with Raiffeisen International Bank-Holding AG. Raiffeisen BANK Bosna i Hercegovina has been operating as a financial institution since November 1992 when it was first founded as Market Banka d.d. Sarajevo, backed predominantly with private capital of over 90 per cent. Thanks to its exceptional performance, Raiffeisen BANK Bosna i Hercegovina quickly stood out as a very successful and profitable player. Between 1996 and 2000 Raiffeisen BANK Bosna i Hercegovina was one of the leading partner banks to international financial institutions (World Bank, IFC, KfW, SOROS and EBRD) in implementing their credit lines. On 21 July 2000 Raiffeisen Zentralbank Österreich AG-Vienna acquired Market Banka and successfully integrated it into the Raiffeisen network under the name Raiffeisen BANK d.d. Bosna i Hercegovina. In May 2001 RZB became the sole owner of Hrvatska Poštanska banka which was then renamed Raiffeisen BANK HPB. Since 1 January 2003, when Raiffeisen BANK HPB was successfully integrated with Raiffeisen BANK, Raiffeisen BANK Bosna i Hercegovina has been operating under a single name, Raiffeisen BANK d.d. Bosna i Hercegovina. This acquisition has further strengthened the Raiffeisen BANK Bosna i Hercegovina’s position in the market in Bosnia and Hercegovina and its branch network has undergone significant expansion. In the years that followed, Raiffeisen BANK Bosna i Hercegovina took on a pioneering role in the country's banking industry and was one of the first banks to sign a deposit insurance agreement. When payment services were transferred from the Payment Transactions Authority to commercial banks Raiffeisen BANK Bosna i Hercegovina successfully made the transition and was the most active bank during the introduction of the euro. The bank was among the first to launch card business, the first to offer online banking services and a SME program and the first to negotiate and place foreign credit lines (DEG, KfW and IFC). In addition, it became the first bank to operate in both entities of Bosnia and Herzegovina. Having established a presence in Banja Luka, in March 2001, the bank continued to operate in the single market of Bosnia and Herzegovina. Raiffeisen BANK Bosna i Hercegovina reaffirmed its leading position in the local banking market when it became the first bank in the country to pass the total assets mark of two billion BAM in 2004. In the years that followed, the bank’s total assets almost doubled to reach 3.7 billion BAM as of 31 December 2012. As of 31 December 2012 Raiffeisen BANK Bosna i Hercegovina operated through a network of 92 offices and had 1,552 employees. The numerous national and international awards are testimony to the Raiffeisen BANK Bosna i Hercegovina’s success. They include: “The Best Bank in BiH” from Euromoney; “Bank of the Year” from The Banker; “The Best Bank in BiH” from EMEA Finance; and the national awards “Zlatni BAM” and “Kristalna prizma”. Raiffeisen BANK Bosna i Hercegovina retains its competitive edge in the B&H market in part through investments in new technologies, experienced and trained staff who undergo continual professional education, focus on an individual approach to each customer and the introduction of new distribution channels and modern products and services. Ownership Structure of Raiffeisen BANK d.d. Bosna i Hercegovina: Raiffeisen Bank International AG 96.99% Raiffeisen SEE Region Holding GmbH 3.00% Other shareholders 0.01% In addition to Raiffeisen BANK Bosna i Hercegovina, the Raiffeisen Group is represented in Bosnia and Herzegovina by Raiffeisen INVEST, Raiffeisen LEASING, Raiffeisen CAPITAL and Raiffeisen Special Assets Company.

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Vision • Raiffeisen is the leading financial services Group in Bosnia and Herzegovina. Client satisfaction is at the highest level.

Mission • We achieve highest client satisfaction, offer excellent service quality and the full range of banking, leasing, insurance and brokerage products. We set standards in partnering and are committed to long-term relationships with our clients. • Our employees are the key contributors in achieving our vision and strategic goals. Their commitment, loyalty and motivation lead to a unique team-spirit and strong corporate culture. We strongly support the personal development of our employees. • We achieve the highest level of sustainable profitability in B&H banking market in order to fulfil shareholders expectations.

Raiffeisen at a Glance

• We see ourselves as a responsible part of society in supporting local developments and initiatives with the goal of creating value.

The gable cross is part of the trademark used by almost every company in the Raiffeisen Banking Group and RZB Group in CEE. It represents two stylized horse’s heads, crossed and attached to the gable of a house. It is a symbol of protection rooted in old European folk tradition: a gable cross on the roof was believed to protect the house and its occupants from outside dangers and to ward off evil. It symbolizes the protection and security that the members of the Raiffeisen banks enjoy through their self-determined collaboration. Today, the gable cross is one of Austria’s bestknown trademarks and a well-recognized brand in CEE.

The Management Board Damir Karamehmedović, Executive Director Michael Georg Müller, CEO Sanela Pašić, Executive Director Karlheinz Dobnigg, Deputy CEO

Raiffeisen at a Glance

18

Organisational Structure

Raiffeisen at a Glance

19

20

Balance Sheet as at 31 December 2012 and 2011 2012 (BAM 000)

2012 (EUR 000)

2011 (BAM 000)

2011 (EUR 000)

Cash and cash equivalents

551,677

282,068

716,868

366,529

Legal reserve with the Central Bank of B&H

238,559

121,973

266,540

136,280

Loans and advances to banks

235,652

120,487

225,917

115,510

2,164,368

1,106,624

2,306,730

1,179,412

0

0

403

206

Assets

Loans and advances to customers Trading assets Financial assets available for sale

189

97

3,299

1,687

Financial assets at fair value through profit and loss

158,729

81,157

158,897

81,243

Financial assets held to maturity

146,569

74,940

138,090

70,604

Financial investments

2,681

1,371

2,436

1,245

Investments in associates

8,175

4,180

8,173

4,179

669

342

846

432

Deferred tax assets Other assets and receivables Tangible and intangible fixed assets Total Assets

24,616

12,586

31,597

16,155

153,105

78,281

155,893

79,707

3,684,989

1,884,105

4,015,689

2,053,189

Liabilities Deposits from banks

353,969

180,981

468,004

239,287

2,750,363

1,406,238

2,944,442

1,505,469

7,108

3,634

7,491

3,830

Other liabilities

30,134

15,407

29,167

14,913

Subordinated debt

45,957

23,497

65,484

33,481

3,187,531

1,629,759

3,514,588

1,796,980

237,388

121,375

237,388

121,375

4,473

2,287

4,473

2,287

90

46

3,201

1,637

Regulatory reserves

102,443

52,378

89,035

45,523

Retained earnings

153,064

78,260

167,004

85,388

Total Equity

497,458

254,346

501,101

256,209

3,684,989

1,884,105

4,015,689

2,053,189

814,030

416,207

871,216

445,446

Deposits from customers Provisions

Total Liabilities Equity Shareholder capital Share premium Revaluation reserves for investments

Total Equity and Liabilities Commitments and Contingencies

21

Income Statement 2012 (BAM 000)

2012 (EUR 000)

2011 (BAM 000)

2011 (EUR 000)

Interest and interest-like income

197,535

100,998

219,994

112,481

Interest expenses and interest-like expenses

(61,452)

(31,420)

(71,705)

(36,662)

Net interest income

136,083

69,578

148,289

75,819

67,342

34,431

65,008

33,238

Fee and commission income Fee and commission expenses

(10,924)

(5,585)

(9,143)

(4,675)

Net fee and commission income

56,418

28,846

55,865

28,563

Net trading income

11,406

5,832

4,652

2,379

3,233

1,653

7,226

3,695

Other operating income Operating income Administrative expenses Depreciation and amortization Operating expenses Profit before impairment losses, provisions and income tax Provisioning for impairment losses Recoveries Profit before income tax

207,140

105,909

216,032

110,455

(110,955)

(56,730)

(117,879)

(60,271)

(9,872)

(5,047)

(9,655)

(4,937)

(120,827)

(61,778)

(127,534)

(65,207)

86,313

44,131

88,498

45,248

(43,450)

(22,216)

(40,513)

(20,714)

63

32

1,289

659

42,926

21,948

49,274

25,193

Income Tax

(6,398)

(3,271)

(5,421)

(2,772)

Net profit for the year

36,528

18,676

43,853

22,422

N/A

N/A

N/A

N/A

Earnings per share (BAM)

Raiffeisen at a Glance

for the years ended 31 December 2012 and 2011

22

Key financial ratios The presented data is stated or calculated on the basis of the bank's revised financial statements. 2012 (BAM 000)

2011 (BAM 000)

2010 (BAM 000)

2009 (BAM 000)

Total assets

3,684,989

4,015,689

3,722,233

4,196,962

Deposits from customers

2,750,363

2,944,442

2,622,705

2,723,531

Loans and advances to customers

2,164,368

2,306,730

2,243,190

2,315,721

Shareholder capital

241,861

241,861

241,861

241,861

Shareholder capital and reserves

497,458

501,101

371,924

367,006

Total income

207,203

217,321

205,965

186,101

Total operating expenses

Year-end

Annual results

164,277

168,147

198,088

176,521

Profit before tax

42,926

49,274

7,877

9,580

Profit after tax

36,528

43,853

5,872

8,364

Ratios Return on assets

1.1%

1.3%

0.2%

0.2%

Return on equity

7.3%

10.0%

1.6%

2.3%

58.3%

59.9%

66.1%

69.1%

2012 (EUR 000)

2011 (EUR 000)

2010 (EUR 000)

2009 (EUR 000)

Total assets

1,884,105

2,053,189

1,903,148

2,145,873

Deposits from customers

1,406,238

1,505,469

1,340,968

1,392,519

Loans and advances to customers

1,106,624

1,179,412

1,146,925

1,184,009

Shareholder capital

123,662

123,662

123,662

123,662

Shareholder capital and reserves

254,346

256,209

190,162

187,647

105,941

115,789

109,445

98,683

Total operating expenses

83,993

90,596

105,417

93,785

Profit before tax

21,948

25,193

4,027

4,898

Profit after tax

18,676

22,422

3,002

4,276

Cost/income ratio

Year-end

Annual results Total income

Ratios Return on assets

1.1%

1.3%

0.2%

0.2%

Return on equity

7.3%

10.0%

1.6%

2.3%

58.3%

59.9%

66.1%

69.1%

Cost/income ratio

23

Total assets with loan data

2012 (BAM 000)

2011 (BAM 000)

2010 (BAM 000)

2009 (BAM 000)

Total assets

3,684,989

4,015,689

3,722,233

4,196,962

Loans and advances to customers

2,164,368

2,306,730

2,243,190

2,315,721

2012 (EUR 000)

2011 (EUR 000)

2010 (EUR 000)

2009 (EUR 000)

Total assets

1,884,105

2,053,189

1,903,148

2,145,873

Loans and advances to customers

1,106,624

1,179,412

1,146,925

1,184,009

2012 (BAM 000)

2012 (EUR 000)

2011 (BAM 000)

2011 (EUR 000)

Change %

Corporate loans

1,139,962

582,853

1,285,549

665,021

(11.3)%

Retail loans

1,283,789

656,391

1,273,719

654,928

0.8%

Gross loans

2,423,751

1,239,244

2,559,268

1,319,949

(5.3)%

Impairments

259,383

132,620

252,538

140,536

2.7%

2,164,368

1,106,624

2,306,730

1,179,412

(6.2)%

Lending

Net loans

Raiffeisen at a Glance

Although 2012 was characterized as a very challenging year considering the overall economic situation, the bank closed the year with sound business results and a profit of EUR 18,676 thousand. These results have to be viewed in the context of a more cautions approach to lending and additional business optimization measures, primarily cost efficiency improvements. Over the course of the past year, the bank continued to be active in the lending business, which is of great importance considering the present economic situation in the region. The year ended with total assets of EUR 1,884,105 thousand and total loans of EUR 1,106,624 thousand.

24

Deposits from customers Deposits from customers amounted to EUR 1,392,519 in 2009 and EUR 1,406,238 in 2012 respectively. Deposits from customers grew by EUR 158,828 or 20.35 per cent, both in BAM and in other currencies, as a result of longstanding and successful business relations based on meeting customer needs.

Deposits from corporate customers

2012 (BAM 000)

2011 (BAM 000)

2010 (BAM 000)

2009 (BAM 000)

913,342

1,172,076

958,899

1,197,151

1,837,021

1,772,366

1,663,806

1,526,380

2012 (EUR 000)

2011 (EUR 000)

2010 (EUR 000)

2009 (EUR 000)

Deposits from corporate customers

466,984

599,273

490,277

612,094

Deposits from private individuals

939,254

906,196

850,690

780,426

Deposits from private individuals

Total income (with total income structure) Total income amounted to EUR 95,152 in 2009 and EUR 105,941 in 2012 respectively. Total income is dominated by net interest income, which also recorded the strongest growth in this period, of EUR 9,398 thousand or 15.61 per cent. The increase in net interest income is due to decreased interest expenses for funding from abroad. Net commission and fee income grew by EUR 4,202 thousand or 17.05 per cent.

25

2012 (BAM 000)

2011 (BAM 000)

2010 (BAM 000)

2009 (BAM 000)

Total income

207,203

217,321

205,965

186,101

Net interest income

136,083

148,289

123,756

117,702

Net fee and commission income

56,418

55,865

53,009

48,200

Other operating income

14,702

13,167

29,200

20,199

2012 (EUR 000)

2011 (EUR 000)

2010 (EUR 000)

2009 (EUR 000)

105,941

111,114

105,308

95,152

Net interest income

69,578

75,819

63,275

60,180

Net fee and commission income

28,846

28,563

27,103

24,644

7,517

6,732

14,930

10,328

2012 (BAM 000)

2011 (BAM 000)

2010 (BAM 000)

2009 (BAM 000)

Total operating expenses

164,277

168,147

198,088

176,521

Total income

207,203

217,321

205,965

186,101

2012 (EUR 000)

2011 (EUR 000)

2010 (EUR 000)

2009 (EUR 000)

83,993

85,972

101,281

90,254

105,941

111,114

105,308

95,152

Total income

Other operating income

Operating expenses/total income comparison

Raiffeisen at a Glance

Total operating expenses in the relevant period (20092012) recorded a decline by EUR 6,261 thousand or 6.94 per cent as a result of efficiency measures. Stricter cost control, by both cost organization and structure, resulted in an improvement of the cost/income ration.

Total operating expenses Total income

26

Business Overview

Corporate Banking Small and Micro Enterprises (SME) Retail Banking Treasury, Financial Markets and Investment Banking

28 29 32 38

Business Overview

27

28

Corporate Banking The continued effects of the recession on the business environment had a direct impact on the corporate banking business in 2012. In terms of the Corporate Banking Division, the past year was characterized by a decrease in risk weighted assets and the strong promotion of capital light products. The global financial and economic crisis combined with the local liquidity crisis left their mark on the corporate deposit portfolio, which recorded a decline of 29 per cent compared to the previous year. During the same period total assets fell by 12 per cent. In light of developments in the business environment and limited access to liquid assets the bank placed special emphasis on the promotion of capital light products and Alternative Sales Channels and RBBHnet Corporate Online Banking. The Corporate Division has traditionally recorded outstanding results for capital light products through its offer of cash management and trade finance products. These promotions had a positive effect on net fee and commission income, which rose by 6 per cent, and on product unit costs where, compared to the budgeted figure, a saving of 33 per cent was achieved. The focus in 2012 was on innovative products that make business easier for the customer, with special emphasis on improving their current liquidity. Amongst these products, forfaiting deserves special mention as a product that enables exporters to convert their account receivables quickly and easily into cash by assigning a loro letter of credit to the bank. The promotion of electronic payments yielded outstanding results, as illustrated by their share of total corporate customer payments that reached 85 per cent in 2012. In addition to providing traditional financing for current needs, the Corporate Division continued to support energy efficiency projects and development projects in cooperation with its creditors: EBRD, KfW, OPEC, USAID, SIDA, the World Bank and the Foundation for Sustainable Development (OdRaz). By dealing fairly with its customers and providing them with active support the bank not only managed to retain its existing customer base but also acquired new customers; by the end of 2012 the bank had more than 4,770 corporate customers.

29

Small and Micro Enterprises (SME) The Small and Micro Enterprises segment or SME includes legal entities or groups of connected customers (GCC) whose annual revenue is less than EUR 2.5 million (5 million BAM) and where exposure is less than EUR 1 million (2 million BAM). Raiffeisen BANK Bosna i Hercegovina works constantly to build and retain long standing business relationships with existing customers in the SME segment and to acquire and build relations with potential customers. The main characteristic of SME business is a segmented approach toward customers which are classified into sub-segments based on similar features, their individual preferences and market position. Each sub-segment has its own service model and a specially trained and dedicated customer relations manager. For this segment, 2012 was a year shaped by increased illiquidity amongst corporate entities and greater demand for short-term loans and debt restructuring loans. Although the new loan volume was dominated by working capital finance an increase in long-term investment financing was noted in the final quarter of 2012, which was a small yet significant improvement compared to the previous period. In view of the changed market conditions the focus of activities shifted away from loan portfolio growth to portfolio quality improvement. This required increased risk monitoring, concentrating on high net worth customers and placing more emphasis on other banking products. Additionally, existing resources were reallocated to process development and improvement tasks, to improve service quality and reduce product unit costs. This resulted in a decrease of the cost/income ratio of 10 per cent compared with the preceding year’s value. In order to provide SME with better access to financing in 2012 Raiffeisen BANK Bosna i Hercegovina intensified its utilization of the USAID loan and guarantee fund, which is intended to mitigate the problem of inadequate loan collateralization for SME.

