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CREDIT AGRICOLE BANKA SRBIJA A.D. NOVI SAD

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED ON 31 DECEMBER 2016

AND INDEPENDENT AUDITOR’S REPORT

CREDIT AGRICOLE BANKA SRBIJA A.D.NOVI SAD

Consolidated financial statements for the year ended on 31 December 2016

Table of Contents

Independent Auditor’s Report 1

Consolidated Balance Sheet

Consolidated Income Statement

Consolidate Other Comprehensive Income Statement

Consolidated Statement of Changes in Equity

Consolidated Cash Flow Statement

Notes to the Consolidated Financial Statements 2-90

1-9 (AD E.9 a Todorovie

icensed Auditor

Belgrade, 25 April 2017

pwc INDEPENDENT AUDITOR'S REPORT

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

We have audited the accompanying consolidated financial statements of Credit Agricole banka Srbija a.d. Novi Sad (the "Bank") and its subsidiary (the "Group") which comprise the consolidated balance sheet as of 31 December 2016 and the consolidated income statement, consolidated statement of other comprehensive income, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended and a summary of significant accounting policies and other explanatory notes.

Management's Responsibility for the Consolidated Financial Statements

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

Auditor's Responsibility

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

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

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

Opinion

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2016, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

p„,,,L,4,,,..,1„.641!....k.)Or_, et ta • . 13er-el rtisk PricewaterhouseCoopers d.o.o. Beograd

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

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

Novi Sad 31 March 2017

I-lead of Accounting

Vera Tase ska

Chairm- of the Executive Board

Carlos-De. C-ofdaTe

CREDIT AGRICOLE BANKA SRBIJA AD NOVI SAD

CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDING 31st DECEMBER 2016

Note 2016.

On thousands RSD)

2015. INCOME AND EXPENSES

Interest income 5 3,946,859 3,997,149

Interest expenses 5 (616,317) (956,539)

Net interest income 5 3,330,542 3,040,610

Fees and commissions income 6 1,637,706 1,628,131

Fees and commissions expense 6 (440,332) (460,326)

Net fees and commissions income 6 1,197,374 1,167,805

Net losses from risk protection (18) (8,310) Net gains on financial assets that are initially recognized at fair value through profit or loss 2,767

Net foreign exchange losses and the foreign currency clause effects 7 (48,667) (20,872)

Other operating income 8 63,243 44,093 Net losses from impairment of financial assets and credit risk-weighted off-balance sheet items 9 (412,354) (285,795)

TOTAL. NET BUSINESS INCOME 4,132,887 3,937,531

Salaries, wages and other personal expenses 10 (1,978,375) (1,862,858)

Depreciation 11 (238,522) (210,344)

Other expenses 12 (1,660,478) (1,647,288)

PROFIT BEFORE TAXATION 255,512 217,041

Income tax 13 (13,947) (14,349)

Deferred tax expenses 13 (35,167) (61,246)

PROFIT 206,398 141,446

Profit attributable to the parent entity 206,398 141,446

Earnings per share Basic earnings per share (in RSD) 27 32 22

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CREDIT AGRICOLE BAN KA SRBIJA AD NOVI SAD

CONSOLIDATED OTHER COMPREHENSIVE INCOME STATEMENT FOR THE YEAR ENDING ON 31st DECEMBER 2016

2016.

(in thousands RSD)

2015.

PROFIT FOR THE PERIOD 206,398 141,446 Other comprehensive income:

Components of other comprehensive income that cannot be reclassified to profit or loss:

Increase of revaluation reserves 2,067

Actuarial gains 6,108 8,104

Other comprehensive income for the period 8,175 8,104

COMPREHENSIVE INCOME FOR THE PERIOD 214,573 149,550

Comprehensive income attributable to the parent entity 214,573 149,550

Chairm n of t tive Board

_.----7/ ------- Carlos De Cordoue


CONSOLIDATED BALANCE SHEET ON 315t DECEMBER 2016

(in thousands RSDJ

ASSETS Note 31.12.2016. 31.12.2015.

Cash and cash funds held with the central bank 14

11,068,675 9,450,342

Financial assets initially recognized at fair value through profit or loss. 2,767

Financial assets held to maturity 15 462,001 2,456,429

Loans and receivables due from banks and other financial institutions 16 5,532,162 6,559,620

Loans and receivables due from customers 17 62,848,625 54,665,978

Intangible assets 18 124,249 150,698

Property, plant and equipment 19 1,503,266 1,458,966

Investment property 20 139,618 136,698

Current tax assets 227

Deferred tax assets 13 91,145 126,312

Other assets 21 396,174 367,765

TOTAL ASSETS 82,168,909 75,372,808

LIABILITIES

Deposits and other liabilities due to banks, other financial institutions and the central bank 22

21,869,597 21,624,165

Deposits and other liabilities due to customers 23 48,158,207 41,843,418

Subordinated liabilities 24 2,483,767 2,447,899

Provisions 25 142,118 117,897

Current tax liabilities 13 458 2,679

Other liabilities 26 718,166 727,361

TOTAL LIABILITIES 73,372,313 66,763,419

Equity

Share capital 27 8,420,500 8,420,500

Loss 27 346,026 166,994

Reserves 27 30,070 21,895

TOTAL CAPITAL 8,796,596 8,609,389

TOTAL LIABILITIES 82,168,909 75,372,808


Head of Accounting .,( A • , Member of the Executive Board Giti-N0 . ' 5 ' ooria,

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-.. 2eljko Obradovid

Carlos De Cordoue


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

Share capital Share premium Other reserves Revaluation reserves

Retained earnings!

(Accumulated loss)

(in thousands RSD)

Total

Balance at 15t January 2015 13,122,105 1,523,079 111,500 13,610 (6,313,991) 8,456,303 Profit for the year 141,446 141,446 Accumulated other comprehensive income 8,104 8,104 Profit distribution — loss coverage (4,701,605) (1,523,079) (114,855) 6,339,539 Other - increase 3,355 181 3,536

Balance at 315t December 2015 8,420,500 21,895 166,994 8,609,389

Balance at 15t January 2016 8,420,500 21,895 166,994 8,609,389 Profit for the year 206,398 206,398 Accumulated other comprehensive income 8,175 8,175 Other — reduction (27,366) (27,366)

Balance at 31st December 2016 8,420,500 30,070 346,026 8,796,596

Novi Sad 31st March 2017

Head of Accounting

Member of the Executive Board

Chairman of the Executive Board

Chai4na of the Executive Board

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CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDING ON 31st DECEMBER 2016

2016. (in thousands RSD)

2015.

OPERATING ACTIVITIES Cash inflows from operating activities 5,535,096 5,537,478 Inflows from interests 3,796,075 3,612,086 Inflows from fees and commissions 1,629,183 1,636,591 Inflows from other operating activities 72,476 263,253 Inflows from dividends and profit sharing 37,362 25,548 Cash outflows from operating activities (4,717,026) (5,067,091) Outflows from interests (653,622) (903,104) Outflows from fees and commissions (412,347) (433,062) Outflows from gross salaries, wages and other personal expenses (2,076,734) (1,787,438) Outflows from taxes, contributions and other duties charged (117,117) (110,320) Outflows from other operating expenses (1,457,206) (1,833,167) Net cash inflow from operating activities before increase or decrease in loans and deposits 818,070 470,387 Decrease in loans and increase in deposits and other liabilities 11,418,962 8,645,156 Decrease in loans and receivables from banks and other financial institutions, the central bank and customers 1,409,456 103,410

Increase in deposits and other liabilities due to banks, other financial institutions, central banks and customers 10,009,506 8,541,746

Increase in loans and decrease in deposits and other liabilities (15,514,681) (6,472,663)

Increase in loans and receivables from banks and other financial institutions, the central bank and customers (11,599,506) (3,806,968) Decrease in deposits and other liabilities due to banks, other financial institutions, central banks and customers (3,915,175) (2,665,695) Net (outflow)/inflow from operating activities before income tax (3,277,649) 2,642,880 Paid income tax (15,534) (80,799) Net (outflow)/inflow from operating activities (3,293,183) 2,562,081

INVESTMENT ACTIVITIES Inflows from investment activities 2,914,072 Inflows from securities investment 2,914,072 Outflows from investment activities (1,178,938) (1,709,032) Outflows from securities investment (922,411) (1,456,429) Outflows from the purchase of intangible assets, property plant and equipment (256,527) (252,603)

Net cash inflow/outflow from financing activities 1,735,134 (1,709,032)

FINANCING ACTIVITIES Inflows from financing activities

2,229,172 1,644,254

Inflows from borrowings 2,229,172 1,644,254 Outflows from financing activities (2,344,322) (1,488,869) Outflows from subordinated liabilities (87,435) (90,838) Outflows from borrowings (2,256,887) (1,398,031) Net outflows/inflows from financing activities (115,150) 155,385

TOTAL NET CASH INFLOWS 22,097,302 15,826,888

TOTAL NET CASH OUTFLOWS (23,770,501) (14,818,454) NET CASH INCREASE 1,008,434 NET CASH DECREASE (1,673,199) Cash and cash equivalents at the beginning of the year 9,277,089 8,284,556 Foreign exchange gains 3,850,998 6,993,725 Foreign exchange loss (3,896,775) (7,009,626) Cash and cash equivalent at the end of the year (Note 33) 7,558,113 9,277,089

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2eljko Obradovib


Head of Accounting

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

2

1. THE ESTABLISHMENT AND OPERATIONS

These financial statements are consolidated financial statements of Credit Agricole banka Srbija a.d. Novi Sad (the Bank) and its subsidiary CA Leasing d.o.o. Beograd (the Group). Credit Agricole Banka Srbija a.d. Novi Sad (the Bank) was established on 15 August 1991 as Yuco – Bank a.d. Novi Sad in accordance with the Founding Act and the National Bank of Serbia Decision dated 19 February 1992 . The Bank was registered with the Commercial Court in Novi Sad on 3 March 1992 . As of 20 September 2001, the Bank has been operating under the name of Meridian Bank A.D. Novi Sad in accordance with the Commercial Court of Novi Sad Decision no. Fi. 2766/07. As of 13 March 2006 by the Republic of Serbia Business Registers Agency’s Decision no. 110567-2006, the Bank changed its name into Meridian Bank – Credit Agricole Group Stock company, Novi Sad, and its short form into MEBA – CA GROUP AD, NOVI SAD. Based on Decision No. BD 137033/2009 issued by the Serbian Business Registers Agency dated 04.09.2009, the Bank changed its name from MERIDIAN BANK – CREDIT AGRICOLE GROUP into CREDIT AGRICOLE BANKA SRBIJA. The Bank’s full business name reads: CREDIT AGRICOLE BANKA SRBIJA AKCIONARSKO DRUŠTVO NOVI SAD, BRAĆE RIBNIKARA 4-6. Through the sale of the eighteenth issue of shares that took place in June 2005, the Bank became part of Credit Agricole S.A. Paris, one of the largest bank groups in Europe. As at 31/12/2015, the Bank’s 100% shareholder was Credit Agricole S.A. Paris. CA Leasing d.o.o. Belgrade CA Leasing d.o.o. Beograd (the Company) was founded under the name Meridian Leasing d.o.o. Beograd a.d. pursuant to the Founding Decision of Meridian bank – Credit Agricole Group Novi Sad, passed at the Shareholders Assembly of Meridian bank – Credit Argicole Group a.d. Novi Sad on 10 May 2007. On 12 July 2007, the Company obtained licence No. 8725 issued by the National Bank of Serbia. The licence provides approval of the Founding Decision passed by the Assembly of Credit Agricole Banka Srbija a.d. Novi Sad. The Company was registered with the Republic of Serbia Business Registers Agency under No. BD 78002/2007 on 20 July 2007 . The subscribed and paid-in registered capital amounts to Euro 1,000,000.00 (equivalent to RSD 78,666,700.00). In 2009, Meridian bank – Credit Argicole Group a.d. Novi Sad changed its name into Credit Agricole Banka Srbija a.d. Novi Sad. By Shareholders’ Assembly Decision dated 14.02.2011, the Company changed its name and was registered with the Republic of Serbia Business Registers Agency as CA Leasing Srbija d.o.o. on 23 March 2011. Under the Law on Banks, the Bank’s Founding Act and its Articles of Association, the Bank is registered to perform the following activities:

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

and are in compliance with the Founding Act and the Articles of Association of the Bank.



3

1. THE ESTABLISHMENT AND OPERATIONS (Continued) The bodies of the Bank are: the Bank’s Assembly, the Board of Directors, the Executive Board and other committees of the Bank. The Bank establishes a Committee for monitoring business activities of the Bank (Audit Committee), the Benefits and Compensation Committee, the Credit Committee, the Committee for Managing Assets and Liabilities, as well as a special unit called Risk Management. The President and the members of the Board of Directors are appointed for a term of four years, having previously obtained approval of the National Bank of Serbia. The Board of Directors appoints and dismisses from duty the President and the members of the Executive Board of the Bank. The Group operates through its Head Office located in Novi Sad at 4-6 Braće Ribnikara street, and a network of 82 branches located in major cities throughout Serbia (31 December 2016 - 82 branches). The Group performs leasing operations through its Head Office located in Belgrade at 52A Milentija Popovica street and two branches, CA Leasing Novi Sad branch and CA Leasing Čačak branch. As at 31 December 2016, the Group had 952 employees (31 December 2015 – 941 employees). The Bank’s tax identification number is 101697525. The Bank’s identification number is 08277931. The Group's consolidated financial statement for the year ended 31 December 2016 were approved by the Bank’s Managing Board at the meeting held on 24 February 2016.



4

2. BASIS OF PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. The policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation and presentation of financial statements The Group’s consolidated financial statements for the year 2016 have been prepared in accordance with the International Financial Reporting Standards (IFRS) and the NBS regulations governing the system of financial reporting for banks. As the Group’s Parent, the Bank has also prepared and presented a special set of standalone financial statements. These consolidated financial statements have been prepared under the historical cost convention, except for items measured at fair value such as: securities available-for-sale, derivatives, other financial assets and liabilities held for trading, financial assets and financial liabilities at fair value through profit and loss. The Group’s consolidated financial statements are presented in RSD thousand unless otherwise stated. The Serbian dinar (RSD) is the functional currency of the Group. All transactions in currencies other than the functional currency are treated as foreign currency transactions. The consolidated financial statements are prepared in accordance with the going concern concept, which assumes that the Group will continue its operations for the foreseeable future. The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of current events and actions, actual results ultimately may differ from those estimates. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 4. In the preparation of these consolidated financial statements, the group applied the principal accounting policies disclosed in Note 3. Basis of consolidation The consolidated financial statements comprise the Bank’s financial statements and the financial statements of the company directly controlled by the Bank. Control exists if the Bank has the power to govern the financial and operating policies of an entity so as to obtain benefit from its activities. Consolidation of a subsidiary begins when the Bank obtains control over the subsidiary and ceases when the Bank loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Bank obtains control until the date the Group loses control of the subsidiary. When necessary, adjustments are made to the financial statements of a subsidiary to bring their accounting policies in line with those used by the Bank, as a Parent within the Group. All transactions, balances, income and expenses within the Group are eliminated on consolidation. 2.2. Comparative information Comparative information represents audited financial statements of the Bank for the year ending 31 December 2015.



5

2. BASIS OF PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS (continued) 2.3. New and amended Standards and Interpretations The following amended standards became effective for the Bank from 1 January 2016, but did not have any material impact on the Bank.

