Piraeus Bank Romania
Annual Report 2006
PIRAEUS BANK
06 Contents Letter from the Chairman
5
Key Figures 2006
7
Group Information
9
Board of Directors
11
Macroeconomic Environment
13
2006 Business Overview
17
Corporate Banking
21
Retail Banking
22
Online Banking and Money Transfer Service
23
SME Sector
23
Treasury Operations
24
Human Resources
27
Outlook for the Future
28
Subsidiaries
29
Auditor’s Report
30
IFRS Financial Statements
33
3
PIRAEUS BANK
Romanian Atheneum
4
06
Letter from the Chairman
Dear All, Romania has become one of the favourite destinations for investments in the Central and Eastern Europe. The foreign investors have recognized the potential of the Romanian market, have bet on it and therefore, succeeded in achieving a very active presence. Their trust was underpinned, of course, by a continuously improving macroeconomic environment, by a mature political setting and by the willingness of the Government and the Romanian people to transform the social and cultural institutional framework according to European standards. The success of the reforms performed by Romania during the latest years was acknowledged by the European Union, which accepted the country as a member in January 2007. Piraeus Bank has had an active presence on the Romanian market since 2000. Today, Piraeus Bank Romania has a network of 54 branches, which strive to offer most of the financial services modern company needs, while making strong efforts to grow to 100 branches by the end of 2007. The bank offers a complete range of competitive products to all major market segments: governments, corporate, SME’s and individuals. The achievements are reflected by the significant improvement of the current performance: total loans increased by 84% in 2006 to € 693 million and total assets by 91% to € 962 million. In the majority of the segments we are active in, we succeeded to enlarge our market share, while we maintained a high quality of customer services and improved the worth of the loan portfolio. In our attempt to meet all the financial needs of our customers, there were established and developed a Leasing Company, a Real Estate Company, a Securities’ Trading Company and an Insurance Brokerage one. With these four subsidiaries, Piraeus Bank Romania, covers a wider spectrum of the financial industry, gathering all customers, either at a personal or at a corporate level, which apart from traditional banking services would like to have access to more innovate and promising opportunities offered by the Romanian economy. For 2007, we retain our goal of continuing our rapid growth. This will be achieved by: • further expanding our branch network and market share; • strengthening our position in retail banking with a focus on housing and consumer loans; • open especially designed business centers to support adequately the increasing demand of SMEs; • expanding our corporate banking operations, by retaining, however, the quality of our loan portfolio; • launching new products according to our clients’ needs; • developing and structuring more sophisticated treasury products, in order to fulfill clients’ needs, regarding hedging activities or speculations. Having enhanced our position and experience in the Romanian banking market, we remain convinced that a stronger presence is being achieved everyday by responding to the expectations of our customers and shareholders.
Stavros Lekkakos Chaiman and Chief Executive Officer
5
PIRAEUS BANK
“Sfatului” Square
06
Key Figures 2006 Income Statement 1
2006 €mn
2005 €mn
Change %
Net interest income Net fee and commission income Net trading income Other net operating income Operating income Loan loss provisions Operating Expenses Profit before tax Income tax Net profit for the year
14.05 8.38 5.67 0.40 28.51 0.54 27.12 0.85 0.18 0.68
14.38 3.22 1.56 0.00 19.18 2.11 15.32 1.73 0.32 1.41
-2.3 159.4 264.2 48.7 -74.67 75.2 -50.4 -45.0 -51.67
Balance Sheet 2
2006 €mn
2005 €mn
Change %
580.44 962.01 311.27 381.57 692.84 295.50 63.92
307.26 503.76 179.38 196.50 375.88 131.84 34.75
88.8 90.9 73.5 94.2 84.3 124.1 83.9
Ratios
2006 %
2005 %
Change %
Cost-income ratio 4 Loan provision ratio 5 Return on average equity Return on average assets Capital adequacy ratio, Tier II6
89.6 1.3 1.4 0.1 16.8
80.1 2.0 4.8 0.5 30.8
11.7 -35.0 -70.8 -80.0 -45.5
Staff & Network
2006
2005
Change %
Employees 7 Branch Offices
713 54
417 30
70.9 80.0
Total assets Total assets, including the assigned loans 3 Total loans Assigned loans Total loans, including the assigned loans 3 Due to customers Shareholders’ Equity
1) The equivalent of income statement figures has been calculated using the RON / average exchange rates published by the National Bank of Romania for 2005 and 2006 (i.e. 2005: 3.6234 RON / 1; 2006: 3.5245 RON / 1 ). 2) The equivalent of balance sheet figures has been calculated using the RON / year end exchange rates published by the National Bank of Romania (i.e. Dec.31, 2005: 3.6771 RON / 1; Dec.31, 2006: 3.3817 RON / 1 ). 3) Assigned loans are loans originated in Piraeus Bank Romania and assigned to Piraeus Bank-London Branch; Piraeus Bank Romania continues to administrate those loans, being remunerated for the services provided. 4) Cost-income ratio as a percentage of operating expenses (staff, administrative and depreciation expenses) after the deduction of LG provisions in operating income; there were no exceptional expenses which might influence the level of this efficiency ratio. 5) Loan loss ratio as a percentage of the loan provisions in total loans (excluding the assigned loans); for the assigned loans also the risk has been transferred. 6) Statutory figures. 7) Full-time employees.
7
PIRAEUS BANK
Bran Castle
06
Group Information Piraeus Bank Romania is a member of Piraeus Bank Group, being established in April 2000, after the takeover of Pater Credit Bank from Budapest Bank, a member of the General Electric Capital Group. Piraeus Bank Group is one of the most dynamic and active financial organisations in the Greek economy. Piraeus Bank was established in 1916 and operated as a private bank for many decades. In 1975 it is placed under State control, a status held until 1991. Since December 1991, when it underwent re-privatisation, it has recorded a continuous and sustained increase in business, financial figures and areas of activity. Along with its organic growth, Piraeus Bank made a series of strategic movements with the goal of establishing a strong presence in the domestic market. Thus, in 1998, the Bank absorbed the activities of Chase Manhattan in Greece, took over controlling interest in Macedonia-Thrace Bank and acquired the specialised Bank Credit Lyonnais Hellas. At the beginning of 1999, the Bank acquired Xiosbank and absorbed the activities of National Westminster Bank Plc in Greece. In June 2000, the Bank unified its three commercial banks in Greece (Piraeus Bank, MacedoniaThrace Bank and Xiosbank), a merger completed with great success, thus creating one of the three largest private sector banks in Greece. In early 2002, Piraeus Bank acquired the Hellenic Industrial Development Bank (ETBAbank) from the Greek State, thus enhancing the Group’s capital base and market share. ETBAbank was successfully absorbed by Piraeus Bank in December 2003. Also, at the beginning of 2002, a strategic alliance agreement for the Greek market was signed between Piraeus Bank Group and “ING Greek Life Insurance Company S.A.” and “ING Greek General Insurance Company S.A.”, mainly focused in the field of bank assurance. In early 2005, Piraeus Bank Group, implementing its strategy for expansion in South-eastern Europe and Eastern Mediterranean markets, acquired the Bulgarian Eurobank (renamed into Piraeus Bank Bulgaria), strengthening its presence in Bulgaria, while it entered into the Serbian market by acquiring Atlas Bank (renamed into Piraeus Atlas Bank), and into Egyptian market by acquiring Egyptian Commercial Bank (renamed into Piraeus Bank Egypt). The vision of Piraeus Bank Group is to establish a strong financial organisation that will play a major part in the broader geographic regions of South-eastern Europe and Eastern Mediterranean, satisfying its customers, having loyal and competent employees and delivering high performances to its shareholders, in excess of the banking market average. Key highlights of Piraeus Bank Group in 2006: • Universal Bank with balanced focus on Consumer Lending, SME’s and Corporate Banking. • 65% increase in net profit attributable to shareholders to €435 mn, exceeding the initial guidance by 15% (€380 mn). Basic EPS up 56% to 1.66. • Branch network expansion to 536 units (up from 449 units in 2005). • Dynamic expansion of total assets, loans and customer deposits & debt securities by 31% yoy. • Proposed dividend per share of €0.64 versus €0.4 in 2005 (+60%). • Growth & Performance oriented culture. On the Romanian market Piraeus Bank Group performs financial operations through Piraeus Bank Romania (since 2000), Piraeus Leasing Romania (since 2003), Piraeus Securities and Piraeus Insurance (since 2006). Piraeus Bank Group focuses to strengthen its presence on the Romanian market by targeting very dynamic growths for its subsidiaries: Bank, Leasing Company, Securities Company and the Insurance Brokerage Company and also by establishing a mutual fund. There is a strong commitment from Piraeus Bank Group to further sustain the operations from the Romanian market by channelling important funds as well as by transferring innovative know-how.
9
PIRAEUS BANK
Peles Castle
06
The Executive Management
Mr. Stavros Lekkakos Chairman & CEO
Board of Directors: Mr. Stavros Lekkakos – Chairman of the Board & CEO, since April 2006 Mr. Sofronis Strinopoulos – Vice-Chairman & General Manager Mr. C`t`lin Pårvu – General Manager - Member Mr. Emanuel Odobescu – Deputy General Manager
- Member
Mr. George Mantakas – Member Mr. George Papaioannou – Member Mr. Ilias Milis – Member Mr. Ioannis Kyriakopoulos – Member Mr. Michael Colakides – Member Mr. Spyridon Papaspyrou – Member Mr. Vassiliki Campbell – Member
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PIRAEUS BANK
Moldavian monastery
06
Macroeconomic Environment From an economic point of view, 2006 was a successful year, characterised by economic growth, backed by a good agricultural output, a boost in the construction sector and a more than satisfactory rate of growth in industry. The disinflation process accelerated and the inflation target was met. The only concerns were created by the widening of external imbalances and rapid appreciation of the local currency towards the end of the year. After a year marked by extensive flood damage, economic growth recovered in 2006, demonstrating a rate of 7.8% in the first nine months of the year. This robust growth was sustained by buoyant private consumption and accelerating investments, encouraged by the prospect of EU membership. Industrial output edged up by 7.1% over the previous year. The increase was seen in all three sectors: manufacture, which went up by 7.8%, power - 4.4% and mining - 2.4%. The construction sector maintained a steady rate of growth throughout the year reaching, at the end of 2006, a 19.3% increase over the previous year. The National Bank of Romania inflation target of 5%, with a fluctuation band of +/-1% was successfully met, as annual inflation dropped from 8.6% yoy in December 2005 to 4.9% yoy in December 2006 – its lowest level in the last 17 years. Lower than predicted increases in administrative prices and also some reductions in volatile prices, mainly in the food segment due to a good agricultural year, contributed significantly to the disinflation process. The National Bank of Romania managed to keep the disinflation process on the right track by maintaining tight monetary conditions throughout the year. In a number of steps, the monetary policy interest rate rose to 8.75% in August from 7.5% at the beginning of the year and a strong control was achieved over the liquidity through frequent sterilisation operations.
Inflation Rate (yoy. %)
35 30 25
Actual
20
Target
15 7.5 10 5
30.3 2001
17.8 2002
14.1 2003
9.3 2004
8.6 2005
5±1pp
4.9 2006
Benefiting from the upbeat pace of economic growth, unemployment inched down to 5.2% in December 2006 from the 5.9% one year ago. With a deficit limit set, after several revisions, at 2.5% of the GDP, Romania’s consolidated budget ran a deficit of 1.7% in 2006, although until the end of November it showed a surplus of 1.2 %. Revenues to the consolidated budget totalled 107 billion RON – i.e. 31.8 % of GDP, while budget spending reached 112.6 billion RON – i.e. 33.5% of GDP. Romania’s current account deficit rose in 2006 by 44.8% yoy to € 9.97 billion. The expansion was fuelled by a widening trade balance, which jumped 50.6% in the year to € 11.7 billion on strong imports. High domestic demand encouraged the import of goods, which amounted to € 37.6 billion while exports reached only € 22.3 billion. Direct foreign investments increased by 75% over the previous year and offered a comfortable 91% coverage of the C/A gap. The total amount of € 9.1 billion attained by FDIs in 2006 also included € 2.2 billion as proceeds of the Romanian Commercial Bank’s privatisation. The C/A deficit also benefited from a boost in current transfers, which reached € 1.2 billion in the last month of the year, almost four times the monthly average volume during 2006, reflecting a strong increase in remittances. National Bank of Romania monetary reserves reached € 21.309 billion while gold reserves were valued at € 1.6 billion. The degree of coverage of imports by reserves was equal to 6.4 months compared with 6.3 months at the end of 2005.
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PIRAEUS BANK
06
Country Rating Profile
Moody’s: BAA3 / Stable Standard & Poor’s: BBB- / Positive Fitch: BBB / Stable Japan Credit Agency: BBB / Stable At the end of August, Fitch Ratings upgraded Romania’s foreign currency sovereign credit rating to ‘BBB’ from ‘BBB-’, reflecting a rise in foreign direct investment that is supporting economic development and diversification. Moody’s Investors Service upgraded Romania’s ratings to investment grade in October, becoming the last major rating agency to bring the Black Sea to the top category. Moody’s justified the upgrade by the continuing improvement in Romania’s economic institutions, structural reforms and a falling debt burden, while Romania’s accession to the European Union next year, ensured further benefits.