Special emphasis was given to encouraging customers to use the Corporate Online Banking system RBBHnet, which is a distribution channel that enables customers to transact their financial business at lower cost. These efforts resulted in an increase in new online banking customers of 57 per cent compared with 2011. This was largely due to a project implemented in 2012 to redesign this service. As a result, this service was improved and enhanced through additional functions and by making the application more user-friendly. By providing high quality service and overall support to its customers the bank not only managed to retain its existing customers but also to acquire new ones, thus ending 2012 with a base of more than 9,000 SME customers.

Business Overview

In 2012 business cards registered a growth of 17 per cent compared to 2011.

30

Development of the loan and deposit portfolios (SE segment) ’000 BAM Real estate finance Credit cards

March 2012

June 2012

September 2012

December 2012

97

94

92

89

980

1,035

1,100

1,167

4,236

4,176

3,914

4,053

Loans covered by financial institutions

17,483

16,161

13,953

12,687

Overdraft

17,690

17,915

17,234

18,628

Investment finance and non-purpose loans

45,894

45,811

45,558

48,289

Working capital finance

74,589

72,715

67,943

69,722

’000 BAM

March 2012

June 2012

September 2012

December 2012

Purpose deposits

1,387

1,281

1,673

1,423

Mortgage loans

Term deposits

2,826

2,957

2,313

1,373

Sight deposits

40,097

45,376

46,697

49,909

31

’000 BAM

March 2012

June 2012

September 2012

December 2012

Mortgage loans

1,994

1,892

1,809

1,741

Credit cards

1,635

1,871

1,869

2,055

Working capital finance

19,121

17,631

15,518

17,242

Investment finance and non-purpose loans

32,896

31,016

29,505

28,044

Overdraft

34,812

34,609

33,577

32,160

’000 BAM

March 2012

June 2012

September 2012

December 2012

Purpose deposits

1,062

1,085

1,027

832

Term deposits

1,931

1,858

1,809

1,655

Sight deposits

56,118

63,486

65,927

69,121

Business Overview

Development of the loan and deposit portfolios (Micro segment)

32

Retail Banking By implementing state-of-the-art technological solutions for modern banking Raiffeisen BANK Bosna i Hercegovina is constantly working to further improve its service quality. It has introduced new products and tailored existing products to meet the needs of its customers, specifically for the areas of deposits, credit and the card business. To address the needs of its most distinguished customers the bank offers Raiffeisen Premium Banking as a special concept based on a proactive approach toward the individual needs of its most affluent premium business customers.

Deposits from private individuals In the deposit business area total savings of private individuals grew by 4 per cent in 2012 when compared to 2011. This growth in private savings in 2012 was the result of ongoing efforts to preserve customer confidence in the safety of their deposits. The following activities are particularly noteworthy: • establishment of the Loyalty Program as a strategy to keep existing term deposits in the bank; and • quarterly CRM actions aimed at routing free funds from a-vista accounts to term deposit accounts. These activities not only increased the volume of term deposits, but also improved their maturity structure, as attractive prices for longer terms were offered. As a result, long-term savings rose by 7 per cent compared to the previous year.

PI deposit portfolio 2012

growth in %

2011

growth in %

2010

growth in %

2009

Short-term savings

51,396

(24.2)%

67,830

(24.2)%

89,424

(41.4)%

152,664

Long-term savings

1,123,416

6.9%

1,051,432

7.6%

976,968

4.6%

933,983

659,565

1.3%

651,229

9.3%

595,892

36.0%

438,248

2,623

25.8%

2,085

32.2%

1,577

4.0%

1,516

1,837,000

3.6%

1,772,576

6.5%

1,663,861

9.0%

1,526,411

’000 BAM

Sight deposits Purpose deposits Total

33

Private Lending Over the course of 2012 Raiffeisen BANK Bosna i Hercegovina recorded a slight increase in the overall loan portfolio compared to the previous year. The loan product offer was extended by a new product: the XS Quick Cash non-purpose loan. This is a mass customer loan product available within a single day through a hassle free procedure that does not require guarantors and has no management fee. The marketing campaigns for new and existing products and the focus on customer relationship management helped achieve a total loan volume of 400.2 million BAM in 2012. The loan portfolio was dominated by non-purpose loans with an 81 per cent share, followed by mortgage loans with a 9 per cent share and then by Lombard loans and purpose loans with a share of 5 per cent respectively. The best selling products from the non-purpose loan offer were the XXL non-purpose loan without guarantors and the Consolidation loan. These two loans made the main contribution to total lending in 2012 with 42 per cent or 166.8 million BAM and 28 per cent or 112.9 million BAM respectively.

PI loan portfolio 2012

growth in %

2011

growth in %

2010

growth in %

2009

Short-term loans

10,047

9.3%

9,194

11.3%

8,262

(9.3)%

9,111

Long-term loans

1,093,931

(0.6)%

1,100,699

4.2%

1,055,916

(8.2)%

1,150,351

102,524

11.0%

92,330

2.1%

90,442

(0.3)%

90,683

1,206,502

0.4%

1,202,223

4.1%

1,154,620

(7.6)%

1,250,145

Card products Total

Business Overview

’000 BAM

34

Card Business The card portfolio continued to grow throughout 2012 and the year ended with a total of 574,429 cards (cumulative figure). In 2012 alone 69,565 cards were issued, which translates into a growth of newly issued cards of 21 per cent compared to 2011. The strongest growth was recorded amongst credit cards (revolving and charge cards) and business cards, which grew by 36 per cent and 9 per cent respectively. The number of newly issued cards grew by 21 per cent on the year, with credit cards growing by 66 per cent. The increase in the number of newly issued credit cards was driven by a new product: the MasterCard Shopping Card. With its many benefits, the card proved to be an attractive product as it enables customers to pay in instalments without incurring any fees and interest. An addition benefit is the extended warranties given for those goods purchased with the card. A significant contributory factor to the number of debit cards issued was the continued action to acquire public sector and corporate firms that pay staff salaries through accounts linked to debit cards issued by Raiffeisen BANK Bosna i Hercegovina.

Neutral Business Good results were achieved in the neutral business area in 2012, in particular in the exchange office business where exchange transactions increased by 40 per cent compared to 2011. This was primarily due to the signing of new contracts with authorized exchange offices in 2012. Rapid money transfer and receipt via the Western Union system played a key role in the neutral business segment. Despite the recession and the negative market development across the world, Western Union continued its upward trend in transactions with the bank and its sub-agents. Transactions increased in 2012 by 5 per cent compared to the previous year. These good results were driven by the Loyalty Program, an incentive system rewarding customer loyalty in the use of Western Union's rapid money transfer and receipt service. In addition, there was huge customer demand for the Raiffeisen BANK Bosna i Hercegovina's Account Sets, which drove up the number of account sets by 25 per cent in comparison to 2011. Net commission and fee income from the card business grew by 12 per cent in 2012 compared to the previous year. Raiffeisen BANK Bosna i Hercegovina continued to monitor the number of private customers in its IT system in accordance with the status assigned to them since 2011, based on their relationship with the bank. The year ended with a base of more than 470,000 customers.

Network Coordination While the period from 2002 to 2008 was characterized by an extensive expansion of the business outlet network, the past four years have been shaped by consolidation. In light of the market environment Raiffeisen BANK Bosna i Hercegovina achieved an optimum number of business outlets. As of 31 December 2012 the bank had a business outlet network of 92 branches offering products and services to customers and six regional branches to act as the hubs of the business network. The regional branches operate in the country’s main administrative and political centers and provide the branch network with administrative and professional support.

Quality Management The Quarterly Quality Index, applied since 2009 in all branches, was expanded in 2012 to cover all positions in the branches and some parameters applied to each employee. Additionally, the Call Center and Electronic Sales Channels were both included into this quality index methodology. Mystery Shopping and Mystery Calls were again conducted for all branch sales staff in 2012.

Business Overview

35

36

Alternative Sales Channels Card Acquiring at Points of Sale (POS) and Automated Teller Machines (ATMs) For the Card Acquiring Unit 2012 was another year of positive trends in all of its business segments. Turnover and the number of transactions at merchant’s POS terminals grew by 17 per cent and 24 per cent respectively, compared to 2011. During the same period fees grew by 12 per cent. As of 31 December 2012 the bank had a network of 2,013 merchants, 4,981 POS terminals and 4,328 merchant sales points. Close cost monitoring and optimization measures resulted in a cost reduction of 8 per cent compared to 2011. The merchant network was further expanded in 2012 to enable customers to pay in instalments without incurring any interest or fees by using their MasterCard Shopping Card. This growth is illustrated by the fact that the number of transactions rose by 86 per cent, fee income rose by 61 per cent and turnover by 62 per cent. This indicates a significant increase in the number of MasterCard Shopping Card holders. As of 31 December 2012 the benefits of the above mentioned MasterCard Shopping Card were offered at 2,691 POS terminals, which account for 54 per cent of the entire Raiffeisen BANK Bosna i Herzegovina POS network. Fully aware of the underutilized potential of the country’s card market and the need to differentiate itself from its competitors, at the beginning of 2012 Raiffeisen BANK Bosna i Hercegovina launched the Loyalty Program and the program for acquiring merchants for the use of its Raiffeisen e-pay service to add to its already established MasterCard Shopping Card. The Loyalty Program was implemented in cooperation with 95 merchants; private customers received discounts or gifts from these merchants as a reward for making card payments. A total of 94 customers were acquired in 2012 for the use of the Raiffeisen e-pay service, which allows card acquisition at internet points of sale. Raiffeisen BANK Bosna i Hercegovina further affirmed its pioneer role in the local banking market in April 2012 by launching the first ATM exchange machine at Sarajevo International Airport. The automated exchange machine can be used to exchange cash from the foreign currencies EUR, USD, CHF and HRK into the local currency BAM. Over the course of 2012 sixteen new automated teller machines were installed, bringing the total number to 217. In addition, ten info terminals of the type 1000 were replaced by info terminals of the type 2000 and five new terminals were also added, bringing the total number of info terminals to 89 by the end of the year.

Agents and Cooperation Unit While continually developing and improving its services, the Agents and Cooperation Unit continued the positive trend started in 2010. The network of mobile bankers or direct sales agents whose task it is to make the bank's services available for customers ’24/7 at their doorstep’ increased by 15 per cent. This service enables customers not only to apply for loans or a Raiffeisen BANK Bosna i Hercegovina card at the bank’s branches but also by using the services of 213 mobile bankers, who are distributed evenly throughout Bosnia and Herzegovina. The total volume of loans granted to private individuals through the channels within the scope of the Agents and Cooperation Unit rose by 29 per cent in annual terms. The number of credit cards issued to private individuals through this unit also rose significantly: by 86 per cent on the year. The development of the Authorized Exchange Office Network continued during 2012, resulting in business relations with 24 partners by the end of the year. This enabled tourists and non-residents to make currency conversions in all parts of Bosnia and Herzegovina at several hundred locations. The turnover achieved in 2012 through authorized exchange offices rose by 70 per cent compared to 2011.

37

Electronic Sales Channels Electronic Sales Channels achieved notable progress in comparison with previous years in terms of the number of users, electronic orders and SMS enquiries (through the SMS service).

Online Banking Raiffeisen BANK Bosna i Hercegovina offers online banking to both its corporate and private customers. Additionally, individual customers can choose between Raiffeisen Direct NET, with authorization via a mini token, and Raiffeisen NET via SMS, with authorization via a SMS password. Compared to 2011, at the close of 2012 the number of Corporate Online Banking customers had grown by approximately 16 per cent. A total of 2.045.597 electronic orders were carried out through the Corporate Online Banking system in 2012, which translates into an annual growth rate of 3 per cent. The number of Personal Online Banking customer was 33,514 by the end of 2012. A total of 168,936 electronic orders were carried out using the Personal Online Banking system, which translates into an annual growth rate of 30 per cent.

Raiffeisen Direct SMS Service The number of Raiffeisen Direct SMS customers, which stood at 76,680 by the end of 2012, clearly shows that customers recognize the benefits of this service. The number of generated SMS enquiries concerning account balances grew by 28 per cent on the year.

Call Centre Call Centre operators answered a total of 622,300 calls and 17,800 emails during 2012. Compared to 2011 the number of answered calls and handled emails grew by 4 per cent and 13 per cent respectively. The increase in handled calls and emails helped improve the service quality indicator by 2 per cent. Although the service level indicator of 72 per cent and the abandon rate of 8 per cent suggest a satisfactory service quality level quality improvement remains ongoing. The IVR (Interactive Voice Response) was redesigned in 2012 to offer standard information to customers, who no longer have to wait to be attended by a Call Centre operator.

Business Overview

The Service to Sale – S2S sales concept also recorded a strong sales result, which further testifies to the development of the Call Centre into a sales channel.

38

Treasury, Financial Markets and Investment Banking Trading and Sales Department The foreign exchange business for private and corporate customers recorded an upward trend in 2012, despite the effects of the global economic crisis and the competitive environment in the local market. One of the main activities of the Trading Department in 2012 was efficient FX risk management, whilst maintaining its profit orientation in the current environment. The foreign currency market environment was strongly influenced by fluctuations in the main global currencies whose increased volatility had an impact on FX risk exposure. During 2012 open FX positions were maintained within the limits set by the Banking Agency of the Federation of Bosnia and Herzegovina (FBA) and within the internal limits determined by the methodology of the Raiffeisen Group. Special attention was paid to corporate customers using the Customer Desk service. The primary goal in 2012 was to preserve trust amongst existing customers and increase the number of Customer Desk users. The year ended with 106 active customers. These clients have access to information on developments within the local and international financial markets and are offered a wide range of products tailored to meet their individual needs and protect them from FX and interest rate risks. The global money markets were influenced by the highly expansive monetary policy of the European Central Bank and recorded historic lows in the value of reference interest rates. The Trading and Sales Department reduced its activities in the area of placing foreign funds down to the limits set by Raiffeisen Bank International (RBI), making sure that the liquidity principle was always adhered to.

Funding and Financial Institutions The past year was marked by intensified utilization of wholesale funding for energy efficiency loans and a credit line made available by the OPEC Fund for International Development. Individual facilities for small and medium-sized enterprises from a World Bank credit line were also arranged with the Foundation for Sustainable Development (ODRAZ). In addition, to meet the demands of its corporate customers Raiffeisen BANK Bosna i Hercegovina entered into negotiations with the European Bank for Reconstruction and Development (EBRD) for a new credit line within an energy efficiency component. Negotiations were also begun with the World Bank for a new credit line to improve access to funding for small and medium-sized enterprises. The bank received approval in 2012 from the European Investment Bank (EIB) for a lending limit intended to finance corporate customer development projects aimed at creating new job opportunities. This credit line will be available to draw upon over the next couple of years. At the end of the year the Raiffeisen BANK Bosna i Hercegovina funding portfolio was structured as follows: development banks and institutions had a 37 per cent share, supranational financial institutions 31 per cent and the mother bank and Group members 32 per cent. The overall credit line portfolio accounts for 11 per cent of the bank's total funding. The bank's borrowing in relation to its capital under credit lines amounted to 112 per cent. During the course of 2012 and following successful negotiations with its correspondent banks and key partners Raiffeisen BANK Bosna i Hercegovina was granted additional benefits in the international payments area for the bank and its customers. The bank also opened accounts for its customers with foreign banks to cater for currencies other than the EUR and USD for which there was customer demand, namely CNY, RSD and TRL.

39

Investment Banking Again in 2012, Bosnia and Herzegovina’s capital market was characterized by significant turnovers in the primary market for debt securities on both entities’ stock exchanges. The Sarajevo Stock Exchange (SASE) successfully carried out four auctions for long term bonds (two-year, three-year and five-year) and a further four auctions for treasury bills (six-month) of the Federation of Bosnia and Herzegovina. The total amounted to 248.6 million BAM, which comprised up to two-thirds of the total turnover made on SASE during the past year. At the same time, the Banja Luka Stock Exchange (BLSE) carried out two auctions for long term bonds (seven-month) and two auctions for treasury bills (sixmonth and nine-month) of Republika Srpska. The total amounted to 124.9 million BAM, which made up around 50 per cent of the BLSE's turnover for the full year. There were also four auctions for municipal bonds (three BLSE and one SASE) and three auctions for corporate bonds (two BLSE and one SASE) amounting in total to 8.1 million BAM. The average yield at which the finance ministries in the two entities collected these amounts were almost identical to those collected in 2011, remaining extremely low with an average yield of between 2.1 per cent and 3.5 per cent for treasury bills and between 4.3 per cent and 6.1 per cent for long-term bonds.

Business Overview

Regular bond trading on the country’s stock exchanges recorded diametrically opposed trends. While the regular bond turnover on SASE was just 15.23 million BAM, 34 per cent less than in 2011, the regular bond turnover on BLSE grew by 61 per cent to 47.8 million BAM. Moreover, BLSE traded treasury bonds in the secondary market to a total amount of 17.3 million BAM. On the other hand, regular share trading declined on both stock exchanges: 2 per cent on SASE and by a high 41 per cent on BLSE. The trading volume was 82.2 million BAM on SASE and 37.5 million BAM on BLSE. An overview of developments pertaining to regular bond trading on the secondary market of SASE and BLSE is provided in Chart 1.