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

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

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

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

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

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

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

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



6

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

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

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

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

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

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

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

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

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



7

2. BASIS OF PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS (continued)

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

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

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

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

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

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

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

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

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

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

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



8

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3.1. Functional and reporting currency The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. The policies have been consistently applied to all the years presented, unless otherwise stated. The Group’s consolidated financial statements are presented in RSD thousand unless otherwise stated. The Serbian dinar (RSD) is the functional currency of the Group. All transactions in currencies other than the functional currency are treated as foreign currency transactions. 3.2. Foreign currency translation Items included in the consolidated financial statements of the Group are measured using the currency of the primary economic environment in which the Group operates (the 'functional currency'). The financial statements are presented RSD thousand which is the functional currency of the Group. Foreign currency transactions are translated into RSD using the interbank middle exchange rate prevailing at the date of transaction. Gains and losses arising from the translation of financial assets and liabilities with currency clause are recorded in the income statement within net gains / losses on foreign exchange transactions and the effects of foreign currency clause. Commitments and contingent liabilities denominated in foreign currencies are translated into dinars at the middle exchange rate of the National Bank of Serbia at the balance sheet date. The exchange rates defined at the Foreign Exchange Interbank Market as at 31 December 2015 and 31 December 2014 were as follows:

31 December

2016 31 December

2015

EUR 123,4723 121,6261

USD 117,1353 111,2468

CHF 114,8473 112,5230 3.3. Interest income and expense Interest income and expenses further comprise default interest and other income and expenses relating to interest-bearing assets and liabilities. They are calculated on accrual basis and in accordance with the terms and conditions contracted between the Group and the client. For all financial instruments measured at amortized cost and interest bearing financial instruments classified as available–for–sale, interest income or expense is recorded using the EIR, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.



9

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

Subsequent measurement of financial instruments

Subsequent measurement of financial instruments depends on their classification (Note 3.7).

Derecognition of financial assets and financial liabilities

Financial assets A financial asset (or part of a financial asset or group of financial assets) shall be derecognised if:

• The contractual rights to the cash flows from the financial asset expire; or • The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation

to pay the received cash flows in full without material delay to a third party under a ‘pass–through’ arrangement; and

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

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

Financial liabilities

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



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.7 Classification of financial instruments The Management of the Group determines the classification of its financial instruments at initial recognition. The classification of financial assets upon initial recognition depends on the purpose for which the financial instrument has been acquired and its characteristics. The Group has classified its financial assets in the following categories: loans and receivables, financial assets available for sale, financial assets held to maturity and financial assets carried at fair value through profit and loss. Subsequent measurement of financial instruments depends on their classification: a) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and advances to banks and customers approved by the Group are recognised in the balance sheet as of the moment the funds have been transferred to the loan beneficiary. All loans and borrowings are initially recognized at fair value. As at the balance sheet date, loans are stated at amortised cost using the effective interest rate, less any impairment allowance. Amortized cost is calculated by taking into account any discount or premium on acquisition and includes fees and costs that are an integral part of the effective interest rate. Amortisation is included in the income statement within Interest income. Impairment losses are recognized in the income statement within Impairment losses on financial assets (net). Loan contracts entered into between the Group and and its clients include a foreign currency clause. RSD loans with a currency clause linked to Euro are revalued in accordance with the provisions of each loan contract. Gains and losses arising on this basis are shown in the income statement as income/expenses arising from foreign exchange translation differences and currency clause effects. b) Financial assets available for sale Securities intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices, are classified as available for sale. After initial recognition, available for sale securities are carried at fair value. The fair values of quoted available for sale securities are based on current bid prices. Unrealized gains and losses on available for sale securities are recognized as a part of other comprehensive income until the security is sold, collected or otherwise realized, or until the security is impaired. When securities available-for-sale are sold or impaired, the accumulated fair value adjustments recognized in other comprehensive income are transferred to the income statement. Interest income on debt securities is calculated using the effective interest method and recognised in the income statement within Interest income. Equity investments of other legal entities that do not have a quoted market price in an active market and for which other reasonable assessment methods are inadequate, are measured at cost less any allowance for impairment instead of at market value. Dividends on available-for-sale securities are included in other operating income and shares in equity when the right on their payment is established.



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

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



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.7 Classification of financial instruments (continued) d) Financial assets at fair value through profit and loss (continued) Gains and losses arising on the measurement and sale of financial assets at fair value through profit or loss are recorded the income statement. In the ordinary course of business, the Group enters into agreements on derivative financial instruments in order to manage currency risk, liquidity risk, and interest rate risk; therefore, these financial instruments are primarily held for trading. As at 31 December 2016 the Group did not have financial derivatives in its portfolio. Impairment of financial investments and provision for risks Under its internal policy, the Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Evidence of impairment may include indications that a borrower or group of borrowers are experiencing significant financial difficulty, default or delinquency in interest or principal payments, probability that the borrower will enter bankruptcy or other financial reorganization, observable data indicating that there is a measurable decrease in the estimated cash flows, including movements within unsettled liabilities or economic conditions that correlate with defaults on the terms contracted. When assessing impairment of loans and advances to banks and customers measured at amortised cost, the Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.7 Classification of financial instruments (continued) d) Financial assets at fair value through profit and loss (continued) Impairment of financial investments and provision for risks (continued) If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is recognized are not included in the collective assessment of impairment. The Group defines the objective evidence of impairment as follows:

Significant financial difficulties experienced by the borrower

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

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

A growing likelihood that the borrower will enter bankruptcy

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

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

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



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.7 Classification of financial instruments (continued) d) Financial assets at fair value through profit and loss (continued) Impairment of financial investments and provision for risks (continued) Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently (as at the balance sheet date) exist. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. For the purpose of the impairment testing at a group level, financial assets are grouped on the basis of the Group’s internal classification of credit risk that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors. Restructured loans Whenever possible, the Group chooses to restructure loans rather than to activate a loan collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, the loan is no longer considered past due. The Group continuously reviews restructured loans to ensure that future payments are likely to occur, however, these loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original effective interest rate. 3.8. Financial liabilities The Group’s financial liabilities comprise liabilities for deposits and other liabilities to banks, other financial organizations and clients, as well as other operating liabilities. a) Bank and customer deposits Bank and customer deposits and other interest bearing financial liabilities are initially recognized at fair value less transaction costs incurred, exclusive of the financial liabilities which are measured at fair value through profit and loss. Subsequent to their initial recognition interest bearing deposits and loans are recognized at amortised cost. b) Borrowings

Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Liabilities on borrowed funds are classified as current liabilities unless the Group has an unconditional right to settle the liability for at least 12 months after the reporting date.

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



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.8. Financial liabilities (continued) c) Operating liabilities Trade payables and other short term liabilities are stated at nominal value. 3.9. Offsetting financial instruments Financial assets and liabilities are offset and the difference between their amounts is reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 3.10. Sale and repurchase agreements (‘Reverse Repos’) Securities purchased under a contract to be resold at a specific future date are not recorded in the balance sheet. Cash paid under such agreements, inclusive of interest payable, is recognised in the balance sheet. The difference between the sale and the repurchase price is treated as interest income generated during the contract term. 3.11. Leases a) Financial lease - the Group as Lessee A lease is classified as finance lease when it is contractually stipulated that: the power to hold and use the subject matter of the lease is transferred to the Group, as lease beneficiary, during the lease period; the right to asset ownership is transferred to the lease beneficiary under contractually defined terms and conditions; the lease term approximates the asset's useful life; and the value of the lease agreement is a close approximation to the cost of asset. The Group as lessee recognizes financial lease within Property, plant and equipment together with a corresponding liability to lessor included in Other liabilities. Capitalised assets held under lease are depreciated over the lease term. Lease payments are allocated between finance charges and reduced lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in the income statement within Finance costs.

b) Operating lease - the Group as Lessee and Lessor Leased out assets where the risks and rewards of ownership remain with the lessor are recorded as operating lease. The leases entered into by the Group are primarily operating leases. The total payments made under operating leases are charged to expenses in the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment to be made to the lessor by way of penalty is recognized as an expense in the period in which the termination takes place.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.11. Leases (continued)

c) Finance lease receivables The Group recognizes assets held under a finance lease in its balance sheet and presents them as a receivable at an amount equal to the net investment in the lease. The Group transfers the inherent risk of ownership, so that lease payments are considered as principal repayments with a corresponding portion of finance income. Finance income recognition is based on a pattern reflecting a constant periodic rate of return on the outstanding net investment in the finance lease. Lease payments relating to the accounting period, excluding costs for services, are applied against the gross investment in the lease to reduce both the principal and the unearned finance income. The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. Impairment of accounts receivable is established when there is objective evidence that the Group will not be able to collect all amounts due in accordance with the original terms of receivables. Significant financial difficulties of the debtor, the probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted using the effective interest rate. When a finance lease receivable is impaired, its carrying amount is reduced through the use of an allowance account and recorded as a net expense arising from the impairment of finance lease receivables and financial assets.

d) Repossessed leased assets in exchange for outstanding receivables In case of early termination of a finance lease contract, the leased item is repossessed and the value of the financial investment is transferred to inventories. Furthermore, repossessed leased items are valued at an estimated net realizable value. The valuation of repossessed leased items is performed regularly by a certified appraiser whenever there is a change in their values because of significant changes in market prices or the physical condition of the leased items, however at least once a year. During the valuation, market factors, depreciation and the item’s condition are taken into consideration. For the difference between the finance lease investments and the leased item’s estimated value, a receivable for a compensation claim is created within Other short-term receivables, for which a provision is made in the same amount. 3.12. Cash and cash equivalents In the consolidated Cash Flow Statement, cash and cash equivalents comprise cash held with the Group’s drawing account and with the Cashier’s office (in RSD and FX), as well as FX amounts deposited with local and foreign banks. 3.13. Intangible assets Intangible assets are stated at cost less accumulated depreciation and any losses on impairment of assets. The Group's intangible assets mainly comprise computer software licenses with finite useful life. Computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives and the periods for which licences are granted.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.13. Intangible assets (continued) Costs associated with developing or maintaining computer software programmes are recognized as an expense when incurred. Costs that are directly attributable to identifiable and unique software products controlled by the Group that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Amortization is calculated at cost of intangible assets using the straight-line method, by applying the amortization rates defined in a manner that allows for their full amortization over their useful lives. Intangible assets’ amortization charge begins in the month following their being brought to use. Useful life in 2016 : Software 5 years Licences and other intangible assets 5 years The amortisation period and the amortisation method for intangible assets with finite useful life are reviewed at least annually. 3.14. Property, plant and equipment and investment property a) Property, plant and equipment Property, plant and equipment comprise buildings, equipment, other fixed assets, as well as leasehold improvements for operating purposes. Property, plant and equipment is stated at cost less accumulated depreciation and any losses on impairment. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other maintenance costs are charged to the income statement during the financial period in which they are incurred. Depreciation of property, plant and equipment is calculated using the straight-line method by which the cost is written-off over the assets’ estimated useful lives. The assets’ depreciation charge begins in the month following the one in which the assets have being brought into use. Useful life in 2015 : Description Buildings 40 years Computer equipment 3 - 7 years Furniture and other equipment 5 - 7 years Vehicles 5 years PPE is derecognised after disposal, due to technical obsolescence or when no future economic benefit is expected from its use. Gains and losses on disposals or write-off of a fixed asset (determined as the difference between the net realizable value and the net carrying amount) are recognized in the income statement for the period.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.14. Property, plant and equipment and investment property (continued) b) Investment property

Investment property is a property, or part of property, that is held by the Group for rental yields or for capital appreciation or both. Investment property is measured initially, during the acquisition, at cost. At the initial measurement, the related acquisition costs are included in the cost. Following the initial recognition, investment property is subsequently measured using the cost method less the total calculated depreciation and impairment. Depreciation is calculated at the rates that ensure the compensation of the investment properties’ value during their useful lives. The difference between the carrying amount and the realizable value of the investment property being sold is recognized in the income statement as incurred, whereas receivables arising from the disposal or the exchange of investment property are initially recognized in the amount of its fair value.

If any indication exists that investment property may be impaired, the Group estimates the recoverable amount as the higher of the value in use and the fair value less costs to sell. The carrying amount of an investment property is written down to its recoverable amount through profit or loss. An impairment loss recognised in prior years is reversed if there has been a subsequent change in the estimates used to determine the asset’s recoverable amount. Subsequent expenditure is capitalized only when it is probable that future economic benefits associated with it will flow to the Group and the cost can be measured reliably. All other repairs and maintenance costs are expensed when incurred. If an investment property becomes owner-occupied by the Group, it is reclassified to property, plant and equipment, and its carrying amount at the date of reclassification becomes its deemed cost to be subsequently depreciated. 3.15. Impairment of non-financial assets In accordance with its accounting policy, the management of the Group analyses at each reporting date the carrying values of intangible assets and property, plant and equipment. If any indication exists that an asset has been impaired, the recoverable amount of the property is assessed to determine the amount of impairment. Where the recoverable amount of an asset is lower than its carrying amount, the carrying amount is reduced to its recoverable amount, which is the higher of the net realisable value and the value in use. Impairment loss is recognized as expense. Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.16. Provisions, contingent liabilities and contingent assets Provisions are recognised and made when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. The Group makes provisions for potential losses arising from commitments and contingent liabilities, potential outflow with respect to legal claims, payment of employee benefits i.e. retirement benefits and other contingent liabilities, provided they meet the recognition requirements. Provisions are reviewed, established and, where necessary, adjusted at each balance sheet date to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the legal or constructive obligation, the provision is reversed and recognized as income. Provisions are monitored by type and can be used only for expenditures for which they were initially recognized. Provisions are not recognised for future operating losses. Contingent liabilities are not recognized in the Bank’s financial statements. Contingent liabilities are disclosed in the Notes to the Financial Statements (Note 32), unless there is a low probability of outflows relative to benefit generating resources.

Contingent assets are not recognized in the Group’s financial statements. Contingent assets are disclosed in the Notes to the Financial Statements where an inflow of economic benefit is probable. The Group makes provisions, which are recognized as an expense, with respect to off-balance sheet credit exposures up to the level of required reserves by applying the same methodology that applies to loans and investments. 3.17. Employee benefits

a) Taxes and contributions for mandatory social insurance In accordance with the regulations applicable in the Republic of Serbia, the Group calculates and pays contributions for pension and medical insurance and unemployment insurance at the rates prescribed by law and based on employee gross salaries. The Group has a legal obligation to perform the transfer of withheld contributions to relevant state funds. The Group is not obliged to pay reimbursements to employees which is the responsibility of the Republic of Serbia Pension Fund. Contribution costs are recognized in the income statement in the same period as related salary expenses. The Group has no further liabilities for contributions in this respect. b) Retirement benefits The Group does not operate its own pension funds, therefore the Group had no identified costs as at 31 December 2016 . Under the Labour Law and the Group’s internal Employment Handbook, the Group is obliged to pay retirement benefits or termination benefits to employees in the event of loss of working ability amounting to three gross salaries in the business sector in the Republic of Serbia, according to the latest information published by the competent statistical body. The entitlement to these benefits is usually conditional on the employee remaining in service up to retirement age or the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment. The Group does not have a commitment with respect to payment of jubilee awards. Provisions for retirement benefits were created based on an independent actuary's report and stated as present value of expected future payments (Note 25). Actuarial gains arising from the effects of changes in demographic, financial and experience assumptions used for calculation of provision for future liabilities for retirement benefits, are recognized as Other income.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.18. Current and deferred income tax a) Current taxes The current income tax charge is calculated and paid in accordance with the provisions of the Serbian Law on Corporate Income Tax. During the year the Group pays in monthly instalments the income tax charge, which is estimated on the basis of Tax Return for determining either the advance payment or the final payment of CIT base for the previous year. The final tax base, to which a prescribed 15% tax rate is applied, is established based on the taxpayer's Tax Balance Sheet. The Law on Corporate Income Tax of the Republic of Serbia provides a taxpayer who invested in fixed assets up to and including 2013 with a 20% tax credit. However, the tax credit may not be higher than 33% of the calculated tax charge for the year in which the investment occurred. The unused portion of the tax credit may be carried forward to the future income tax account up to the limit of 33% for a period not longer than ten years. Tax regulations in the Republic of Serbia do not allow for a current period tax loss to be used as a basis to recover the income tax paid in the previous period. However, current period losses may be used to reduce the future tax base for up to 5 years (tax losses incurred by 2009 may be carried forward over the period of 10 years, i.e. By 2019) ). b) Deferred taxes The deferred income tax charge is calculated using the liability method on all temporary differences (as at the balance sheet date) between the present value of assets and liabilities in the financial statements and their taxable values. For deferred tax calculation purposes, current tax rates have been used at the balance sheet date. Deferred tax liabilities are recognised for all taxable temporary differences, except where: the deferred tax asset arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss); and and in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures where the timing of the reversal of a temporary difference may be controlled and where it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized except where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss and where in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3.18. Current and deferred income tax (continued) b) Deferred taxes (continued) The carrying value of deferred assets is reviewed at each balance sheet date and reduced to the extent that it is probable that future taxable profit will be available against which the whole deferred tax asset or its part can be utilised. Deferred tax assets that have not been recognised are assessed at each balance sheet date and recognised to the extent that it is probable that future taxable profit will be available against which deferred tax assets can be utilised. Deferred tax assets and liabilities are measured at the income tax rate that is expected to apply to the year when the tax benefit is realised, or the liability settled, based on the official tax rates and tax regulations that have been enacted or substantively enacted at the balance sheet date. Current and deferred taxes are recognized as income and expense and are included in the net profit for the period. Deferred income tax relating to items recognized directly within Other comprehensive income is also charged or credited to Other comprehensive income. c) Taxes and contributions not related to performance Taxes and contributions not related to performance comprise property tax, value added tax, taxes and contributions on salaries paid by the employer, and other taxes and contributions paid under national and local tax regulations. These taxes and contributions are presented within Other expenses. 3.19. Earning per share Basic earnings per share is calculated by dividing the net profit attributable to equity holders, holders of common shares of the Group by the weighted average number of ordinary shares outstanding during the reporting period. 3.20. Fiduciary services Assets and revenues arising from fiduciary activities where the Group acts as an agent are not included in the Group’s balance sheet items.