Banking market The banking system continued to expand, its net assets being €50.9 billion at the end of 2006, up with 46.2% against the previous year. The first three big banks in the system were in control of over 50% from the total amount of assets. Financial intermediation remained at a low level, of approximately 25%, but higher comparing with the 21.2% of the last year and representing less than a quarter of the EU average. The increase of assets can be explained by the aggressive expansion of branch network, which rose by 1100 units reaching around 4500. At the end of the year 2006 the Romanian banking system registered a net profit of €647 million, 14% higher than last year. Almost 65% of the total amount of profit was brought by the first two banks in the system: BRD – Société General and Romanian Commercial Bank. Comparing with the previous years the retail sector took the leading position in terms of lending. Consequently, the individuals’ loans showed a real significant growth of 75% to €11.6 billion. The consumer loans represented the main engine of growth with an increase of 94.6% and a year end balance of €9.2 billion. The mortgage and housing loans amounted €2.4 billion, i.e. an increase of 52% from 2005 to 2006. The corporate segment knew a slower raise compared with retail sector of just 31% in real terms, ending the year with €16 billion. The year 2006 marked a series of changes in the Romanian banking sector. It was the year of frequent mergers and acquisitions. HVB Bank Romania and Tiriac Bank succeeded in finishing their merger during the year and started the junction with UniCredit Romania Bank. Also C.R.Firenze Bank took over Daewoo Bank and Leumi Bank acquired Eurom Bank. Romexterra Bank was taken over by MKB Hungary. Intesa and SanPaolo Imi Bank merged as well. At the end of the year new arrivals like Portuguese Millennium BCP or the Bank of Cyprus showed up on the market. The government finalized the privatization of Romania’s largest bank – Banca Comerciala Romana, concluding with Erste Bank a deal of €3.75 billion for a stake of 61.88%.
14
Romania Saving Bank’s privatization was cancelled in December, as the offers received were well bellow the expectations of the privatization commission. Romania repeatedly postponed the sale of a 69.9% stake in its fifthlargest bank, with the hope of obtaining a better price.
15
PIRAEUS BANK
Hunedoara castle
16
06
2006 Business Overview The year 2006 was one of great progresses for Piraeus Bank Romania. The Bank took a big step forward, both in operational and in financial terms. For 2006 the Bank set forth an agenda of a dynamic growth that included the branch network development, boosting the loan portfolio, improving the operating results of the core businesses, while controlling the cost structure and maintaining adequate capital base. The results also reflect the change in the mix of the business with important results coming from the retail segment. The following comments should be read in conjunction with the IFRS financial statements and the related notes. The financial statements of the Bank for the years 2006 and 2005 have been audited by PricewaterhouseCoopers Audit SRL. Balance Sheet Developments: Assets: The total assets of the Bank amounted €580.4 million by 31 December 2006, against €307.3 million by 31 December 2005 (i.e. an increase of 88.9%). In addition to the above, assets in amount of €381.5 million have been committed on behalf of Piraeus Bank – London Branch following the policy of active cost management and distribution of assets. During the whole year Piraeus Bank Romania acted as an agent, managing the external portfolio while the risk and related income laying with London Branch. Assets under PBR’s Administration It should be emphasized that the managed loans are associ(EUR million) 1100 ated with Piraeus Bank Romania’s efforts in terms of customer 1000 900 relationships, portfolio build-up, and initial risk assessment. Fur800 381.5 Assigned 700 Loans, under thermore, Piraeus Bank Romania continues to serve the clients PBR’s 600 administration by fully covering their operational needs. 500 PBR Assets 400
Thus, at year-end 2006 Piraeus Bank Romania had under its administration assets amounting €962.01 million, by combining its own loans with those belonging to Piraeus Bank - London Branch. Assets in local currency increased by 80.1% in 2006, reaching a share of 44.6% in the total assets which remained constant comparing with 46.8% by the end of 2005, confirming the efforts of the Bank towards a balanced and risk adverse development of its multicurrency balance sheet.
196.5
580.4
300 200
307.3
100 Dec 2005
Dec 2006
Assets - Currency Structure (EUR million) 600 500
321.5
400 300 163.6
258.9
200 100
143.8
FCY Assets LCY Assets
Loans: Dec 2005
Dec 2006
In 2006 the Bank achieved significant increases in loans, while maintaining strict credit discipline and high quality of its loan portfolio. Along with its traditional orientation toward corporate clients, in 2006 the Bank strengthened its efforts to open its business in the retail market as well, through competitive lending offers addressed to both individual clients and small and medium enterprises. Even more the Bank appeal to external channels (Stores Chains, Loans Brokerage Companies). Piraeus customers are serviced by the departments in the Head Office and the Bank’s countrywide branch network. Corporate clients are defined based on Piraeus Bank Romania’s client internal segmentation (i.e. a computation based on their annual turnover) and generally include large companies and very high net worth individuals
17
PIRAEUS BANK
06
which are under the administration of Corporate Division. Large corporate loans were evenly channelled to all the sectors of the economy. Therefore, Trade&Industry, Real Estate and Services&Other stood each for 60% - 20 % - 20% of the portfolio.
Structure of Loans Administration (EUR million) 700 130.1
600
53.6
500 400
The corporate segment continued to be in 2006 the driven engine for the operations and the income of the Bank. Consequently, by the end of 2006 the loans under the administration of Piraeus Bank Romania amounted to €692.8 million against €375.8 million by the end of 2005, with a nominal increase of 84%. The loans showed in Piraeus Bank Romania’s balance sheet accounts as of December 31, 2006 amounted to €311.3 million.
Individuals
28.5 18.9
300
Beyond the IFRS figures presenting the accurate balance sheet, the lending performances for the whole year 2006 should be completely understood by taking into consideration as well the efforts made for the expand of the loans committed on behalf of Piraeus Bank – London Branch.
SMEs 508.2
Corporate
200 328.5 100
Dec 2006
Dec 2005
Loans under PBR’s Administration (EUR million) 700 600 381.6
500 400 300
196.5 311.3
200 100
Assigned Loans under PBR’s administration PBR Loans
179.4
Dec 2006
Dec 2005
Consistent to the changes in the lending policy of the Bank the volumes boosted also in the retail area. The straightforward approach focus toward individual clients resulted in an increase of 356.3% in individuals’ loans (non-corporate), with remarkable growing trends in both mortgage (+ 56.3%) and consumer (+790.8%) segments. The individual sector’s development was sustained by the improved presence of the Bank into the market through an extended branch network as well as through a more diversified offer of retail lending products. It have been mentioned that the noteworthy evolution in consumer segment is due also to external channels which the Bank started to work from this year. In 2006, the loan portfolio disbursed to SME customers increased with 183.9% up to €53.6 million. The structure of the SME portfolio covers short- and long-term loans for both working capital and investment projects.
Individuals Loans Structure (EUR million) 150
120
90
The dynamic growth in terms of volumes the Bank has been made along with the implementation of prudent lending policies reflecting the care of the Bank for a high quality of its loan portfolio. The loan loss provisions have been maintained to less than 1.3% of total loans as reported in IFRS figures.
103.7
Other (Personal &Consumer)
60 Mortgage 30
11.6 26.4
16.9 Dec 2005
Dec 2006
PBR’s own loans Analysis by sector as of Dec. 31, 2006 Other 9% Trade 29 %
PBR’s own loans Currency analysis as of Dec. 31, 2006
Turism 1% FCY loans 62 %
LCY loans 38 %
Manufacturing 8%
Consumer 33 % Mortgage 8%
18
Transport 1%
Construction 10 %
Liquid assets Consistent with its liquidity policy and compliant with the Central Bank requirements during 2006 the Bank continued to secure an adequate management of its liquidity, by placing important amounts in high liquid assets. The cash and cash equivalents grew due to the increase, in 2006, of the mandatory reserve with BNR (National Bank of Romania) – an increase caused, in its turn, by the growth of the drawn sources under the reserve requirement (current accounts, deposits from clients, deposits from foreign banks, etc.). Tangible and Intangible Assets As part of its growth, in order to secure an adequate base for business processes, in 2006 the Bank sustained important investments. Along with the investments required for the new 24 branches, important funds have been channelled toward the rebranding of old locations for being in line with the Group standards. By the end of 2006 the properties and the equipments of the Bank reached €18.9 million (an increase of 153.1% vs. December 2005) while the intangible assets amounted to €1.1 million (keeping the same level like the previous year). Liabilities & Equity The overall evolution of liabilities reflects the efforts of the Bank to diversify its financing resources in order to sustain the business development.
Liabilities Structure (EUR million) 600
66.4
500
11.8 15.1
400
295.5
Equity
The development of the branch network as well as the inter34.7 Other Liabilities 300 6.6 est policy of the Bank promoted over the year was crucial for 15.0 Subordinated Loans 200 194.9 131.8 Due to Customers the success in attracting new customer deposits. During 2006 Due to Banks 100 121.9 the Bank aligned its deposits interest policy with the market trends, by positioning itself within the medium to top range 0 Dec 2006 Dec 2005 and within reasonable limits. In addition to the attractive interest rates, the boost in customers’ deposits was stimulated by confirmed high quality services and a diversified and customer-friendly offer of saving products. An important stone in building up the deposits portfolio was the advertising campaign for individuals’ deposits which was broadcasted for a significant period. The achievement of the objectives set forth at the beginning of the year to attract new funds has resulted in a significant increase (124.2% i.e. € 163.5 million) in the level of customers’ deposits. At the end of 2006 the customers’ deposits amounted €295.5 million, against €131.8 million by the end of 2005. The trend of growth of the deposits of the Bank exceeded the market (35%), the Bank gaining a larger market share. To build assets and gain market share fast, the Bank was in the situation to sustain its growing efforts primarily through resources attracted from the Mother-Bank. Deposits from banks increased in 2006 by 60%, from €121.9 million in December 2005 to €194.9 million by the end of 2006. Beside the increase of customers’ deposits and shareholders’ funds the raise of funds attracted from inter-bank market was explained by the financing needs subsequent to the group’ decision on assets distribution. Consistent to its business philosophy according to which the Bank lead its operations within a prudential framework, focusing the optimum convergence of profitability criterion with banking processes associated risks, the Bank constantly acted for maintaining an adequate capital base. A significant increase was registered within equity, which was meant to increase the Bank operational capability. The total equity of the Bank has been raised to €63.9 million at year-end 2006, against €34.7 million a year before. In June 2006 Piraeus Bank Romania increased its share capital with €25 million based on the cash subscription of Piraeus Bank S.A. (Greece). New and substantial capital inflows are planned for 2007.
19
PIRAEUS BANK
06
Income Statement The operating profit (i.e. profit before provisions and tax) registered a downward slope from €3.85 million in the previous year to €1.39 million at the end of December 2006. Keeping the same trend the profit after tax decreased to €0.68 million in 2006 from €1.4 million in 2005 following the declining interest margins and the higher operating costs induced by business and network development. The growth in the operating income of the Bank (i.e. advanced with €9.3 million) almost allowed covering the increases of the operating costs (i.e. increased by €11.8 million). Faced with an increased competition as well as with the burden of the reserve requirements the Bank attentively managed the interest rates, matching both its profitability requirements as well as the clients’ needs. Regardless of the continuous decrease of the interest margins and the tough minimum reserve requirements (accompanied by a low remuneration), the net interest income (i.e. €14.1 million) were down by € 0.3 million from the previous year (i.e. a decrease of 2.3%), holding a share of 49.2% in the 2006 operating income. The lending related interest income was up to 85.9% of 2006 total interest income versus 79.2% in 2005. The higher level of resources both in local and in foreign currencies led to an increase in interest expenses of €1.8 million, out of which €1.7 million was due to the increase of the customer deposits. Following the funds structural changes (i.e. a shift from inter-bank funds to customers’ deposits) in 2006 the share of inter-bank funding in total interest expenses slipped down to 56.5% from 65.3% in 2005. Operating Income (EUR million)
35 30
5.7
25
20
8.4
1.6
15
Net Trading Income
3.2
14.1
10
14.4
5
0
Net Free and Commission Income Net Interest Income
2006
2005
Subsequent to the business expansion, the net fee and commission income grew to €8.4 million from €3.2 million in 2005 (i.e. an increase of 159.4%). The increase in fee and commission income was mainly driven by the management fees charged for the administration of the loans belonging to Piraeus Bank-London Branch, which reach to €4.5 million comparing with €1.2 million at the end of 2005. In addition, money transfer commissions had another standout performance (i.e. an increase of 66.1% amounting €1.5 million), benefiting from the enlarging of the operations and branch network of the Bank. The net trading income was up by €4.1 million in 2006 from the previous year (i.e. an increase of 264.23%). The net trading income consists in the revenues of the Bank from foreign currency exchange operations with customers, as well as from the inter-bank market transactions. In addition, the foreign currency translation gains / losses (i.e. revaluation of the open position of the Bank) are included within net trading income (i.e. 2006: €2.5 million vs. 2005: €0.8 million). The increased volume and complexity of the operations of the Bank, the development of the branch network, accompanied by the increase in staff number, boosted the operating expenses to €27.1 million in 2006, from €15.3 million in 2005.
Operating Expenses (EUR million) 20 2.5 15 1.4
12.5 Depreciation
10 7.4
Staff expenses were in amount of €12.1 million with an increase of €5.5 million as compared to 2005, mainly explained by the organic growth in staff number which followed the network and business general development. The staff expenses share in total operating expenses slightly increased in 2006 to 44.6% from 42.8% in 2005.
12.1
Administrative Exp.
5 6.6
0
2005
Staff Expenses
2006
Despite the continuous effort of the Bank to enhance the efficiency, having the development associated costs in the top of the operating expenses, the cost to income ratio deteriorated from 80.1% in 2005 to 89.6% in 2006. Subsequent to the sustainable efforts of the Bank in managing the cost, the operating expenses per employee slightly increase with €2.1k (to €45.7 k) in 2006 comparing with the previous year.