40

The extremely low level of liquidity in the secondary market was accompanied by a strong drop in the blue-chip indices SASX-10 and BIRS, which touched all time lows of 663.55 index points and 784.02 index points respectively. The blue-chip indices managed to recover partially by the end of the year but still remained far below the values recorded in 2011. At the end of 2012 the SASX-10 reached 760.7 index points (minus 4 per cent yoy), while BIRS fell to 807.12 index points (minus 8 per cent yoy). During the same period the indices of investment funds recorded remarkable growth of 4 per cent for BIFX and FIRS in 2012, compared with the end of 2011. The extremely low level of liquidity of the SASE and BLSE stock markets and the further decline of blue-chip stock indices are shown in Chart 2.

Consequently, the total turnover achieved on SASE was 373.57 million BAM with debt securities accounting for 71 per cent or 266.4 million BAM of the total turnover (in the primary and secondary markets). On the other hand, total turnover on BLSE for 2012 fell by 39 per cent on the year reaching 260.9 million BAM with debt securities (primary and secondary markets) accounting for 75 per cent or 196.2 million BAM. Despite the challenging environment in the local capital market, 2012 was another successful year for the Investment Banking Department with both income and the number of customers remaining stable in almost every area of business. Capital Markets also had a very successful year in 2012 managing to increase the number of its customers in all business areas and increase total assets under custody. The renowned magazine ’The Global Custodian’ recognized the success of Raiffeisen BANK Bosna i Hercegovina in the custody business as a bank “recommended by its customers” (Award for Excellence 2012). The bank's prime status was further confirmed as it was again TOP RATED for custody services. The bank’s custody license for the capital market of Republika Srpska was successfully renewed. The competent regulators thereby confirmed that Raiffeisen BANK Bosna i Hercegovina satisfies all of the legal criteria for the provision of custody services. The total number of custody accounts grew by 10 per cent and total assets under custody by more than 15 per cent, which is strong evidence of the confidence that its customers place in the bank. In the depository business area, Raiffeisen BANK Bosna i Hercegovina successfully performed depository deals for its existing customers as well as depository deals for the issuance of securities and in the trading area. In the fund administration area the focus was placed on providing depository services for open-ended investment funds and on implementing the Amended Reporting Bylaws for Investment Funds, Management Companies and Depository Banks. Raiffeisen BANK Bosna i Hercegovina acted as the issuing agent for the Federal Ministry of Finance in 2012 for two treasury bills issued by the Federation of Bosnia and Herzegovina to a total amount of 60 million BAM.

41

The Proprietary Trading Team continued its activities related to the purchase and sale of securities for the account of Raiffeisen BANK Bosna i Hercegovina and recorded a significant result, thus continuing to make a significant contribution to the bank's overall profitability. The bank continued to actively participate in the primary and secondary debt securities markets, particularly in the local market. The Brokerage and Advisory Team also had a successful business year. As a professional intermediary on the Sarajevo Stock Exchange Raiffeisen BANK Bosna i Hercegovina ranked first according to the number of executed transactions and second by the turnover achieved in 2012. The number of transactions in international markets for the bank’s customers also grew and led to an increase in income from these services. In the local market the bank's customers traded mostly in shares of the company Bosnalijek d.d. Sarajevo. Significant trading volumes were also achieved for local war damage bonds and foreign currency deposits. Customers were kept up-to-date with significant events in the local market, especially in the area of public securities issues, through regular reports aimed at encouraging existing customers and acquiring new ones to investment in debt securities.

Business Overview

The Research and Analysis Department continued to develop and expand its range of publications and specialized analyses for the needs of investment banking customers as well as other customers and members of the public. The quality and reliability of the publications prepared by the Research and Analysis Department were not only recognized by the local media and the bank's customers across all business segments but also by numerous international financial institutions and organizations.

42

Financial Statements

Management Board's Report 44 Responsibilities of the Management and Supervisory Boards for the preparation and approval of the annual financial statements 45 Independent Auditor's report 46 Separate income statement 47 Separate statement of comprehensive income 48 Separate statement of financial position 49 Separate statement of changes in equity 50 Separate statement of cash flows 51 Notes to the separate financial statements 52

Financial Statements

43

44

Management Board’s Report The Management Board has pleasure in submitting its report for the year ended 31 December 2012.

Review of operations The result for the year ended 31 December 2012 of the Bank is set out in the income statement on page 47.

Supervisory Board, Management Board and Audit Committee During the course of 2012 and up to the date of this report, the Supervisory Board comprised:

Supervisory Board Peter Lennkh Ferenc Berszán Klemens Haller Frantisek Jezek Johannes Kellner

Chairman Member Member Member Member

During the course of 2012 and up to the date of this report, the Audit Committee comprised:

Audit Committee Wolfgang Kettner Izudin Kešetović Boris Tihi Miloš Trifković Mahir Džafić

Chairman Member Member Member Member

As of 31 December 2012 the Management Board comprised a director, deputy director and 2 executive directors, who served during the year and up to the date of this report as follows:

Management Board Michael Georg Müller Karlheinz Dobnigg Sanela Pašić Damir Karamehmedović

Director, member of the Management Board Deputy Director, member of the Management Board Executive Director, member of the Management Board Executive Director, member of the Management Board

On behalf of the Management Board

Michael Georg Müller Director

Elvir Muhić Head of Finance Division

45

Responsibilities of the Management and Supervisory Boards for the preparation and approval of the annual financial statements The Management Board is required to prepare financial statements, which give a true and fair view of the financial position of the Bank and of the results of its operations and cash flows, in accordance with applicable accounting standards, and is responsible for maintaining proper accounting records to enable the preparation of such financial statements at any time. Management has a general responsibility for taking such steps as are reasonably available to it to safeguard the assets of the Bank and to prevent and detect fraud and other irregularities. The Management Board is responsible for selecting suitable accounting policies to conform with applicable accounting standards and then applying them consistently; making judgements and estimates that are reasonable and prudent; and preparing the separate financial statements on a going concern basis unless it is inappropriate to presume that the Bank will continue in business. The Management Board is responsible for the submission to the Supervisory Board of its annual report on the Bank together with the annual separate financial statements, following which the Supervisory Board is required to approve the annual separate financial statements for submission to the General Assembly of Shareholders for adoption. The separate financial statements set out on pages 47 to 99 were authorised by the Management Board on 4 March 2013 for issue to the Supervisory Board, and are signed below to signify this, on behalf of the Bank, by:

Financial Statements

Michael Georg Müller Director Raiffeisen BANK dd Bosna i Hercegovina Zmaja od Bosne bb 71000 Sarajevo Bosnia and Herzegovina 4 March 2013

46

Independent Auditor’s report To the shareholders of Raiffeisen BANK d.d. Bosna i Hercegovina: We have audited the accompanying separate financial statements of Raiffeisen BANK d.d. Bosna i Hercegovina (the “Bank”), which comprise the separate statement of financial position as at 31 December 2012, the separate income statement, separate statement of comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

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

Auditors’ Responsibility Our responsibility is to express an opinion on these separate financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatements. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the separate financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the separate financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the separate 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 separate 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 separate financial statements give a true and fair view of the financial position of the Bank as at 31 December 2012, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

Other Matter The financial statements of the Bank as at and for the year ended 31 December 2011 were audited by another auditor who expressed an unqualified audit opinion on those statements in its report dated 28 February 2012.

KPMG B-H d.o.o. za reviziju Registered Auditors Zmaja od Bosne 7-7A/III 71 000 Sarajevo Bosnia and Herzegovina

4 March 2013

On behalf of KPMG B-H d.o.o. za reviziju:

Manal Bećirbegović Director

Senad Pekmez FBiH registered auditor Licence number: 3090044102

47

Separate income statement For the year ended 31 December ’000 BAM

Notes

2012

2011

Interest income

6

197,535

219,994

Interest expense

7

(61,452)

(71,705)

136,083

148,289

Net interest income Fee and commission income

8

67,342

65,008

Fee and commission expense

9

(10,924)

(9,143)

56,418

55,865

Net fee and commission income Dividend income Net trading income

10

Net realised gain from sale of available-for-sale financial assets Other operating income

11

Operating income

67

55

7,842

4,597

3,497

-

3,233

7,226

207,140

216,032

Personnel expenses

12

(58,672)

(59,954)

Administrative expenses

13

(52,283)

(57,925)

27, 28

(9,872)

(9,655)

(120,827)

(127,534)

86,313

88,498

(43,450)

(40,513)

63

1,289

42,926

49,274

Depreciation and amortisation Operating expenses Profit before impairment losses, provisions and income tax Impairment losses and provisions

14

Recoveries Profit before income tax Income tax Net profit for the year

15

(6,398)

(5,421)

36,528

43,853

Financial Statements

The accompanying notes form an integral part of these financial statements.

48

Separate statement of comprehensive income For the year ended 31 December ’000 BAM

Notes

2012

2011

36,528

43,853

386

1,010

Net amount transferred to income statement

(3,497)

-

Total other comprehensive income

(3,111)

1,010

Total comprehensive income for the year

33,417

44,863

Net profit for the year Other comprehensive income for the year Fair value reserves (financial assets available for sale) Net change in fair value

The accompanying notes form an integral part of these financial statements.

20

49

Separate statement of financial position For the year ended 31 December ’000 BAM

Notes

2012

2011

Cash and cash equivalents

16

551,677

716,868

Obligatory reserve with the Central Bank

17

238,559

266,540

Placements with other banks

18

235,652

225,917

Loans and advances to customers

19

2,164,368

2,306,730

-

403

Assets

Assets classified as held for sale Financial assets available for sale

20

189

3,299

Financial assets at fair value through profit or loss

21

158,729

158,897

Financial assets held to maturity

22

146,569

138,090

Investments in subsidiaries

23

2,681

2,436

Investments in associates

24

8,175

8,173

Deferred tax assets

25

669

846

Other assets

26

21,217

28,212

3,399

3,385

Income tax prepayment Property and equipment

27

146,561

148,596

Intangible assets

28

6,544

7,297

3,684,989

4,015,689

Total assets Liabilities Due to banks

29

353,969

468,004

Due to customers

30

2,750,363

2,944,442

Provisions for liabilities and charges

31

7,108

7,491

Other liabilities

32

30,134

29,167

Subordinated debt

33

45,957

65,484

3,187,531

3,514,588

237,388

237,388

4,473

4,473

90

3,201

Regulatory reserves for credit losses

102,443

89,035

Retained earnings

153,064

167,004

Total equity

497,458

501,101

3,684,989

4,015,689

Total liabilities

Share capital Share premium Fair value reserves

Total liabilities and equity

The accompanying notes form an integral part of these financial statements.

34

Financial Statements

Equity

50

Separate statement of changes in equity For the year ended 31 December 2012

’000 BAM

Balance as of 1 January 2012

Share capital

Share premium

Fair value reserves

Regulatory reserves for credit losses

Retained earnings

Total

237,388

4,473

3,201

89,035

167,004

501,101

Net profit for the year

-

-

-

-

36,528

36,528

Other comprehensive income

-

-

-

-

-

-

Net change in fair value

-

-

386

-

-

386

Net amount transferred to income statement

-

-

(3,497)

-

-

(3,497)

Total other comprehensive income

-

-

(3,111)

-

-

(3,111)

Total comprehensive income

-

-

(3,111)

-

36,528

33,417

Transfer from retained earnings to regulatory reserves

-

-

-

13,408

(13,408)

-

Dividend paid Balance as of 31 December 2012

-

-

-

-

(37,060)

(37,060)

237,388

4,473

90

102,443

153,064

497,458

Movements in regulatory reserves for credit losses are explained in Note 3(n). The accompanying notes form an integral part of these financial statements.

For the year ended 31 December 2011 Share capital

Share premium

Fair value reserves

Regulatory reserves for credit losses

Retained earnings

Total

237,388

4,473

2,191

89,035

127,872

460,959

Net profit for the year

-

-

-

-

43,853

43,853

Other comprehensive income

-

-

-

-

-

-

Net change in fair value

-

-

1,010

-

-

1,010

Total other comprehensive income

-

-

1,010

-

-

1,010

Total comprehensive income for the year

-

-

1,010

-

43,853

44,863

Effects of merger of Raiffeisen BROKERS d.o.o. Sarajevo into the Bank

-

-

-

-

(1,633)

(1,633)

’000 BAM

Balance as of 1 January 2011

Dividend paid Balance as of 31 December 2011

-

-

-

-

(3,088)

(3,088)

237,388

4,473

3,201

89,035

167,004

501,101

The accompanying notes form an integral part of these financial statements.

51

Separate statement of cash flows For the year ended 31 December ’000 BAM

2012

2011

42,926

49,274

9,872

9,655

45,748

40,832

97

(2,567)

401

3,415

(499)

(509)

Operating activities Profit before income tax Adjustments for: Depreciation and amortisation Impairment losses and provisions Gain on disposal of tangible and intangible assets Realised losses and fair value adjustments on financial assets at fair value through profit or loss Release of accrued expenses in previous year Net loss on disposal of financial assets held to maturity Written-off liabilities Effect of change of accounting policy on commitments and contingencies

-

920

(65)

(443)

-

115

(67)

(55)

Net decrease in obligatory reserve with the Central Bank

27,981

39,325

Net (increase)/decrease in placements with other banks

(9,735)

24,442

Net decrease/(increase) in loans to customers, before impairment losses

98,467

(44,640)

4,580

(12,583)

(14)

-

Dividend income recognised in the income statement Changes in operating assets and liabilities:

Net decrease/(increase) in other assets, before impairment losses Net decrease/(increase) in income tax prepayment Net increase/(decrease) in due to banks – deposits Net (decrease)/increase in due to customers

1,123

(2,738)

(194,079)

321,737

Net increase/(decrease) in other liabilities

967

(765)

Net proceeds from financial assets at fair value through profit or loss

168

2,472

27,871

427,887

Income tax paid

(6,235)

(2,939)

Net cash generated by operating activities

21,636

424,948

(8,479)

(9,327)

-

8,859

(245)

(400)

Net increase in financial assets held to maturity Proceeds from bonds held to maturity sold Investments in subsidiaries Investments in associates Cash acquired from business combination Dividends received

(2)

-

-

49

67

55

(6,423)

(9,015)

-

3,763

(15,082)

(6,016)

(115,158)

(117,408)

Repayments of subordinated debt, net

(19,527)

(16,532)

Dividends paid

(37,060)

(3,088)

Net cash used in financing activities

(171,745)

(137,028)

Net (decrease)/increase in cash and cash equivalents

Purchases of tangible and intangible assets Proceeds from tangible assets sold Net cash used in investing activities Financing activities Repayments of borrowings, net

(165,191)

281,904

Cash and cash equivalents as at 1 January

716,868

434,964

Cash and cash equivalents as at 31 December

551,677

716,868

The accompanying notes form an integral part of these financial statements.

Financial Statements

Investing activities

52

Notes to the separate financial statements 1. General Incorporation and registered activities Raiffeisen BANK d.d. Bosna i Hercegovina, Sarajevo (the “Bank”) is a joint stock company incorporated in Bosnia and Herzegovina in 1993. Its registered address in Sarajevo is Zmaja od Bosne bb. The principal activities of the Bank are the provision of general banking services through an extensive branch network in Bosnia and Herzegovina.

2. Basis of preparation a) Statement of compliance These separate financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as published by the International Accounting Standards Board. Based on criteria outlined in International Accounting Standard 27: Consolidated and Separate Financial Statements (“IAS 27”), applicable for consolidation exemption, the Bank elects not to present consolidated financial statements and thus presents only separate financial statements for 2012. These separate financial statements were authorised for issue by the Management Board on 4 March 2013 for approval by the Supervisory Board.

b) Basis of measurement These separate financial statements have been prepared on the historical or amortised cost basis except for financial assets available for sale and financial assets at fair value through profit or loss, which are stated at fair value.

c) Functional and presentation currency These separate financial statements are presented in thousands of convertible mark (BAM ’000) which is the functional currency of the Bank. The Central Bank of Bosnia and Herzegovina (“Central Bank” or “CBBH”) has implemented a currency board arrangement aligning BAM to EUR at an exchange rate of EUR 1: BAM 1.95583, which prevailed throughout 2012 and 2011. This is expected to continue in the foreseeable future.

d) Use of estimates and judgements The preparation of separate financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods. Information on areas with significant uncertainty in the estimates and critical judgments in applying accounting policies that have the most significant effect on the amounts recognised in these separate financial statements are disclosed in Note 5.