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4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation and presentation of consolidated financial statements requires management to use the best estimates and reasonable assumptions that affect the presented amounts of assets and liabilities, the disclosure of contingent receivables and payables as at the reporting date as well as the disclosure of income and expenses during the reporting period. These estimates and assumptions are based on the information available as at the date of consolidated financial statements. The actual results may differ from these estimates. Estimates and related assumptions are reviewed on an ongoing basis, and where adjustments are required they are recognized in the income statement for the periods in which they have become known.

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

4.1. Determining the fair value of financial instruments The fair value of financial instruments traded in an active market is based on quoted bid and offer prices at the balance sheet date, without any deduction of transaction costs. The fair value of financial instruments that are not quoted in an active market is determined using appropriate valuation techniques, which include net present value techniques, comparison to similar instruments for which market prices are available, as well as other relevant valuation models. Where market inputs are not available, they are determined based on estimates that include a certain degree of judgement in estimating the "fair" value. The valuation models reflect current market conditions at the measurement date which may not be representative of market conditions either before or after the measurement date. Therefore, valuation techniques are revised periodically in order to appropriately reflect current market conditions. 4.2. Impairment of financial assets carried at amortised cost The Group assesses, at each reporting date, whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. This evidence may include observable data indicating that there has been an adverse change in the payment status of the borrowers in the Group in respect of payment obligations to the Group, or national or local economic conditions that correlate with defaults in payment. The Group considers evidence of impairment on an individual and group basis. All individually significant financial assets are tested for impairment on an individual basis. All significant assets not found to be impaired on an individual basis, are assessed on a group basis so as to determine the impairment that occurred but has not yet been identified. Assets that are not individually significant, but which are carried at amortized cost, are grouped based on similar risk characteristics. With respect to the assessment of impairment losses on loans, the Group reviews its loan portfolio, in the event of group provisions (irrespective of whether or not loans are in default status), at least once a month to assess impairment. Individual assessment of impairment losses is performed in accordance with changes in the assumptions for the calculation of future cash flows, and the Bank should review them at least quarterly.



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4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) 4.2. Impairment of financial assets carried at amortised cost (continued) When assessing impairment on a group basis, the Group uses statistical models for analysing historical trends regarding the probability of loss, recovery and collection of incurred losses. The Group’s Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio that existed at the time when future cash flows were projected. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between estimated and actual losses. The impairment of financial assets carried at amortised cost is calculated as the difference between the carrying amount of the financial asset and the present value of expected future cash flows discounted at the asset’s original effective interest rate. Losses are recognised in the income statement and reflected in the movements within the allowance account for impaired loans. When a subsequent event leads to a reduction in the amount of impairment, previously recognized impairment loss is reversed through the income statement. 4.3. Provisions for litigations The Group is involved in a number of lawsuits arising from daily operations, including commercial, contractual and employment issues which are resolved or considered in the ordinary course of business. The Group assesses the likelihood of adverse outcomes of these matters as well as ranges of probable and reasonable estimated losses. Reasonable estimates include judgement made by the management after considering information such as notifications, settlements, estimates performed by legal department, available facts, identification of other potentially responsible parties and their ability to contribute, as well as prior experience. A provision is recognized when it is probable that there is an obligation the amount of which can be reliably estimated based on a careful analysis (Note 25). The required provision may change in the future due to new developments or additional information. Contingent liabilities and items that do not meet the provisioning criteria are disclosed, unless the probability of an outflow of resources embodying economic benefits is low. 4.4. Deferred tax assets Deferred tax assets are recognized for all unused tax losses and/or tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and/or tax credits can be utilized. Significant estimate by the management is necessary to determine the amount of deferred tax assets that can be recognized based on the period of occurrence and the amount of future taxable income and tax policy planning strategy (Note 13). 4.5. Retirement and other post-employment benefits to employees The costs of defined employee benefits payable upon the termination of employment, i.e. retirement in accordance with legal requirements are determined based on the actuarial valuation. The actuarial valuation includes an assessment of the discount rate, future movements within salaries, mortality rates and employee turnover. As these plans are by their nature long-term, the estimates are affected by significant uncertainties. Additional information is disclosed in Note 25.



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4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) 4.6. Useful lives of intangible assets and property, plant and equipment The assessment of the useful lives of intangible assets and property and equipment is based on historical experience with similar assets as well as any anticipation of technological development and changes that are affected by broad economic or industry factors. The appropriateness of the estimated useful lives is reviewed annually, or whenever there is an indication of significant changes in the underlying assumptions. The impact of any change in these assumptions could be material to the Group’s financial position and performance. The Group’s management reviews intangible assets and property, plant and equipment at each balance sheet date. If any indication exists that an asset has been impaired, the recoverable amount of the property is assessed to determine the amount of impairment. Where the recoverable amount of an asset is lower than its carrying amount, the carrying amount is reduced to its recoverable amount. An impairment review requires from the management to make subjective judgement concerning cash flows, growth rates and discount rates of the cash generating units which are subject to consideration. 5. INTEREST INCOME AND EXPENSE

2016. 2015.

Interest income Banks and other financial institutions 153,943 173,601 Public companies 50,232 41,160 Other companies 1,109,288 1,244,627 Entrepreneurs 90,512 103,838 Public sector 67,251 104,950 Retail 2,291,529 2,305,806 Foreign clients 25 228 Other clients 184,079 22,939

Total 3,946,859 3,997,149

Interest expense Banks and other financial institutions 254,465 270,689 Public companies 2,562 12,210 Other companies 188,407 311,102 Entrepreneurs 2,502 7,577 Public sector 1,495 10,342 Retail 146,243 284,642 Foreign clients 14,179 30,062 Other clients 6,464 29,915

Total 616,317 956,539

Net interest income 3,330,542 3,040,610



25

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

Interest income Loans and advances to customers 3,505,187 3,491,008 Loans and advances to banks and other financial institutions 16,122 8,865 Reverse repos 68,290 49,985 Securities 63,349 96,355 RSD mandatory reserve 60,635 92,737 Surplus of liquidity assets deposited with the NBS 7,444 22,014 Interest on other loans and advances 4,555 10,314 Interest income from financial lease 221,277 225,871

Total 3,946,859 3,997,149

Interest expense Deposits of clients 354,101 676,954 Loans from banks and other financial institutions 222,118 247,535 Loans and advances to banks and other financial institutions 40,098 32,050

Total 616,317 956,539

Net interest income 3,330,542 3,040,610

Total interest income on impaired loans as at 31 December 2016, amounted to RSD 92,998 thousand.

6. FEE AND COMMISSION INCOME AND EXPENSE

Fee and commission income and expense comprise: 2016. 2015.

Fee and commission income Domestic payment operations 711,727 659,656 Foreign payment operations 129,243 125,257 Sale and purchase of foreign exchange 237,470 293,686 Lending operations 70,840 96,804 Payment cards operations 266,123 247,373 Commission for issued guarantees and other warranties 115,374 121,779 Insurance agency activities 82,359 55,966 Other fee and commission income 24,570 27,610

Total 1,637,706 1,628,131

Fee and commission expense Sale and purchase of foreign exchange 105,297 163,823 Domestic payment operations 28,049 27,024 Foreign payment operations 62,075 47,274 Lending operations 25,826 17,176 Fees paid to the Association of Serbian Banks 27,264 19,301 Commission - F/X guarantees and sureties 54,399 59,417 Payment cards operations fee 100,860 84,172 Insurance agency activities 6,202 6,976 Other fee and commission expense 12,771 15,510 Lease operations expense 17,589 19,653

Total 440,332 460,326

Net fee and commission income 1,197,374 1,167,805



26

7. NET (EXPENSE) INCOME ARISING FROM FOREIGN EXCHANGE DIFFERENCES AND

CURRENCY CLAUSE EFFECTS

2016. 2015.

Foreign exchange gains - foreign currency receivables and payables 2,084,347 4,178,779 - foreign currency clause 1,753,533 2,797,934 - finance lease operations 143,188 283,875

Total foreign exchange gains 3,981,068 7,260,588

Foreign exchange losses - foreign currency receivables and payables (2,664,331) (4,378,623) - foreign currency clause (1,223,779) (2,613,989) - finance lease operations (141,625) (288,848)

Total foreign exchange losses (4,029,735) (7,281,460)

Net income/expense from foreign exchange differences and currency clause effects 2016. 2015.

8. OTHER OPERATING INCOME

2016. 2015.

Income from liability decreases 9,766 4,318 Income from costs recharged 3,749 7,505 Rental income 3,777 5,093 Legal charges collected 10,362 10,422 Gains on disposal of fixed assets 12,245 4,220 Reversal of unused provisions for litigations (Note 25) 4,783 91 Disposal of foreclosed property - 2,067 Other operating income 18,473 10,346 Gains on the sale of leased items 88 31

Total other operating income 63,243 44,093



27

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

2016. 2015.

Reversal of impairment of financial assets: - Loans and receivables from banks and other financial organisations (Note 16) 47 48 - Loans and receivables from customers (Note 17) 649,057 1,103,595 - Other assets (Note 21) 34,608 20,472

Total income from reversal of impairment of financial assets: 683,712 1,124,115

Expenses from impairment of financial assets - Loans and receivables from customers (Note 17) (1,056,677) (1,506,499) - Other assets (Note 21) (42,209) (27,557)

Total expenses from impairment of financial assets: (1,098,886) (1,534,056)

Net expense from impairment of financial assets: (415,174) (409,941)

Income from reversal of provision for off-balance sheet credit exposures:

- (Note 25) 16,538 134,027

Expense from provision for off-balance sheet credit exposures: (Note 25) (19,194) (10,601)

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

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

Total income from written-off receivables 5,476 720

Net expense arising from impairment of financial assets and off balance sheet credit exposures: (412,354) (285,795)

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

2016. 2015.

Wages and salaries 1,290,753 1,212,810 Taxes and contributions 643,833 608,148 Other personal expenses and temporary worker fees 38,716 33,779 Expense from movements within provisions for employee benefits (Note 25) 5,073 4,765 Expense from movements within provisions for other employee benefits - 3,356

Wages and salaries and other personal expenses - total 1,978,375 1,862,858

11. DEPRECIATION/AMORTISATION EXPENSE

2016. 2015.

Amortisation of intangible assets (Note 18) 104,372 98,355

Depreciation of property, plant and equipment (Note 19) 130,083 108,371

Depreciation of investment property (Note 20) 4,067 3,618

Total depreciation and amortisation 238,522 210,344



28

12. OTHER EXPENSES

2016. 2015.

Lease 296,834 310,288 Insurance premiums 216,483 209,552 Cost of material 184,996 178,973 Maintenance of fixed assets 113,056 128,307 Maintenance of software and licences 122,889 103,956 Postal and telecommunication services 93,251 95,380 Technical assistance - parent bank 85,746 89,862 Advertising and marketing 86,097 79,046 Legal and advocacy services 47,885 45,500 Provision for litigations (Note 25) 34,906 43,238 Transportation costs and daily allowances 43,039 41,383 Taxes and charges 36,289 36,014 Professional services 29,085 32,273 Legal costs 37,519 28,088 Money transport & surveillance 19,657 23,655 Office cleaning 23,822 23,524 Project design and documentation development 26,756 20,808 Training costs 24,766 19,848 Security services 17,901 15,568 Contributions and taxes payable by the employer 16,383 15,151 Entertainment 18,741 15,533 ATM maintenance cost 9,721 9,393 Cost of general and technical liability insurance 8,215 9,273 Salaries of disabled persons and subsistence allowance 5,393 6,065 Employee expense 6,669 6,951 Telecommunications costs – Reuters 6,850 6,294 Property tax and building land charges 7,680 6,124 Shortages and damages 162 5,984 Food and hotel accommodation (business travel) 4,839 5,336 Cost of official gazettes and publications 5,542 5,021 Other taxes 9,811 4,326 Donation and sponsorship 3,167 3,306 Utility services and electrical installation services 3,166 3,009 Membership fees 2,798 2,464 Transportation services 2,863 2,848 Revaluation of financial liabilities 952 1,069 Disposal or write-off of fixed assets 5 889 Contract termination penalties - 701 SW ATM software reinstallation 540 690 Other expenses 6,004 11,598

Other expenses - total 1,660,478 1,647,288



29

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

Total tax expense comprises:

31.12. 2016. 31.12. 2015.

Current income tax (13,947) (14,349) Loss arising from deferred tax (35,167) (61,246)

Total (49,114) (75,595)

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

31.12. 2016. 31.12. 2015.

Profit before tax 293,086 242,589

Tax calculated at a 15% rate (46,963) (36,388)

Tax effects of income not recognized for tax purposes 29,797 26,494 Tax effects of expenses not recognized for tax purposes (28,574) (23,908) Utilisation of previously unrecognised tax loss carry forward 28,568 19,142 Tax effects of losses from the current period based on which deferred tax assets are not recognized - - Loss arising from deferred tax (35,167) (61,246) Tax relief on capital investments 225 311

Income tax presented in the income statement (49,114) (75,595)

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

31.12. 2016. 31.12. 2015.

Deferred tax assets 91,145 126,312

Deferred tax liabilities - -

Deferred tax assets - net 91,145 126,312



30

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

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

Tax losses/credits carry-forward

Temporary difference

on PPE

Other deferred tax assets - net

Total deferred

tax assets

As at 1 January 2015 141,272 46,193

93

187,558

Credited to income statement (56,614) (4,678)

55

(61,246) Charged to other comprehensive income

As at 31 December 2015 84,658 41,506

148

(126,312)

Charged (credited) to income statement (31,538) (3,619)

333

(34,947) Credited to other comprehensive income - - - -

As at 31 December 2016 53,120 37,887

481

91,145

DEFERRED TAX ASSETS

31.12. 2016. 31.12. 2015.