20
Corporate Banking The corporate sector is a major pillar for the growth of the business of the Bank. Piraeus Bank Romania’s corporate policy is oriented towards constantly improving the quality of the products and services offered to the clients.
Corporate Loans in Administration (EUR million)
550 500 450 400
381.6
350 300 196.5
250
Assigned Corporate loans, under PBR
200 administration The offer of the Bank addressed to corporate clients in150 132.0 PBR Corporate loans 100 126.7 cludes a large range of lending products, starting with 50 0 overdrafts and working capital credit facilities, continuDec. 2006 Dec. 2005 ing with medium- and long-term project financing, also including factoring and syndicated loans. In addition the Bank offers to its clients, trade finance and attractive deposit products.
The Bank places special emphasis on providing its corporate clients with innovative solutions, combining flexibility and prompt services. Generally the credit conditions offered by the Bank are flexible and reflect the particular circumstances of each client. Over the years, steps have been taken to enhance the capability of the Bank to better identify customer needs and to provide promptly optimal services. During 2006, the Bank proved its quick reaction capacity in responding to certain industries’ requirements or to some market segments in full expansion. At the end of 2005 the corporate loans were having a share of 40.6% of total loan (73.4% at the level of total loans in administration i.e. by combining both own loans of the Bank and those belonging to Piraeus Bank – London Branch). The Corporate Banking Division strengthened its collaboration with several major corporate players in Romania. Existing customer relations were enhanced and consolidated. Therefore, in 2006, our Corporate Banking Division successfully proved its innovation and quick reaction capacity, as well as its professionalism and efficiency in the way of responding to the requirements of certain industries, where Piraeus Bank holds important expertise, or of some market segments in full expansion.
Corporate Deposits (EUR million) 160 120 80
151.0
40 44.6 0
Dec. 2005
Dec. 2006
The Bank continued in 2006 to target those clients which might generate high turnovers through the accounts of the Bank. Also, Piraeus Bank Romania carefully monitored the operating outlook for different industrial sector. Notwithstanding the significant growth in corporate lending, careful consideration is always given to the current situation and outlook of various industries. Furthermore, important steps have been taken for taking advantage of the cross-selling opportunities, especially with companies from the real estate sector. In the future the corporate offer will be diversified further more by promoting sophisticated products like derivatives in order to support the clients in their efforts for hedging the risks.
21
PIRAEUS BANK
06
Retail Banking Individuals Sector Number of Retail Clients During 2006, Piraeus Bank Romania continued its focus on the Retail segment, meeting its customers with innovaDec. 2005 tive products. Considering its interest in growing the reDec. 2006 tail portfolio, the bank continuously adjusted its products 74458 68243 according to the market conditions and customer needs, making them flexible and easy to obtain. In this respect 28073 the loan conditions were improved and the eligibility criteria 24548 6215 3525 smoothened. As a result, during the year the number of Individuals Total Retail SMEs Clients loans, especially personal needs loans, increased rapidly. The bank’s aim was to get closer to the client not only by offering well-diversified products but also by increasing its presence across the country. 24 new branches were opened in Bucharest and in other major cities of Romania, at the end of 2006, the network consisting of 54 branches. All branches are located and designed according to the corporate image of the Bank.
Besides the increased number of branches, the Bank addressed its clients through a large number of intermediaries and agents. The products promoted by the intermediaries were mainly personal loans and consumer refinance loans, the area being continuously enlarged so as to include the other categories of products: mortgage loans, equity loans and real estate loans. The number of partnerships concluded during the year reached 55, but more and more agreements are on the verge to be signed. The number of agents was by the end of the year close to 1.450. One of the major partners attracted by the Bank was one of the most important retail chains in Romania that entered the market at the beginning of the year and has already opened stores in 7 locations. The consumer loan product was modified so as to consider the characteristics of typical consumer loans existing in the market. Promotional campaigns were carried out also for personal needs loans offered through branches and also through the Hypermarkets. The result was the increase of sales volumes and bank awareness.
Retail Deposits (EUR milion)
144.5
87.4
Dec. 2005
Dec. 2006
Considering the evolution of the real-estate market, the bank seized the opportunity to increase its mortgage-based loans portfolio by attracting the customers of the ongoing construction projects. In this respect, there were concluded conventions with big developers both from Bucharest and the rest of the country. Important steps were taken in order to increase the addressability of Piraeus Bank cards: going live with Shop&Cash debit card, launching credit card product, expanding the ATM network. Continuing the same approach as for other products, the new credit card launched in May was promoted both through the bank branches and third parties with whom agreements were concluded. At the end of 2006 the number of credit cards was of 2.908. In order to offer to the clients the entire range of products, the first steps in developing the overdraft facility and savings accounts were taken. The branches will become sales units, their main responsibility being the permanent increase of clients’ portfolio. In order to attain this goal, also the follow-up and monitoring activity was taken over by Head Office - Loan Admin & Collection department.
22
Retail Loans (EUR milion)
Dec. 2005 Dec. 2006 183.7 130.1
47.4 28.5 53.6 18.9 SMEs Loans
Individuals Loans
Total Retail Loans
A significant impact on the sales evolution had the improvement of the approval process flow and the increase of the number of credit analysts within the Retail Credit Unit Department. Internet Banking / Fast Money Transfer Services Piraeus bank is offering - Piraeus Online Banking - a modern electronic banking service meant to save the time spent by the clients to perform the daily banking transactions and to access the information related to their accounts. The service will continuously be improved so that the clients can benefit of the best instrument that facilitates the communication with the bank. The Bank provides the international Western Union fast money transfer service. Western Union enables the public to receive or remit money without opening an account with the Bank, to any Western Union facility located in more than 190 countries. SME Sector The vast majority of enterprises actively operating in Romania at the moment are micro and small enterprises. This market segment can provide the banks with lower risks assets with high lending margins. The SME represent a strategic segment for Piraeus Bank’s development, so that it will become one of the universal banks on the domestic market. The actual market is offering products that take into consideration SME’s financial needs: accessibility and rapidity in granting the loans and other products and services as well. The Piraeus Bank’s selling strategy for SME’s follows three main directions: • Targeting the most active economic sectors and sub-sectors; • Generating a portfolio of standardized products selected by annual turnover and industries; • Positioning the Bank as “coming towards SME’s” by using as main differentiation factors: the quality of the services provided, the large range of products covering all needs and the professionalism of Piraeus Bank’s personnel. The sales representatives are promoting products to each potential client paying attention to the financing offers which are based on a good understanding of the SME business, the rapid response and the flexibility of the banking services. These banking products are mainly meant to contribute to the development of small business by financing premises or equipment acquisition, or offering traditional loans for working capital. Piraeus Bank SME loans provide tailored financial solutions. Short-term loans are created with the purpose of financing working capital such as overdraft, advance in the current account, commercial loans, capital loans or factoring, while medium-term loans are designed to finance investment projects. Branch Network During 2006 there were opened 24 new branches, the bank acting on the Romanian market at the end of 2006 with 54 branches. The expansion of the bank in 2006 was balanced between the capital town and the country, the network consisting of 21 branches in Bucharest (39% of total branches) and 33 branches in the country side (61%). The branches set up is following the corporate image established back in 2000. The Corporate branch design plays a strong role in the brand building process.
23
PIRAEUS BANK
06
Treasury Operations Year 2006 was for the Treasury of Piraeus Bank Romania both a year of consolidation of the past two years’ activities, as well as a year of expansion in new fields of activity with accent mainly on Sales and Treasury Business Development areas. Also, 2006 brought a shift in strategy, with less emphasis on own account trading and much more on providing value to both Treasury’s and Bank’s customers through an expanded and dedicated Sales Desk of four persons, as well as trough the new Treasury Development Department of three persons. Treasury Sales played an active role in offering professional services and competitive prices to its customers, representing in the same time a reliable channel between the bank’s products and clients’ needs. The main goal of the new TBD desk is to develop the entire infrastructure required by the Treasury, and to design and implement along with the already established proprietary FX, MM and FI desk new financial products that will suit and fulfil better the needs of our customers and will add value to their business. The activity was performed under constant personnel training and improvement, both in Athens HQ and with external training programs. Further, the Treasury staff performed training sessions and presentations for all the business units of the Bank in order to increase the market awareness and the knowledge about Treasury products.
PBR Market Share Foreign Exchange Trading (FX) -%-
20
15
PBR Market Share Money Market (MM) in terms of daily transaction -%-
13
14
15
8
10 15
10 14
7
10
12 10
8 5
13
5
2003
3
5 3 2.5
2005
5
7
12
0.5 0
PBR Market Share Fixed Income Securities (F1) -%-
10
(f) 2007
(f) 2009
0
3 0
2003
2005
(f) 2007
(f) 2009
2.9
1.2
2003
2004
3.3
3.1
2005
2006
5
6.5
(f) 2007
2008
7.5
(f) 2009
FX Desk: The market share of the FX desk continued to expand during 2006, though at a lower pace compared to the previous years due to both external and internal factors (the clients started to have a more Treasury-oriented approach, the off-shores increased their presence in the RON market etc.). Besides the continuous improvement of the image of the bank, the increased market presence and sound proprietary trading contributing to the bank’s cash flows, the FX desk provided full support for the development of FX related new products as well as for the cash management at the branch level. MM Desk: In 2006, the Money Market desk maintained its role in Bank’s Assets & Liabilities Management, finding different funding structures for the Bank and supporting all its business initiatives. PBR continued to be an active player in the local market, increasing permanently the traded volumes. As a consequence, the National Bank of Romania named PBR as one of the contributors to BUBOR starting with 1st of January 2007.
24
Also, PBR continued to participate in National Bank of Romania’s monthly inflation expectations questionnaires. FI Desk: For the Romanian Fixed Income Market 2006 was the year of capital account liberalisation. In the first phase on 1st of April the non residents gained access to Romanian Government Bonds, followed by the gaining of full access for non-residents to FX-derivatives and to RON-denominated T-Bills in September. Piraeus Bank is one of the most active players on secondary market. As showed in the chart the Sell-by-Back transactions count about one third of the market volume. Piraeus Bank transacted Sellby-Backs in amount of €26.4 million, representing 6.14% from the total Sell-by-Back deals. The most important objective for achieving in 2007 is to switch the status from Secondary Dealer to Primary Dealer. Also another purpose which has to be accomplished is to launch new Fixed Income Products (Sell-by-Back with Eurobonds and Hedging products).
Volumes on Secondary Market
Today 1,825 38 % SBB 1,516 32 %
Volumes in 2006 RON 4.783 EUR 1.408
Repo 498 10 %
Tom+ Spot 84 2%
Fwd 859 18 %
All in all, the Treasury’s activity in 2006 grew significantly in what we believe it was a very successful attempt of supporting Piraeus Bank Romania’s fast expansion strategy, providing both financial and informational support to all activities and business of our bank.
25
PIRAEUS BANK
“Curtea de Arges” monastery
06
Human Resources
1300
Staff Number
1200 1100 1000
In the opinion of the Piraeus Bank management, employees represent 900 800 1235 the most important investment bearing extra value and essentially in700 600 713 fluencing the progress of the Bank in the Romanian Banking System. 500 400 Human resources’ activities focus on consolidating the image of the 300 417 200 Bank as a flexible organisation, respecting both its customers and its 219 100 140 89 66 employees. 0 2001 2002 2003 2004 (f) 2005 2006 (f) 2007 The main focus of the Human Resources Development Policy is to create a strong team of professionals capable of operating effectively within the competitive environment of the banking market. This is achieved by modernising organisational structures, training systems and rational management of human resources, focused on building a culture among staff members, with the following main features: “passion” for the customer, team spirit, professionalism, effectiveness, entrepreneurial vision, and emphasis on learning – change. The number of employees increased in 2006 by 71% compared to 2005. The increase was higher at a network level (79%), compared to the headquarters level (59%), in order to support business development. University graduates hold a significant share of 95% of the overall number of employees. Out of the total number of 713 employees at the end of 2006, management staff represents 10.6%. The personnel’s quantitative growth was accompanied by a qualitative growth, mirrored in the following facts: • recruitment followes precise criteria, as defined in the job descriptions, and recruitment channels were diversified: head-hunting agencies, job fairs, internet – specialised sites, advertising and the own Bank’s data base – which was significantly developed in 2006 as against 2005, reaching over 12,000 applications; • the personnel average age was around 30 years. The human resources strategy of the Bank aims at having motivated, committed and proficient employees within Piraeus Bank in order to support the organisation’s continuous development. Internal training programmes are designed to improve the current employees’ competence and increase the quality of the services they offer to the bank’s customers, as well as to support the diversification of the products and services. In 2006, about 1.000 participants were trained based on a coherent plan designed as a strong point for improving employees’ performance and as a powerful internal communication tool. The Piraeus staff training programmes are implemented in cooperation with institutions authorised to train banking staff, as well as in the own professional training centre of the Bank (Panduri – specialised training centre for operations and credit activity). Three major ways have been used in order to obtain a high standard level of the professionalism and motivation of the network employees: Trainings, which increased significantly against last year: • Customer Service Trainings have been provided to all people in the branches in order to develop the sales skills (outsourced trainings); • Cross selling skills have been developed through these trainings; • Internal trainings have been organized in Sales & Training Model Branch (Panduri Branch). Other trainings are planed for both new and existing employees. Staff motivation through: • Sales Rallies were organized over the whole year period. Deposits Rallies were organized every 3 months; • Sales Incentives Model – additional tool along with the rallies that strongly motivate the people in the branches for better results. Staff evaluation through: Balanced Scorecard Concept – monthly updated and quarterly evaluation report directly connected to the achievement of sales goals (branch goals & personal goals) – being a tool to measure results & to motivate employees with bonuses based on performance.