53

3. Summary of significant accounting policies The accounting policies set out below have been consistently applied for all periods presented in these separate financial statements. Certain comparative amounts in the separate statement of financial position have been reclassified to conform with the current year’s presentation.

a) Foreign currency transactions Transactions in foreign currency are translated into the functional currency at the exchange rate prevailing at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Non-monetary assets and items that are measured in terms of historical cost in foreign currency are translated using the exchange rate at the date of the transaction and are not retranslated at the reporting date.

b) Interest income and expense Interest income and expense are recognised in the income statement as they accrue using the effective interest rate method. Effective interest rate is the rate that discounts estimated future cash flows of financial assets or liabilities over the life of the financial instrument (or, if appropriate, a shorter period) to its net carrying value. In the calculation of effective interest rates the Bank estimates future cash flows considering all contractual terms, but not future credit losses. Calculation of the effective interest rate includes all paid or received transaction costs, fees and points, which are an integral part of the effective interest rate. Transaction costs include all incremental costs incurred directly in connection with the issuance or acquisition of financial assets or financial liabilities. Interest income and expense recognised in the income statement include interest on financial assets and financial liabilities that are measured at amortised cost calculated using the effective interest rate method and interest income on financial assets at fair value through profit or loss.

c) Fee and commission income and expenses Fee and commission income and expenses that are integral part of the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Fee and commission income and expenses, reported as such, comprise mainly fees related to credit card transactions, the issuance of guarantees and letters of credit, domestic and foreign payment transactions and other services and are recognised in the income statement upon performance of the relevant service.

d) Net trading income Net trading income comprises net gains and losses from foreign exchange trading, net gains and losses from the translation of monetary assets and liabilities denominated in foreign currency at the reporting date, and net gains or losses from fair value changes in financial assets at fair value through profit or loss.

e) Dividend income f) Lease payments Payments made as lessee under operating leases are recognised in the income statement on a straight-line basis over the term of the lease.

g) Income taxes The income tax charge is based on taxable profit for the year and comprises current and deferred tax. Current tax is the expected tax payable on the taxable income for the year, using the tax rates enacted or substantially enacted at the balance sheet date and any adjustments to tax payable in respect of previous years.

Financial Statements

Dividend income is recognised in the income statement when the rights to receive the dividend are established.

54

The amount of deferred tax is calculated using the balance sheet liability method whilst taking into account the temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and amounts used for income tax purposes. Deferred tax assets and liabilities are recognised using the tax rates that are expected to apply on taxable income in the period in which those temporary differences are expected to be recovered or settled based on tax rates enacted or substantially enacted at the reporting date. The measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the enterprise expects at the reporting date to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are not discounted and are classified as non-current assets and/or liabilities in the statement of financial position. Deferred tax assets are recognised only to the extent that it is probable that sufficient taxable future profits will be available against which the deferred tax assets can be utilised. At each reporting date the Bank reassesses unrecognised potential deferred tax assets and the carrying amount of recognised deferred tax assets for indications of potential impairment.

h) Financial instruments Classification The Bank classifies its financial instruments in the following categories: loans and receivables, financial assets available for sale, financial assets held to maturity, financial assets at fair value through profit or loss and other financial liabilities. The classification depends on the purpose for which the financial assets and liabilities were acquired. Management determines the classification of financial assets and liabilities upon initial recognition and re-evaluates this classification at each reporting date.

a) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determined payments that are not quoted in an active market. Loans and receivables arise when the Bank provides money to a debtor with no intention of trading with these receivable and include placements with and loans to other banks, loans and receivables from customers and balances with the Central Bank.

b) Financial assets available for sale Financial assets available for sale are non-derivatives that are either designated in this category or not classified into any of the other categories. Financial assets classified as available for sale are intended to be held for an indefinite period of time, but may be sold in response to needs for liquidity or changes in interest rates, foreign exchange rates or equity prices. Financial assets available for sale include equity securities.

c) Financial assets held to maturity Financial assets held to maturity are non-derivative assets with fixed or determinable payments and fixed maturity that the Bank has the positive intent and ability to hold to maturity. Any sale or reclassification of a significant amount of financial assets held to maturity not close to their maturity would normally result in the reclassification of all financial assets held to maturity as available for sale, and prevent the Bank from classifying investment securities as held to maturity for the current and the following financial years. Financial assets held to maturity include investments into debt securities.

d) Financial assets at fair value through profit or loss Financial asset at fair value through profit or loss is classified in this category only if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term for the purpose of short-term profit taking or designated as such by management at initial recognition. The Bank designates financial assets at fair value through profit or loss when: • the assets are managed, evaluated and reported internally on a fair value basis; • the designation eliminated or significantly reduced an accounting mismatch which would otherwise have arisen; or • the asset contains an embedded derivative that significantly modified the cash flows that would otherwise be required under the contract. Financial assets at fair value through profit or loss include equity securities, debt securities and investments into openended investment funds.

55

e) Other financial liabilities Other financial liabilities comprise all financial liabilities which are not at fair value through profit or loss and include amounts due to customers, due to banks and subordinated debt.

Recognition Loans and receivables, financial assets held to maturity and other financial liabilities are recognised when advanced to borrowers or received from lenders (settlement date). The Bank recognises financial assets available for sale and financial assets at fair value through profit or loss on the trade date which is the date when the Bank commits to purchase or sell the instruments.

Initial and subsequent measurement Loans and receivables and financial asset held to maturity are initially recognised at fair value. After initial recognition, loans and receivables and financial assets held to maturity are measured at amortised cost using the effective interest rate method, less any impairment. Financial assets available for sale are measured initially at their fair value plus transaction costs that are directly attributable to the acquisition or issue of the financial asset. Subsequent to initial recognition financial assets available for sale are measured at fair value, except for equity securities that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, which are stated at cost less impairment. Financial assets at fair value through profit or loss are initially recognised at fair value. All transaction costs are immediately expensed. Subsequent measurement is also at fair value. Other financial liabilities are initially measured at fair value including transaction costs. Subsequent to initial recognition the Bank measures other financial liabilities at amortised cost using the effective interest rate.

Recognition of gains and losses on subsequent measurement of financial instruments Gains and losses from changes in the fair value of available-for-sale financial assets are recognised directly in other comprehensive income until derecognition or impairment, when the cumulative amount previously recognised in other comprehensive income is transferred to the income statement. Interest income calculated using the effective interest rate method is recognised in the income statement. Foreign exchange gains and losses on available-for-sale equity instruments are part of the fair value of these instruments and are recognised in other comprehensive income. Dividend income on available-for-sale equity securities is recognised in profit or loss when the right to receive payment has been established. Gains and losses arising from a change in the fair value of financial assets at fair value through profit or loss are recognised in the income statement.

Derecognition

The Bank derecognises financial liabilities only when the financial liability ceases to exist, i.e. when it is discharged, cancelled or has expired. If the terms of a financial liability change, the Bank will cease recognising that liability and will instantaneously recognise a new financial liability with new terms and conditions.

Financial Statements

The Bank derecognises financial assets (in full or partially) when the rights to receive cash flows from the financial instrument have expired or when it loses control over the contractual rights on those financial assets. This occurs when the Bank transfers substantially all the risks and rewards of ownership to another business entity or when the rights are realised, surrendered or have expired.

56

Identification and measurement of impairment of financial assets a) Financial assets carried at amortised cost The Bank assesses at each reporting date whether there is any 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 has occurred after the initial recognition of the asset (an incurred ’loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Objective evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified for the individual financial assets in the group. For financial assets carried at amortised cost, the Bank first assesses whether objective evidence of impairment exists individually, for financial assets that are individually significant, or collectively, for financial assets that are not individually significant. Those individually significant assets which are not identified as impaired are subsequently included in the basis for collective impairment assessment. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Allowances are assessed collectively for losses on loans to customers that are not individually significant (specific provisions calculated on a collective basis) and for all loans where there is not yet objective evidence of individual impairment (collective evaluation of impairment for incurred but not reported losses or “IBNR”). For the purpose of collective evaluation of impairment the Bank uses statistical models and historical data on the probability of occurrence that causes impairment, the time required to recover and the total loss incurred, adjusted for management’s judgement as to whether the current economic and credit conditions are such that it is likely that the actual losses will be higher or lower of those calculated by historical modelling. The Bank regularly reviews the loss rate and the expected rate of recovery at each reporting date, to ensure accurate reporting. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred) discounted at the original effective interest rate of financial assets valid at the time the asset become impaired. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. For individually significant loans, impairment allowance is determined based on the sustainability of the counterparty’s business plan, its ability to improve performance once a financial difficulty has arisen, the availability of other financial support and the realisable value of collateral, and the timing of the expected cash flows. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of reversal is recognised in the income statement. When a loan is uncollectible, it is written off against the related impairment allowance account. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are recognised as a reversal of impairment losses in the income statement. For the purpose of assessing capital adequacy and, the recognition of special reserves within equity, in accordance with local regulations, the Bank also calculates provisions in accordance with the relevant regulations of the Banking Agency of Federation of Bosnia and Herzegovina ("the Agency" or "FBA"). In accordance with these regulations, the relevant placements are classified into appropriate risk groups, depending on the past due days, the financial position of the borrower and collateral; and are provided for at prescribed rates. A general provision is also calculated in accordance with these regulations at a rate of 2% on exposure not specifically impaired.

b) Financial assets available for sale The Bank assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the investment below its acquisition cost is considered in determining whether the assets are impaired.

57

If any such evidence exists for financial assets available for sale, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the income statement, is removed from other comprehensive income and recognised in the income statement. Any subsequent recovery in the fair value of an impaired available-for-sale equity security is subsequently recognised in other comprehensive income.

c) Financial assets carried at cost Financial assets carried at cost include equity securities classified as available for sale for which there is no reliable measure of fair value. The Bank assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. An impairment loss is calculated as the difference between the carrying amount of the financial asset and the present value of expected future cash flows discounted by the current market interest rate for similar financial assets. Impairment losses on such instruments, recognised in the income statement, are not subsequently reversed through the income statement.

Fair value measurement principles The Bank determines the fair value of financial assets at fair value through profit or loss based on closing bid market price at the reporting date. The fair value of equity securities classified as available for sale traded on an active market is based on closing bid prices at the reporting date for these securities. Analyses of financial instruments that are measured subsequent to initial recognition at fair value are grouped into Levels 1 to 3 as follows: • Level 1 – fair value measurements derived from quoted prices in active market; • Level 2 – fair value measurements derived from inputs other than quoted prices included in Level 1; • Level 3 – fair value measurements derived from valuation techniques that are not based on observable market data.

Specific instruments Cash and cash equivalents For the purpose of reporting cash flows, cash and cash equivalents are defined as cash, balances with the Central Bank and current accounts with other banks. Cash and cash equivalents exclude the compulsory minimum reserve with the Central Bank as these funds are not available for the Bank’s day-to-day operations. The compulsory minimum reserve with the Central Bank is a required reserve to be held by all commercial banks licensed in Bosnia and Herzegovina.

Placements with banks and obligatory reserve with the Central Bank

Loans and receivables from customers Loans to customers are presented at amortised cost net of impairment allowances to reflect the estimated recoverable amounts.

Equity securities Equity securities are classified as financial assets at fair value though profit or loss or financial assets available for sale and are carried at fair value, unless there is no reliable measure of the fair value, in which case equity securities are stated at cost, less impairment.

Financial Statements

Placements with banks and obligatory reserve with the Central Bank are classified as loans and receivables and are carried at amortised cost less impairment losses.

58

Investments in funds Investments in open cash funds are classified as financial assets at fair value through profit or loss and are carried at fair value.

Debt securities Debt securities are classified as financial assets held to maturity or financial assets at fair value through profit or loss and are carried at amortised cost or fair value, respectively.

Investments in associates and subsidiaries Investments in associates and subsidiaries are accounted at cost less impairment.

Borrowings and subordinated debt Interest-bearing borrowings and subordinated debt are classified as other financial liabilities and are recognised initially at fair value, less attributable transaction costs. Subsequent to initial recognition, these are stated at amortised cost with any difference between proceeds (net of transaction costs) and redemption value being recognised in the income statement over the period of the borrowings using the effective interest rate method.

Current accounts and deposits from banks and customers Current accounts and deposits are classified as other liabilities and initially measured at fair value plus transaction costs and subsequently stated at their amortised cost using the effective interest method.

i) Property and equipment Property and equipment are stated at historical cost less accumulated depreciation and impairment losses. The cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent cost is included in net book value or is accounted for as separate assets, depending what is applicable, only if it is probable that the future economic benefits embodied within the part will flow to the Bank and its cost can be measured reliably. The costs of day-to-day repairs are recognised in profit or loss as incurred. Depreciation is provided on all property and equipment except for land and assets in the course of construction on a straight-line basis at prescribed rates designed to write off the cost over the estimated useful lives of the assets. The estimated depreciation rates applicable in the reporting and comparative period were as follows: Computers Furniture and equipment Business premises

33.3% 7%-20% 1.3%

Depreciation method and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Gains and losses on disposal are determined by comparing proceeds with the carrying amount, and are included in the income statement as other income or operating expense.

j) Intangible assets Intangible assets are stated at cost less accumulated amortisation and impairment losses. The cost includes all expenditure that is directly attributable to the acquisition of the items. Amortisation is provided on all intangible assets except assets in the course of construction on a straight line basis at prescribed rates designed to write off the cost over the estimated useful lives of the assets. The estimated depreciation rates are as follows: Software

20%

Leasehold improvements

20%

59

Amortisation methods, the asset’s useful life and residual value are reviewed, and adjusted if appropriate, at each reporting date.

k) Impairment of non-financial assets The carrying amounts of the Bank’s non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in income statement. The recoverable amount of other assets is the greater of their value in use and fair value less cost to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, as if no impairment loss had been recognised.

l) Employee benefits Short-term benefits On behalf of its employees, the Bank pays pension and health insurance which is calculated on the gross salary paid as well as tax on salaries which are calculated on the net salary paid. The Bank pays the above contributions into public pension and health funds according to statutory rates during the course of the year. In addition, meal allowances, transport allowances and vacation bonuses are paid in accordance with local legislation. These expenses are recorded in the income statement in the period in which the salary expense is incurred. Obligations for contributions to defined contribution pension plans are recognised as an expense in income statement as incurred.

Long-term employee benefits: retirement payments The Bank pays to its employees retirement benefits upon retirement in an amount representing three times the average salary of the respective employee in the preceding tree-month period. The obligation and costs of these benefits are determined by using a projected unit credit method. The projected unit credit method considers each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation. The obligation is measured at the present value of estimated future cash flows using a discount rate that is similar to the estimated interest rate on government bonds.

m) Provisions

Provisions for liabilities and charges are maintained at the level that the Bank's management considers sufficient for absorption of incurred losses. The Management determines the sufficiency of provisions on the basis of insight into specific items, current economic circumstances risk characteristics of certain transaction categories as well as other relevant factors. Provisions are released only for such expenditure in respect of which provisions are recognised at inception. If the outflow of economic benefits to settle the obligations is no longer probable, the provision is reversed.

Financial Statements

Provisions are recognised when the Bank has a present legal or constructive obligation as a result of past events for which it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made or as required by law in the case of provisions for unidentified impairment of off-balance-sheet credit risk exposures.

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n) Share capital Issued share capital Issued share capital comprises ordinary shares and is stated in BAM at nominal value.

Regulatory reserve for credit losses The regulatory reserve for credit losses represents the excess of provisions calculated in accordance with regulations as prescribed by the Agency over impairment allowances recognised in accordance with IFRS. The reserve is presented directly within equity (as a non-distributable reserve) and until 31 December 2012 (as explained below) was created by transfers from retained earnings, recognised after approval by shareholders. Prior to 2012, the need for transfers from retained earnings to an earmarked reserve within equity (regulatory reserve for credit losses) was calculated for the whole credit risk portfolio on a net basis, thereby taking into account both instances where application of Agency regulations would have resulted in a higher provision and instances where the application of Agency regulations would have resulted in a lower provision. However, from 2012, banks are required to calculate the requirement for regulatory reserves for credit losses taking into account only instances where higher provisions would have resulted from the application of the Agency rules. Retroactive application of this change in Agency rules is not required. Based on a new decision issued by the Agency in February 2013, any increases in regulatory requirements should only be presented as a deduction of regulatory capital for the purpose of capital adequacy calculation and will not need to be recognised in equity (as a movement in equity as described above). The decision has retrospective application from 31 December 2012. Consequently, the excess of Agency provisions over IFRS-based impairment allowances determined in 2012 will not be proposed for transfer to the regulatory reserve for credit losses in 2013.

Retained earnings Retained earnings represent the accumulation of net profits after appropriations to owners and other transfers, such as transfers to regulatory reserves as described above.

Fair value reserve The fair value reserve comprises changes in fair value of financial assets available for sale.

Dividends Dividends on ordinary shares are recognised as a liability in the period in which they are approved by the Bank’s shareholders.

o) Off-balance sheet commitments and contingent liabilities In the ordinary course of business, the Bank enters into credit-related commitments which are recorded off balance sheet and primarily comprise guarantees, letters of credit, undrawn loan commitments and credit card limits. Such financial commitments are recorded in the Bank’s statement of financial position if and when they become payable.

p) Managed funds for and on behalf of third parties The Bank manages funds for and on behalf of corporate and retail clients. These amounts do not represent the Bank’s assets and are excluded from the statement of financial position. For the services rendered the Bank charges a fee.

61

4. Standards, interpretations and amendments to published standards that are not yet effective and were not used in preparation of these financial statements Several new and altered Standards and Interpretations issued by the International Accounting Standards Board and its International Financial Reporting Interpretations Committee have been authorised for issue but are not applicable to entities reporting under IFRS for periods ended 31 December 2012, and have not been applied in preparation of these separate financial statements. Most new and altered Standards and Interpretations are not relevant to the Bank’s business and will not affect the separate financial statements, except for below stated. • IFRS 9 Financial Instruments (a complete version of which has not yet been adopted and International Accounting Standards Board has an active project with certain changes related to classification and measurement as well as inclusion of certain new requirements related to impairment and hedge accounting), which replaces IAS 39 Financial Instruments: Recognition and Measurement, is effective for annual periods beginning on or after 1 January 2015; early adoption is permitted. This Standard introduces significant changes with respect to the classification and measurement of financial assets. The Bank has not yet decided on the date of the initial application of the new Standard neither it has analysed the effects of its application. • IFRS 13 Fair Value Measurement, which is effective prospectively for annual periods beginning on or after 1 January 2013, with earlier application permitted, replaces the fair value measurement guidance contained in individual IFRSs with a single source of fair value measurement guidance. It defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. IFRS 13 explains ’how’ to measure fair value when it is required or permitted by other IFRSs. The Bank will adopt IFRS 13 from 1 January 2013 and does not expect that the new Standard will have significant impact on the separate financial statements.