Tax losses/credits carry-forward 53,120 84,658

Temporary differences on PPE and

intangible assets 38,245 41,654

Total deferred tax assets 91,365 126,312

The Group has tax loss and credit carry-forwards incurred in previous years which may be used in future fiscal years, as presented in the analysis below: 31.12. 2016. 31.12. 2015.

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

Total tax losses carry-forward: 4,043,838 4,243,155

31.12. 2016. 31.12. 2015.

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

Total tax credit carryforwards: 179,362 318,842



31

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

31.12. 2016. 31.12. 2015.

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

5,004,354 4,945,357

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

6,064,321 4,504,985

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

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

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

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

During the accounting period the Group is obliged to maintain daily average RSD mandatory reserve deposits on its drawing account. The mandatory reserve calculated in RSD is earmarked in RSD currency and placed on the Group’s drawing account. The Group is obliged to, within the accounting period, maintain an average daily balance of allocated RSD required reserves on its bank account. Calculated obligatory reserve in RSD is allocated to the bank account of the Group.

Calculated RSD required reserve for the accounting period from 18 December 2016 to 17 January 2017, amounted to RSD 3,591,113 thousand.

The average interest rate on the amount of allocated RSD required reserves during 2016 was 1.75% on an annual basis

A mandatory foreign currency reserve represents the minimum foreign currency reserve deposits set aside in accordance with the National Bank of Serbia Decision on Banks' Required Reserves Held with the National

Bank of Serbia (Official Gazette of RS, No. 3/2011, 31/12.57/12, 78/12, 87/12, 107/12, 62/13,125/14, 135/14, 4/15, 78/15 and 102/15). Under this decision, banks shall calculate the mandatory RSD reserve at the rates of:

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

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

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

Allocated foreign currency required reserve for the accounting period from 18 December 2016 to 17 January 2017, amounted EUR 39,410 thousand (RSD 4,878,424).

The National Bank of Serbia does not pay interest on earmarked mandatory foreign currency reserve deposits.



32

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

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

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

As at 31 December 2016, the Group had long-term coupon bonds of the Republic of Serbia Ministry of Finance with a variable interest rate (NBS reference interest rate of +1.15%) 16. LOANS AND RECEIVABLES FROM BANKS AND OTHER FINANCIAL ORGANISATIONS 31.12. 2016. 31.12. 2015.

In RSD Repurchase agreements with the NBS 4,002,232 2,801,361 Loans granted 1,647 2,770

Total RSD 4,003,879 2,804,131

In FX Deposits on foreign currency accounts held with other banks 1,367,862 3,314,627 Loans maturing within one day (overnight loans) - 289,245 Loans granted 3,296 3,009 Deposits 161,679 153,209

Total FX

1,532,837

3,760,090

Loans and receivables - gross

5,536,716 6,564,221

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

Loans and receivables from banks and other financial organisations - total 5,532,162

6,559,620

Movements within allowance for impairment were as follows: 31.12. 2016. 31.12.2015.

As at 1 January 4,601 4,649 Reversal of allowance for impairment (note 9) (47) (48)

Provision as at 4,554

4,601

Receivables reversed repo transactions, in the amount of RSD 4,000,000 thousand as at 31 December 2016, relate to purchase of treasury bills from the National Bank of Serbia, with a maturity of 7 days and the interest rate of 2.87%, per annum, while the amount of RSD 2,232 thousand, relates to deferred interest for the period from 30 to 31 December 2016



33

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

31.12.2016 31.12.2015

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

Public companies 12,045 1,598,642 1,610,687 12,408 - 12,408

Other companies 3,294,239 2,372,507 5,666,746 1,326,444 3,079,399 4,405,843

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

Public sector 384 974 1,358 519 - 519

Retail 2,240,202 8,111,548 10,351,750 1,595,606 6,706,257 8,301,863

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

Total in RSD 6,220,715 13,010,859 19,231,574 3,245,519 10,436,188 13,681,707

In FX

Public companies 105,817 3,051 108,868 145,358 718,355 863,713

Other companies 3,393,646 16,620,701 20,014,347 3,282,780 15,507,240 18,790,020

Entrepreneurs 73,005 889,792 962,797 16,732 794,278 811,010

Public sector - 107,206 107,206 - 220,767 220,767

Retail 84,942 26,291,467 26,376,409 59,846 23,284,669 23,344,515

Other clients 196,580 672,669 869,249 407,454 1,139,105 1,546,559

Total in foreign currency 3,853,990 44,584,886 48,438,876 3,912,170 41,664,414 45,576,584

Loans and receivables - gross 10,074,705 57,595,745 67,670,450

7,157,689 52,100,602 59,258,291

Allowance for impairment of receivables - - (4,821,825)

- - (4,592,313)

As at 31 December 10,074,705 57,595,745 62,484,625

7,157,689 52,100,602 54,665,978

Loans with foreign currency clause are included in the review of loans and deposits in foreign currency.



34

17. LOANS AND RECEIVABLES FROM CUSTOMERS (continued) b) Movements within allowance for impairment were as follows:

31.12. 2016. 31.12. 2015.

As at 1 January 4,592,313 4,205,016 New allowances (note 9) 1,056,677 1,506,499 Reversal of allowance for impairment (note 9) (649,057) (1,103,595) Write-off (118,585) (27,897) Unwinding (92,998) - Net foreign exchange differences 33,475 12,290

Provision as at 4,821,825 4,592,313

18. INTANGIBLE ASSETS Movements within intangible assets:

Licences and

software

In course of construction

Total

As at 1 January 2015

Cost 502,775 407 503,182 Accumulated amortization (351,515) - (345,635)

Net book value 151,260 407 151,667

Year ended 31 December 2015 Opening net book value 151,260 407 151,667

Additions 1,559 95,827 97,386 Transfers 95,827 (95,827) - Amortization (98,355) - (98,355)

Closing net book value 150,291 407 150,698

At 31 December 2015 Cost 599,474 407 599,881 Accumulated amortization (449,183) - (449,183)

Net book value 150,291 407 150,698

Year ended 31 December 2016 Opening net book value 150,291 407 150,698

Additions 1,598 76,325 77,923 Transfers 76,325 (76,325) - Amortization (104,372) - (104,372)

Closing net book value 123,842 407 124,249

At 31 December 2016 Cost 630,685 407 631,092

Accumulated amortization (506,843) - (506,843)

Net book value 123,842 407 124,249

As at 31 December 2016, the net present value of intangible assets comprised mainly software and licences.



35

19. PROPERTY, PLANT AND EQUIPMENT Movements within property, plant and equipment:

Buildings

Equipment and other

assets

PPE held under a finance lease

Investments in leased business premises

Construction in progress Total PPE


Cost 1,572,774 1,213,131 - 138,900 - 2,924,805 Accumulated depreciation (336,280) (1,006,785) - (132,127) - (1,475,192)

Net book value 1,236,494 206,346 - 6,773 - 1,449,613

Year ended 31 December 2015

Opening net book value 1,236,494 206,346 - 6,773 - 1,449,613 Additions - 754 - - 117,634 118,388 Transfers - 117,634 - - (117,634) -

Disposals (139) (449) - (76) - (664) Depreciation (39,336) (66,507) - (2,528) - (108,371)

Impairment - - - - - -

Closing net book value 1,197,019 257,778 - 4,169 - 1,458,966

At 31 December 2015

Cost 1,572,562 1,197,954 - 135,168 - 2,905,684 Accumulated depreciation (385,543) (940,176) - (130,999) - (1,446,718)

Net book value 1,197,019 257,778 - 4,169 - 1,458,966


Opening net book value 1,197,020 257,778 - 4,169 - 1,458,967 Additions - 1,785 - - 181,578 183,363 Transfers 4,320 166,717 - 10,541 (181,578) - Disposals - (8,980) - - - (8,981)

Depreciation (39,360) (88,740) - (1,984) - (130,083)

Closing net book value 1,161,980 328,560 - 12,726 - 1,503,266

At 31 December 2016

Cost 1,576,882 1,187,196 - 144,649 - 2,908,727 Accumulated amortization (414,902) (858,636) - (131,923) - (1,405,461)

Net book value 1,161,980 328,560 - 12,726 - 1,503,266

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



36

20. INVESTMENT PROPERTY

Total Investment property


Cost 122,987 Accumulated depreciation (20,163)

Net book value 102,824


Opening net book value 102,824 Additions 69,448 Disposals (31,956)

Depreciation (3,618)


At 31 December 2015

Cost 160,279 Accumulated depreciation (23,581)



Opening net book value 136,698 Additions 13,198 Disposals (6,211)

Depreciation (4,067)

Closing net book value 139,618

At 31 December 2016

Cost 164,877 Accumulated amortization (25,259)


Investment properties consist of residential and business premises which, in 2016, generated rental revenues in the amount of RSD 5,525 thousand (2015: RSD 7,005 thousand). The market value does not deviate significantly from the values recorded in the Bank's books of accounts. 21. OTHER ASSETS 31.12. 2016. 31.12. 2015.

Funds acquired through collected receivables 241,284 226,396 Other receivables from operations 53,174 46,230 Temporary accounts 71,314 38,957 Accrued receivables for other expenses 25,340 34,117 Fee and commission receivables 38,625 38,074 Advances paid 7,913 17,003 Other accruals 18,435 17,241 Transactions in progress 3,724 5,655 Other equity investments. 569 569 Accrued interest expense 10 223 Receivables from employees 64 103 Receivables based on overpaid tax 5 7

Total other assets 460,457 424,575

Allowance for impairment (64,283) (56,810)

Total other assets 396,174 367,765



37

21. OTHER ASSETS (continued) Changes in allowances were as follows: 31.12. 2016. 31.12. 2015.

As at 1 January 56,810 50,287 New allowances (note 9) 42,209 27,557 Reversal of allowance for impairment (note 9) (34,608) (20,472) Write-off (158) (572) Net foreign exchange differences 30 10

Provision as at 64,283

56,810



38

22. DEPOSITS AND OTHER LIABILITIES TOWARDS BANKS, OTHER FINANCIAL INSTITUTIONS AND THE CENTRAL BANK 31.12. 2016. 31.12. 2015.

Deposits and other financial liabilities:

Demand deposits

Short-term deposits

Long-term deposits Total

Demand deposits

Short-term deposits

Long-term deposits

Total

Local banks - - - - 225 608,131 - 608,356 Other financial institutions 290,516 1,376,039 - 1,666,555 181,730 1,023,849 8,514 1,214,093 Parent Bank 88,991 4,947,370 311,841 5,348,202 66,658 5,473,176 307,178 5,847,012 Interest and fees 100 - - 100 2,231 - - 2,231

TOTAL 379,607 6,323,409 311,841 7,014,857 250,844 7,105,156 315,692 7,671,692

Borrowings Overnight

Short-term deposits

Long-term deposits

Total Overnight

Short-term deposits

Long-term deposits

Total

Local banks - 116,799 4,575,577 4,692,376 - 115,045 4,861,624 4,976,669 The European Investment Bank - - - - 9,471 - - 9,471 Other financial institutions - 1,975,577 8,149,174 10,124,751 - 1,155,448 7,784,072 8,939,520 Parent Bank - 37,613 - 37,613 - 26,813 - 26,813

TOTAL - 2,129,989 12,724,751 14,854,740 9,471 1,297,306 12,645,696 13,952,473

Total Deposits and other liabilities towards banks 379,607 8,453,398 13,036,592 21,869,597 260,315 8,402,462 12,961,388 21,624,165

Short-term RSD deposits of financial institutions that have been deposited for a period of three months, six months as well as those deposited for a period of one year, with interest rates ranging between 2.25% - 3.50%, for RSD deposits, and 0.40% - 0.50% for FX deposits. Within FX liabilities towards the Parent Bank ,Credit Agricole SA Paris, the largest share have liabilities arising from FX deposits received for a period between 181 and 365 days amounting to EUR 22,000 thousand or RSD 2,716,391 thousand at interest rates ranging between -0.23% and 0.30% per annum, and deposits received for a period between 91 and 180 days amounting to EUR 18,000 thousand or RSD 2,222,501, at interest rates ranging between 0.06% and 0.03% per annum, and deposits received for a period between 31 and 90 days amounting to AUD 100 thousand or RSD 8,478, at interest rates of 2%.



39

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

In 2013 and 2014 the Group entered into cooperation with the European Investment Bank, and as at 31 December 2016 it had borrowings amounting to EUR 38,003 thousand or RSD 4,225,212 thousand with interest rates ranging between -0.314% and 1.44% and maturity dates ranging between 2018 and 2023 . As at 31 December 2016 the Group had borrowings from the Parent, Credit Agricole S.A. amounting to EUR 82,000 thousand or RSD 10,124,751 thousand. The Group took the borrowings in 2013, 2014, 2015 and 2016 at interest rates ranging between -0.28% and 1.807% with maturity dates between 2017 and 2026 . 23. DEPOSITS AND OTHER LIABILITIES TOWARDS OTHER CUSTOMERS

On transaction deposits in RSD and currency The Group does not pay interest. Term deposits in RSD, to one year, are deposited at interest rates ranging from 0.50% to 2.75% per annum, and in foreign currency from 0.00% to 0.90% per annum, depending on the depositing period and currency. Short-term and long-term retail deposits in dinars and foreign currency are deposited with interest rates ranging from 0.50% to 1.00% per annum and from 0.10% to 1.00% per annum, depending on the currency and the period depositing.



40

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

31.12.2016

31.12.2015

Deposits and other financial liabilities in RSD

Demand deposits

Short-term deposits

Long-term deposits

Total

Demand deposits

Short-term deposits

Long-term deposits

Total

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

312,868 27,642 - 340,510

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

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

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

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

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

32,554 62,406 - 94,960

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

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

Foreign clients 34,887 709 - 35,596

47,964 - 200 48,164

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

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

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

6,842,936 4,323,354 156,048 11,322,338

Deposits and other financial liabilities

in FX Demand

deposits Short-term

deposits Long-term

deposits Total

Demand deposits

Short-term deposits

Long-term deposits

Total

Public companies 232,958 - - 232,958

131,100 - - 131,100

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

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

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

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

Public sector 23,615 - - 23,615

101,047 - - 101,047

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

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

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

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

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

65,811 - 3,736 69,547

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

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

31.12.2016 31.12.2015

Overnight loans received

In RSD

In FX

Total

In RSD

In FX

Total

Public companies

39,275

-

39,275

4,617

-

4,617

Other companies

2,011,364

156,881

2,168,245

2,755,677

200,324

2,956,001

Entrepreneurs

18,351

-

18,351

20,228

-

20,228

Public sector

10,204

-

10,204

1,357

-

1,357

Retail

-

-

-

-

-

-

Foreign clients

-

-

-

-

-

-

Other clients

23,881

-

23,881

83,002

-

83,002

TOTAL

2,103,075

156,881

2,259,956

2,864,881

200,324

3,065,205

Total deposits and other liabilities toward clients

48,158,207

41,843,418



41

24. SUBORDINATED DEBT 31.12.2016. 31.12. 2015.

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

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

The Group has a subordinated loan from the parent bank Credit Agricole SA received in 2009, with the following initial terms and conditions: EUR 40,000 with an interest rate of EURIBOR 3M plus 3.805% and maturity date as at 31 March 2017. By contract Annex dated 6 December 2013, the terms and condition of the subordinated loan where changed in the manner that the maturity date is 28 April 2023 and the EURIBOR interest rate is 3M plus 3.679%. The subordinated loan is not collateralised. All liabilities arising from the contract are considered subordinated. In the event of a liquidation or bankruptcy, the liabilities shall be settled only after settling the obligations towards other creditors.