27
PIRAEUS BANK
06
Outlook for the future For the next four years, Piraeus Bank Romania targets very ambitious growth in volumes and market share. Therefore, the main strategic goals for 2007 – 2010 are to achieve by the end of 2010 a 4.5% market share in terms of loans and a 1.9% market share in terms of customer deposits. The objectives are believed to be sustainable considering the strong commitment of the group to support a large expansion. The Bank is confident that it is well positioned to become a more important player in the Romanian market in order to strengthen the business relationships with its existing clients, to explore other business, to seize more growth opportunities. After the set up of Insurance Brokerage Company, Securities Trading Company and Real Estate Company during 2006, 2007 has to be the year of the organic growth of the financial group in order to create more cross selling opportunities. The actual expansion will be continued. The network will be enlarged to around 300 branches. The number of employees will be more than 2400 by 2010. The re-engineering of the business will target the increase in productivity and higher efficiency. A strong emphasis will always be put on the tight control of the processes subsequent to such development.
28
Subsidiaries Piraeus Leasing Piraeus Leasing was established in December 2002, first to meet the needs of the existing Group’s clientele and second to capture a market share based on the credit culture of Piraeus Group. 2006 was one of the most productive years for Piraeus Leasing reflected by the organic growth and the mature stage of development achieved during that period. The company managed to reach almost 5% market share occupied the seventh position in top leasing companies and the total value of new signed leasing contracts exceeded €110 million. During 2006 Piraeus Leasing started the expansion in the country by opening the first two sales points in Constanta and Iasi. Subsequent the same trend for the next year the company planed to be present in another 8 locations. The loan portfolio proved to have a very good quality and a high level of diversification in terms of clients and financed items. The company is financing all type of assets like vehicles, construction equipment, industrial equipment and real-estate. The biggest achievements in 2006 was the increase of real estate leasing up to 10% of our portfolio while this product is not weighting more than 2 – 3% in the other leasing companies portfolio. Company’s strategy is to provide top quality of service, fast response and tailor-made offers. Professionalism, credit culture and quality of the service assured for us a leading place in the Romanian leasing industry. Piraeus Securities Piraeus Bank Group acquired in fall 2006 a local investment firm to enlarge the services provided to local and international clients with brokerage and investment banking operations. PIRAEUS SECURITIES ROMANIA S.A. provides a full range of financial investment services on the Romanian capital market such as: trading in equities on the Bucharest Stock Exchange, public offers and take-over bids, advisory, corporate services. In order to reach a top position in the coming years and to enhance the quality of services it has attracted brokers and analyst with sound market knowledge and proper expertise to professionally address local and international clients. Piraeus Insurance Piraeus Insurance was taken over in October 2006. In the first phase the company have had the purpose to respond to the necessities of Group Companies: the Bank and the Leasing Company. The main products offered are insurance for vehicles, buildings and liabilities. After a stage of growing gradually the company plans to offer services also to the Piraeus clients. In order to attain the targets the company have to increase the number of staff accordingly with business evolution. The short period from 2006 was allocated for building the infrastructure of IT-network and systems and defining the procedural framework. A strong point of the company is its team, composed of young and dynamic people which bring an important contribution to build up the business.
29
PIRAEUS BANK
30
06
31
PIRAEUS BANK
06
Piraeus Bank Romania SA FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2006 PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS
33
PIRAEUS BANK
06
CONTENTS
PAGE
Balance sheet
36
Statement of income
37
Statement of cash-flows
38
Statement of changes in equity
39
NOTES TO FINANCIAL STATEMENTS 1. THE BANK AND ITS OPERATIONS
40
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
41
3. FINANCIAL RISK MANAGEMENT
57
4. CRITICAL ACCOUNTING ESTIMATES, AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES
69
5. NET INTEREST INCOME
69
6. NET FEE AND COMMISSION INCOME
70
7. NET TRADING INCOME
70
8. OTHER INCOME
71
9. IMPAIRMENT CHARGE FOR CREDIT LOSSES
71
10. OTHER OPERATING EXPENSE
71
11. INCOME TAX EXPENSE
72
12. CASH AND BALANCES WITH CENTRAL BANK
75
13. LOANS AND ADVANCES TO BANKS
75
14. LOANS AND ADVANCES TO CUSTOMERS
76
15. DERIVATIVE ASSETS AND DERIVATIVE LIABILITIES
77
16. INVESTMENT SECURITIES AVAILABLE FOR SALE
78
17. INTANGIBLE ASSETS
80
18. PROPERTY AND EQUIPMENT
81
19. OTHER ASSETS
82
20. DEPOSITS FROM BANKS
82
21. DUE TO CUSTOMERS
82
22. OTHER BORROWED FUNDS
82
23. OTHER LIABILITIES
83
24. SHARE CAPITAL
84
25. OTHER RESERVES
85
26. CASH AND CASH EQUIVALENTS
86
27. COMPARATIVES
87
28. RELATED PARTY TRANSACTIONS
88
29. COMMITMENTS AND CONTINGENCIES
90
30. OPERATING ENVIRONMENT OF THE BANK
92
35
PIRAEUS BANK
06
PIRAEUS BANK ROMANIA SA
BALANCE SHEET FOR THE YEAR ENDED 31 DECEMBER 2006 (all amounts in RON thousand unless otherwise stated)
Note
31 Dec. 2006
31 Dec. 2005
Cash and balances with Central Bank
12
481,809
247,585
Loans and advances to banks
13
251,195
9,445
Loans and advances to customers
14
1,038,635
646,278
Derivative assets
15
11,360
-
Investments securities available for sale
16
103,802
191,505
Intangible assets
17
4,141
3,852
Property and equipment
18
63,699
27,189
Deferred income tax asset
11
340
-
Other assets
19
7,900
3,979
1,962,881
1,129,833
Total assets Deposits from banks
20
667,477
448,585
Due to customers
21
999,302
484,775
Derivative liabilities
15
115
2,755
Other borrowed funds
22
51,005
55,395
Other liabilities
23
28,792
10,071
Deferred tax income tax liability
11
-
457
1,746,691
1,002,038
Total liabilities Shareholder’s equity Share capital
24
204,724
116,889
Other reserves
25
24,497
18,229
(13,031)
(7,323)
216,190
127,795
1,962,881
1,129,833
Accumulated losses Total shareholders equity Total liabilities and shareholders equity
The financial statements on pages 1 to 57 were signed and approved on behalf of the Board of Directors on 22.03.2007 by:
36
PIRAEUS BANK ROMANIA SA
STATEMENT OF INCOME FOR THE YEAR ENDED 31 DECEMBER 2006 (all amounts in RON thousand unless otherwise stated)
Note
Year ended
Year ended
31 Dec. 2006
31 Dec. 2005
Interest and similar income
5
91,556
88,903
Interest expense and similar charges
5
(42,023)
(36,773)
49,533
52,130
Net interest income Fee and commission income
6
32,443
14,940
Fee and commission expense
6
(2,900)
(3,232)
29,543
11,708
7
18,417
5,644
1,571
-
8
1,436
13
Net fee and commission income Net trading income Gains less losses from investment securities Other operating income Impairment charge for credit losses
9
(1,896)
(7,678)
Other operating expenses
10
(95,581)
(55,534)
3,023
6,283
(623)
(1,160)
2,400
5,123
Profit before income tax Income tax expense Profit for the year
11
The financial statements on pages 1 to 57 were signed and approved on behalf of the Board of Directors on 22.03.2007 by:
37
PIRAEUS BANK
06
PIRAEUS BANK ROMANIA SA
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2006 (all amounts in RON thousand unless otherwise stated)
Year ended 31 Dec. 2006
Year ended 31 Dec. 2005
100,828 (40,476) 32,443 (2,900) 21,407 10,616 (76,108) 205
87,726 (36,214) 18,525 (3,232) 2,536 1,882 (51,158) (5,627)
46,015
14,438
Change in operating assets Increase in loans and advances to customers Increase in other assets Total changes in operating assets
(389,700) (29,252) (418,952)
(12,942) (90) (13,032)
Change in operating liabilities Increase / (decrease) in deposits from banks Increase in amounts due to customers (Decrease) / increase in other borrowed funds (Decrease) / increase in other liabilities Total changes in operating liabilities
218,509 500,892 (4,430) (1,742) 713,229
(182,777) 176,227 55,395 11,752 60,597
Cash flows from operating activities
340,292
62,003
Note Net cash flows from operating activities Interest receipts Interest paid Fee and commission receipts Fee and commission paid Net trading and other income Recoveries on loans previously written off Cash payments to employees and suppliers Income tax recovered / (paid) Net cash flows from operating profits before changes in operating assets and liabilities
Cash flows from investing activities Sale or redemption of investment securities Purchase of investment securities Purchase of property, equipment and intangible assets Net cash from / (used in) investing activities
82,328 (14,961)
15,422 (62,036)
(39,261) 28,106
(19,372) (65,986)
Cash flow from financing activities Issue of ordinary shares Net cash from financing activities
87,835 87,835
26,097 26,097
Increase in cash and cash equivalents
456,233
22,114
Cash and cash equivalents at 1 January
291,732
269,618
747,965
291,732
Cash and cash equivalents at 31 December
38
26
PIRAEUS BANK ROMANIA SA
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2006 (all amounts in RON thousand unless otherwise stated)
Accumulated Note Balance as at 1 January 2005 Profit for the year
Share capital
Reserves
losses
Total
90,792
16,105
(12,446)
94,451
-
-
5,123
5,123
-
2,124
-
2,124
-
2,124
5,123
7,247
26,097
-
-
26,097
116,889
18,229
(7,323)
127,795
-
-
2,400
2,400
-
(1,840)
-
(1,840)
-
(1,840)
2,400
560
Change in fair value of available for sale investment securities, net of tax
25
Total recognized income Increase of share capital
24
Balance as at 31 December 2005 Profit for the year Change in fair value of available for sale investment securities, net of tax
25
Total recognized income Transfer to reserves
25
-
8,108
(8,108)
-
Increase of share capital
24
87,835
-
-
87,835
204,724
24,497
(13,031)
216,190
Balance as at 31 December 2006
39
PIRAEUS BANK
1.
06
THE BANK AND ITS OPERATIONS
Piraeus Bank Romania SA (“Piraeus Bank” or the “Bank”) has been incorporated in Romania since 1995 as a joint stock Company and is licensed by the National Bank of Romania to conduct banking activities. The Bank is principally engaged in wholesale and retail banking operations in Romania and employed 743 members of staff at 31 December 2006 (31 December 2005: 417). The Bank operates through its head office located in Bucharest and 54 branches and offices (31 December 2005: 30) located in Romania. The registered office of the Bank is: Piraeus Bank Romania SA Bd. Carol I nr. 34-36 Bucharest, Sector 2 ROMANIA
The Board of Directors composition as at 31 December 2006 was: Mr. Stavros Lekkakos - Chairman Mr. Sofronis Strinopoulos Vice - Chairman
Members: Mr. Catalin Parvu - Member Mr. Emanuel Odobescu - Member Mr. George Mantakas - Member Mr. Ioannis Kyriakopoulos - Member Mr. Michael Colakides - Member Mr. Spyridon Papaspyrou - Member Mrs. Vassiliki Campell - Member The parent company of the Bank is Piraeus Bank SA (Athens), which is listed on the Athens Stock Exchange. The address of its registered office is 4, Amerikis Str, 10 364 Athens, Greece.
40
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2.1. Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) under the historical cost convention as modified by the revaluation of available-for-sale investments and derivative transactions. The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the periods presented. The preparation of financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Bankís accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4. (a)
Standards, amendments to published standards and interpretations effective 1 January 2006
The standards, amendments to existing standards and interpretations are detailed below: IAS 19 Amendment - Actuarial Gains and Losses, Group Plans and Disclosures; IAS 21 Amendment - Net Investment in a Foreign Operation; IAS 39 Amendment - Cash Flow Hedge Accounting of Forecast Intragroup Transactions; IAS 39 Amendment - The Fair Value Option; IAS 39 and IFRS 4 Amendment - Financial Guarantee Contracts; IFRS 1 (Amendment), First-time Adoption of International Financial Reporting Standards, and IFRS 6 (Amendment), Exploration for and Evaluation of Mineral Resources; IFRS 6 Exploration for and Evaluation of Mineral Resources; IFRIC 4 Determining whether an Arrangement contains a Lease; IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds; and IFRIC 6 Liabilities arising from Participating in a Specific Market Waste electrical and Electronic Equipment. IAS 19 Amendment introduces the option of an alternative recognition approach for actuarial gains and losses. It also adds new disclosure requirements. As the Bank does not intend to change the accounting policy adopted for recognition of actuarial gains and losses and does not participate in any multi-employer plans, adoption of this amendment only impacts the format and extent of disclosures presented in the accounts.
41
PIRAEUS BANK
06
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IAS 21 Amendment, IAS 39 − Cash flow hedge accounting of forecasted intra-group transactions, IFRS 1, IFRS 6, IFRIC 4, IFRIC 5 and IFRIC 6 are not relevant to the Bank’s operating activities and therefore have no material effect on the Bank policies. IAS 39 Amendment – The Fair Value Option. Prior to the amendment, the Bank applied the unrestricted version of the fair value option in IAS 39. The Bank does not apply this option in the financial statements. IAS 39 and IFRS 4 Amendment – Financial Guarantee Contracts. These types of contract are now accounted for under IAS 39 and no longer accounted for under IFRS 4, as previously required under IFRS. The measurement and disclosure requirements under IAS 39 have not resulted in a material change to the Bank policies. (b) Standards issued that are not yet effective but which will have a significant impact on the Bank’s financial statements Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Bank’s accounting periods beginning on or after 1 January 2006 or later periods but which the Bank has not early adopted. The adoption of IFRS will have a significant impact on the financial statements.