5. Critical accounting judgements and key sources of estimation uncertainty The Bank makes estimates and assumptions about uncertain events, including estimates and assumptions about the future. Such accounting assumptions and estimates are regularly evaluated and are based on historical experience and other factors such as the expected flow of future events that can be rationally assumed in existing circumstances, but nevertheless necessarily represent sources of estimation uncertainty. The estimation of impairment losses in the Bank’s credit risk portfolio represents the major source of estimation uncertainty. This and other key sources of estimation uncertainty, that have a significant risk of causing a possible material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below.

a) Impairment losses on loans and receivables and provisions for off-balance-sheet exposure

Impairment losses are made mainly against the carrying value of loans to corporate and retail customers (as disclosed in Note 19) and as provisions for liabilities and charges arising from off-balance-sheet exposure to customers, mainly in the form of guarantees and letters of credit (as disclosed in Note 31) and other assets (Note 26). Impairment losses are also considered for credit risk exposures to banks and for other assets not carried at fair value, where the primary risk of impairment is not credit risk. The Bank first assesses whether objective evidence of impairment exists individually for assets that are individually significant (corporate exposures) and collectively for assets that are not individually significant (retail exposures). However, assets assessed individually as unimpaired are then included in groups of assets with similar credit risk characteristics and then assessed collectively for impairment.

Financial Statements

The Bank monitors the creditworthiness of its customers on an ongoing basis. The need for impairment of the Bank’s on and off-balance sheet exposure to credit risk is assessed on a monthly basis.

62

The Bank estimates impairment losses in cases where it judges that the observable data indicates the likelihood of a measurable decrease in the estimated future cash flows of the asset or portfolio of assets. Such evidence includes delinquency in payments or other indications of financial difficulty of borrowers and adverse changes in the economic conditions in which borrowers operate or in the value or enforceability of security, where these changes can be correlated with defaults. Summary of impairment allowances ’000 BAM Impairment allowance for balance sheet exposures, including IBNR Provisions for off-balance-sheet, including IBNR

Note

31/12/ 2012

31/12/ 2011

19, 26

262,119

253,072

31

2,256

4,841

264,375

257,913

As at 31 December 2012 and 31 December 2011, the gross value of impaired loans and receivables (non-performing loans – NPL) and the rate of impairment loss recognised were as follows: 31 December 2012

31 December 2011

Corporate

Retail

Total

Corporate

Retail

Total

Gross exposure

215,786

134,556

350,342

166,457

140,394

306,851

Impairment allowance

117,158

129,345

246,503

102,764

136,087

238,851

54.3%

95.4%

70.4%

61.7%

96.9%

77.8%

Impairment rate

An increase in the impairment rate of 1 percentage point of the gross non-performing exposure presented above as at 31 December 2012, would lead to the recognition of an additional impairment loss of BAM 3,503 thousand (2011: BAM 3,068 thousand). In addition to identified losses on impaired loans, as described above, the Bank also recognises impairment losses which are known to exist at the reporting date, but which have not yet been specifically identified (“IBNR”). Amounts, for which specific impairment losses have been identified, are excluded from this calculation. The amount of IBNR as at 31 December 2012 amounted to BAM 18,131 thousand (2011: BAM 19,116 thousand) or 0.78% (2011: 0.77%) of loans and receivables from customers and 0.62% (2011: 0.61%) of total on- and off-balance-sheet credit risk exposure to customers in both cases.

b) Taxation The Bank provides for tax liabilities in accordance with the tax laws of Federation of Bosnia and Herzegovina. Tax returns are subject to the approval of the tax authorities which are entitled to carry out subsequent inspections of taxpayers’ records.

c) Regulatory requirements The Agency is entitled to carry out regulatory inspections of the Bank’s operations and to request changes to the carrying values of assets and liabilities, in accordance with the underlying regulations. In addition to impairment allowance calculated and recognised in accordance with IFRS, the Bank also calculates impairment in accordance with Agency regulations for the purpose of assessing capital adequacy and the recognition of special reserves within equity. The following table summarises impairment allowances calculated in accordance with the Agency regulations. Regulatory provisions as of 31 December 2012 are calculated in accordance with the new methodology, as explained in Note 3(n):

63

Summary of impairment allowances 31/12/ 2012

31/12/ 2011

Provisions for balance-sheet exposure (Agency)

358,023

334,912

Provisions for off-balance–sheet items (Agency)

25,779

25,444

383,802

360,356

Impairment allowances under IFRS

264,375

257,913

Excess at period end

119,427

102,443

’000 BAM

Until 2012, any increase in the excess as computed above was required to be transferred to a special regulatory reserve within equity from profit or retained earnings, upon the decision of the General Assembly. However, as explained in Note 3(n), based on a new decision issued by the Agency in February 2013 any further shortfall in regulatory provisions should be presented as a (cumulative) deduction of regulatory capital in the capital adequacy calculation but without the need for recognition within regulatory reserves in equity. As presented in the above table, total Agency provisions exceeded impairment allowances recognised under IFRS by BAM 119,427 thousand as at 31 December 2012 (31 December 2011: BAM 102,443 thousand). Out of this amount, BAM 102,443 thousand has been recognised as a regulatory reserve for credit losses within equity as at 31 December 2012 (31 December 2011: BAM 89,035 thousand). The remaining amount of BAM 16,984 thousand, which represents the current year shortfall, in line with the new Agency regulation, as explained above, will not be transferred to regulatory reserves for credit losses, but is presented as a deduction from capital in calculating capital adequacy.

d) Litigation and claims The Bank performs an individual assessment of all court cases and creates provisions in accordance with the assessment. The assessment of risks and proposal for provisions for legal cases is performed by the Legal Affairs Department, and a decision on the creation of provisions is made by the Bank’s management. As stated in Note 31, the Bank provided BAM 490 thousand (2011: BAM 585 thousand) for such cases, which management estimates as sufficient. It is not practicable for management to estimate the financial impact of changes to the assumptions based on which management assesses the need for provisions.

’000 BAM

2012

2011

115,614

115,146

68,921

84,465

Financial assets at fair value through profit or loss (mainly State)

7,338

8,695

Financial assets held to maturity (mainly State)

4,786

4,881

768

5,200

Obligatory reserve with the Central Bank

81

1,580

Other

27

27

197,535

219,994

Loans to citizens Loans to companies

Banks

Financial Statements

6. Interest income

64

7. Interest expense ’000 BAM Citizens Companies

2012

2011

35,785

36,010

7,792

8,331

Banks

17,398

26,770

Other

477

594

61,452

71,705

2012

2011

Domestic and foreign payment transactions

23,849

24,187

Credit cards

21,110

19,345

Guarantees and other off-balance-sheet exposure

10,287

10,540

FX transactions

4,460

3,665

Current account maintenance

4,221

3,249

Other

3,415

4,022

67,342

65,008

’000 BAM

2012

2011

Credit cards fees

6,745

6,063

SWIFT services

1,006

902

724

592

8. Fee and commission income ’000 BAM

9. Fee and commission expense

Central Bank services Domestic and foreign payment transactions

76

78

2,373

1,508

10,924

9,143

’000 BAM

2012

2011

Net gains from foreign exchange spot trading

9,860

10,969

Other

10. Net trading income Net foreign exchange losses from the translation of monetary assets and liabilities

(1,617)

(2,037)

Fair value adjustments of financial assets at fair value through profit or loss

(233)

(1,990)

Net loss from sale of financial assets at fair value through profit or loss

(168)

(1,425)

Net loss from sale of financial assets held to maturity

-

(920)

7,842

4,597

The net loss of BAM 920 thousand from the sale of financial assets held to maturity incurred in 2011 represents a loss on the disposal of bonds issued by the Republic of Portugal, classified as held to maturity. The Bank's decision to sell was prompted by a significant deterioration in the creditworthiness of the issuer, which had not been anticipated when the asset was acquired. In view of this, the Bank considers that the sale of the bonds, which did not represent a significant part of the held-to-maturity portfolio, did not represent a tainting of the portfolio, and accordingly, it did not reclassify its remaining held-to-maturity investments.

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11. Other operating income ’000 BAM Net gain on disposal of tangible assets Rent income Written-off liabilities Other income

2012

2011

-

2,567

1,040

886

65

443

2,128

3,330

3,233

7,226

2012

2011

44,911

47,948

2,933

319

10,828

11,687

58,672

59,954

12. Personnel expenses ’000 BAM Gross salaries Provisions for employee benefits (Note 31) Other personnel expenses

Personnel expenses include BAM 10,103 thousand (2011: BAM 11,499 thousand) of defined pension contributions paid into the public pension plan. Contributions are calculated as percentage of the gross salary paid. The Bank had 1,555 employees as at 31 December 2012 (1,593 as at 31 December 2011).

’000 BAM

2012

2011

Deposit insurance premiums

7,778

7,452

Services

6,068

7,178

Maintenance

7,766

7,073

Consultancy expenses

4,062

5,616

Telecommunication expense

4,376

5,309

Rent

4,232

4,693

Representation and marketing expense

3,266

4,158

Other taxes and dues

1,498

2,753

Material expenses

2,236

2,734

Asset insurance premiums

2,760

2,400

Energy

2,311

2,372

Insurance expense for employees

118

1,224

Education

348

493

Transportation

182

203

Donations

160

149

97

-

Net loss on disposal of tangible assets Other expenses

5,025

4,118

52,283

57,925

Financial Statements

13. Administrative expenses

66

14. Impairment losses and provisions ’000 BAM

2012

2011

Loans and advances to customers (Note 19)

43,895

39,164

Provisions for off-balance-sheet items (Note 31)

(2,585)

673

Provisions for court cases (Note 31)

(95)

585

Provisions for other assets (Note 26)

2,235

91

43,450

40,513

15. Income tax Income tax recognised in the income statement includes current and deferred tax. The current rate of income tax amounts 10% (2011: 10%). Income tax expense recognised in the income statement: ’000 BAM

2012

2011

Current income tax

6,221

5,798

177

(377)

6,398

5,421

Deferred income tax (Note 25)

Reconciliation of income tax expense: ’000 BAM

2012

2011

42,926

49,274

Tax calculated at rate of 10%

4,293

4,928

Non-deductible expenses

1,536

1,272

(633)

(780)

-

1

Profit before income tax

Non-taxable income Transfer pricing Under-provisioning of tax from previous periods

1,202

-

Income tax expense

6,398

5,421

Average effective income tax rate

14.9%

11.0%

16. Cash and cash equivalents ’000 BAM

2012

2011

Current account with the Central Bank

362,430

572,763

Current accounts with other banks

112,395

83,461

Cash on hand in domestic currency

51,935

41,034

Cash on hand in foreign currency

24,880

19,562

37

48

551,677

716,868

Cheques in foreign currency

67

17. Obligatory reserve with the Central Bank The obligatory reserve represents amounts required to be deposited with the Central Bank of B&H. The obligatory reserve is calculated on the basis of deposits and borrowings taken regardless of currency. The basis for calculation of obligatory reserve excludes: • borrowings taken from foreign entities; • funds from governments of B&H entities for development projects. Required obligatory reserve rates are: • 10% (2011: 10%) of deposits and borrowings with maturity of up to one year (short-term deposits and borrowings) • 7% (2011: 7%) on deposits and borrowings with maturity over one year (long-term deposits and borrowings).

18. Placements with other banks ’000 BAM OECD countries

2012

2011

235,652

225,917

235,652

225,917

Placements with other banks are presented including accrued interest in the amount of BAM 5 thousand (31 December 2011: BAM 5 thousand). During 2012, the interest rates for placements in EUR were within the range from 0.01% p.a. to 0.60% p.a. (2011: from 0.12% p.a. to 1.62% p.a.) and for placements in USD from 0.05% p.a. to 0.78% p.a. (2011: from 0.01% p.a. to 1.00% p.a.). Interest rates on placements in other currencies were from 0.00% p.a. to 4.45% p.a. (2011: from 0.02% p.a. to 5.10% p.a.).

19. Loans and advances to customers ’000 BAM

2012

2011

688,350

708,216

3,703

7,955

692,053

716,171

Short-term loans: in domestic currency in foreign currency

in domestic currency in foreign currency

Less: allowance for impairment losses

205,687

237,967

1,526,011

1,605,130

1,731,698

1,843,097

2,423,751

2,559,268

(259,383)

(252,538)

2,164,368

2,306,730

Loans and receivables include interest receivable, comprising uncollected due interest, and accrued interest not yet due, with a carrying value of BAM 16,473 thousand (31 December 2011: BAM 21,966 thousand). The movements in the allowance for impairment losses are summarised as follows:

Financial Statements

Long-term loans:

68

’000 BAM Balance as at 1 January Increase in allowances (Note 14)

2012

2011

252,538

213,374

43,895

39,164

Write-offs

(37,050)

-

Balance as at 31 December

259,383

252,538

Annual interest rates for granted loans in 2012 and 2011 are summarised as follows: 31 December 2012

31 December 2011

’000 BAM

Annual interest rates

’000 BAM

Annual interest rates

Companies

688,555

2.50% - 18.00%

718,072

5.53% - 18.00%

Citizens

205,482

2.00% - 18.00%

228,111

2.00% - 18.00%

451,407

0.00% - 16.00%

567,477

0.00% - 16.00%

1,078,307

4.63% - 10.00%

1,045,608

5.31% - 12.00%

Domestic currency

Foreign currency (including foreign currency clause) Companies Citizens

2,423,751

2,559,268

20. Financial assets available for sale ’000 BAM

2012

2011

121

3,233

68

66

189

3,299

Equity instruments Listed or quoted Unlisted or unquoted

Analysis of financial assets available for sale according to fair value levels Analysis of financial assets available for sale (other than financial instruments carried at the cost) according to fair value levels is presented in the table below:

31 December 2012 ’000 BAM Equity securities listed or quoted

31 December 2011 ’000 BAM Equity securities listed or quoted

Level 1

Level 2

Level 3

Total

121

-

-

121

121

-

-

121

Level 1

Level 2

Level 3

Total

3,233

-

-

3,233

3,233

-

-

3,233

69

Analysis of financial assets available for sale according to external ratings Analysis of financial assets available for sale according to Fitch's ratings is presented in the table below: 31 December 2012 ’000 BAM Equity securities

31 December 2011 ’000 BAM Equity securities

AAA/AA-

A+/A-

BBB-

B+/B-

Unrated

Total

-

-

-

-

121

121

-

-

-

-

121

121

AAA/AA-

A+/A-

BBB-

B+/B-

Unrated

Total

-

-

-

-

3,233

3,233

-

-

-

-

3,233

3,233

21. Financial assets at fair value through profit or loss ’000 BAM

2012

Equity securities, listed Government bonds, listed Investment in open-ended investment funds – related party, non listed

2011

504

996

154,337

153,011

3,888

4,890

158,729

158,897

Analysis of debt securities at fair value through profit and loss on a geographical basis

’000 BAM

2012

2011

Romania

88,300

86,442

France

14,950

14,787

Germany

13,022

13,424

Belgium

11,480

11,271

Finland

10,289

10,771

The Netherlands

10,312

10,634

Italy

3,939

3,691

Slovenia

2,045

1,991

154,337

153,011

Financial Statements

Government bonds at fair value through profit or loss can be analysed on a geographical basis as follows:

70

Analysis of financial assets at fair value through profit or loss according to fair value levels Analysis of financial assets at fair value through profit or loss according to fair value levels is presented in the table below: 31 December 2012 ’000 BAM Equity securities, listed Government bonds, listed Investment in open-ended investment funds

31 December 2011 ’000 BAM Equity securities, listed Government bonds, listed Investment in open-ended investment funds

Level 1

Level 2

Level 3

Total

504

-

-

504

154,337

-

-

154,337

3,888

-

-

3,888

158,729

-

-

158,729

Level 1

Level 2

Level 3

Total

996

-

-

996

153,011

-

-

153,011

4,890

-

-

4,890

158,897

-

-

158,897

Analysis of financial assets at fair value through profit or loss according to external ratings An analysis of financial assets at fair value through profit or loss according to Fitch’s ratings is presented in the table below: 31 December 2012 ’000 BAM Equity securities Government bonds Investment in open-ended investment funds

31 December 2011 ’000 BAM Equity securities Government bonds Investment in open-ended investment funds

AAA/AA-

A+/A-

BBB-

B+/B-

Unrated

Total

-

-

-

-

504

504

60,053

5,984

88,300

-

-

154,337

-

-

-

-

3,888

3,888

60,053

5,984

88,300

-

4,392

158,729

AAA/AA-

A+/A-

BBB-

B+/B-

Unrated

Total

-

-

-

-

996

996

62,878

3,691

-

-

86,442

153,011

-

-

-

-

4,890

4,890

62,878

3,691

-

-

92,328

158,897

2012

2011

BH entities treasury bills

18,331

29,500

BH entities government bonds

23,915

12,576

104,323

96,014

146,569

138,090

22. Financial assets held to maturity ’000 BAM

Other sovereign bonds

Financial assets held to maturity presented above include accrued interest in the amount of BAM 1,857 thousand (31 December 2011: BAM 1,546 thousand).