25. PROVISIONS 31.12. 2016. 31.12. 2015.

Provision for off-balance sheet credit risk losses 11,346 8,618 Provision for litigations 94,781 71,923 Other provision 8,645 8,850 Provision for long-term employee benefits 27,346 28,506

Total provisions 142,118

117,897

Movements in provisions were as follows:

Provision for off-balance sheet credit risk losses 31. 12. 2016. 31.12.2015.

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

As at 11,346 8,618

Provision for litigations 31.12.2016.

31.12.2015.

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

As at 94,781

71,923

Other provision 31.12. 2016. 31.12. 2015.

As at 1 January 8,850 9,237 Provision used – payables (205) (387)

As at 8,645

8,850



42

25. PROVISIONS (continued) Provision for long-term employee benefits 31.12. 2016. 31. 12.2015.

As at 1 January 28,506 32,079 New provisions (Note 10) 5,073 4,765 Provision used – payables (125) (234) Actuarial gains (6,108) (8,104)

As at 27,346 28,506

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

- Employee data - Total years of service as at 31/05/2016 . - Year of birth and gender - Number of years of remaining working lives (old-age pension, normal retirement age) - RS mortality tables (2010-2012) - 6% discount rate - average gross salary paid per employee in the Republic of Serbia during the period Jan-May 2016, - an assumed annual salary increase of 2%.

Movements within Provisions for Retirement Benefits are presented in the table below: Present value of employee benefits as at 31.12.2015 28,506

Service costs a. Current service cost 1,402 b. Past service cost 1,539 c. Interest cost 2,132 d. Payables (125) Actuarial gains/losses arising from: a. changes in demographic assumptions - b. changes in financial assumptions (4,668) c. changes in experience assumptions (1,440)

Present value of employee benefits as at 31.12.2016 27,346



43

26. OTHER LIABILITIES 31.12.2016. 31.12.2015.

Trade payables 55,824 112,849 Net salaries and fringe benefits payable 154,761 140,204 Tax 10,591 14,021 Liabilities in calculation 8,192 6,244 Finance lease payables 38,576 12,406 Advances received 43,442 38,130 Other liabilities 25,125 19,250 Temporary accounts Accrued expenses 62,684 68,915 Accrued expenses 281,642 277,404 Accrued other income 34,560 36,895 Other accrued expenses 2,769 1,043

Total, Other liabilities 718,166 727,362

27. EQUITY 31.12. 2016. 31.12. 2015.

Share capital 8,420,500 8,420,500

Equity 8,420,500 8,420,500

Reserves 30,070 21,895 Retained earnings 102,054 - Profti for the year 243,972 166,994

Total equity 8,796,596

8,609,389

a) Share capital

The Group’s share capital includes initial investments of its principal shareholders and subsequent issues of new shares. As at 31 December 2016, the Group’s subscribed and paid-in capital amounted to 6,477,307 ordinary shares with nominal value of RSD 1,300 per share, in other words RSD 8,420,500 thousand (2015.: 6.477.307 ordinary shares with nominal value of RSD 1,300 per share, in other words RSD 8,420,500 thousand). The Group’s share capital, based on the Central Securities Depository and Clearing house as at 31 December 2016, was as follows:

Number of ordinary

shares % of share

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



44

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

2016. 2015.

Profit attributable to equity holders of the Bank 243,972 141,446

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

Basic earnings per share (expressed in RSD per share) 31.86 21.84

c) Reserves Reserves amounting to RSD 29,816 thousand as at 31 December 2016 (2015: RSD 21,688 thousand) comprise of actuarial gains arising from the effects of changes in demographic, financial and experience assumptions used for calculation of provision for future liabilities for retirement benefits. 28. OFF-BALANCE SHEET ITEMS

31.12.2016. 31.12.2015.

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

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

a) Fiduciary activities

31 December

2016 31 December

2015

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

As at 31 December 521,697 555,788

Fiduciary fund resources mainly comprise short term and long term loans granted from funds received from the Fund for Agricultural Development amounting to RSD 6,140 thousand (2015: RSD 43,640 thousand), while RSD 514,459 thousand relates to the funds received from the National Corporation for Housing Loans (2015: RSD 510,961 thousand) and RSD 1,097 thousand (2015: RSD 1,187 thousand), which is relative to received bills of exchange.



45

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

31.12.2016. 31.12.2015.

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

Total payable guarantees and performance bonds 7,390,418 7,962,401

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

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

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

Unused commitments relate to unused granted loans that cannot be unilaterally cancelled, such as: overdrafts, revolving loans to companies, multi-purpose revolving loans, and other irrevocable commitments. Irrevocable commitments usually have fixed maturity dates or maturity related clauses. As irrevocable commitments may expire before they are withdrawn by customers, the total agreed amount is not necessarily presented as future cash outflows. The Group monitors the maturity of irrevocable commitments arising from unused granted loans because long term commitments bear greater credit risk than short term commitments. 29. RECONCILIATION OF RECEIVABLES Based on Article 18, of the Law and Accounting, the Group performed the reconciliation of receivables by sending statements of open items to all legal entities and entrepreneurs on 30 November 2016 . The total value of verified statements of open items confirming the Group’s receivables amounts to RSD 18,781,900 thousand. Based on the Statements of Open Items exchanged with the clients, there remained the following unreconciled receivables and payables: Total value of unresolved Statements of Open Items amounts to RSD 500,681 thousand. The main problem relating to unresolved statements of open items lies in the following: incorrect address (RSD 127,299 thousand); a number of Statements of Open Items have been declared void without providing any justification; statements of open items bearing no signature. The Group is of an opinion that the value of unresolved statements of open items is immaterial.



46

30. RELATED PARTY TRANSACTIONS (continued) Effects of related party transactions – legal entities The Group enters into various business relationships with Credit Agricole S.A. Paris, parent bank, and other Credit Agricole Group members. The tables below summarise receivables and payables and related income and expenses arising from business relationships with other related parties through to and including the balance sheet date:

2016 Credit

Agricole S.A. Paris

CA CIB CA CIB Sweden

CA CIB India Cariparma CA Cards & Payments

Silca

Progica

Lesica CA CIB London

CA DU Morbihan

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

-

-

- -

Investments in subsidiaries - - - - - -

-

-

- -

Other assets 2,078 510 - - - -

-

-

- -

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

-

- -

Deposits and other liabilities:

15,478,596 - - - 5 -

-

-

- 13,513

-

Subordinated debt 2,483,767 - - - - -

-

-

- - -

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

-

436

- - 5

Total liabilities 18,015,105 1,944 - - 5 370

-

436

- 13,513 5

Interest income 810 - - - - -

-

- - -

Fee and commission income 2,986 31,734 1,001 25 54 -

-

- 25

Net income arising from foreign exchange differences

- 1,706 - - - -

-

- -

-

Other income 197 - - - - -

-

- - -

Total income 3,993 33,440 1,001 25 54 -

-

- 25 -

Interest expense 167,713 - - - - -

-

-

- - -

Fee and commission expense

116,838 40,272 - - - -

-

-

- -

24

Net expense arising from foreign exchange differences

185,340 - - - - 7

5

11

6

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

4,349

2,909

3,078 - -

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

4,354

2,920

3,084 - 24



47

30. RELATED PARTY TRANSACTIONS (continued) Effects of related party transactions – legal entities (continued)

2015 Credit Agricole

S.A. Paris CA CIB

CA CIB Sweden CA CIB Indija Cariparma

CA Cards & Payments Silca Progica

Lesica Loans and receivables

3,487,847

-

152 - - -

-

-

-

Investments in subsidiaries - - - - - - - - - Other assets 105 734 - - - - - - - Total assets

3,487,952

734

152 - - -

-

-

-

Deposits and other liabilities: 14,801,661 402 - - - - - - - Subordinated debt 2,447,899 - - - - - - - - Other liabilities 56,849 307 - - - 331 541 881 - Total liabilities

17,306,409 709 - - - 331

541

881

0

Interest income 810 - - - - - - - - Fee and commission income 2,986 32,918 1,174 - 59 - - - - Net income arising from foreign exchange differences

- - - - - 6,615

4

-

3

Other income 197 - - - 9 - - - - Total income

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

4

-

3

Interest expense 170,324 - - - - - - - - Fee and commission expense 100,681 33,344 - 48 - - - - - Net expense arising from foreign exchange differences

136,323 26,123 - - 1 -

-

13

-

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

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

3,243

2,978

2,790



48

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

As at 31

December 2016

As at 31

December 2015

Investments and receivables 26,361 26,104 Deposits 124,643 82,350 Fees to members of the Managing and Executive boards (gross) paid in 2016 and 2015 are presented in the table below:

As at 31 December

2016

As at 31 December

2015

Salaries of the members of the Executive Board 123,237 120,758 Fees paid to members of the Managing Board 5,759 4,867 Other benefits 40,134 23,390

Total 169,130 149,015



49

31. FINANCIAL RISK MANAGEMENT 31.1. Introduction Banking activities involve inherent risk however, the risk is managed through a process that includes ongoing risk identification, measurement and monitoring, as well as the setting of risk limits and the application of other control systems. Risk management procedures are key to the Group’s continuing profitability, and each and every individual within the Group is held accountable for risk exposure within their area of operations. The Group is exposed to credit risk, liquidity risk and market risk. The Group is also exposed to operational risk. The independent risk management process does not include business risks such as changes in the environment, technology and industry. They are monitored through the Group’s strategy planning process. The Group is exposed to the following risks: credit risk, liquidity risk, interest rate risk, currency risk, operating risk, risks of exposure to one entity or a group of related parties (excessive risk concentration) investment risk, and risk related to the country of origin Risk management structure The Board of Directors and the Executive Board are ultimately responsible for identifying and controlling risks. However, the Group established separate independent bodies responsible for managing and monitoring risks. Board of Directors and Executive Board The Board of Directors and the Executive Board are responsible for the overall risk management approach and for approving the risk management strategies and principles. The Audit Committee

The Audit Committee is responsible for monitoring the overall risk management process within the Group. Risk Management Committee The Risk Management Committee has overall responsibility for the development of risk management strategy and the implementation of principles, frameworks, policies and limits. The Committee is also responsible for fundamental findings relating to risk as well as for managing and monitoring relevant risk related decisions. Risk Management Department The Risk Management Department is responsible for the implementation and maintenance of risk related procedures which ensure independent process control.



50

31. FINANCIAL RISK MANAGEMENT (continued) 31.1. Introduction (continued) Risk Control Department The Risk Control Department is responsible for monitoring compliance with principles, policies and limits set by the Group. Within each business group there is a decentralized unit which is responsible for independent risk control, including risk monitoring in accordance with the set limits, as well as for monitoring risks arising from the introduction of new products and complex transactions. This unit also ensures that risk is incorporated in the risk measurement and reporting system. Assets and Liabilities Committee (ALCO) The committee for liquidity management is responsible for managing the Group’s assets and liabilities and the overall financial structure. Also, the committee is primarily responsible for sources of funding and the Group’s liquidity. Internal Audit The process of risk management in the Group is controlled at least once a year by the internal audit function which examines procedure adequacy as well as the Group’s compliance with the adopted procedures. The internal auditors discuss the results of their work with the Group’s management and reports on their findings and recommendations to the Audit Committee. a) Risk management and reporting systems The Group’s risks are measured using a method that reflects both the expected losses likely to arise in normal circumstances and unexpected losses, which are an estimate of the ultimate actual losses based on statistical models. The models use probability derived from historical data, adjusted to reflect the current economic environment. The Group also runs the worst case scenarios that would arise in the event that extreme events which are unlikely to occur, in fact, occur. Monitoring and controlling risks is primarily based on limits setting. The limits reflect the Group’s business strategy and market environment, as well as the level of risk the Group is willing to accept. The Group also monitors and measures the overall risk bearing capacity taking into account the aggregate risk exposure across all risks types and activities. Information compiled from all business activities are examined and processed in order to identify, analyse and control early risks. This information is presented and explained to the Board of Directors, the Executive Board, the Risk Management Committee and managers of all business units. The reports include: aggregate credit exposure, credit metric forecasts, hold limit exceptions, market risk measuring, liquidity ratios and risk profile changes. The Group’s senior management quarterly assess the adequacy of loan impairment. An extensive report on risks that includes all relevant information needed to assess and make conclusions on the Group’s risk exposure is presented to the Audit Committee at least quarterly. For each new level in the Group separate risk management reports are prepared so that all business units may have access to detailed, necessary and updated information. Daily reports on the utilization of market limits, liquidity and foreign exchange risk as well as other important information are submitted to all Executive Directors and relevant members of the Group’s Executive Board.



51

31. FINANCIAL RISK MANAGEMENT (continued) 31.1. Introduction (continued) b) Excessive risk concentration Risk concentration arises when a significant number of counterparties are engaged in similar business activities or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political and other conditions. Risk concentration indicates the relative sensitivity of the Group’s performance to changes affecting a particular industry of geographical location. In order to avoid excessive risk concentration, the Group’s policies and procedures include specific guidelines for development and maintenance of a diverse portfolio. Identified concentrations of credit risks are controlled and managed accordingly. 31.2. Credit risk Credit risk is the risk that certain receivables of the Group will not be fully collected in view of the conditions under which they were initially approved, i.e. the risk that the debtors will be unable or unwilling to fulfil their contractual obligations. Debtor means any natural or legal person who has an on- and/or off-balance sheet obligation towards the Group. The only debtors of the Group are related parties in terms of Article 2 of the Law on Banks. The process of credit risk management is based on general principles:

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

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

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

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

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

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



52

31. FINANCIAL RISK MANAGEMENT (continued) 31.2. Credit risk (continued) Contingent liability risks related to credit risk The Group issues guarantees and letters of credit to its customers which may require that the Group make payments in favour of third parties. In this way the Group is exposed to risks relating to credit risk which can be mitigated by the same control processes and procedures. Excessive risk concentration Excessive risk concentration is a risk arising from the Group’s large exposure to a group of debtors or a single party. Risk concentration arises when a significant number of counterparties are engaged in similar business activities or activities in the same geographic region, have similar economic features, or are exposed to similar factors that reflect on the client's income and expenses, which would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political and other conditions. In order to achieve, maintain and secure their credit portfolio and minimize concentration risks, security measures are established by defining maximum levels of exposure and credit limits as well as by regular monitoring compliance with the established limits. Under the Decision on Risk Management by Banks (RS Official Gazette, Nos. 112/08, 45/11, 94/11, 119/12, 123/12, 23/13, 43/13, 92/13, 33/15, 61/15 and 61/16 ), large exposure of the Group to a single borrower or a group of related parties relates to exposure of at least 10% of the bank’s capital.