IFRS 7, Financial Instruments: Disclosures, and a complementary Amendment to IAS 1, Presentation of Financial Statements - Capital Disclosures (effective from 1 January 2007). IFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, including sensitivity analysis to market risk. It replaces IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and disclosure requirements in IAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under IFRS. The amendment to IAS 1 introduces disclosures about the level of an entity’s capital and how it manages capital. The Bank assessed the impact of IFRS 7 and the amendment to IAS 1 and concluded that the main additional disclosures will be the sensitivity analysis to market risk and the capital disclosures required by the amendment of IAS 1.
42
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(c) Standards and interpretations issued that are not yet effective but which will not have a significant impact on the Bank’s financial statements The Bank has chosen not to early adopt the following standard and interpretations that were issued but not yet effective for accounting periods beginning on 1 January 2006:
-
IFRS 8, Operating Segments (effective 1 January 2009);
-
IFRIC 7, Applying the Restatement Approach under IAS 29 (effective 1 March 2006);
-
IFRIC 8, Scope of IFRS 2 (effective 1 May 2006);
-
IFRIC 9, Reassessment of embedded derivative (effective 1 June 2006);
-
IFRIC 10, Interim Financial Reporting and Impairment (effective 1 November 2006);
-
IFRIC 11, IFRS 2 – Group Treasury Share Transactions (effective 1 March 2007);
-
IFRIC 12, Service Concession Arrangements (effective 1 January 2009); and
-
IAS 23, Borrowing Costs (effective 1 January 2009).
The application of these new interpretations will not have a material impact on the Bank’s financial statements in the period of initial application.
2.2. Foreign currency translation (a) Functional and presentation currency Functional currency of the Bank is the currency of the primary economic environment in which it operates. The financial statements are presented in RON which is the Bank’s functional and presentation currency. (b) Transaction and balances Transactions denominated in foreign currency are translated into the functional currency at the official exchange rate ruling at the transaction date. Exchange differences resulting from the settlement of transactions denominated in foreign currency are included in the statement of income at the time of settlement using the exchange rate ruling on that date.
43
PIRAEUS BANK
06
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Monetary assets and liabilities denominated in foreign currency are expressed in RON as at the balance sheet date. At 31 December 2006 the exchange rate used for translating foreign currency balances was USD 1 = RON 2.5676 (2005: USD 1 = RON 3.1078) and EUR 1 = RON 3.3817 (2005: EUR 1 = RON 3.6771). Foreign currency gains and losses arising from the translation of monetary assets and liabilities are reflected in the statement of income for the year. Changes in the fair value of monetary securities denominated in foreign currency classified as available for sale are analysed between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. Translation differences on non-monetary items, such as equities classified as available for sale financial assets, are included in the fair value reserve in equity. 2.3. Accounting for the effect of hyperinflation Prior to 1 January 2004 the adjustments and reclassifications made to the statutory records for the purpose of IFRS presentation included the restatement of balances and transactions for the changes in the general purchasing power of the RON in accordance with IAS 29 (“Financial Reporting in Hyperinflationary Economies”). IAS 29 requires that the financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the measuring unit current at the balance sheet date. As the characteristics of the economic environment in Romania indicate that hyperinflation has ceased, effective from 1 January 2004 the Bank no longer applies the provisions of IAS 29. Accordingly, the amounts expressed in the measuring unit current at 31 December 2003 are treated as the basis for the carrying amounts in these financial statements. The restatement was calculated using the conversion factors derived from the Romanian Consumer Price Index (“CPI”), published by the National Commission of Statistics. The indices used to restate corresponding figures, based on 1998 prices (1998 = 100) for the five years ended 31 December 2003, and the respective conversion factors are: Year
Movement in CPI
Indices
1999
54.8%
1.548
2.46
2000
40.7%
2.178
1.75
2001
30.3%
2.838
1.35
2002
17.8%
3.343
1.14
2003
14.1%
3.815
1.00
The main guidelines followed in restating the corresponding figures were:
44
Conversion Factor
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) All corresponding amounts were stated in terms of the measuring unit current at 31 December 2003. Monetary assets and liabilities held at 31 December 2003 were not restated because they were already expressed in terms of the monetary unit current at 31 December. Non-monetary assets and liabilities (those balance sheet items that were not expressed in terms of the monetary unit current at 31 December 2003) and components of shareholders’ equity were restated from their historical cost by applying the change in the general price index from the date the non-monetary item originated to 31 December 2003. All items in the statement of income and cash flows were restated by applying the change in the general price index from the dates when the items were initially transacted to 31 December 2003. Gain or losses that arose as a result of holding monetary assets and liabilities for the reporting period ended 31 December 2003 were included in the statement of income as a monetary gain or loss. 2.4. Financial assets (a) Classification The Bank classifies its financial assets into the following categories: financial assets held at fair value through profit or loss; loans and receivables; held-to-maturity investments; and available-for-sale financial assets. Management determines the classification of its investments at initial recognition. (i) Financial assets at fair value through profit or loss (“FVTPL”) This category has two sub-categories: financial assets held for trading and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. The Bank currently does not have any financial assets designated at fair value through profit or loss at inception. Derivatives are also categorised as held for trading unless they are designated as hedges.
45
PIRAEUS BANK
06
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: (a) those that the entity intends to sell immediately or in the short term, which are classified as held for trading, and those that the entity upon initial recognition designates as at fair value through profit or loss; (b) those that the entity upon initial recognition designates as available for sale; or (c) those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration. (iii) Held-to-maturity (“HTM”) HTM investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank’s management has the positive intention and ability to hold to maturity. Were the Bank intends to sell other than an insignificant amount of HTM assets, the entire category would be tainted and reclassified as available for sale. During 2006 the Bank did not hold any HTM securities in its portfolio. (iv) Available-for-sale (“AFS”) AFS investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. (b) Recognition, de-recognition and initial measurement Purchases and sales of financial assets AFVPL, HTM and AFS are recognised on trade-date – the date on which the Bank commits to purchase or sell the asset. Loans are recognised when cash is advanced to the borrowers. Financial assets are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit and loss. Financial assets carried at fair value through profit and loss are initially recognised at fair value, and transactions costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognised when they are extinguished – that is, when the obligation is discharged, cancelled or expires.
46
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (c) Subsequent measurement AFS financial assets and financial assets AFVPL are subsequently carried at fair value. Loans and receivables and HTM investments are carried at amortised cost using the effective interest method. Gains and losses arising from changes in the fair value of the AFVPL category are included in the income statement in the period in which they arise. Gains and losses arising from changes in the fair value of AFS financial assets are recognised directly in equity, until the financial asset is derecognised or impaired at which time the cumulative gain or loss previously recognised in equity should be recognised in profit or loss. However, interest calculated using the effective interest method is recognised in the income statement. Dividends on AFS equity instruments are recognised in the income statement when the entity’s right to receive payment is established. (d) Fair value measurement principles The fair values of quoted investments in active markets are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Bank establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions and discounted cash flow analysis. 2.5. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 2.6. Derivative financial instruments and hedge accounting Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and valuation techniques, including discounted cash flow models. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.
The best evidence of the fair value of a derivative at initial recognition is the transaction price (ie, the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (ie, without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. When such evidence exists, the Bank recognises profits on day 1.
47
PIRAEUS BANK
06
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Certain derivatives embedded in other financial instruments, such as the conversion option in a convertible bond, are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognised in the income statement. No embedded derivatives are at reporting date. The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Bank did not designate any derivative transaction as a hedging instrument during the years 2006 and 2005 and did not use hedge accounting. The fair value gain or loss has been recognised by the Bank through profit or loss in the line “Net trading income”.
2.7. Interest income and expense Interest income and expense are recognised in the statement of income for all instruments measured at amortised cost using the effective interest method. Interest income includes coupons earned on fixed income investment securities and accrued discount and premium on treasury securities. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Once a financial asset or a group of financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. 2.8. Fee and commission income Fees and commissions are generally recognised on an accrual basis when the service has been provided. Loan origination fees for loans which are probable of being drawn down, are deferred and recognised as adjustments to the effective yield on the loan. Fee and commission income consists mainly of fees and commissions received for the transfers of money for customers, trading of securities and foreign exchange, and issuance of guarantees and letters of credit.
48
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.9. Dividends Dividends on ordinary shares are recognised in equity in the period in which they are approved by the Annual General Meeting of shareholders. The statutory financial statements of the Bank prepared in accordance with Romanian Accounting Regulations are the basis for profit distribution and other appropriations. 2.10. Sale and repurchase agreements Securities sold subject to linked repurchase agreements (“repos”) are classified in the financial statements as securities available for sale and the counter party liability is included in amounts due to customers. The difference between sale and repurchase price is treated as interest and accrued over the life of repo agreements using the effective yield method. 2.11. Impairment of financial assets (a) Assets carried at amortised cost The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include: -
Delinquency in contractual payments of principal or interest;
-
Cash flow and financial difficulties experienced by the borrower;
-
Breach of loan covenants or conditions;
-
Initiation of bankruptcy proceedings;
-
Deterioration of the borrower’s competitive position;
-
Deterioration in the value of collateral; and
-
Downgrading below investment grade level.
The estimated period between a loss occurring and its identification is determined by local management for each identified portfolio. In general, the periods used vary between three months and 12 months; in exceptional cases, longer periods are warranted.
49
PIRAEUS BANK
06
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (e.g. on the basis of the industry and product types, and for retail if the exposure is insured for credit risk). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the Bank and historical loss experience for assets with credit risk characteristics similar to those in the Bank. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in related observable data from period to period (for example, changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any differences between loss estimates and actual loss experience.
50
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the income statement. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the income statement. (b) Assets classified as available for sale The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the income statement. 2.12. Intangible assets Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives which is typically three years. Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Bank, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include software development employee costs and an appropriate portion of relevant overheads. Computer software development costs recognised as assets are amortised using the straight-line method over their useful lives which is typically three years.
51
PIRAEUS BANK
06
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.13. Property and equipment
Cost Property and equipment are stated at cost, restated to the equivalent purchasing power of the Romanian Leu at 31 December 2003 for assets acquired prior to 1 January 2004, less accumulated depreciation and provision for impairment, where required. Cost includes borrowing costs incurred on specific or general funds borrowed to finance construction of qualifying assets. Costs of repairs and maintenance are expensed when incurred. Cost of replacing major parts or components of property and equipment items are capitalised and the replaced part is retired. Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in profit or loss.
Depreciation Land is not depreciated. Depreciation on other items of property and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives. Useful lives in years 2006 Leasehold improvements Buildings Office equipment, fixtures and fittings Vehicles
2005
over the term of the underlying lease 50
-
3-15
3-15
5
5
The residual value of an asset is the estimated amount that the Bank would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Bank expects to use the asset until the end of its physical life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
52
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.14. Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. 2.15. Finance lease liabilities Where the Bank is a lessee in a lease which transferred substantially all the risks and rewards incidental to ownership to the Bank, the assets leased are capitalised in property and equipment at the commencement of the lease at the lower of the fair value of the leased asset and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of future finance charges, are included in borrowings. The interest cost is charged to the income statement over the lease period using the effective interest method. The assets acquired under finance leases are depreciated over their useful life or the shorter lease term if the Bank is not reasonably certain that it will obtain ownership by the end of the lease term.
2.16. Operating Leases
The leases entered into by the Bank are primarily operating leases. The total payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place.
53
PIRAEUS BANK
06
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.17. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months’ maturity from the date of acquisition: cash; non-restricted balances with central banks, including minimum mandatory reserves; treasury bills and other eligible bills; loans and advances to banks and short-term government securities.
2.18. Provisions Provisions are recognised when the Bank has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.
2.19. Financial guarantees contracts Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities. Financial guarantees are initially recognised in the financial statements at fair value on the date the guarantee was given. Subsequent to initial recognition, the bank’s liabilities under such guarantees are measured at the higher of the initial measurement, less amortisation calculated to recognise in the income statement the fee income earned on a straight line basis over the life of the guarantee and the best estimate of the expenditure required to settle any financial obligation arising at the balance sheet date. These estimates are determined based on experience of similar transactions and history of past losses, supplemented by the judgment of Management. Any increase in the liability relating to guarantees is taken to the income statement under other operating expenses.
54
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.20. Other credit related commitments In the normal course of business, the Bank enters into other credit related commitments including loan commitments and letters of credit. Specific provisions are raised against other credit related commitments when the Bank has a present obligation as a result of a past event, when it is probable that there will be an outflow of resources and when the outflow can be reliably measured. 2.21. Pension obligations and other post retirement benefits The Bank, in the normal course of business makes payments to the Romanian State funds on behalf of its Romanian employees for pension, health care and unemployment benefit. Substantially all employees of the Bank are members of the State pension plan. The Bank does not operate any other pension scheme and, consequently, has no obligation in respect of pensions. The Bank has no obligation to provide further services to current or former employees. 2.22. Income taxes (a) Current income tax The Bank records profit tax upon net income from the financial statements in accordance with Romanian Accounting Regulations and profit tax legislation. Romanian profits tax legislation is based on a fiscal year ending on 31 December. In recording both the current and deferred income tax charge for the year ended, the Bank has computed the annual income tax charge based on Romanian profits tax legislation enacted (or substantially enacted) at the balance sheet date. (b) Deferred income tax Differences between financial reporting under International Financial Reporting Standards and Romanian fiscal regulations give rise to material differences between the carrying value of certain assets and liabilities and income and expenses for financial reporting and income tax purposes. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
55
PIRAEUS BANK
06
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The principal temporary differences arise from depreciation of property and equipment, revaluation of certain financial assets and liabilities including derivative contracts, provisions for post-retirement benefits and tax losses carried forward. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit nor loss. Deferred tax related to fair value re-measurement of available-for-sale investments, which are charged or credited directly to equity, is also credited or charged directly to equity and subsequently recognised in the income statement together with the deferred gain or loss. 2.23. Borrowings Borrowings are recognised initially at fair value net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between proceeds net of transaction costs and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. 2.24. Fiduciary activities The Bank commonly acts as trustees and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and income arising thereon are excluded from these financial statements, as they are not assets of the Bank. 2.25. Comparatives Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. The comparatives reclassifications in respect of cash and cash equivalents are presented in Note 26. Other material re-classifications of comparatives are disclosed in Note 27.