71

Financial assets held to maturity can be analysed on a geographical basis as follows: ’000 BAM

2012

2011

Austria

41,806

44,935

France

31,603

-

The Federation of Bosnia and Herzegovina

24,857

12,576

Republika Srpska

17,389

29,500

Italy

10,950

12,471

The Netherlands

10,071

10,132

Belgium

9,893

20,585

Slovenia

-

7,891

146,569

138,090

The annual interest rate on bonds held to maturity in 2012 was from 2.50% to 6.10% (2011: from 2.50% to 8.00%).

Analysis of financial assets held to maturity according to external ratings An analysis of financial assets held to maturity according to Fitch's ratings is presented in the table below: 31 December 2012 ’000 BAM

AAA/AA-

A+/A-

BBB-

B+/B-

Unrated

Total

BH entities treasury bills

-

-

-

18,331

-

18,331

BH entities government bonds

-

-

-

23,915

-

23,915

Other sovereign bonds

31 December 2011 ’000 BAM

93,373

10,950

-

-

-

104,323

93,373

10,950

-

42,246

-

146,569

AAA/AA-

A+/A-

BBB-

B+/B-

Unrated

Total

-

-

-

29,500

-

29,500

BH entities treasury bills BH entities government bonds Other sovereign bonds

-

-

-

12,576

-

12,576

83,543

12,471

-

-

-

96,014

83,543

12,471

-

42,076

-

138,090

% of share

2012

2011

’000 BAM

Industry

Raiffeisen Special Assets Company d.o.o. Sarajevo

Financial advisory services

100%

1,983

1,983

Raiffeisen INVEST društvo za upravljanje fondovima d.o.o. Sarajevo

Fund management

100%

645

400

Raiffeisen CAPITAL a.d. Banja Luka

Agent for shares /securities

100%

53

53

2,681

2,436

Financial Statements

23. Investments in subsidiaries

72

Financial information about the Bank’s subsidiaries as of 31 December 2012 are as follows:

Raiffeisen Special Assets Company d.o.o. Sarajevo

Total assets

Owner’s equity / registered capital

Total equity

Revenue

Profit / (loss) for the year

3,334

1,983

2,271

308

160

Raiffeisen INVEST društvo za upravljanje fondovima d.o.o. Sarajevo

290

645

281

86

289

Raiffeisen CAPITAL a.d. Banja Luka

340

355

48

130

(5)

2012

2011

2,436

2,288

245

400

Acquisition of the share in Raiffeisen CAPITAL a.d. Banja Luka

-

53

Effect of merger of Raiffeisen BROKERS d.o.o. Sarajevo

-

(507)

Effect of change of accounting policy – Release of provisions

-

202

2,681

2,436

% of share

2012

2011

8,173

8,173

Movement in investments in subsidiaries is as follows: ’000 BAM Balance as at 1 January Contributions by the Bank/Acquisition of the share in Raiffeisen INVEST društvo za upravljanje fondovima d.o.o. Sarajevo

Balance as at 31 December

24. Investments in associates ’000 BAM

Industry

Raiffeisen LEASING d.o.o. Sarajevo

Leasing

49.00%

RL Assistance Member of Raiffeisen Group d.o.o.

Insurance broker

50.00%

2

-

8,175

8,173

Financial information about the Bank’s associate as of 31 December 2012 was as follows:

Raiffeisen LEASING d.o.o. Sarajevo RL Assistance Member of Raiffeisen Group d.o.o.

Total assets

Owner’s equity / registered capital

Total equity

Revenue

Profit / (loss) for the year

244,728

17,774

19,146

24,731

1,372

1,761

4

1,661

2,098

1,657

2012

2011

8,173

8,173

2

-

8,175

8,173

Movement in investments in associates is as follows: ’000 BAM Balance as at 1 January Acquisition of the share in RL Assistance Member of Raiffeisen Group d.o.o. Balance as at 31 December

73

25. Deferred tax assets Movements in temporary differences of deferred tax assets in income statement are presented as follows: ’000 BAM Balance as at 1 January (Decrease)/increase in deferred tax assets (Note 15) Balance as at 31 December

2012

2011

846

469

(177)

377

669

846

The Bank recognises deferred tax assets based on temporary differences between the tax value and carrying value of loan origination fees.

26. Other assets ’000 BAM

2012

2011

Receivables from spot FX transactions

5,560

9,295

Receivables from credit card operations

8,302

8,660

Prepayments

1,439

2,467

Receivables from the tax authorities

2,366

2,070

Accrued fees

1,514

1,460

Other assets

4,772

4,794

23,953

28,746

(2,736)

(534)

21,217

28,212

2012

2011

534

443

2,235

91

Less: allowance for impairment losses

’000 BAM Balance as at 1 January Net charge to income statement (Note 14) Write-offs Balance as at 31 December

(33)

-

2,736

534

Financial Statements

The movements in allowance for impairment losses for other assets are summarized as follows:

74

27. Property and equipment 2012 ’000 BAM

Land and buildings

Vehicles

Office equipment

Assets in the course of construction

Total

Cost As at 1 January 2012

134,038

1,698

46,224

2,115

184,075

Additions

-

-

-

5,518

5,518

Transfer from small tools and consumables in use

-

-

2,558

-

2,558

Transfers

1,221

348

3,671

(5,240)

-

-

(302)

(2,750)

(26)

(3,078)

135,259

1,744

49,703

2,367

189,073

As at 1 January 2012

5,068

1,080

29,331

-

35,479

Depreciation charge for the year

7,485

Disposals and write-offs As at 31 December 2012 Accumulated depreciation

1,659

222

5,604

-

Transfer from small tools and consumables in use

-

-

2,378

-

2,378

Disposals and write-offs

-

(247)

(2,583)

-

(2,830)

6,727

1,055

34,730

-

42,512

As at 1 January 2012

128,970

618

16,893

2,115

148,596

As at 31 December 2012

128,532

689

14,973

2,367

146,561

As at 31 December 2012 Net carrying value

Assets in the course of construction as at 31 December 2012 represents buildings and equipment, not yet brought into use. 2011 ’000 BAM

Land and buildings

Vehicles

Office equipment

Assets in the course of construction

Total

Cost As at 1 January 2011

100,247

1,617

44,191

34,191

180,246

Additions

-

-

-

6,836

6,836

Increase due to merger of Raiffeisen BROKERS d.o.o. Sarajevo (Note 37)

-

30

162

-

192

Transfer from small tools and consumables in use Transfers Disposals and write-offs

-

-

701

-

701

34,814

246

3,611

(38,671)

-

(1,023)

(195)

(2,441)

(241)

(3,900)

134,038

1,698

46,224

2,115

184,075

As at 1 January 2011

3,624

929

25,552

-

30,105

Depreciation charge for the year

1,464

234

5,849

-

7,547

Increase due to merger of Raiffeisen BROKERS d.o.o. Sarajevo (Note 37)

-

7

127

-

134

Transfer from small tools and consumables in use

-

-

146

-

146

As at 31 December 2011 Accumulated depreciation

Disposals and write-offs As at 31 December 2011

(20)

(90)

(2,343)

-

(2,453)

5,068

1,080

29,331

-

35,479

96,623

688

18,639

34,191

150,141

128,970

618

16,893

2,115

148,596

Net carrying value As at 1 January 2011 As at 31 December 2011

Assets in the course of construction as at 31 December 2011 represents buildings and equipment, not yet brought into use.

75

28. Intangible assets 2012 ’000 BAM

Software

Licence

Leasehold improvement

7,751

7,407

2,065

Assets in the course of construction

Total

770

17,993

Cost As at 1 January 2012 Additions

-

-

-

1,634

1,634

Transfers

1,061

607

88

(1,756)

-

-

-

(389)

-

(389)

8,812

8,014

1,764

648

19,238

As at 1 January 2012

4,319

4,638

1,739

-

10,696

Amortisation charge for the year

1,140

1,168

79

-

2,387

-

-

(389)

-

(389)

5,459

5,806

1,429

-

12,694

As at 1 January 2012

3,432

2,769

326

770

7,297

As at 31 December 2012

3,353

2,208

335

648

6,544

Disposals and write-offs As at 31 December 2012 Accumulated depreciation

Disposals and write-offs As at 31 December 2012 Net carrying value

Assets in the course of construction as at 31 December 2012 represents software, not yet brought into use.

2011 ’000 BAM

Assets in the course of construction

Total

Software

Licence

Leasehold improvement

5,256

6,564

1,760

2,119

15,699

-

-

-

2,179

2,179

158

-

-

-

158

2,339

843

346

(3,528)

-

(2)

-

(41)

-

(43)

7,751

7,407

2,065

770

17,993

3,328

3,453

1,760

-

8,541

903

1,185

20

-

2,108

90

-

-

-

90

Cost As at 1 January 2011 Additions Increase due to merger of Raiffeisen BROKERS d.o.o. Sarajevo (Note 37) Transfers Disposals and write-offs As at 31 December 2011

As at 1 January 2011 Amortisation charge for the year Increase due to merger of Raiffeisen BROKERS d.o.o. Sarajevo (Note 37) Disposals and write-offs

(2)

-

(41)

-

(43)

4,319

4,638

1,739

-

10,696

As at 1 January 2011

1,928

3,111

-

2,119

7,158

As at 31 December 2011

3,432

2,769

326

770

7,297

As at 31 December 2011 Net carrying value

Assets in the course of construction as at 31 December 2011 represents software, not yet brought into use.

Financial Statements

Accumulated depreciation

76

29. Due to banks ’000 BAM

2012

2011

344,252

458,823

3,507

4,094

347,759

462,917

937

499

70

106

in domestic currency

2,209

259

in foreign currency

1,955

1,854

1,039

2,369

6,210

5,087

353,969

468,004

Borrowings Long-term borrowings from foreign banks and other financial institutions from domestic banks and other financial institutions

Deposits Current accounts in domestic currency in foreign currency Term deposits Short-term deposits

Long-term deposits in domestic currency

Current accounts, deposits from banks and borrowings are presented including accrued interest in the amount of BAM 1,069 thousand (31 December 2011: BAM 1,677 thousand). The portfolio of long-term borrowings is divided into portfolios with fixed and with variable interest rates (linked to EURIBOR/EUROLIBOR). Interest rates on total borrowings were in the range from 1.00% to 4.95% p.a. (fixed), and from EURIBOR+0.095% to EURIBOR+5.75% (variable). During 2011, interest rates on total borrowings were in the range from 1.00% to 4.95% p.a. (fixed) and from EURIBOR+0.095% p.a. to EURIBOR+5.75% p.a. (variable).

77

30. Due to customers ’000 BAM

2012

2011

in domestic currency

347,288

333,187

in foreign currency

312,287

318,049

659,575

651,236

in domestic currency

377,909

720,886

in foreign currency

327,825

119,811

705,734

840,697

1,365,309

1,491,933

in domestic currency

199,541

159,959

in foreign currency

977,905

961,171

1,177,446

1,121,130

A vista deposits: Citizens:

Legal entities:

Term deposits: Citizens:

Legal entities: in domestic currency in foreign currency

65,529

150,829

142,079

180,550

207,608

331,379

1,385,054

1,452,509

2,750,363

2,944,442

Due to customers are presented including accrued interest in the amount of BAM 131 thousand (31 December 2011: 242 thousand). During 2012 and 2011, annual interest rates on deposits from customers were as follows: • a vista deposits in domestic currency – from 0.00% to 0.25% p.a. (2011: from 0.00% to 0.10% p.a.), • a vista deposits in foreign currency – from 0.00% to 1.75% p.a. (2011: from 0.00% to 1.75% p.a.), • short-term deposits – from 0.00% to 3.60% p.a. (2011: from 0.00% to 3.60% p.a.), • long-term deposits – from 0.00% to 4.20% p.a. (2011: from 0.00% to 4.50% p.a.).

’000 BAM

2012

2011

Provisions for off-balance-sheet items

2,256

4,841

Provisions for employee benefits

4,362

2,065

490

585

7,108

7,491

Provisions for court cases

Movement in provisions for liabilities and charges were as follows:

Financial Statements

31. Provisions for liabilities and charges

78

Provisions for retirement benefits

Provisions for unused holiday

Provisions for court cases

Provisions for off-balancesheet items

Total

Balance as at 1 January 2011

2,635

1,499

-

4,168

8,302

Net charge to income statement

389

(70)

585

673

1,577

Provisions used during the year

(2,388)

-

-

-

(2,388)

Balance as at 31 December 2011

636

1,429

585

4,841

7,491

Balance as at 1 January 2012

636

1,429

585

4,841

7,491

Net charge to income statement

3,019

(86)

(95)

(2,585)

253

Provisions used during the year Balance as at 31 December 2012

(636)

-

-

-

(636)

3,019

1,343

490

2,256

7,108

Except for provisions for retirement benefits and unused holiday which are presented within personnel expenses (Note 12), provisions for liabilities and charges are presented within impairment losses and provisions (Note 14).

32. Other liabilities ’000 BAM

2012

2011

Liabilities for items in the course of settlement

7,050

8,084

Deferred income

4,818

5,209

Liabilities from credit card operations

5,166

4,264

Liabilities for spot FX transactions

5,056

867

Liabilities toward suppliers

3,674

4,076

Employee payables

2,909

3,877

Other tax liabilities

89

56

Liabilities towards shareholders

13

11

1,359

2,723

30,134

29,167

2012

2011

Commercial banks – related parties

26,274

45,858

Development banks

19,683

19,626

45,957

65,484

Other liabilities

33. Subordinated debt ’000 BAM

Subordinated debt received from related party commercial banks relates to four active loans, received from June 2003 to September 2007, in the total amount of BAM 55,471 thousand. These loans mature from March 2013 to September 2014, and are repayable in semi-annual instalments. Subordinated debt from development banks relates to one loan received in May 2008, in the total amount of BAM 19,558 thousand, repayable in semi-annual instalments and with maturity date in September 2015. Interest rates of subordinated loans are in the range from EURIBOR+2% to EURIBOR+2.8%. Subject to the approval of the Agency, subordinated debt may be used as additional capital for regulatory purposes.

79

34. Share capital The shareholder structure of the Bank as at 31 December 2012 and 31 December 2011 was as follows. 31 December 2012 Shareholders Raiffeisen Bank International AG, Vienna, Austria Raiffeisen SEE Region Holding GmbH, Vienna, Austria (previously: Millenia Beteiligungsverwaltungs GmbH, Graz, Austria) Other shareholders Total

31 December 2011

No. of shares

Amount ’000 BAM

%

No. of shares

Amount '000 BAM

%

921,016

230,254

96.99

921,016

230,254

96.99

28,488

7,122

3.00

28,488

7,122

3.00

48

12

0.01

48

12

0.01

949,552

237,388

100.00

949,552

237,388

100.00

Share capital comprises 949,552 ordinary shares with a nominal value of BAM 250 each (2011: 949,552 shares).

35. Commitments and contingencies In the ordinary course of business, the Bank enters into credit related commitments which are recorded in off-balancesheet accounts and primarily comprise guarantees, letters of credit and undrawn loan commitments. ’000 BAM

2012

2011

303,822

325,665

Commitments Framework agreements Unused portion of overdraft loans

153,916

176,413

457,738

502,078

Performance bonds

202,710

207,460

Payment guarantees

132,304

140,969

21,278

20,709

356,292

369,138

814,030

871,216

Letters of credit

Total commitments and contingencies

Financial Statements

Contingent liabilities

80

36. Managed funds The Bank manages assets on behalf of third parties. These assets are recorded separately from the Bank’s assets. For its services, the Bank charges a fee amounting to 1% of the total amount under management. ’000 BAM

2012

2011

337

362

Government

5,701

5,953

Companies

4,518

4,636

72

82

10,628

11,033

Loans to companies

3,884

3,912

Loans to citizens

6,744

7,121

10,628

11,033

Liabilities Citizens

Other

Assets

37. Business combination with Raiffeisen BROKERS d.o.o. Sarajevo A previously wholly-owned subsidiary of the Bank, Raiffeisen BROKERS d.o.o. Sarajevo, was merged into the Bank with effect from 1 May 2011, as of which date, the Bank assumed the net liabilities of the merged subsidiary in its accounting records as follows: ’000 BAM Tangible and intangible assets

01/05/ 2011 278

Investments in subsidiary

53

Financial assets available for sale

48

Trade and other receivables

3

Cash and cash equivalents

49

Total assets Borrowings Trade and other payables Net liabilities

431 (1,540) (17) (1,126)

The effect of the merger on the Bank’s equity at the date of merger is as follows: Elimination of cost of investment in subsidiary Net liabilities acquired on merger

(507) (1,126) (1,633)

The Bank chose not to restate its accounting records to include the income and expense of the merged subsidiary for the four months to 30 April 2011 in the Bank’s income statement.