53

31. FINANCIAL RISK MANAGEMENT (continued)

31.2. Credit risk (continued)

Maximum credit risk exposure

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

31.12.2016 31.12.2015

Financial asset classes

Maximum balance sheet

exposure to credit risk a

Allowance for impairment

Group assessment

Net balance sheet

exposure to credit risk

Maximum balance sheet

exposure to credit risk a

Allowance for impairment

Group assessment

Net balance sheet exposure

to credit risk

Balance on the account held with the Central Bank

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

Financial assets initially recognized at fair value through income statement

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

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

Loans and receivables from banks and other financial organisations

5,536,716 4,554 4,554

5,532,162

6,564,221 4,601 4,601

6,559,620

Loans and receivables from customers 67,670,450

4,821,825 1,596,075

62,848,625

59,258,291 4,592,313 1,577,813

54,665,978

Other assets 341,404 64,283 45,996 277,121 326,611 56,810 35,684 269,801

As at 31 December 83,082,000 4,890,662 1,646,625 78,191,338 76,130,384 4,653,724 1,618,098 71,476,660

Payment guarantees and performance bonds

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

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

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

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

TOTAL

107,241,154 4,902,007 1,653,808 102,339,147

99,663,258 4,662,341 1,622,451 95,000,917

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



54

31. FINANCIAL RISK MANAGEMENT (continued) 31.2. Credit risk (continued) Maximum credit risk exposure


Total 2016

Serbia Other

Belgrade

Vojvodina Other parts

of Serbia European

Union Other parts

of the world

Balances with the Central Bank

9,068,662 - - - - 9,068,662


- - - 2,767 - 2,767

Financial assets held to maturity 462,001 - - - - 462,001

Loans and receivables from banks and other financial organisations

4,007,998 - 4,114 1,231,754 292,850 5,536,716

Loans and receivables from customers

28,078,019 26,242,045 13,350,386

- - 67,670,450

- of which: Corporate 11,406,979 11,012,922 3,257,132 - - 25,677,033

- of which: Retail 14,024,220 14,637,362 9,424,051 - - 38,085,633

- of which: Public sector 1,611,660 108,447 108,031 - - 1,828,138

- of which: Other clients 1,035,160 483,314 561,172 - - 2,079,646

- of which: Foreign clients - - - - - 0

Other assets 37,396 274,203 29,317 437 51 341,404

Balance sheet assets 41,654,076 26,516,248 13,383,817 1,234,958 292,901 83,082,000 Contingent liabilities and commitments 12,703,665 7,415,784 3,190,358 848,034 1,313 24,159,154

- of which: Payment guarantees and performance bonds

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

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

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

Maximum exposure to credit risk as at 31 December 2016

54,357,741 33,932,032 16,574,175 2,082,992 294,214 107,241,154

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


Total 2015

Serbia Other

Belgrade

Vojvodina Other parts

of Serbia European

Union Other parts

of the world

Balances with the Central Bank 7,524,832

-

-

-

-

7,524,832 Financial assets held to maturity 2,456,429 - - - - 2,456,429 Loans and receivables from banks and other financial organisations 2,807,912

14

4,077

3,485,801

266,417

6,564,221


26,046,371 21,754,492 11,457,428

-

-

59,258,291

- of which: Corporate 11,583,849 9,214,514 2,461,948 - - 23,260,311

- of which: Retail 12,654,076 11,775,160 8,322,602 - - 32,751,838

- of which: Public sector 871,035 221,290 167,522 - - 1,259,847

- of which: Other clients 937,411 543,528 505,356 - - 1,986,295

- of which: Foreign clients - - - - - - Other assets 44,790 254,285 27,221 291 24 326,611

Balance sheet assets 38,880,334 22,008,791 11,488,726 3,486,092 266,441 76,130,384

Contingent liabilities and commitments 13,777,580

6,062,307

2,942,432

746,813

3,742

23,532,874

- of which: Payment guarantees and performance bonds 4,377,206

2,128,292

1,071,226

381,935

3,742

7,962,401 - of which: Uncovered letters of credit 462,343 11,669 122,480 364,878 - 961,370 - of which: Unused commitments 8,938,031 3,922,346 1,748,726 - - 14,609,103 Maximum exposure to credit risk as at 31 December

52,657,914 28,071,098 14,431,158 4,232,905 270,183 99,663,258



55



The analysis of the Group’s balance sheet assets and off-balance sheet items as at 31 December 2016 classified by industry sectors prior to taking collaterals into consideration, is presented in the table below:

Financial asset classes Finance Retail Process

industries Trade Mining Agriculture Construction

industry Transport Service

industries Other Total

Balances with the Central Bank

9,068,662 - - - - -

- -

-

- 9,068,662


2,767 - - - - -

- -

-

- 2,767

Financial assets held to maturity

462,001 - - - - -

- -

-

- 462,001

Loans and receivables from banks

5,536,716 - - - - -

- -

-

- 5,536,716


5,910 36,658,640 10,254,715 8,092,644 976,003 3,590,775 1,078,545 4,127,491 134,875 2,750,852 67,670,450

- of which: Corporate 5,423 - 8,962,865 6,908,910 892,449 3,521,516 673,741 2,350,722 80,238 2,281,169 25,677,033 - of which: Retail 480 36,658,640 253,042 660,796 76,983 58,848 39,923 118,304 43,815 174,802 38,085,633 - of which: Public sector - - 105,988 12 820 401 41 1,610,748 57 110,071 1,828,138 of which: Other Clients 7 - 932,820 522,926 5,751 10,010 364,840 47,717 10,765 184,810 2,079,646

of which: Foreign clients - - - - - -

-

-

- - -

Other assets 248,128 31,474 13,256 14,687 2,502 1,234 3,967 7,250 4,683 14,223 341,404

Balance sheet assets 15,324,184 36,690,114 10,267,971 8,107,331 978,505 3,592,009 1,082,512 4,134,741 139,558 2,765,075 83,082,000

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


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

- of which: uncovered letters of credit and avals

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

- of which: Unused commitments

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

As at 16,473,285 38,034,245 16,641,523 16,880,549 1,090,681 4,558,157 3,440,635 5,850,906 182,690 4,088,483

107,241,154



56

31. FINANCIAL RISK MANAGEMENT (continued) 31.2. Credit risk (continued) The analysis of the Group’s balance sheet assets and off-balance sheet items as at December 2015 classified by industry sectors prior to taking collaterals into consideration, is presented in the table below:

Financial asset classes Finance Retail Process

industries Trade Mining Agriculture Construction

industry Transport Service

industries Other Total

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

-

-

- 7,524,832

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

-

-

- 2,456,429

Loans and receivables from banks 6,564,221 - - - - - -

-

-

- 6,564,221 Loans and receivables from customers 162,396 31,394,951 9,318,791

8,416,836 664,449 3,101,046 908,139 2,980,424 109,098 2,202,161 59,258,291

- of which: Corporate - - 7,935,898 7,407,103 590,946 2,992,023 515,104 2,167,071 57,351 1,594,815 23,260,311 - of which: Retail - 31,394,951 292,939 599,990 67,828 62,312 25,646 119,872 38,976 149,324 32,751,838 - of which: Public sector 162,396 - 165,842 0 18 34,179 298 667,362 279 229,473 1,259,847 of which: Other Clients - - 924,112 409,743 5,657 12,532 367,091 26,119 12,492 228,549 1,986,295

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

-

-

-

- Other assets 235,975 28,206 11,765 12,381 2,497 1,176 1,903 4,567 4,479 23,662 326,611

Balance sheet assets 16,943,853 31,423,157 9,330,556 8,429,217 666,946 3,102,222 910,042 2,984,991 113,577 2,225,823 76,130,384

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

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

453,349

4,080

724,731

7,962,401

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

440,882

969

-

961,370

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

268,883

36,381

576,086

14,609,103

As at 17,459,258 33,037,124 14,475,711 18,387,859 771,245 4,458,064 3,244,245 4,148,105 155,007 3,526,640

99,663,258



57

31. FINANCIAL RISK MANAGEMENT (continued) 31.2. Credit risk (continued) Collateral and other assets pledged as collateral Both the amount and the type of required collateral depend on the estimated credit risk pertaining to each client. The main types of collateral include:

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

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

The management monitors the market value of collateral and requires additional collateral in accordance with underlying contracts. The management also takes into account the market value of collateral obtained during the review of the adequacy of loan provision. Renegotiated loans and advances to customers Restructuring of loans to customers means: redefinition of debtor-creditor relations between banks and debtors, and the granting of additional concessions to the client due to the deterioration of its financial situation, which would not be granted if the borrower is not in trouble, regardless of whether it is a certain amount of receivables due, whether the claim is impaired and whether it is for him status of default occurred. Operating lease restructuring implies any activity undertaken by the Group with a view to changing all relevant terms and conditions under which customer receivables were originally approved. This includes changes in: maturity date, interest rate, instalment due date, amount of instalment, etc. In the event of deterioration of debtor’s financial ability, restructuring of such receivables may be carried out only under the conditions and in the manner described in the Bank’s Credit Standards. In such cases, the restructuring of receivables is feasible only if it enables the client to regularly settle their obligations towards the Group and on condition that the client continues to generate income with a view to regularly servicing its debt, irrespective of its deteriorated financial position. Whether the customer is a natural person, an entrepreneur, a farmer or a legal entity, before making the restructuring decision it is necessary to visit the client and prepare a financial monitoring report on the client’s operations or income. The renegotiation of receivables is subject to pre-approval by the Group’s Credit Risk Department.

Restructuring of liabilities is done with the application of appropriate measures of restructuring that involve changing the original contractual terms and manner of repayment claims with the new conditions and manner of repayment adapted to the newly created risk profile of the client. In the analysis of the file it is estimated if the restructuring of loans to the debtor is economically viable and reasonable, for the debtor and the bank, which includes a detailed analysis of the reasons that led to the financial difficulties of the debtor, the projection of future cash flows, in accordance with internal procedures for the approval of loans to customers of the Group .



58

31. FINANCIAL RISK MANAGEMENT (continued) 31.2. Credit risk (continued) The Group’s restructured and renegotiated receivables as at 31 December 2016 and 31 December 2015 in addition to estimated collaterals are presented in the tables below:

Data on restructured receivables also show their movement during the period of one year as well as the structure of the restructuring measures.

Financial assets classification Total

receivables (gross)

Accumulated allowance for impairment of

receivables

Restructured receivables (gross)

Of which: Problematic debts


estructured receivables

% of

restructured receivables

Value of collateral of

restructed receivables

Loans and advances to banks and other financial institution

5,536,741

4,553

-

-

-

-

-

Loans and advances to customers 62,906,117

4,761,608

2,595,556

2,509,436

1,306,355

- 886,501

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

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

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

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

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

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

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

Credentials 1,374,521 10 - - - - -

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

Commitments and contingencies 24,159,153 11,345 - - - - -

Balance at 31 December 2016 92,937,310 4,841,789 2,595,666 2,509,546 1,306,449 - 886,556

The following table presents data on changes of restructed receivables at 31 December 2016

Financial assets classification Gross value at

the beginning of the year

Reeceivables that were restructed

during the year

Receivables that during the year ceased to be considered as restructured

The exchange

rate impact

Other changes*

Gross value at the end of the

year

Net vaule at the end of the year

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

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

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

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

Of which: Other customers 480,401 60,109 13,235 7,033 3,970 538,278 101,563

Other assets 104 5 5 - 6 110 16

Balance at 31 December 2016 2,598,271 146,069 145,080 50,865 -54,461 2,595,666 1,289,217

The following table presents information about the structure of restructured receivables, by restructuring measures on 31 December 2016.

Financial assets classification

Reduction of interest rate

The extension of

the repayment

period

Moratorium Capitalization Refinancing Partial write-off

Conversion of debt

Other measures**

Total in 2016

Loans and advances to customers

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

Of which: Industry 275,644 829,777 - - 778,091 - - 10,326 1,893,838

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

-

-

-

56,599

Of which: Public sector 1,024 105,817 - - -

-

-

-

106,841

Of which: Other customers

338,353 199,925 - - -

-

-

-

538,278

Other assets 28 82 - - -

-

-

-

110

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



59

31. FINANCIAL RISK MANAGEMENT (continued) 31.2. Credit risk (continued) The following table presents data on restructured receivables at 31 December 2015:


Total

receivables (gross)


receivables

Restructured receivables

(gross)

Of which: Problematic debts


estructured receivables

% of restructure

d receivable

s

Value of collateral of restructed

receivables

Loans and advances to banks and other financial institution

6,564,234

4,669

-

-

-

-

-


55,304,552

4,538,415

2,598,167

2,535,889

971,139

-

786,968

Of which: Industry 19,738,771 1,841,536 1,969,261 1,908,172 487,073 9,97% 496,431 Of which: Retail 32,328,569 1,346,530 3,148 1,959 503 0,01% 1,002 Of which: Public sector 1,251,022 69,397 145,357 145,357 49,898 13,35% 145,357 Of which: Other customers 1,986,190 1,280,952 480,401 480,401 433,665 24,19% 144,178 Other assets 324,231 51,810 104 104 93 0,03% 56

Balance sheet assets 62,193,017

4,594,894

2,598,271

2,535,993

971,232

-

787,024

Guarantees 7,962,401

4,310

-

-

-

-

-

Credentials 960,401

6

-

-

-

-

-

Unused commitments 14,609,103

4,301

-

-

-

-

-

Avals 969

-

-

-

-

-

-

Commitments and contingencies

23,532,874

8,617

-

-

-

-

-

Balance at 31 December 2016

85,725,891

4,603,511

2,598,271

2,535,993

971,232

-

787,024

The following table presents data on changes of restructured receivables at 31 December 2015:

Financial assets classification Gross value at

the beginning of the year

Receivables that were

restructured during the year

Receivables that during the year ceased to be considered as restructured

The exchange

rate impact

Other changes*

Gross value at the end of the

year

Net value at the end of the year

Loans and advances to customers 1,382,577 1,566,591 110,080 6,847 (247,766) 2,598,167 1,627,027

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

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

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

Of which: Other customers 355,424 - - 1,733 123,244 480,401 46,736

Other assets 105 - 2 - - 104 11

Balance at 31 December 2015 1,382,682 1,566,591 110,082 6,847 (247,766) 2,598,271 1,627,038

Within receivables restructured during 2015, most of the amount related to the restructured loans for clients Victoria Oil and Sojaprotein. The following table presents information about the structure of restructured receivables, by restructuring measures on 31 December 2015:


Reduction of interest rate

The extension of

the repayment

period

Moratorium Capitalization Refinancing Partial write-off

Conversion of debt

Other measures**

Total in 2015


631,449 1,126,144 - - 829,403 - - 11,171 2,598,167

Of which: Industry 310,863 818,023 - - 829,203 - - 11,171 1,969,261

Of which: Retail 1,094 1,855 - - 200 - - - 3,148

Of which: Public sector 34,160 111,197 - - - - - - 145,357

Of which: Other customers

285,332 195,069 - - -

-

-

-

480,401

Other assets 34 68 - - - - - 2 104

Balance sheet assets 631,483 1,126,212 - - 829,403 - - 11,173 2,598,271

Presented changes of the restructured parties have arisen, as a result of the fall of collection and exposure.