56
3.
FINANCIAL RISK MANAGEMENT
3.1 Strategy in using financial instruments By their nature, the Bank’s activities are principally related to the use of financial instruments including derivatives. The Bank accepts deposits from customers at both fixed and floating rates, and for various periods, and seeks to earn above-average interest margins by investing these funds in high-quality assets. The Bank seeks to increase these margins by consolidating short-term funds and lending for longer periods at higher rates, while maintaining sufficient liquidity to meet all claims that might fall due. The Bank also seeks to raise its interest margins by obtaining above-average margins, net of allowances, through lending to commercial and retail borrowers with a range of credit standing. Such exposures involve not just on-balance sheet loans and advances; the Bank also enters into guarantees and other commitments such as letters of credit and performance, and other bonds. 3.2 Credit risk The Bank takes on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Impairment provisions are provided where there is objective evidence that the bank will not be able to collect all amounts due. Significant changes in the economy, or in the health of a particular industry segment that represents a concentration in the Bank’s portfolio, could result in evidence that is different from those provided for at the balance sheet date. Management therefore carefully manages its exposure to credit risk. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. The exposure to any one borrower including banks and brokers is further restricted by sub-limits covering on and off-balance sheet exposures, and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees.
57
PIRAEUS BANK
06
3. FINANCIAL RISK MANAGEMENT (CONTINUED)
Credit-related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit – which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties – carry the same credit risk as loans. Documentary and commercial letters of credit – which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions – are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards and obtaining prior approval before such credits are extended. The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. 3.3 Interest rate risk
Interest sensitivity of assets, liabilities and off balance sheet items – repricing analysis Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on both its fair value and cash flow risks. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. The Bank sets limits on the level of mismatch of interest rate repricing that may be undertaken, which is monitored daily. The table below summarises the Bank’s exposure to interest rate risks. Included in the table are the Bank’s assets and liabilities at carrying amounts, categorised by the earlier of contractual repricing or maturity dates.
58
3. FINANCIAL RISK MANAGEMENT (CONTINUED) 1 month Up to
to 3 months
1 month 3 months
1 year
Non
to
Over 5 interest
to 1 year
5 years
years bearing
Total
31 December 2006 Assets Cash and balances with the Central Bank
452,565
-
-
-
-
29,244
481,809
251,195
-
-
-
-
-
251,195
155,552
354,253
447,892
49,255
31,683
-
-
-
-
-
16,984
2,140
30,558
51,330
2,045
Loans and advances to banks Loans and advances to customers Derivative assets Investment securities Intangibles
- 1,038,635 11,360
11,360
746
103,802
4,141
4,141
Property and equipment
-
-
-
-
-
63,699
63,699
Deferred income tax assets
-
-
-
-
-
340
340
Other assets
-
-
-
-
-
7,900
7,900
Total assets
876,296
356,393
478,449
100,585
33,728 117,430 1,962,881
Deposits from banks
493,950
33,527
140,000
-
-
-
667,477
Due to customers
873,639
53,077
48,133
24,453
-
-
999,302
Derivative liabilities
-
-
-
-
-
115
115
Other borrowed funds Other liabilities Total liabilities
-
51,005
-
-
-
-
51,005
133
265
1,211
6,566
1,068
19,550
28,792
1,367,722
137,873
189,344
31,019
1,068
19,665 1,746,691
(491,426)
218,519
289,106
69,566
32,661
Total interest sensitivity gap
97,765
59
PIRAEUS BANK
06
3. FINANCIAL RISK MANAGEMENT (CONTINUED) 1 month Up to
to 3 months
1 month 3 months
1 year
Non
to
Over 5 interest
to 1 year
5 years
years bearing
Total
31 December 2005 Assets Cash and balances with the Central Bank
234,209
-
-
-
-
13,376
247,585
9,445
-
-
-
-
-
9,445
Loans to customers
119,317
86,341
322,908
66,167
51,545
-
646,278
Investment securities
24,335
34,703
13,347
103,325
15,391
404
191,505
Intangibles
-
-
-
-
-
3,852
3,852
Property and equipment
-
-
-
-
-
27,189
27,189
Other assets
-
-
-
-
-
3,979
3,979
Total assets
387,306
121,044
336,255
169,492
66,936
Due to banks
423,042
-
25,543
-
-
-
448,585
Due to customers
340,012
51,502
74,485
18,776
-
-
484,775
Due from banks
Derivative
48,800 1,129,833
-
-
-
-
-
2,755
2,755
55,395
-
-
-
-
-
55,395
Other liabilities
-
-
-
-
-
10,071
10,071
Deferred tax liabilities
-
-
-
-
-
457
457
818,449
51,502
100,028
18,776
-
(431,143)
69,542
236,227
150,716
66,936
Other borrowed funds
Total liabilities
13,283 1,002,038
Total interest sensitivity gap
35,517
The Board of Directors monitors this risk on a periodical basis and sets limits on the level of mismatch of interest rate re-pricing that may be undertaken. In the absence of any available hedging instruments, the Bank normally seeks to match its interest rate positions.
60
3. FINANCIAL RISK MANAGEMENT (CONTINUED) The table below summarises the effective interest rate by major currencies for monetary financial instruments held by the Bank as at 31 December 2006. EUR
USD
RON
Assets Cash and balances with Central Bank
0.69%
0.00%
4.52%
-
4.90%
7.10%
Due from banks
5.03%
3.37%
8.35%
Loans and advances to customers
6.73%
4.28%
12.71%
-
-
7.00%
Deposits from banks
3.79%
6.32%
7.62%
Due to customers
2.18%
2.92%
5.28%
Other borrowed funds
3.49%
-
-
Investment securities
Certificates of Deposit Liabilities
The table below summarises the effective interest rate by major currencies for monetary financial instruments as at 31 December 2005. EUR
USD
RON
Assets Cash and balances with Central Bank
0.77%
0.01%
6.36%
Investment securities
8.35%
3.98%
6.55%
Due from banks
1.89%
2.24%
7.20%
Loans and advances to customers
6.68%
5.18%
14.61%
-
-
7.23%
Deposits from banks
2.93%
3.61%
6.17%
Due to customers
1.79%
2.03%
6.85%
Other borrowed funds
4.60%
-
-
Certificates of Deposit Liabilities
61
PIRAEUS BANK
06
3. FINANCIAL RISK MANAGEMENT (CONTINUED) 3.4 Currency risk The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Bank sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily. Romania is just recently moving out of a long period of high rates of inflation and significant currency devaluation. As such, there is a consequent risk of loss in value in respect of net monetary assets held in Romanian Lei. The table below summarises the Bank’s exposure to foreign currency exchange rate risk at 31 December. Included in the table are the bank’s assets and liabilities at carrying amounts, categorised by currency. RON
EUR
USD
Other
Total
226,439
253,323
1,564
483
481,809
52,856
197,441
767
131
251,195
395,945
610,330
19,371
12,989
1,038,635
11,360
-
-
-
11,360
103,802
-
-
-
103,802
31 December 2006 Cash and balances with Central Bank Loans and advances to banks Loans and advances to customers Derivative assets Investment securities available for sale Intangible assets
4,141
-
-
-
4,141
63,699
-
-
-
63,699
340
-
-
-
340
Other assets
5,948
1,596
18
338
7,900
Total assets
864,530
1,062,690
21,720
13,941
1,962,881
Property and equipment Deferred income tax assets
Deposits from banks
465,198
168,538
32,967
774
667,477
Due to customers
369,325
591,477
37,944
556
999,302
Derivative liabilities
115
-
-
-
115
-
51,005
-
-
51,005
11,451
16,034
47
1,260
28,792
846,089
827,054
70,958
2,590
1,746,691
Other borrowed funds Deferred tax liability Total liabilities
62
3. FINANCIAL RISK MANAGEMENT (CONTINUED) RON
EUR
USD
Other
Total
18,441
235,636
(49,238)
11,351
216,190
-
(252,444)
49,241
(12,841)
(216,044)
18,441
(16,808)
3
(1,490)
146
94,408
151,658
1,175
344
247,585
-
8,424
676
345
9,445
Loans to customers
237,595
325,490
83,193
-
646,278
Investments securities
162,306
22,507
6,692
-
191,505
3,852
-
-
-
3,852
27,189
-
-
-
27,189
Net on balance sheet position Net off balance sheet position Net currency position 31 December 2005 Cash and balances with Central Bank Due from banks
Intangible assets Property and equipment Other assets
2,721
418
125
715
3,979
Total assets
528,071
508,497
91,861
1,404
1,129,833
Deposits from banks
179,984
174,028
94,573
-
448,585
Due to customers
308,465
143,214
32,707
389
484,775
Derivative liabilities
2,755
-
-
-
2,755
-
55,395
-
-
55,395
6,711
2,907
453
-
10,071
Other borrowed funds Other liabilities Deferred tax liability Total liabilities
457
-
-
-
457
498,372
375,544
127,733
389
1,002,038
30,283
132,892
(35,872)
1,015
128,318
-
(115,227)
33,697
-
(81,530)
30,283
17,665
(2,175)
1,015
46,788
Net on balance sheet position Net off balance sheet position Net currency position
Other currencies include mainly British Pound and Swiss Franc.
63
PIRAEUS BANK
06
3. FINANCIAL RISK MANAGEMENT (CONTINUED) 3.5 Liquidity risk The Bank is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan draw-downs and guarantees. The Bank does not maintain cash resources to meet all of these needs, as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. The Bank sets limits on the minimum proportion of maturing funds available to meet such calls and on the minimum level of inter-bank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand. The table below analyses the Bank’s assets and liabilities into relevant maturity groupings based on the remaining period at balance sheet date to the contractual maturity date.
As at 31 December 2006 1 month Up to
1 year
to
3 months
to
Over 5
1 month 3 months
to 1 year
5 years
years
Total
Assets Cash and balances with Central Bank
481,809
-
-
-
-
481,809
251,195
-
-
-
-
251,195
155,552
75,556
319,736
265,973
221,818
1,038,635
Loans and advances to banks Loans and advances to customers Derivative assets
11,360
-
-
-
-
11,360
Investments securities
16,984
2,140
30,558
51,330
2,791
103,802
Intangible assets
-
-
-
4,141
-
4,141
Property and equipment
-
-
-
-
63,699
63,699
-
-
340
-
340
Other assets
7,900
-
-
-
-
7,900
Total assets
924,800
77,696
350,294
321,784
288,308
1,962,881
Deferred income tax asset
Deposits from banks
440,765
86,712
140,000
-
-
667,477
Due to customers
873,344
64,825
60,775
358
-
999,302
Derivative liabilities
115
-
-
-
-
115
-
280
-
-
50,725
51,005
19,682
265
1,211
6,566
1,068
28,792
Other borrowed funds Other liabilities
64
3. FINANCIAL RISK MANAGEMENT (CONTINUED) 1 month Up to
Total liabilities
1 year
to
3 months
to
Over 5
1 month 3 months
to 1 year
5 years
years
Total
1,333,906
152,082
201,986
6,924
51,793
1,746,691
(409,106)
(74,386)
148,308
314,860
236,515
216,190
(409,106)
(483,492)
(335,184)
(20,324)
216,190
247,585
-
-
-
-
247,585
9,445
-
-
-
-
9,445
99,399
35,639
290,729
101,739
118,772
646,278
available for sale
-
34,703
13,347
127,660
15,795
191,505
Intangibles
-
-
-
3,852
-
3,852
Property and equipment
-
-
-
27,189
-
27,189
prepayments
-
-
3,979
-
-
3,979
Total assets
356,429
70,342
308,055
260,440
134,567
1,129,833
Due to banks
329,272
88,079
-
31,234
-
448,585
Due to customers
340,022
51,502
74,485
18,766
-
484,775
Derivative liabilities
-
-
2,755
-
-
2,755
Net Liquidity (gap) / surplus Cumulated liquidity (gap) / surplus
As at 31 December 2005 Cash and balances with Central Bank Loans and advances to banks Loans and advances to customers Investments securities
Other assets and
Other borrowed funds
-
-
-
-
55,395
55,395
Other liabilities
-
-
10,071
-
-
10,071
Deferred tax liabilities
-
-
-
457
-
457
669,294
139,581
87,311
50,457
55,395
1,002,038
(312,865)
(69,239)
220,744
209,983
79,172
127,795
(312,865)
(382,104)
(161,360)
48,623
127,795
Total liabilities Net Liquidity (gap) / surplus Cumulated liquidity (gap) / surplus
65
PIRAEUS BANK
06
3. FINANCIAL RISK MANAGEMENT (CONTINUED) The liquidity table is prepared based on the residual contractual maturity of the customers’ funds. If it were to be prepared on an “expected” basis, the gap would not be so high, as most part of these funds from customers are current account balances and short term deposits which are rolled-over. The liquidity risk is also monitored as per Central Bank requirements and there is no non-compliance noted. Moreover the Bank has a strong equity position (CAD ratio of over 20%). The management believes that the negative liquidity gap does not trigger a going concern risk.