81

38. Related party transactions The Bank is majority owned by Raiffeisen Bank International AG (its immediate parent) which in turn is majority owned by Raiffeisen Zentralbank AG (the Bank’s ultimate parent). The Bank considers that it has an immediate related-party relationship with its ultimate parent and affiliates thereof, including the Bank’s direct subsidiaries and associates; Supervisory Board members, Management Board members and other executive management (together “key management personnel”); close family members of key management personnel; and entities controlled, or significantly influenced by key management personnel and their close family members. Related party transactions are part of the Bank’s regular operations. An overview of related party balances as at 31 December 2012 and 31 December 2011 and transactions in 2012 and 2011 is presented below: ’000 BAM

2012

2011

Raiffeisenlandesbank Oberösterreich AG, Linz

50,442

52,807

Raiffeisenlandesbank Niederösterreich-Wien AG, Vienna

19,558

19,558

2,755

2,350

13,324

25,929

2,467

6,532

1,120

1,119

2

1

417

9,077

Receivables Placements with other banks:

Raiffeisen Bank International AG, Vienna Cash and cash equivalents: Raiffeisen Bank International AG, Vienna Raiffeisenbank Austria d.d. Zagreb Loans and advances to customers: Raiffeisen SAC d.o.o. Sarajevo Raiffeisen INVEST d.o.o. Sarajevo Other receivables: Raiffeisen Bank International AG, Vienna Raiffeisen LEASING d.o.o. Sarajevo Raiffeisenbank Austria d.d. Zagreb Raiffeisen Banka d.d. Maribor

3

32

993

5

1

1

91,082

117,411

16,974

39,823

-

1,937

Payables Borrowings: Raiffeisen Bank International AG, Vienna Raiffeisenlandesbank Oberösterreich AG, Linz Subordinated debt: Raiffeisen Bank International AG, Vienna Raiffeisenlandesbank Oberösterreich AG, Linz Raiffeisen-Landesbank Steiermark AG, Graz

5,690

19,256

10,953

13,845

9,535

12,757

Raiffeisen Bank International AG, Vienna

145

-

12,930

6,846

Raiffeisen SAC d.o.o. Sarajevo

678

1,135

Raiffeisen INVEST d.o.o. Sarajevo

196

286

Raiffeisen Banka d.d. Maribor

19

19

Raiffeisenbank Austria d.d. Zagreb

55

13

Raiffeisen LEASING d.o.o. Sarajevo

Other liabilities Centralised Raiffeisen International Services & Payments

45

50

Raiffeisenbank Austria d.d. Zagreb

5

15

Raiffeisen SAC d.o.o. Sarajevo

-

12

Raiffeisen Trening centar d.o.o. Zagreb

-

10

57,225

96,004

Financial Statements

Due to banks – deposits:

82

’000 BAM

2012

2011

101

699

Income Interest income: Raiffeisen Bank International AG, Vienna Raiffeisen SAC d.o.o. Sarajevo

62

61

Raiffeisen LEASING d.o.o. Sarajevo

7

24

Raiffeisenlandesbank Oberösterreich AG, Linz

1

-

Raiffeisenbank Austria d.d. Zagreb

5

-

163

135

Raiffeisenbank Austria d.d. Zagreb

49

67

Raiffeisen LEASING d.o.o. Sarajevo

36

48

Raiffeisen INVEST d.o.o. Sarajevo

Fee and commission income: Raiffeisen Bank International AG, Vienna

49

-

Raiffeisen Banka d.d. Maribor

1

-

Raiffeisen SAC d.o.o. Sarajevo

2

-

Raiffeisen LEASING d.o.o. Sarajevo

26

553

Raiffeisen Bank International AG, Vienna

15

21

Raiffeisen SAC d.o.o. Sarajevo

4

15

Raiffeisen Trening centar d.o.o. Zagreb

-

3

Raiffeisen Banka d.d. Maribor

6

1

Raiffeisen INVEST d.o.o. Sarajevo

5

-

532

1.627

Other operating income:

Expenses Interest expenses: Raiffeisen Bank International AG, Vienna

1,307

2,926

Raiffeisenlandesbank Oberösterreich AG, Linz

489

650

Raiffeisen-Landesbank Steiermark AG, Graz

463

534

41

12

Raiffeisen SAC d.o.o. Sarajevo

9

9

Raiffeisen INVEST d.o.o. Sarajevo

3

-

-

1

34

-

1,496

2,635

2,742

3,033

-

1,048

Raiffeisen LEASING d.o.o. Sarajevo

261

528

Raiffeisen Trening centar d.o.o. Zagreb

159

200

Raiffeisen SAC d.o.o. Sarajevo

150

168

49

-

7,203

11,744

Raiffeisen LEASING d.o.o. Sarajevo

Fee and commission expenses: Raiffeisen Banka d.d. Maribor Raiffeisen Bank International AG, Vienna Consulting services: Raiffeisen Bank International AG, Vienna Other expenses: Raiffeisen Bank International AG, Vienna Centralised Raiffeisen International Services & Payments

Raiffeisenbank Austria d.d. Zagreb

83

Remuneration paid to Management Board and other key management personnel: ’000 BAM

2012

2011

Net salaries

3,180

3,750

Salary taxes and contributions

1,933

2,266

Other benefits

1,577

2,098

760

1,265

7,450

9,379

Taxes and contributions on other benefits

There were no transactions with the members of the Supervisory Board during the year, nor in 2011.

39. Financial risk management The Bank’s activities expose it to a variety of financial risks: credit risk, liquidity risk, market risk and operating risk. Market risk includes currency risk, interest rate risk and price risk. This note presents information about the Bank’s exposure to each of the above risks, the Bank’s objectives, policies and processes for measuring and managing risk, and the Bank’s management of capital.

Risk management framework The Bank’s Management Board has overall responsibility for the establishment and oversight of the Bank’s risk management framework. The Management Board has established the Bank’s Asset and Liability Management Committee (ALCO), which is responsible for developing and monitoring Bank’s risk management policies. The Bank’s risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Bank’s activities. The Bank, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Bank’s Audit Committee oversees how management monitors compliance with the Bank’s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Bank. The Bank Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Bank’s Audit Committee.

39.1 Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Bank.

Credit risk is by far the most important risk category in the Bank. It is analysed and monitored both on an individual loan and customer basis as well as on a portfolio basis. Credit risk management and lending decisions are based on the respective credit risk policies, credit risk manuals, and the corresponding tools and processes which have been developed for this purpose. The internal control system for credit risks includes different types of monitoring measures, which are tightly integrated into the work flow – from the customer’s initial credit application, to the Bank’s credit approval, and finally to the repayment of the loan. The limits of credit risk exposure are determined in relation to the Bank’s regulatory capital. In order to manage the level of credit risk, the Bank deals with counterparties of good credit standing, and when appropriate, obtains collateral.

Financial Statements

Management of credit risk

84

The choice of collateral instruments for covering the Bank’s receivables depends on: • The assessment of the borrower’s credit standing • Risk evaluation of the lending product itself • Evaluation of the value of the offered collateral • External regulations The Bank holds collateral against loans and advances to customers in the form of mortgages and other securities over assets and guarantees. Eligible forms of collateral are defined in the Bank’s collateral catalogue and evaluation guidelines for collateral. The collateral value is calculated according to specified methods which include standardised calculation formulas based on market values, predefined minimum discounts, and expert assessments.

Maximum exposure to credit risk before collateral held or other credit enhancement ’000 BAM

Maximum credit risk exposure Net exposure

Commitments / guarantees issued

Total

Estimated value of collateral

Current accounts with the Central Bank and other banks

474,825

-

474,825

-

Obligatory reserve with the Central Bank

238,559

-

238,559

-

Placements with other banks

235,652

38,266

273,918

-

15,549

326

15,875

996

770,432

515,486

1,285,918

703,185

31 December 2012

Loans and advances to/guarantees and commitments on behalf of customers Public sector Corporate – large clients Corporate – SMEs

135,157

75,433

210,590

125,187

Retail – individuals

1,138,475

146,049

1,284,524

499,872

98,344

37,790

136,134

56,120

Retail – micro enterprises Other

6,411

680

7,091

109

Debt securities at fair value through profit or loss

154,337

-

154,337

-

Financial assets held to maturity

146,569

-

146,569

-

3,414,310

814,030

4,228,340

1,385,469

Current accounts with the Central Bank and other banks

656,224

-

656,224

-

Obligatory reserve with the Central Bank

266,540

-

266,540

-

Placements with other banks

225,917

29,835

255,752

-

31 December 2011

Loans and advances to/guarantees and commitments on behalf of customers Public sector

26,953

7,533

34,486

1,246

Corporate – large clients

890,633

574,064

1,464,697

932,901

Corporate – SMEs

111,301

81,183

192,484

151,538

Retail – individuals

1,162,415

137,175

1,299,590

399,345

108,243

40,963

149,206

64,072

7,185

463

7,648

44

Debt securities at fair value through profit or loss

153,011

-

153,011

-

Financial assets held to maturity

138,090

-

138,090

-

3,746,512

871,216

4,617,728

1,549,146

Retail – micro enterprises Other

85

For balance-sheet items, the exposures set out above are based on the net carrying amounts as reported in the statement of financial position. The above table represents the maximum credit risk exposure of the Bank as at 31 December 2012 and 31 December 2011, without taking into account any collateral held or other credit enhancements attached.

Problem loan management The credit portfolio and individual borrowers are subject to constant monitoring. The main purpose of monitoring is to ensure that the borrower meets the terms and conditions of the contract, as well as following the obligor’s economic development. Such a review is conducted at least once annually in the corporate (non-retail) segment. This includes a client rating review and the re-evaluation of financial and tangible collateral. Problem loans (where debtors have or might run into material financial difficulties or a delayed payment is expected) need special treatment. The Problem Loan Committee is responsible for making decisions on problematic exposures. If the need for intensified treatment and workout is identified, then problem loans are assigned either to a designated specialist or to a restructuring unit (workout department). Work-out units play a decisive role in assessing the extent of provisions required for impairment losses (write-offs, value adjustments, provisioning). Their early involvement can help reduce losses resulting from problem loans. Problem loan management standards in the retail area comprise the whole restructuring and collection process for private individuals and micro enterprises. A restructuring guideline defines the Bank’s restructuring framework including uniform strategy, organisation, methods, monitoring and controlling. In the workout process customers are classified into three categories “early,” “late,” and “recovery,” for which a standardised customer handling process is defined.

Restructuring of loans During the year the Bank rescheduled certain loans to clients aimed at achieving an improvement of their final recoverability. Rescheduling is mainly performed in response to initial deterioration of clients’ financial position or for the prevention of further such deterioration. Following the restructuring the loans remain graded as performing loans unless or until there are clear signs of default. Whenever possible, the Bank’s position was improved by obtaining additional instruments of collateral.

Non-performing loans and provisioning A default which results in a non-performing loan (NPL) is internally defined as an event which causes a specific debtor to be unlikely to be able to pay its credit obligations to the Bank in full, or where the debtor is overdue more than 90 days on any material credit obligation. The Bank has defined twelve default indicators which are used to identify a default event in the corporate (non-retail) segment. These include insolvency or similar proceedings of a customer, if credit risk management has judged a customer account receivable to be not wholly recoverable, or the workout unit is considering stepping in to help a company restore its financial soundness. Provisions for impairment losses are formed on the basis of Group-wide standards according to IFRS accounting principles and cover all identifiable credit risks. In the corporate (non-retail) segment, the Problem Loan Committee decides on the amount of individual loan loss provisions. In the retail area, provisioning is performed by Retail Risk Department, which computes loan loss provisions according to defined calculation schemes on a monthly basis. Identification and measurement of impairment losses is explained in detail in Note 3(h).

Financial Statements

The tables below set out information about the credit quality of financial assets and the allowance for impairment losses held by the Bank.

86

Financial assets ’000 BAM

Unimpaired assets

Impaired assets

Total gross carrying amount

Neither past due nor impaired

Past due but not impaired

Collectively impaired assets

Individually impaired assets (total carrying amount)

Current accounts with the Central Bank and other banks

474,825

474,825

-

-

-

-

474,825

Obligatory reserve with the Central Bank

238,559

238,559

-

-

-

-

238,559

Placements with other banks

235,652

235,652

-

-

-

-

235,652

15,549

15,549

-

-

-

-

15,549

873,088

641,772

49,178

-

182,138

(102,656)

770,432

Corporate – SMEs

159,303

109,186

16,469

-

33,648

(24,146)

135,157

Retail – individuals

1,263,755

977,740

155,077

8,860

122,078

(125,280)

1,138,475

105,645

86,183

15,844

1,146

2,472

(7,301)

98,344

Allowance for impairment losses

Total net carrying amount

31 December 2012

Loans and advances to customers: Public sector Corporate – large clients

Retail – micro enterprises Other

6,411

6,411

-

-

-

-

6,411

Debt securities at fair value through profit or loss

154,337

154,337

-

-

-

-

154,337

Financial assets held to maturity

146,569

146,569

-

-

-

-

146,569

3,673,693

3,086,783

236,568

10,006

340,336

(259,383)

3,414,310

Current accounts with the Central Bank and other banks

656,224

656,224

-

-

-

-

656,224

Obligatory reserve with the Central Bank

266,540

266,540

-

-

-

-

266,540

Placements with other banks

225,917

225,917

-

-

-

-

225,917

26,953

26,941

12

-

-

-

26,953

Corporate – large clients

975,436

777,403

69,389

-

128,644

(84,803)

890,633

Corporate – SMEs

173,783

115,535

20,435

-

37,813

(62,482)

111,301

Retail – individuals

1,259,046

963,287

160,216

6,147

129,396

(96,631)

1,162,415

116,865

93,430

18,584

2,052

2,799

(8,622)

108,243

7,185

7,185

-

-

-

-

7,185

Debt securities at fair value through profit or loss

153,011

153,011

-

-

-

-

153,011

Financial assets held to maturity

138,090

138,090

-

-

-

-

138,090

3,999,050

3,423,563

268,636

8,199

298,652

(252,538)

3,746,512

31 December 2011

Loans and advances to customers: Public sector

Retail – micro enterprises Other

87

Total impairment allowance for loans to customers is BAM 259,383 thousand (2011: BAM 252,538 thousand) of which BAM 246,503 thousand (2011: BAM 238,851 thousand) represents specific impairment allowance and the remaining amount of BAM 12,880 thousand (2011: BAM 13,687 thousand) represents the provision calculated on a portfolio basis for incurred but not reported credit losses.

Past due loans with no specific impairment allowance Loans to customers less than 90 days past due are not considered impaired, unless other information is available to indicate the contrary. Gross amounts of loans to customers that were past due but not impaired for the Bank were as follows: ’000 BAM

Retail

Corporate

Retail individual

Retail micro enterprises

Total

Public sector

Corporate – large clients

Corporate – SME

Total

127,504

11,449

138,953

-

36,861

13,912

50,773

27,573

4,395

31,968

-

12,317

2,557

14,874

155,077

15,844

170,921

-

49,178

16,469

65,647

130,223

12,907

143,130

12

42,512

14,968

57,492

29,993

5,677

35,670

-

26,877

5,467

32,344

160,216

18,584

178,800

12

69,389

20,435

89,836

Corporate – SME

Total

2012 Past due up to 30 days Past due 30-90 Total 2011 Past due up to 30 days Past due 30-90 Total

Non-performing loans for which impairment has been recognised The classification of loans to customers that are impaired is as follows: ’000 BAM

Retail

Corporate

Retail individual

Retail micro enterprises

Total

Public sector

Corporate – large clients

Non-performing loans – gross

130,938

3,618

134,556

-

182,138

33,648

215,786

Impairment

125,784

3,561

129,345

-

94,969

22,189

117,158

Net

5,154

57

5,211

-

87,169

11,459

98,628

Estimated value of collateral

5,554

287

5,841

-

72,880

9,168

82,048

Non-performing loans – gross

135,543

4,851

140,394

-

128,644

37,813

166,457

Impairment

131,427

4,660

136,087

-

79,324

23,440

102,764

Net

4,116

191

4,307

-

49,320

14,373

63,693

Estimated value of collateral

3,303

544

3,847

-

52,370

10,878

63,248

2012

Financial Statements

2011

88

The estimated value of property serving as collateral is determined by the value of the initial estimate performed by certified appraisers/real estate agents at the time of loan approval, reduced by a certain fixed percentage, depending on the type of collateral and reduced proportionally to the extent that the collateral is also charged as security for other credit risk exposures. In order to verify the adequacy of the impairment allowance, collateral reassessments are performed in accordance with the principles and rules of the collateral management system, taking into proper consideration the volatility of collateral value and the time needed for its realisation, influenced by local and global market conditions. Guarantees, collaterals and bill do not have an associated value in the table above although they are usually required as collateral.

Concentration of credit risk The Bank monitors concentration of credit risk by industry sector and by geographical location. An analysis of concentration of credit risk from loans and advances to customers on a gross basis is shown below: ’000 BAM

2012

2011

1,283,791

1,273,718

Trade

578,148

619,948

Agriculture, forestry, mining and energy

291,048

371,187

Services, finance, sport, tourism

109,586

103,392

Construction

77,354

86,092

Transport and telecommunications

56,208

47,881

Administrative and other public institutions

20,420

25,707

7,196

31,343

2,423,751

2,559,268

Citizens

Other

The Bank only provides loans to customers in Bosnia and Herzegovina.