60

31. FINANCIAL RISK MANAGEMENT (continued) 31.2. Credit risk (continued) The Group manages the quality of financial assets by using the internal credit ratings. The table below shows the quality of loans and advances by financial asset classes exposed to credit risk as at 31 December 2016 . The amounts are presented gross without a deduction for impairment allowance however: Neither past due nor impaired

High grade

quality Standard

grade quality Sub-standard grade quality

Past due but not impaired Impaired

Total 2016

Balances with the Central Bank 9,068,662 - - - - 9,068,662 Financial assets initially recognized at fair value through income statement

2,767 - - - - 2,767

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

5,375,433

156,769 - -

4,514

5,536,716 Loans and receivables from 11,891,478 46,026,546 674,357 1,920,658 7,157,411 67,670,450 Customers 5,185,286 16,354,772 401,410 171,298 3,564,267 25,677,033 of which: Corporate 6,704,534 27,947,689 171,860 1,475,394 1,786,156 38,085,633 - of which: Retail 1,124 1,720,879 - 67 106,068 1,828,138 - of which: Public sector 534 3,206 101,087 273,899 1,700,920 2,079,646 - of which: Other clients - - - - - - - of which: Foreign clients 247,891 25,728 1,499 8,114 58,172 341,404 Other assets 9,068,662 - - - - 9,068,662

Balance sheet assets

27,048,232

46,209,043

675,856

1,928,772

7,220,097

83,082,000

Contingent liabilities and commitments

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


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

- of which: uncovered letters of credit and avals

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

- of which: Unused commitments 11,157,339 3,814,287 406,546 13,640 2,402 15,394,214

As at 31 December

39,404,064

56,801,921

1,768,591

1,987,622

7,278,956

107,241,154

The table below shows loans and advanced individually and collectively impaired

Financial asset classes Impaired

Individually Collectively Total impaired

Loans and receivables from banks and other financial organisations -

4,514

4,514

Loans and receivables from customers 5,299,296 1,858,115 7,121,972

of which: Corporate 3,220,238 344,028 3,564,266

of which: Retail 361,325 1,424,831 1,786,156

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

of which: Other Clients 1,611,874 89,046 1,700,920 of which: Foreign clients - - -

Investments in subsidiaries - - -

Other assets 18,432 39,740 58,172

Balance sheet assets 5,317,728 1,902,369 7,220,097

Contingent liabilities and commitments 50,444 8,415 58,859

- of which: Payment guarantees and performance bonds 50,444 6,013 56,457 - of which: Uncovered letters of credit - - - - of which: Unused commitments - 2,402 2,402

Total 5,368,172 1,910,784 7,278,956



61

31. FINANCIAL RISK MANAGEMENT (continued) 31.2. Credit risk (continued) The table below shows the quality of loans and advances by financial asset classes exposed to credit risk as at 31 December 2015 : Neither past due nor impaired

High grade

quality

Standard grade

quality

Sub-standard

grade quality

Past due but not impaired Impaired

Total 2014

Balances with the Central Bank 7,524,832 - - - - 7,524,832 Financial assets held to maturity 2,456,429 - - - - 2,456,429 Loans and receivables from banks and other financial organisations 6,411,251 148,369 - - 4,601 6,564,221 Loans and receivables from customers 10,855,424 37,576,996 1,053,227 2,369,527 7,403,117 59,258,291 of which: Corporate 4,963,510 13,512,320 592,928 279,247 3,912,306 23,260,311 - of which: Retail 5,654,243 23,303,229 189,479 1,819,076 1,785,811 32,751,838 - of which: Public sector 162,396 674,606 221,204 1,265 200,376 1,259,847 - of which: Other clients 75,275 86,841 49,616 269,939 1,504,624 1,986,295 - of which: Foreign clients - - - - - - Other assets 228,439 34,859 8 9,727 53,578 326,611


27,476,375

37,760,224

1,053,235

2,379,254

7,461,296

76,130,384

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

50,660

23,532,874

- of which: Payment guarantees and performance bonds 2,018,243 5,418,323 465,776 12,076

47,983

7,962,401

- of which: Uncovered letters of credit 365,847 583,854 11,669 -

-

961,370

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

2,677

14,609,103

As at 31 December

40,862,496

46,843,136

2,045,942

2,399,728

7,511,956

99,663,258

The table below shows loans and advanced individually and collectively impaired

Financial asset classes Impaired

Individually Collectively Total impaired

Balances with the Central Bank - - - Financial assets held to maturity - - - Loans and receivables from banks and other financial organisations - 4,601 4,601 Loans and receivables from customers 5,584,364 1,818,753 7,403,117

of which: Corporate 3,553,532 358,774 3,912,306

of which: Retail 421,302 1,364,509 1,785,811

of which: Public sector 199,868 508 200,376

of which: Other Clients 1,409,662 94,962 1,504,624 of which: Foreign clients - - -

Other assets 16,284 37,294 53,578

Balance sheet assets 5,600,648 1,860,648 7,461,296

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

- of which: Payment guarantees and performance bonds 47,589 394 47,983 - of which: Uncovered letters of credit - - - - of which: Unused commitments - 2,677 2,677

Total 5,648,237 1,863,719 7,511,956



62

31. FINANCIAL RISK MANAGEMENT (continued) 31.2. Credit risk (continued) Financial assets neither due nor impaired presented in the table above refer to performing receivables, which are not past due and which have the following qualities:

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

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

doubtful);

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

bad and doubtful, but are under watch);

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

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

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

impaired.



63

31. FINANCIAL RISK MANAGEMENT (continued) 31.2. Credit risk (continued) The table below shows financial assets past due but not impaired, classified on the basis of past due interval in accordance with the Group's internal method of calculating impairment allowance as at 31 December 2016 and 31 December 2015. Financial assets past due but not impaired classified on the basis of past due interval as at 31 December 2016 :

1 to 30

days 31 to 60

days 61 to 90

days Over 91

days Total in

2015

Loans and receivables from banks - - - - -

Loans and receivables from customers 1,302,379 250,597 93,885 273,797 1,920,658

- of which: Corporate 167,681 2,731 836 50 171,298

- of which: Retail 1,134,439 247,866 93,037 52 1,475,394

- of which: Public sector 55 - 12 - 67

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

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


1,306,945 254,073 93,957 273,797 1,928,772

Contingent liabilities and commitments

56,582 2,268 - - 58,850


45,210 - - - 45,210

- of which: Unused commitments 11,372 2,268 - - 13,640

Total

1,363,527 256,341 93,957 273,797 1,987,622

Financial assets past due but not impaired classified on the basis of past due interval as at 31 December 2015 :

1 to 30

days 31 to 60

days 61 to 90

days Over 91

days Total in

2015

Loans and receivables from banks - - - - -

Loans and receivables from customers 1,703,165 291,092 104,826 270,444 2,369,527

- of which: Corporate 255,086 23,071 1,068 22 279,247

- of which: Retail 1,447,758 267,077 103,747 494 1,819,076

- of which: Public sector 321 944 - - 1,265

- of which: Other clients - - 11 269,928 269,939

Other assets 9,318 151 193 65 9,727


1,712,483

291,243

105,019

270,509

2,379,254

Contingent liabilities and commitments 17,337 2,771 366 - 20,474

- of which: Payment guarantees and performance bonds 11,971 106 - - 12,076

- of which: Unused commitments 5,367 2,665 366 - 8,398

Total

1,729,820 294,014 105,385 270,509 2,399,728



64

31. FINANCIAL RISK MANAGEMENT (continued) 31.2. Credit risk (continued) Impairment assessment When determining the existence of objective evidence of impairment, the Bank uses the following list of potential objective evidences of impairment, defined by the internal methodology for the calculation of the allowance for impairment of receivebles of the Group:

The internal rating of the Debtor indicates that the Debtor is in the status of default;

The Debtor is in arrears with servicing its liabilites due to the State, other creditors, employees (this objective evidence of impairment is monitored via frozen account of the client);

The reduction in operating icome is evident in the past two years or a shorter period - > 50%;

The significant decrease of Debtor’s equity due to losses in the previous reporting periods - > 50%;

Debt to service coverage ratio is below the satisfactory level - < 1.1%;

Days past due for a materially significant amount is above 90 days for any of the Bank’s receivables;

The exposure has a Default status in accordance with the criteria defined by the Decision on classification;

The Group has substantially changed the conditions of repayment of loans due to the financial dificulties of the debtor in relation to the initially agreed conditions;

The Debtor is under initiated pre-bankruptcy proceedings;

The Debtor is under bankruptcy;

The Debtor has been erased from the Business Register Agency (APR);

The evidence that the PI has deceased is present based on the status of the current account with the Bank, with additional information whether there is another PI or legal entity taking over the loan;

The evidence that the receivables from the Debtor are under enforced collection.

The group determines the amount of impairment losses on an individual basis for all individually significant customers / groups of related entities for which there is objective evidence of impairment of receivables whose total exposure is greater than RSD 4 million on the day of assessment, the sam applies to all of the exposures that are recorded as off-balance sheet items, based on the present value of estimated future cash flows. Impairment of receivables on an individual basis is performed using amortized cost using the original effective interest rate (EIR). When determining the amount of impairment losses taken into account the expected future payments from the ordinary course of business of the client or the collection of collateral by applying hair cut in accordance with the Bank's internal methodology for calculating allowances for impairment on an individual and collective basis. If the customer is facing financial difficulties also considers the possibility of achieving customer's business plan, its ability to improve performance and real value by which the collateral can be realized and the timing of realization of collateral, the availability fisnansijske support customers, the ability to charge overdue receivables, as well as the timing of the expected cash flows, Allowances are evaluated on each balance sheet date, except in cases where unforeseen circumstances require more attention and more frequent assessment. When calculating the amount of impairment losses the expected future payments from the regular course of business of the client are taken into account or the collection of collateral by applying hair cut in accordance with the Bank's internal methodology for calculating allowances for impairment on an individual and collective basis. If the Debtor is facing financial difficulties, the Bank considers the possibility of the Debtor to achieve its business plan, its ability to improve its performance and values for which any collaterals could be realized along with times to realization of those collaterals, the availability of alternative financial support to the Debtors, the ability to charge overdue receivables, as well as the timing of the expected cash flows, Allowances are assessed on each balance sheet date, except in cases where unforeseen circumstances require more attention and more frequent assessments.



65

31. FINANCIAL RISK MANAGEMENT (continued) 31.2. Credit risk (continued) Collective assessment allowance for impairment The calculation of impairment losses on portfolio basis (collective assessment) applies to:

The client / group of related entities whose total outstanding is less than RSD 4 million, at the level of the claims belong to the small claims

The client / group of related entities, at the level claims which do not belong to the small claims, ie. whose exposure is greater than RSD 4 million and for which there is no objective evidence of impairment and are not included in the calculation of the individual value adjustment.

The calculation of the collective allowance for impairment is made for individuals and SBE clients based on division into groups with similar characteristics and a half days of delay are grouped into buckets, and receivables from Corporate customers are taken into account by combinig the number of days of delay and ANADEFI analysis. The percentages which are applied to the outstandings in each of the buckets are obtained on the basis of historical data for certain groups with similar characteristics, by using the vintage analysis. The formula for determining % corrections values for each of the buckets is: % Collective economic commission = average value PD% * average value of LGD% Groups with similar characteristics are defined for each segment as follows: Corporate (LC, SME, Agro SME):

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

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

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

Individuals:

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



66


31.2. Credit risk (continued) The following table shows data on the type of value of the collaterals type and guarantors by loan sectors and the claim on the day 31 December 2016:


Value of collaterals

Deposits

Financial Securities

Residential Mortgages

Other Mortgages

Inventory

Other Assets

Guarantors:

State Banks Person

connected with the debtor

Other

Loans and receivables from Banks and other financial institutions

- - - - - - - - - -

Loans and receivables from customers: 1,638,321 - 17,146,151 10,815,713 91,026 - - 147,126 - 31,365

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

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

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

of which: Other 273,695 - 205,285 560,687 - - - - - -

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

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

Payment guarantees and performance bonds 427,771 - 147,315 1,462,959 - - - 486,438 - -

Uncover letters of credit 370,417 - - 19,845 - - - - - -

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

Contingent liabilities and commitments 1,213,742 - 192,648 2,385,021 - - - 486,438 400,000 -

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



67


31.2. Credit risk (continued) The following table shows data on the type and value of the collaterals and guarantors by sectors as well as categories of claims on the day 31 December 2015:


Collateral Value

Deposits

Financial Securities

Residential Mortgages

Other Mortgages

Inventory

Other Assets

Guarantors:

State Banks Person

connected with the debtor

Other


- - - - - - - - - -

Loans and receivables from customers: 1,736,740 - 14,591,879 9,239,486 88,230 - - 158,066 - 16,550

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

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

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

of which: Other 272,876 - 235,937 475,300 - - - - - -

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

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

Payment guarantees and performance bonds 645,122 - 190,512 1,618,253 - - - 406,548 825,966 -

Uncover letters of credit 364,878 - - 11,669 - - - - - -

Unused commitments 770,127 - 31,140 846,201 - - - - 400,000 -

Avals 969 - - - - - - - - -

Contingent liabilities and commitments 1,781,096 - 221,652 2,476,123 - - - 406,548 1,225,966 -

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



68



The following table shows the maximum exposure to credit risk by financial asset classes and the collaterals’ fair value as at 31 December 2016 :



Fair value of collaterals Net exposure

2016 Deposit Mortgages Guarantees Other Surplus of collateral

Loans and receivables from banks

and other financial institutions 4,514 - - - - - 4,514

Loans and receivables from customers 7,121,972

2,780 2,652,580 145,427

- 2,800,787

4,321,185

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

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

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

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


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


2,818 2,654,495 145,427

- 2,802,740

4,381,918

Contingent liabilities and commitments 58,859

1,366 50,444 -

- 51,810

7,049


56,457

998 50,444 -

- 51,442

5,015

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

As at 31 December 2016

7,243,517

4,184 2,704,939 145,427

- 2,854,550

4,388,967



69



The following tables shows the maximum exposure to credit risk by financial asset classes and the collaterals’ fair value as at 31 December 2015 :



Fair value of collaterals Net exposure

2015 Deposit

Mortgages Guarantees Other Surplus of collateral

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

Loans and receivables from customers 7,303,678 7,106 2,691,019 157,514 - 2,855,639 4,448,038

- of which: Corporate 3,828,531 30 1,375,390 157,514 - 1,532,934 2,295,596

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

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

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


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


7,106

2,691,100

157,514

-

2,855,720

4,506,137

Contingent liabilities and commitments 50,660

1,197

47,589

-

-

48,786

1,874


47,983

312

47,589

-

-

47,901

82

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

As at 31 December 2015

7,412,517

8,303

2,738,689

157,514

-

2,904,506

4,508,011



70


31.2. Credit risk (continued) The following table shows the claims that are secured with immovable property with respect to values of the LTV index on 31 December 2016.

Value of LTV Index*

Value of the claim secured with the mortgage on immovable property

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

Total 33,118,066

Average LTV index for 2016 74.54

* LTV index shows the relation of the gross value of the claim and the market value of the immovable property with which the loan is secured.

The following table shows the claims that are secured with immovable property with respect to values of the LTV index on 31 December 2015.

Value of LTV Index*

Value of the claim secured with the mortgage on immovable property

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

Total 29,047,202

Average LTV index for 2015 80.38

* LTV index shows the relation of the gross value of the claim and the market value of the immovable property with which the loan is secured.



71


31.2. Credit risk (continued) As problematic loans (NPE) Group encompasses all loans that satisfy one of the following criteria:

Client is in Bankruptcy/Liquidation

Client is in litigation

Client is in a materially significant default, longer than 90 days.

Client was NPE, in the moment of restructuring, and the date of loan opening is not a year older from the moment of when NPE is being assessed.

Client was NPE in the moment of restructuring, is found in a trial period and on the reporting date is in a materially significant default >30 days

Client was NPE in the moment of restructuring and in the trial period additional concessions were made (2nd restructuring)

Client has the number of restructurings ≥ 3

Client has the label "Real objective evidence" (objective evidence of impairment in accordance with CAQ3RZ7523)

Client has another NPE party – the rule of infection for corporate clients. Problematic Status (NPE) is received on the client level, while for the retail clients it is decided on the level of the party and not the client.. Retail clients are clients belonging to the following internal sectors of the Bank: 3, 1201, 12061, and 12064. The following table shows the movements in the problematic loans on 31.December 2016.