3.6 Fair values of financial assets and liabilities The following table summarises the carrying amounts and fair values of those financial assets and liabilities not presented on the Bank’s balance sheet at their fair value. Bid prices are used to estimate fair values of assets, whereas offer prices are applied for liabilities. Carrying value
Fair value
2006
2005
2006
2005
251,195
9,384
251,195
9,384
1,038,635
646,446
1,052,805
646,446
Deposits from banks
667,477
448,168
667,477
448,168
Due to customers
999,302
485,241
999,302
485,241
51,005
55,395
51,005
55,395
Financial assets Due from banks Loans and advances to customers Financial liabilities
Other borrowed funds
a) Due from other banks Due from other banks includes inter-bank placements and items in the course of collection. The fair value of floating rate placements and overnight deposits is their carrying amount. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and remaining maturity.
66
3. FINANCIAL RISK MANAGEMENT (CONTINUED) b) Loans and advances to customers Loans and advances are net of provisions for impairment. The estimated fair value of loans and advances represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value. c) Investment securities available for sale Fair value of investment securities are fair values by reference to prices quoted on the secondary market for securities where secondary market exists or by using discounted cash flows techniques using market rates. d) Deposits and borrowings The estimated fair value of deposits with no stated maturity, which includes non-interest-bearing deposits, is the amount repayable on demand. The estimated fair value of fixed interest-bearing deposits and other borrowings without quoted market price is based on discounted cash flows using interest rates for new debts with similar remaining maturity.
67
PIRAEUS BANK
06
4. CRITICAL ACCOUNTING ESTIMATES, AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES
The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. (a) Impairment losses on loans and advances The Bank reviews its loan portfolios to assess impairment at least on a half yearly basis. In determining whether an impairment loss should be recorded in the income statement, the Bank makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. To the extent that the net present value of estimated cash flows differs by +/- 5% the provision estimate would be approximately RON 3,215 thousands lower or RON 3,418 thousand higher. (b) De-recognition of financial assets The Bank derecognises an asset if it transfers substantially all the risks and rewards of ownership of the asset. The transfer of risks and rewards is evaluated on the Bank’s exposure, before and after the transfer, to the variability in amount and timing of the cash flows that are likely to occur. The entity continues to recognise the asset if it retains substantially all the risks and rewards of ownership of the asset. Derecognition requires the transferor’s exposure to the risks and rewards of ownership to change substantially.
68
4 CRITICAL ACCOUNTING ESTIMATES, AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES (CONTINUED) The Bank determines whether it has retained control of the asset. Control is based on the transferee’s practical ability to sell the asset. The transferee has this ability if it can sell the asset in its entirety unilaterally to an unrelated third party without needing to impose further restrictions on the transfer. A transferee has the practical ability to sell the asset if it is traded in an active market because the transferee could purchase the asset in the market if it needs to return the asset to the transferor. The transferor has lost control if an asset subject to a call option can be readily obtained by the transferee in the market although he has retained some of the risks and rewards in relation to the asset. However, the contractual right to dispose of an asset is of little practical use if there is no market for the asset. The asset is derecognised if the Bank has lost control. The Bank continues to recognise the asset to the extent of its continuing involvement if it has retained control.
5. NET INTEREST INCOME 2006
2005
Interest income Loans and advances to customers
78,653
70,422
Current accounts and deposits to banks
8,221
8,126
Investment securities
4,682
10,355
91,556
88,903
Deposits from banks
21,464
23,668
Customer deposits
18,250
12,740
2,309
365
42,023
36,773
Interest expense
Borrowings
69
PIRAEUS BANK
06
6. NET FEE AND COMMISSION INCOME 2006
2005
Loans servicing fee
16,035
4,356
Payments transactions
13,470
8,332
Fee and commission income
Credit commitments
2,322
1,086
Cards transactions
616
510
Credit default swap
-
656
32,443
14,940
1,962
2,431
938
650
-
151
2,900
3,232
Fee and commission expense Transactions with banks Cards transactions Other
The commission income from loans servicing fees represent commission charged to Piraeus Bank London, to which the Bank sold a portfolio of loans receivables and for which the Bank continues to render administration services against this commission.
7. NET TRADING INCOME 2006
2005
Foreign exchange: - Transaction gains less losses - Translation gains less
70
23,830
2,533
(5,413)
3,111
18,417
5,644
8. OTHER INCOME
Dividends income Other income Gain on disposal of fixed assets
2006
2005
1,196
-
223
13
17
-
1,436
13
2006
2005
9. IMPAIRMENT CHARGE FOR CREDIT LOSSES
Impairment charge for loans (Note 14)
12,512
9,560
Recoveries from loans written off
(10,616)
(1,882)
1,896
7,678
2006
2005
32,941
18,034
10. OTHER OPERATING EXPENSE
Salaries Social security and other contributions Rent
9,753
5,779
12,110
7,098
Depreciation and amortisation (Notes 17; 18)
8,973
4,940
Advertising expenses
8,410
5,768
Services from third parties
3,088
1,314
Provision expense (Note 29)
5,563
1,985
Telecommunication
4,347
2,886
Consumables
1,731
2,384
Transportation expenses
1,644
1,140
Other
7,021
4,206
95,581
55,534
71
PIRAEUS BANK
06
11. INCOME TAX EXPENSE The income tax consists of current and deferred income tax as follows:
Current tax expense Deferred income tax credit
2006
2005
1,070
3,424
(447)
(2,264)
623
1,160
The tax on Bank’s profit before tax differs from the theoretical amount that would arise using the basic tax rate as follows:
Profit before income tax Theoretical tax charge at the applicable statutory rate
2006
2005
3,023
6,283
484
1,005
Tax effect on items which are not deductible or assessable for taxation purposes Non-deductible expenses
658
138
Income which is exempt of taxation
(519)
(343)
-
359
623
1,160
Other Income tax expense for the year
The differences between regulations issued by the Romanian Ministry of Finance and the accounting rules applied in preparing these financial statements give rise to temporary differences between the carrying value of certain assets and liabilities for financial reporting and tax purposes. Current income tax is calculated applying a rate of 16% (2005: 16%). Deferred income taxes are calculated on all temporary differences under the liability method using a profit tax rate of 16% (2005: 16%).
72
11. INCOME TAX EXPENSE (CONTINUED) Deferred income tax assets and liabilities are attributable to the following items: Tax
Tax
recognized
recognized
in income
in
31 Dec 2006
statement
(RON)
(RON)
equity 31 Dec 2005 (RON)
(RON)
-
353
expense / (credit) Tax effect of deductible temporary differences Loan origination fees
2,392
Provision for credit commitments
1,208
890
-
318
821
389
-
432
4,421
3,318
-
1,103
Other accruals
2,039
Tax effect of taxable temporary differences Inflation of fixed assets and equity investments Provisions for impairment of loans Sale / repurchase transactions
534
(130)
-
664
3,479
2,925
-
554
14
76
-
(62)
54
-
(350)
404
4,081
2,871
(350)
1,560
340
447
350
(457)
340
447
350
(457)
Gain on fair value of investment securities available for sale
Net tax effect of temporary differences Total net deferred income tax asset / ( liability)
73
PIRAEUS BANK
06
11. INCOME TAX EXPENSE (CONTINUED) Tax
Tax
recognized
recognized
in income
in
31 Dec 2005
statement
equity
31 Dec 2004
(RON)
(RON)
(RON)
(RON)
expense / (credit) Tax effect of deductible temporary differences Loan origination fees
353
300
-
53
Provision for credit commitments
318
318
-
-
Other accruals
432
432
-
-
1,103
1,050
-
53
Tax effect of taxable temporary differences Inflation of fixed assets and equity investments
664
(30)
-
694
Provisions for impairment of loans
554
(1,005)
-
1,559
(62)
(181)
-
118
404
-
404
-
1,560
(1,216)
404
2,371
Net tax effect of temporary differences
(457)
2,266
(404)
(2,318)
Total net deferred income tax liability
(457)
2,266
(404)
(2,318)
Sale / repurchase transactions Gain on fair value of investment securities available for sale
74
12. CASH AND BALANCES WITH CENTRAL BANK 2006
2005
29,244
13,376
Current account
358,501
234,209
- in RON
115,453
85,905
- in EUR
247,203
148,304
94,064
-
481,809
247,585
Cash
Term deposits
Current accounts are required to satisfy the mandatory reserve requirements of the National Bank of Romania. This reserve is a minimum average deposit with a holding period of one month, based on resources attracted on previous month. The cash balance held with central bank at the reporting date meet these requirements. During 2006 the interest rate ranged between 1.5% at the beginning of the year, reaching 1.9% by the end of the year (2005: 4% - 1.5%) for reserves held in RON, and between 0.7% and 0.8% for reserves held in EUR (2005: 1%-0.7%). The interest rates for term deposits with National Bank of Romania increased from 7.5% in January 2006 to 8.75% in December 2006 (during 2005 this interest rate ranged between 16.6% and 7.5%). All these balances were included in cash and cash equivalents (Note 26).
13. LOANS AND ADVANCES TO BANKS
Current accounts and other receivables from banks Placements with Romanian banks
2006
2005
177,936
2,090
73,259
7,355
251,195
9,445
During 2006 interest on placements in USD ranged from 4.5% to 7.75% (2005: 1% to 2%) and for placements in EUR from 2.1% to 5.8% (2005: 2.3% to 2.9%). Interest rates on placements in RON ranged from 1% to 24% (2005: 7% to 14.2%), while on placements in GBP ranged from 4.53% to 5.1%. The average rate on placements was 7.51% (2005: 7.45%).
75
PIRAEUS BANK
06
14. LOANS AND ADVANCES TO CUSTOMERS 2006
2005
Companies
609,876
540,941
Individuals
440,036
112,210
2,736
6,449
(14,013)
(13,322)
1,038,635
646,278
Other Impairment provision
Analysis by sector 2006
2005
% of total
Companies
609,876
Trade
384,966
37%
336,416
51%
Tourism Manufacturing Construction and Real Estate
540,941
6,744
1%
55,692
8%
93,163
9%
54,212
8%
102,790
10%
50,036
8%
Transport
6,187
1%
23,723
4%
Agriculture
11,122
1%
19,000
3%
4,904
0%
1,862
0%
Energy Individuals Mortgage Consumers loans and overdrafts Credit Card Advances
Total portfolio Less allowance for loan impairment
76
% of total
440,036
112,210
89,141
8%
62,558
9%
347,240
33%
47,930
7%
3,655
0%
1,721
0%
1,052,648
100%
659,600
100%
(14,013)
(13,322)
1,038,635
646,278
14. LOANS AND ADVANCES TO CUSTOMERS (CONTINUED) Allowance for loan losses
At the beginning of the year
2006
2005
13,322
5,789
Charge for the year (Note 9)
12,512
9,560
Loans written off during the year as uncollectible
(11,821)
(2,027)
At the end of the year
14,013
13,322
15. DERIVATIVE ASSETS AND DERIVATIVE LIABILITIES At 31 December 2006 Contract / national amount
Fair values Assets
Liabilities
Derivative held for trading a) Foreign exchange derivatives Currency forwards
(168,501)
11,360
(115)
Total recognized derivative
(168,501)
11,360
(115)
Currency forwards
133,093
-
2,755
Total recognized derivative
133,093
-
2,755
At 31 December 2005 Derivative held for trading a) Foreign exchange derivatives
During the year 2005 the Bank entered into a derivative transaction - credit default swap. This derivative transaction expired before 31 December 2005. During 2006 the Bank did not enter into other similar transactions.
77
PIRAEUS BANK
06
16. INVESTMENT SECURITIES AVAILABLE FOR SALE 2006
2005
Treasury securities
87,132
154,628
- in RON
87,132
125,430
- in USD
-
6,691
Certificates of deposit in RON
14,961
34,703
-
22,507
Romanian Bonds
1,300
1,770
- in RON
1,300
-
- in USD
-
1,770
409
404
103,802
191,505
Eurobonds
Equity investments Total amounts
Treasury securities including Treasury Bills in RON are issued by the Romanian Ministry of Public Finance on the local market with interest rates between 6.41% and 13.91% (2005: 7.5% to 7.3%). Included in Treasury securities are securities sold under sale and repurchase agreements. The certificates of deposit are issued by the National Bank of Romania and denominated in RON, bearing interest of 8.5% (2005: between 6.97% and 7.5%). Included in Romanian Bonds are Government bonds “Primaria Deva” and Navodari with maturities in 2008 and 2009. Equity investments comprise investments in other financial institutions. During the year 2005 the Bank sold securities in held to maturity portfolio. In accordance with the requirements of IAS 39 the Bank’s portfolio of held to maturity securities as at 31/12/2005 was re-classified under the available for sale category and measured at fair value. Subsequently the Bank did not use the held to maturity category in 2006 and will not be allowed to use it also during 2007. The amount included in cash and cash equivalents for cash flow purposes is RON 14,960 (Note 26) (2005: RON 34,702).