39.2 Liquidity risk Liquidity means the ability of the Bank at any time to retain or provide the funds in necessary currencies and amounts, at real cost, in order to meet its financial obligations upon maturity. Liquidity risk includes the risk of being unable to liquidate an asset at a reasonable price and within a reasonable time. Strategic and operational management of liquidity risk is defined at the level of RBI Group, which includes the obligation of implementing the relevant principles of work and developing work processes and reporting to all members of the RBI Group on the liquidity positions. This framework defines risk (measurement and modelling of liquidity position, liquidity gap limits, monitoring of excess liquidity, measurement of Counter-Balancing Capacity which can quickly be converted into liquidity), as well as a way of monitoring, reporting and application of appropriate processes in the case of exceeding liquidity limits. Additionally, there are prescribed ways of implementing resistance tests for stressful situations in the market and methods of calculating disharmony between inflows and outflows, taking into account the remaining periods until maturity. At the local level, the strategic framework for managing liquidity risk is defined by the Supervisory Board in accordance with short, medium and long-term business plans of the Bank as a whole. Risk management is the responsibility of the Treasury, Financial Markets and Investment Banking, through the ALM Department, which manages liquidity reserves on a daily basis, in all currencies, respecting the Bank's business strategy defined by the budget framework and ALCO guidelines. Key processes in the ALM Department are: short-term liquidity management, liquid assets structure management (providing risk diversification), the management of the structure of deposits and their maturities, the management of the process of obtaining and distribution of long-term source of financing through borrowings abroad and the management of liquidity reserves of the securities portfolio, and identification and tracking transactions of loans to clients, in order to optimise the distribution of liquidity. Furthermore, the availability and cost of different sources of funding are continuously monitored, as well as the concentration and diversification of risk. In its operations, the Bank adjusts its activities to be in accordance with local regulations that govern management of liquidity risk and set limits defined by the RBI Group.

89

The average ten-day liquidity minimum, prescribed by the Agency, is one of the most important indicators of liquidity and shows the daily ability of the Bank to provide liquid assets in relation to short-term sources of funds on the agreed maturity. Management of financial assets and liabilities by remaining maturity is also defined by the limits established by the local regulator, the Agency. These indicators provide information about the cash flows within periods of 30, 90 and 180 days, whereby only a portion (15%, 20% and 25%, on a cumulative basis) can be placed for longer periods than the above. In addition to these liquidity ratios, coefficients such as: maintaining the required daily level of obligatory reserve prescribed by the Central Bank, monitoring the ratio of deposits/loans (for residents and businesses), ratio of total net loans/deposits and foreign credit lines, structures and trends of deposits by segments, provide an additional mechanism to manage actively liquidity risk. In order to identify, monitor, measure and control liquidity risk, the Department for Monitoring of Market Risk performs the following actions: establish gap limits on a cumulative level for liquidity positions according to an RBI Group model, deal with limit excesses, carry out controls, simulations and analyses and submit appropriate reports to the relevant functions in the RBI Group and the ALCO Committee.

Maturity analysis The following tables show the remaining contractual maturities of the Bank’s assets and liabilities as at 31 December 2012 and 31 December 2011, except for financial assets available for sale which have been classified in accordance with their secondary liquidity characteristics as maturing within one month and obligatory reserves which have been classified in the maturity period within one month and a vista deposits, which are also classified as maturing within one month. Other assets and liabilities that have no contractual maturities are classified as maturing in over 5 years (for assets) and within one month (for liabilities). Up to 1 month

1 to 3 months

3 months to one year

1 to 5 years

Over 5 years

Total

Cash and cash equivalents

551,677

-

-

-

-

551,677

Obligatory reserve with the Central Bank

238,559

-

-

-

-

238,559

Placements with other banks

235,095

-

-

30

527

235,652

Loans and advances to customers

108,948

174,070

688,575

912,220

280,555

2,164,368

Financial assets available for sale

189

-

-

-

-

189

158,729

-

-

-

-

158,729

7,314

711

51,744

75,617

11,183

146,569

-

-

-

-

2,681

2,681

31 December 2012 ’000 BAM

Financial assets at fair value through profit or loss Financial assets held to maturity Investments in subsidiaries Investments in associates Deferred tax assets Other assets Income tax prepayment Property, equipment and intangible assets Total assets

-

-

-

-

8,175

8,175

16

32

142

319

160

669

18,482

731

914

727

363

21,217

3,399

-

-

-

-

3,399

-

-

-

-

153,105

153,105

1,322,408

175,544

741,375

988,913

456,749

3,684,989

12,787

4,340

108,079

213,760

15,003

353,969

1,462,392

95,974

443,815

688,580

59,602

2,750,363

Liabilities and equity Due to banks Due to customers Provisions

7,108

-

-

-

-

7,108

24,058

6,075

-

1

-

30,134

Subordinated debt

-

4,916

16,740

24,301

-

45,957

Share capital and reserves

-

-

-

-

497,458

497,458

Total liabilities and equity

1,506,345

111,305

568,634

926,642

572,063

3,684,989

Maturity gap

(183,937)

64,239

172,741

62,271

(115,314)

-

Other liabilities

Financial Statements

Assets

90

Up to 1 month

1 to 3 months

3 months to one year

1 to 5 years

Over 5 years

Total

Cash and cash equivalents

716,868

-

-

-

-

716,868

Obligatory reserve with the Central Bank

266,540

-

-

-

-

266,540

Placements with other banks

225,360

-

-

30

527

225,917

Loans and advances to customers

176,321

177,971

720,808

923,075

308,555

2,306,730

-

-

-

-

403

403

3,299

-

-

-

-

3,299

158,897

-

-

-

-

158,897

Financial assets held to maturity

-

15,264

43,607

68,036

11,183

138,090

Investments in subsidiaries

-

-

-

-

2,436

2,436

Investments in associate

-

-

-

-

8,173

8,173

20

40

180

403

203

846

25,293

342

1,519

713

345

28,212

3,385

-

-

-

-

3,385

-

-

-

-

155,893

155,893

1,575,983

193,617

766,114

992,257

487,718

4,015,689

9,217

8,785

128,220

284,488

37,294

468,004

1,596,010

87,694

443,170

757,478

60,090

2,944,442

29,167

-

-

-

-

29,167

1,927

5,556

-

8

-

7,491

Subordinated debt

-

6,365

13,384

45,735

-

65,484

Share capital and reserves

-

-

-

-

501,101

501,101

1,636,321

108,400

584,774

1,087,709

598,485

4,015,689

(60,338)

85,217

181,340

(95,452)

(110,767)

-

31 December 2011 ’000 BAM Assets

Assets classified as held for sale Financial assets available for sale Financial assets at fair value through profit or loss

Deferred tax assets Other assets Income tax prepayment Property, equipment and intangible assets Total assets Liabilities and equity Due to banks Due to customers Provisions Other liabilities

Total liabilities and equity Maturity gap

Future cash flows for interest bearing liabilities The estimated future cash flows for the Bank's interest bearing liabilities as at 31 December 2012 and as at 31 December 2011, including expected interest payments are shown in the following table. A vista deposits from customers are presented as an outflow within 3 months, although, based on the Bank’s experience, this is not expected. Future interest is assumed to be at current rates.

91

31 December 2012 ’000 BAM

Total expected outflow Up to 3 months

From 3 to 12 months

From 1 to 5 years

Over 5 years

Total

Carrying value

17,515

78,143

230,430

47,815

373,903

353,969

1,518,499

408,096

838,955

184,476

2,950,026

2,750,363

-

5,825

42,796

-

48,621

45,957

1,536,014

492,064

1,112,181

232,291

3,372,550

3,150,289

Liabilities Due to banks Due to customers Subordinated debt Total expected outflow

31 December 2011 ’000 BAM

Total expected outflow Up to 3 months

From 3 to 12 months

From 1 to 5 years

Over 5 years

Total

Carrying value

7,665

74,354

303,997

127,385

513,401

468,004

1,663,259

404,236

882,537

224,964

3,174,996

2,944,442

2,076

4,073

66,256

-

72,405

65,484

1,673,000

482,663

1,252,790

352,349

3,760,802

3,477,930

Liabilities Due to banks Due to customers Subordinated debt Total expected outflow

39.3 Market risk

The Bank's market risk management is conducted in accordance with local law and the decisions and instructions of local regulators and in accordance with RBI Group standards (RBI Group regulatory framework and the decision of the RBI Board) and is defined in the internal rules, procedures and policies that are subject to regular internal audits with the aim of complying with regulatory changes, as well as improving the process of (market) risk management due to changes in market conditions, defined strategies and business goals. The process of managing market risk in itself includes mitigation, assessing and limiting exposure before taking risk, and the assessment and control of underwritten risk of the entire bank portfolio i.e. trading and banking book. Despite the existence of restrictions imposed by the regulator, the Bank limits the exposure to market risks in accordance with its business strategies harmonised at the level of RBI, the approval process of the product and a limit system on market risk positions, i.e. establishing limits on the open positions of market risk, limits on the Bank’s portfolio sensitivity in accordance to changes of risk factors and establishing a system of limits on Value at Risk (“VaR”) at the level of the book (trading and banking), at the level of segments (Assets and Liabilities management and Capital Markets) and at the level of the entire portfolio. In addition, for financial instruments carried at fair value, a limit is established on the reduction of their market value, so-called Stop loss limits. Another important part in the process of managing market risk is stress testing of the Bank’s portfolio on extreme changes of market conditions and the calculation of portfolio sensitivity towards crisis scenarios, as well as the impact it has on the financial results. Stress testing of extreme changes in market conditions is performed by RBI on a daily basis.

39.3.1 Foreign currency risk Foreign exchange risk is the risk that changes in currency exchange rates affecting the Bank’s portfolio exists to the extent that assets and liabilities in one currency are not matched in value or maturity. In addition to the VaR limit system, the Bank limits its exposure with the use of foreign exchange limits on open positions for each currency, a limit on the entire long or short position of the Bank, as well as stop loss limits.

Financial Statements

Market risks are defined as risks of possible losses due to changes in market prices of trading and banking book positions. Market risk estimates are based on changes in currency exchange rates, interest rates, credit spreads, the cost of equity and goods and other market parameters.

92

Loans and deposits denominated in local currency but linked to EUR by means of foreign currency revaluation clauses, are presented within the EUR column. 31 December 2012 ’000 BAM

BAM

EUR

USD

Other currencies

Total

Cash and cash equivalents

414,365

88,560

5,427

43,325

551,677

Obligatory reserve with the Central Bank

238,559

-

-

-

238,559

Assets

Placements with other banks

5

108,429

112,948

14,270

235,652

Loans and advances to customers

634,654

1,519,304

-

10,410

2,164,368

Financial assets available for sale

66

123

-

-

189

Financial assets at fair value through profit or loss

4,392

150,398

3,939

-

158,729

42,246

67,205

37,118

-

146,569

Investments in subsidiaries

2,681

-

-

-

2,681

Investments in associate

8,175

-

-

-

8,175

669

-

-

-

669

13,922

6,775

515

5

21,217

3,399

-

-

-

3,399

153,105

-

-

-

153,105

1,516,238

1,940,794

159,947

68,010

3,684,989

Financial assets held to maturity

Deferred tax assets Other assets Income tax prepayment Property, equipment and intangible assets Total assets Liabilities and equity Due to banks Due to customers Provisions Other liabilities Subordinated debt Equity Total liabilities and equity Net foreign exchange position

7,692

336,825

-

9,452

353,969

990,267

1,547,012

157,706

55,378

2,750,363

7,108

-

-

-

7,108

24,385

535

2,663

2,551

30,134

-

45,957

-

-

45,957

497,458

-

-

-

497,458

1,526,910

1,930,329

160,369

67,381

3,684,989

(10,672)

10,465

(422)

629

-

93

Foreign currency position 31 December 2011 ’000 BAM

BAM

EUR

USD

Other currencies

Total

Cash and cash equivalents

613,797

75,328

3,524

24,219

716,868

Obligatory reserve with the Central Bank

266,540

-

-

-

266,540

-

118,733

83,271

23,913

225,917

693,645

1,598,380

1

14,704

2,306,730

403

-

-

-

403

Assets

Placements with other banks Loans and advances to customers Assets classified as held for sale Financial assets available for sale

3,176

123

-

-

3,299

Financial assets at fair value through profit or loss

5,886

149,320

3,691

-

158,897

42,076

49,861

46,153

-

138,090

Investments in subsidiaries

2,436

-

-

-

2,436

Investments in associate

8,173

-

-

-

8,173

846

-

-

-

846

16,680

9,894

575

1,063

28,212

3,385

-

-

-

3,385

155,893

-

-

-

155,893

1,812,936

2,001,639

137,215

63,899

4,015,689

7,205

447,367

-

13,432

468,004

1,337,826

1,420,342

136,440

49,834

2,944,442

7,491

-

-

-

7,491

29,167

-

-

-

29,167

Financial assets held to maturity

Deferred tax assets Other assets Income tax prepayment Property, equipment and intangible assets Total assets Liabilities and equity Due to banks Due to customers Provisions Other liabilities Subordinated debt Equity Total liabilities and equity Net foreign exchange position

-

65,484

-

-

65,484

501,101

-

-

-

501,101

1,882,790

1,933,193

136,440

63,266

4,015,689

(69,854)

68,446

775

633

-

Value at risk (“VaR”)

The table below shows the calculated VaR values (confidence level 99%, risk horizon 1 day) of the trading and banking book as at 31 December 2012 and 31 December 2011; (average, maximum and minimum values for the entire 2012 denominated in BAM thousands). Trading Book VaR 99% 1d ’000 BAM Currency risk Share price risk*

VaR as of 31/12/ 2012

Average VaR

Minimum VaR

Maximum VaR

VaR as of 31/12/ 2011

11.82

35.67

5.80

78.82

32.81

385.06

388.26

385.06

390.91

54.00

*Share price risk i.e. XternalEqVar is the value under risk which is calculated by RBI Group Market Risk Management based on weekly positions for the equity portfolio of the trading book, outside the internal model with the inclusion of the position of seed money.

Financial Statements

VaR is a statistical-probability measure, which serves as the main control instrument for managing market risk under normal market conditions. The internal model in use is subject to validations and back testing, which are regularly performed by the relevant RBI organisational unit.

94

Banking Book VaR 99% 1d ’000 BAM

VaR as of 31/12/ 2012

Average VaR

Minimum VaR

Maximum VaR

VaR as of 31/12/ 2011

Interest rate risk

337.11

572.29

278.84

856.26

731.71

Credit spread risk**

372.93

326.27

111.59

722.77

504.54

**Credit spread risk is being planned to put in use in 2013 for the portfolio of debt securities. VaR as of 31/12/ 2012

Average VaR

Minimum VaR

Maximum VaR

VaR as of 31/12/ 2011

RBBH VaRAll

629.61

781.16

493.71

1,207.39

1,145.20

RBBH_VaRFXIRBS

406.79

621.02

310.68

895.73

873.58

RBBH VaR ’000 BAM

Foreign currency risk sensitivity analysis The Bank has a significant open position in EUR against BAM (domestic currency); however, to the extent that the EURBAM exchange rate is fixed as currently pegged, the Bank is not exposed to fluctuations in exchange rates between these two currencies. Much smaller open positions exist in the following currencies (as shown in table below): USD, GBP, JPY and HRK... The foreign currency risk sensitivity of the Bank’s portfolio to changes of 10% in exchange rates changes as of 31 December 2012 and the resultant financial effects, expressed in thousands of BAM, are shown below.

As of 31 December 2012

CCY

PnL effect for +10% change

PnL effect for -10% change

USD

-42.2

42.2

GBP

45.7

-45.7

JPY

-39.4

39.4

HRK

31.9

-31.9

Other ccy*

24.9

-24.9

39.3.2 Interest rate risk Interest rate risk exists when there is no correspondence with the maturity of the asset and liability with the maturity of its complementary parts, with the next fixing date i.e. the next establishment of its price/value, with the referent rates, on which the next fixing date value/price (interest rates) is based on and other differences (e.g. options dependent to interest rate changes). The calculation of the interest rate risk to which the banking book is exposed, besides the VaR values, uses basis point value (“BPV”) i.e. the sensitivity of the portfolio on interest rate changes for 1 base point (0,01%). For that purpose, limits for every currency, limits for time buckets and for Assets and Liabilities management and Capital Markets segments are established. The table below shows the changes in the present value of the Bank’s banking book in accordance to a change of the yield curve by 1 base point as at 31 December 2012 and 31 December 2011, denominated in BAM thousands for currencies resulting in a material sensitivity.

95

31 December 2012 IR BPV ’000 BAM BB CCY

Total

20 y

0.06

-

-

-

-

-

-

-

-

0.19

2.58

9.57

11.08

3.58

(0.43)

1.21

3.09

0.02

-

(0.001)

0.03

0.06

-

-

-

-

-

-

-

-

0.46

0.22

0.08

0.16

0.01

-

-

-

-

-

-

-

EUR

79.56

(12.75)

1.95

15.19

21.86

9.08

24.36

5.27

10.28

4.30

0.02

0.01

GBP

0.15

0.002

0.03

0.12

-

-

-

-

-

-

-

-

USD

0.88

0.04

(0.29)

0.49

0.17

0.46

0.02

-

-

-

-

-

3-6 m 6-12 m

1-2 y

2-3 y

3-5 y

5-7 y

7-10 y 10-15 y 15-20 y

> 20 y

31 December 2011 IR BPV ’000 BAM BB CCY

Total