78
16. INVESTMENT SECURITIES AVAILABLE FOR SALE (CONTINUED) The movement in the investment securities is presented below: Available for sale
Held to maturity
Total
2,094
166,025
168,119
Additions
62,036
-
62,036
Disposals (sale and redemption)
(37,624)
-
(37,624)
Gains from changes in fair value
(1,026)
-
(1,026)
-
-
-
HTM securities moved to AFS
166,025
(166,025)
-
At 31 December 2005
191,505
-
191,505
At 1 January 2006
191,505
-
191,505
-
-
-
14,961
-
14,961
(100,474)
-
(100,474)
(2,190)
-
(2,190)
-
-
-
103,802
-
103,802
At 1 January 2005
Impairment losses
Exchange differences on monetary assets Additions Disposals (sale and redemption) Losses from changes in fair value Impairment losses At 31 December 2006
79
PIRAEUS BANK
06
17. INTANGIBLE ASSETS Computer
Software
software
in progress
Total
288
2,221
Year ended 31 December 2005 Opening net book amount
1,933
Additions
2,757
532
3,289
Disposals / transfers
-
(288)
(288)
Amortisation charge
(1,370)
-
(1,370)
Closing net book amount
3,320
532
3,852
Cost
7,816
532
8,348
Accumulated amortisation
(4,496)
-
(4,496)
Net book amount
3,320
532
3,852
Opening net book amount
3,320
532
3,852
Additions
At 31 December 2005
Year ended 31 December 2006 2,751
273
3,024
Disposals / transfers
-
(727)
(727)
Amortization charge
(2,008)
-
(2,008)
Closing net book amount
4,063
78
4,141
At 31 December 2006 Cost
80
10,289
78
10,367
Accumulated amortisation
(6,226)
-
(6,226)
Net book amount
4,063
78
4,141
18. PROPERTY AND EQUIPMENT Furniture
Assets in
Leasehold
and
course of
Buildings
improvements
equipment
construction
Total
Opening net book amount
-
5,430
5,597
3,363
14,390
Additions
-
5,493
8,287
5,936
19,716
Disposals / transfers
-
-
(17)
(3,330)
(3,347)
Depreciation charge
-
1,340
(2,175)
(55)
(3,570)
Closing net book amount
-
9,583
11,692
5,914
27,189
-
13,243
20,188
5,969
39,400
and impairment provision
-
(3,660)
(8,496)
Net book amount
-
9,583
11,692
5,914
27,189
-
9,583
11,692
5,914
27,189
38,098
63,410
Year ended 31 December 2005
At 31 December 2005 Cost Accumulated depreciation (55) (12,211)
Year ended 31 December 2006 Opening net book amount Additions
3,129
9,969
12,214
Disposals / transfers
-
-
(28)
Depreciation charge
(41)
(2,663)
(4,261)
-
(6,965)
3,088
16,889
19,617
24,105
63,699
3,129
23,192
30,998
24,105
81,424
(41)
(6,303)
(11,381)
3,088
16,889
19,617
Closing net book amount
(19,907) (19,935)
At 31 December 2006 Cost Accumulated depreciation and impairment provision Net book amount
- (17,725) 24,105
63,699
81
PIRAEUS BANK
06
19. OTHER ASSETS
Prepayments Current income tax receivables
2006
2005
6,076
2,818
-
119
1,824
1,042
7,900
3,979
2006
2005
Term deposits
659,213
448,124
Sight deposits
8,264
44
-
417
667,477
448,585
2006
2005
Term deposits
524,896
270,485
Current accounts
379,584
113,081
Collateral deposits
59,186
41,463
Repurchase agreements
35,636
59,746
999,302
484,775
2006
2005
51,005
55.395
Other assets and receivables
20. DEPOSITS FROM BANKS
Amounts in course of settlement
21. DUE TO CUSTOMERS
22. OTHER BORROWED FUNDS
Subordinated loan
The Bank contracted a subordinated loan of EUR 15,000,000 on 15 November 2005 from Piraeus Bank Athens. The loan was fully drawn as at 31 December 2005. The loan carries variable interest rate and is repayable in a single instalment in 2015. The Bank is not subject to any covenants from the subordinated loan agreement.
82
23. OTHER LIABILITIES 2006
2005
Finance lease payables
9,242
2,748
Payables to suppliers
8,921
3,984
Provisions for credit commitments (Note 29)
7,548
1,985
Other tax and social contributions payable
2,288
1,354
793
-
28,792
10,071
31 December 2006
31 December 2005
2,273
2,691
Later than 1 year and no later than 5 years
7,310
223
Later than 5 years
3,104
-
Future finance charges on finance leases
(3,445)
(166)
Present value of finance lease liabilities
9,242
2,748
1,721
2,535
Later than 1 year and no later than 5 years
6,176
213
Later than 5 years
1,345
-
9,242
2,748
Current income tax payable
Finance lease liabilities are analysed as follows:
No later than 1 year
Present value of finance lease liabilities is as follows: No later than 1 year
83
PIRAEUS BANK
06
24. SHARE CAPITAL
Court registered capital Restatement for hyperinflation in previous years
2006
2005
147,031
59,196
57,693
57,693
204,724
116,889
Percentage Shareholder Piraeus Bank SA, Athens Individuals
2006
2005
99.99%
99.99%
0.01%
0.01%
100.00%
100.00%
The share capital of the Bank consists of 30,786,694 (2005: 13,219,694) allotted and fully paid ordinary shares of RON 5 each (2005: RON 5 each). Each share carries one vote. During the year 2006 the Bank increased the share capital by RON 87,835 thousands by issuing a number of 17,567,000 shares with the same nominal value of RON 5 / share. The share capital was fully contributed in cash. During the year 2005 the Bank increased the share capital by RON 26.097 thousands by issuing a number of 5,219,250 shares with the nominal value of RON 5 / share. The share capital was fully contributed in cash.
84
25. OTHER RESERVES 2006
2005
Statutory reserve
13,220
6,821
General reserve for banking risks
10,993
9,284
284
2,124
24,497
18,229
Available for sale reserve
The movement in the other reserves is detailed below by each category of reserve: Statutory reserve
2006
2005
At the beginning of the year
6,821
6,821
Transfer as distribution of profit
6,399
-
13,220
6,821
General reserve for banking risks
2006
2005
At the beginning of the year
9,284
9,284
Transfer as distribution of profit
1,710
-
10,994
9,284
Available for sale reserve
2006
2005
At the beginning of the year
2,124
-
At the end of the year
At the end of the year
Increase in fair value of investments securities, gross
(2,190)
2,529
Deferred tax liability
350
(405)
At the end of the year
284
2,124
In accordance with the Romanian law on banks and banking activities, the Bank must distribute the profit as dividends or make a transfer to retained earnings (reserves) on the basis of the financial statements prepared under Romanian Accounting Regulations (“RAR”). Amounts transferred to reserves must be used for the purposes designated when the transfer is made. Since the beginning of 2004, under Romanian banking legislation the Bank is required to create the following reserves from appropriation of profit: .
85
PIRAEUS BANK
06
25. OTHER RESERVES (CONTINUED) (a)
statutory reserve, appropriated at the rate of 5% of the gross profit, until the total reserve is equal to 20% of the issued and fully paid up share capital;
(b)
general reserve for banking risk, appropriated from the gross profit at the rate of 1% of assets bearing banking risks.
Computation of reserves according to statutory requirements as at 31 December 2006 cannot diminish reserves accumulated as at 31 December 2005. After reducing taxes and setting aside the legal and general reserves as discussed above, the remaining balance of net profit may be distributed to shareholders. Dividends may only be declared from current statutory profit. The statutory reserves may be distributed subject to the approval of the Annual General Meeting of the Shareholders but would be taxed upon distribution.
26. CASH AND CASH EQUIVALENTS 2006
2005
Cash and balances with Central Banks (Note 12)
481,809
247,585
Loans and advances to banks (Note 13)
251,195
9,445
14,961
34,702
747,965
291,732
Investment securities available for sale (Note 16)
The comparatives have been adjusted to conform with the current year presentation. The change in presentation has derived from the fact that during 2006 the management has revised its estimate of cash and cash equivalents to include the minimum mandatory reserves held with Central Bank. As previously As reported 31 December 2005
reported 31 December 2005
Difference
Current account with the Central Bank included in cash and cash equivalents
86
247,585
13,376
234,209
27. COMPARATIVES As reported
As previously
currently Note
Deposits from banks Derivative liabilities
i)
Other liabilities
i)
Due to customers Loans and advances to banks
31 December 2005
reported 31 December 2005
Difference
448,585
448,168
417
2,755
-
2,755
10,071
13,300
(3,229)
484,775
485,241
(466)
9,445
9,384
61
646,278
646,446
(168)
3,979
4,395
(416)
88,903
86,902
(2,001)
Loans and advances to customers Other assets
Interest and similar income
ii)
Fee and commission income
ii)
14,940
17,517
(2,577)
Other operating expenses
ii)
(55,534)
(56,098)
564
i)
The amount of RON 3,339 thousands representing fair value liability in respect of derivative transactions was presented in 2005 financial statements as other liabilities. In the current year financial statements, as per IAS 39 requirements it was presented as derivative liabilities.
ii)
The amount of RON 2,577 thousands presented as commission income and the amount of RON 576 thousands presented as operating expenses were reclassified as interest income after the bank carefully analyzed the nature of these commissions and expenses and concluded that they are component of effective interest rate of loans to customers.
iii)
The amount of RON 7,938 thousands was presented as interest income as allowed by IAS 32; during 2006 the Bank decided to present these amounts as gains from investment securities.
87
PIRAEUS BANK
06
28. RELATED PARTY TRANSACTIONS The nature of the related party relationships for those related parties with whom the Bank entered into significant transactions or had significant balances outstanding at 31 December are detailed below. Transactions were entered into with related parties during the ordinary course of business at market rates. 2006
2005
Group
Group
Management
Parent
entities
Management
Parent
entities
-
65,928
125,123
-
184
-
Assets Current accounts at banks Loans and advances to customers
-
-
2
-
-
5,907
Loans to management
3,387
-
-
20
-
-
Total assets
3,387
65,928
125,125
20
-
271,583
-
-
177,546
(principal and interest)
-
8,336
-
-
11,045
-
Due to customers
-
-
100,594
-
-
36,726
184
5,907
Liabilities Deposits from banks
-
Asset management liabilities
Subordinated loan
-
51,005
-
-
55,395
-
3,859
-
-
-
-
-
Leasing liability
-
-
9,242
-
-
Total liabilities
3,859
330,924
109,836
-
243,986
Deposits from management
88
2,748 39,474
28. RELATED PARTY TRANSACTIONS (CONTINUED) 2006 Key
Group
2005 Key
Group
Management
Parent
entities
Management Parent
entities
-
-
717
-
-
5,704
-
-
-
-
656
-
agreement
-
16,035
-
-
4,356
-
Total revenues
-
16,035
717
-
5,012
5,704
Revenues Interest on loans to companies Credit default swap (see Note 29) Commission income from asset management
Expenses Interest on deposits from customers and management
1,893
-
1,538
-
-
804
Interest on deposits from banks
-
9,364
-
-
16,988
-
Interest expense with loans
-
2,044
-
-
240
-
salaries
7,703
-
-
3,760
-
-
Total expenses
9,596
11,408
1,538
3,760
17,228
804
Expense with management
Piraeus Bank Athens is the Bank’s ultimate parent. The related parties mainly include entities from Piraeus Bank Group and local management. During 2006 the Bank sold a portfolio of loan receivables in the amount of EUR 261.7 million (2005: EUR 160 million) to Piraeus Bank London branch. The consideration received equals the loans’ fair value. The Bank continues to administer this portfolio of loans and receive a service fee (Note 6).
89
PIRAEUS BANK
06
29. COMMITMENTS AND CONTINGENCIES Credit related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralized by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. Outstanding amounts are: 2006
2005
190,884
18,111
Letters of guarantee
80,852
86,195
Letters of credit
17,644
8,564
289,380
112,870
Unused credit facilities
90
29. COMMITMENTS AND CONTINGENCIES (CONTINUED) 2006
2005
Provision for credit commitments At the beginning of the year
1,985
-
Charge for the year (Note 10)
5,563
1,985
At the end of the year
7,548
1,985
Taxation risk The Romanian taxation system has just undergone a process of consolidation and harmonisation with European Union legislation. However, there are still different interpretations of the fiscal legislation. In various circumstances, the tax authorities may have different approaches to certain issues, and assess additional tax liabilities, together with late payment interest and penalties (accruing at a rate of approximately 36% p.a. in 2006, same for 2007). In Romania, tax periods remain open for 5 years. The Company’s management considers that the tax liabilities included in these financial statements are fairly stated, and they are not aware of any circumstances which may give rise to a potential material liability in this respect. Assets pledged / restricted Assets pledged are detailed below:
Investment securities Related liabilities
2006
2005
3,320
64,050
-
(282)
91
PIRAEUS BANK
06
29. COMMITMENTS AND CONTINGENCIES (CONTINUED) Capital commitments As at 31 December 2006 the Bank had capital expenditure contracted of RON 7,988 thousands (2005: 775 thousands) in respect of software and other fixed assets purchases. The Bank’s management is confident that future net revenues and funding will be sufficient to cover these commitments. Where the Bank is the lessee, the future minimum lease payments under non cancellable building operating leases are as follows: 2006
2005
No later than 1 year
12,403
9,800
Later than 1 year and no later than 5 years
40,000
34,626
Later than 5 years
26,996
17,153
79,399
61,579
30. OPERATING ENVIRONMENT OF THE BANK The economy of Romania continues to display characteristics of an emerging market. These characteristics include, but are not limited to, the existence of a currency that is not freely convertible outside of the country; a low level of liquidity in the public and private debt and equity markets and relatively high inflation. Additionally, the banking sector in Romania is particularly impacted by adverse currency fluctuations and economic conditions. Furthermore, the need for further developments in the bankruptcy laws, in formalised procedures for the registration and enforcement of collateral and other legal, fiscal impediments contribute to the difficulties experienced by banks currently operating in the Romania. The prospects for future economic stability in Romania are largely dependent upon the effectiveness of economic measures undertaken by the government, together with legal and regulatory developments.
92