Financial Asset class

Gross value at beginning of the

year

New problematic Reduction Currency exchange

effect

Other

movements

Gross value at the end of year

Net value at the end of

year Of which bought :

Of which: Paid Of which sold:

Of which: written off


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


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

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

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

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

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

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

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

Payment guarantees and performance bonds 133,828 56,762 - - - - - 232 (122,836) 67,986 58,825

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

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

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



72


31.2. Credit risk (continued) The following table shows the movements in the problematic loans on 31.December 2015.


Gross value at

beginning of the year

New Problematic Reduction Currency Exchange

effect

Other movements

Gross value at the end of year

Net value at the end of

year Of which

bought : Of which: Paid Of which

sold: Of which:

written off


4,644 26 - 3 - - 3 (99) 58 4,627 26


6,286,592 2,080,825 - 498,605 471,350 - 27,256 20,277 (292,929) 7,596,158 3,104,308

Of which: Corporate 1,740,735 1,635,267 - 132,966 131,227 - 1,739 4,397 641,298 3,888,730 2,060,018

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

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

Of which: Other 2,816,285 50,805 - 224,785 204,423 - 20,363 17,909 (885,768) 1,774,445 496,375

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

Balance sheet assets 6,342,269 2,315,435 - 500,866 473,040 - 27,827 20,178 (291,632) 7,885,383 3,337,461

Payment guarantees and performance bonds 15,044 123,020 - - - - - - (4,236) 133,828 133,828

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

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

Total as at 31.12.2016 6,368,148 3,011,202 - 500,866 473,040 - 27,827 20,178 (306,703) 8,591,958 4,043,966



73



The following table shows the data on movements of assets acquired through payment of claims on 31 December 2016:

Type of assets acquired through payment of claims Residential property Other property Financial Assets Other Total

Gross value on 01.01.2016. 25,288 199,973 - 459 225,720

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

Sold during period - - - - -

Became functional during period (e.g. Fixed asset or investment property)

11,958 872 - - 12,830

Reclassified as asset available for sale - - - - -

Of which: sold during the period - - - - -

Gross value on 31 December 2016 28,230 212,594 - 459 241,283

Accumulated impairment - - - - -

Of which: impairment during period - - - - -

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

The following table shows the data on movements of assets acquired through payment of claims on 31 December 2015.

Type of assets acquired through payment of claims Residential property Other property Financial Assets Other Total

Gross value on 01.01.2015. 2,158 124,938 - 889 127,985

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

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

Became functional during period (e.g. Fixed asset or investment property)

33,883 3,408 - - 37,291

Reclassified as asset available for sale - - - - -

Of which: sold during the period - - - - -

Gross value on 31 December 2015 25,288 199,973 - 459 225,720

Accumulated impairment - - - - -

Of which: impairment during period - - - - -

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



74

31. FINANCIAL RISK MANAGEMENT (continued) 31.2. Credit risk (continued) Collectively assessed impairment allowances The Group assesses impairment allowances collectively for loans that are not individually significant (including credit cards, residential loans and unsecured loans to customers), and for loans that are individually significant but for which there is no objective evidence of impairment. Impairment allowance is assessed at each balance sheet date where each credit portfolio, representing a specific group of loans and advances with similar characteristics, receives a separate review. The collective assessment includes impairments that are likely to be present in the Group’s credit portfolio even though there is no objective evidence of individual impairment. Impairment losses are estimated based on the following information: historical losses incurred on the credit portfolio; current economic conditions; the approximate delay between the time a loss has been incurred and the time it will be identified as requiring an individually assessed impairment allowance; the time the impaired asset will be collected or recovered. 31.3. Liquidity risk Liquidity risk is the risk that the Group will be unable to meet its obligations when they fall due. Liquidity risk arises from the mismatch between cash inflows and outflows (structural liquidity risk), in other words inability to sell/convert into cash financial instruments/assets within an acceptable time frame and at acceptable cost (financial instruments liquidity risk). The Group is exposed to daily calls on its available cash resources from current accounts, maturing deposits and loan draw-downs. To reduce or limit this risk, the Group’s management intends to diversify its sources of funding, manage assets with liquidity in mind and monitor future cash flows and liquidity on a daily basis. This includes an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required. The Group manages its assets and liabilities in the manner that ensures the Group’s ability to meet its obligations at all times and the Group’s clients to have assets at their disposal under agreed upon schedules. The liquidity position is presented through the liquidity ratio that shows the proportion of the sum of primary and secondary liquid assets (cash, deposits with other banks, deposits with the NBS, receivables undergoing the process of realization, irrevocable lines of credit granted to the Group, quoted financial instruments, and other receivables of the Group that are due within one month) and the sum of on-demand liabilities with no contracted maturity and liabilities with contracted maturity within the following month. The Assets and Liabilities Committee (ALCO) is responsible for monitoring risk liquidity, managing risk liquidity and proposing to the Executive Board measures and activities aiming at maintaining the Group’s liquidity, reconciling maturities, as well as for the Group’s “Reserve Funding Plan” and other measures that are important for the Group’s financial stability. The Group monitors a portfolio of highly liquid securities and other assets that can be easily converted into cash in the event of unforeseen fluctuations in the Group’s cash flows. The Group also has credit lines that are available to meet immediate liquidity needs. Additionally, the Group maintains a mandatory reserve in RSD and foreign currency, in accordance with the requirements of the National Bank of Serbia. The Group monitors its liquidity risk exposures against prescribed internal and external risk limits.



75

31. FINANCIAL RISK MANAGEMENT (continued) 31.3. Liquidity risk (continued) The National Bank of Serbia prescribed minimum liquidity ratio which represents the external liquidity risk exposure limit and is equal to:

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

Under the Decision on Risk Management by Banks (RS Official Gazette Nos. 45/11, 94/11, 119/12, 123/12, 23/13, 43/13, 92/13, 33/15 and 61/15) the Group is obliged to monitor the narrow liquidity ratio which is equal to:

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

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



76

31. FINANCIAL RISK MANAGEMENT (continued) 31.3. Liquidity risk (continued) Liquidity ratio during 2016 and 2015 was as follows:

2016. 2015.

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

2016. 2015.

Average ratio for the period 1.01 1.05 Maximum ratio for the period 1.29 1.23 Minimum ratio for the period 0.79 0.89 As at 31 December 1.26 1.04 Analysis of financial liabilities by maturity The table below summarizes the maturity profile of the Group’s financial assets and liabilities as at 31 December 2016 based on contractual repayment obligations. The Group expects that the majority of customers will not require repayment of deposits at the contractual maturity date, whilst the table below does not reflect expected cash flows indicated by the Group’s deposit retention history.

Less than one month

1 to 3 months 3 to 12 months 1 to 5 years

Over 5 years

Total 2016

Cash and deposits held with the Central Bank

3,399,314

1,468,548

2,252,633

2,115,398

709,810 9,945,703

Repurchase agreements (‘Reverse Repos’)

4,000,000

-

-

-

- 4,000,000

Financial assets held to maturity

2,119

4,238

454,238

-

- 460,595

Nostro accounts held with foreign banks

1,367,861

-

-

-

- 1,367,861


13,261,028 3,910,918 13,754,085 28,216,990 17,440,804 76,583,825

Total financial assets

22,030,322 5,383,704 16,460,956 30,332,388 18,150,614 92,357,984

Less than one month

1 to 3 months

3 to 12 months

1 to 5 years Over 5 years Total 2016

Deposits liability to banks 1,517,617 1,953,844 5,381,731 9,420,627 2,467,859 20,741,678

Deposits liability to customers 33,424,276

5,188,235

6,070,014

5,138,801

70,359 49,891,685

Subordinated debt 6,935

13,871

62,415

332,881

2,552,667 2,968,769

34,948,828 7,155,950 11,514,160 14,892,309 5,090,885 73,602,132



77

31. FINANCIAL RISK MANAGEMENT (continued) 31.3. Liquidity risk (continued) The table below summarizes the maturity profile of the Group’s financial assets and liabilities as at 31 December 2015 based on contractual undiscounted repayment obligations.

Less than

one month

1 to 3 months

3 to 12 months

1 to 5 years

Over 5 years

Total 2015

Cash and deposits held with the Central Bank

1,832,926 2,800,000

1,244,147 -

2,460,059 -

2,680,685 -

268,008 -

8,485,825 2,800,000

Reverse repo placement 9,206 267,505 1,726,191 460,594 - 2,463,496 Financial assets held to maturity 3,314,629 - - - - 3,314,629

Nostro accounts of foreign banks 13,398,219 3,730,054 11,984,406 24,011,595 14,533,718 67,657,992


1,832,926

1,244,147

2,460,059

2,680,685

268,008 8,485,825

Total financial assets

21,354,980 5,241,706 16,170,656 27,152,874 14,801,726 84,721,942

Less than

one month

1 to 3 months

3 to 12 months

1 to 5 years

Over 5 years

Total 2015

Deposits liability to banks 3,326,525

3,508,603

5,355,832

7,249,583

1,996,051

21,436,594

Deposits liability to customers 27,954,343 3,151,911 6,211,419 6,140,659 73,043 43,531,375

Subordinated debt 7,318 14,636 65,861 351,256 2,608,151 3,047,222

Total financial liabilities

31,288,186 6,675,150 11,633,112 13,741,498 4,677,245 68,015,191

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

Less than one month

1 to 3 months

3 to 12 months

1 to 5 years

Over 5 years

Total 2016

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

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

Less than one month

1 to 3 months

3 to 12 months

1 to 5 years

Over 5 years

Total 2015

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

Total at 31 December 2016 4,680,855 1,459,085 4,607,286 2,098,908 33,031 12,879,165



78

31. FINANCIAL RISK MANAGEMENT (continued) 31.4 Market risk Market risk is the risk that the fair value or expected future cash flows of financial instruments will fluctuate because of changes in market variables such as interest rates and foreign exchange rates. The Group is not exposed to the risk of changes in equity instruments price and price of goods. Other than the concentration of foreign exchange risk the Group has no significant concentration of market risk with respect to other items. a) Interest rate risk Interest rate risk arises from the possibility that movements in interest rates will affect future cash flows or the fair values of financial instruments. The Board of Directors has established limits on the interest rate gaps for stipulated periods. On-balance sheet items are monitored on a daily basis to ensure that they are within the established limits. Interest rate risk is determined as the level of exposure of the Group’s on-balance sheet items to the adverse affects of movements in market interest rates, i.e. the impact on: the Group’s current financial position (mainly net financial results) and capital adequacy. Therefore, interest rates are based on market interest rates, and the Group performs their matching on a regular basis taking into account market interest rates movements. As a result of changes in interest rates, interest margins may increase or decrease. The purpose of interest rate risk management, as part of assets and liabilities management, is to determine the optimal interest rate and, consequently, the Group’s revenues taking into account the market conditions and competitive environment, while at the same time matching the interest rate with the Group’s assets and liabilities. In view of the said, it is very important to assess the sensitivity of revenues to sudden movements in the market interest rate. For the purpose of hedging the underlying exposure to interest rate risk, the Group sets a variable interest rate, matches the structure of interest-bearing assets with interest bearing liabilities, and uses other interest rate risk management tools. The Group manages interest rate risk by:

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

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

The summary of the Group’s exposure to interest rate risk as at 31 December 2015 is prepared in accordance with the following practice: despite the contractual right to change the agreed interest rates on loans and advances to customers, except for EURIBOR based loans with variable interest rate, the Group will not exercise this right before the agreed maturity date, i.e. before the new contract date.



79

31 FINANCIAL RISK MANAGEMENT (continued)

31.4 Market risk (continued)

a) Interest rate risk (continued)

The following table presents the Group’s exposure to interest rate risk as at 31 December 2016 and 31 December 2014. Financial assets and liabilities are presented by the earlier of the interest reset date or the maturity date:

Less than one month

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

Over 1 year Non-interest bearing

Total in 2016

ASSETS

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

Financial assets held to maturity - - 462,001 - - - 462,001

Loans and receivables from banks and other financial organisations 4,004,389 - - - - 1,527,773 5,532,162

Loans and receivables from customers 441,256 657,442 92,073 8,590,577 52,754,752 312,525 62,848,625

Total financial assets 8,635,881 657,442 554,074 8,590,577 52,754,752 8,718,737 79,911,463

LIABILITIES

Deposits and other liabilities towards banks, other financial organisations and the Central Bank

207,138 258,822 2,826,141 5,160,802 13,036,592 380,102 21,869,597

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

Subordinated debt - - - - 2,483,767 - 2,483,767

Total financial liabilities 13,488,418 4,579,762 3,551,366 9,437,996 24,063,297 17,390,732 72,511,571

Net exposure to interest rate risk as at 31 December 2016 . (4,852,537) (3,922,320) (2,997,292) (847,419) 28,691,455 (8,671,995) 7,399,892



80


31.4 Market risk (continued)

a) Interest rate risk (continued)

Less than one

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

year Over 1 year Non-interest bearing Total in 2015

ASSETS Cash and deposits held with the Central Bank 4,036,951 - - - - 5,413,391 9,450,342 Financial assets held to maturity 57,836 - - 998,593 1,400,000 - 2,456,429 Loans and receivables from banks and other financial organisations 3,242,674 3,465,304 6,707,978 Loans and receivables from customers 957,109 546,259 178,388 5,185,984 47,391,563 388,675 54,665,978

Total financial assets 8,312,570 546,259 178,388 6,184,577 48,791,563 9,267,370 73,280,727

LIABILITIES Deposits and other liabilities towards banks, other financial organisations and the Central Bank

1,446,126 689,204 3,881,955 3,892,036 11,575,140 139,704 21,624,165

Deposits and other liabilities towards customers 12,022,937 1,234,980 1,375,916 1,840,606 12,217,359 13,151,620 41,843,418 Subordinated debt - - - - 2,447,899 - 2,447,899

Total financial liabilities 13,469,063 1,924,184 5,257,871 5,732,642 26,240,398 13,291,324 65,915,482

Net exposure to interest rate risk as at 31 December 2015 (5,156,493) (1,377,925) (5,079,483) 451,935 22,551,165 (4,023,954) 7,365,245



81

31 FINANCIAL RISK MANAGEMENT (continued) 31.4 Market risk (continued) a) Interest rate risk (continued) The Group takes on exposure to the effects of fluctuations in the levels of market interest rates on both its financial position and cash flows. Interest margin may increase or decrease as a result of such changes. Interest rates are based on market interest rates and the Group performs their matching on a regular basis. The aim of the interest rate risk management is to optimize the net interest income and keep the market interest rates constant in accordance with the business strategy of the Group. ALCO coordinates the maturity matching of assets and liabilities based on: macroeconomic analyses and forecasts, forecasts of conditions for attaining liquidity, analyses and forecasts of interest rates market trends for different elements within assets and liabilities. Interest rate risk represents an adverse change in the active interest rates price compared to passive interest rates on one hand, and the possibility of reducing the optimal difference between average active and passive interest rates on the other. In managing the interest rate risk, the Group simulates expected and extreme changes in interest rates and makes projections on their effect on the income statement. Interest rate risk is also monitored through sensitivity analysis (scenario analysis), in other words by observing the effects of interest rate fluctuations on the Bank’s income and expenses. The table below presents the income statement sensitivity to the reasonably possible changes in interest rates (4% for RSD and 2% for EUR), with all other variables held constant. The income statement sensitivity represents the effect of predicted changes in interest rates on the net interest income in one year, on financial assets and liabilities based on interest rates as at 31 December 2016 and 31 December 2015.

Currency Percentage

point change

Income statement

sensitivity 2016

Percentage point change

Income statement

sensitivity 2015

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

2% 2% 612 Percentage point decrease RSD (81,195) (146.989) EUR 4% (87,611) 4% (61) b) Foreign exchange risk Foreign exchange risk is the risk of loss on open positions arising from fluctuations in the foreign exchange rate and, consequently, changes in the value of RSD compared to the currencies in which the Group’s loans and advances and payables are denominated. The risk exposure results in increased foreign exchange gains and losses that are recognized in the income statement. The Group manages its foreign exchange risk exposure by reconciling the currency structure of assets and liabilities in accordance with the expected changes in foreign exchange rate. To reduce its exposure to foreign exchange risk, the Group has established appropriate methods for its monitoring and measuring, internally acceptable level of risk (which, needless to say, must be in accordance with relevant laws and regulations), as well as the tools for managing risk and hedging against unacceptable foreign currency positions.



82

31 FINANCIAL RISK MANAGEMENT (continued) 31.4 Market risk (continued) b) Foreign exchange risk (continued) In 2016, the Group was very active in the local interbank foreign exchange market and used the opportunities of this market to efficiently manage its foreign exchange position. To reduce the adverse effects of foreign exchange rate fluctuations on the structure of foreign currency assets and liabilities, the Group monitored and measured the foreign exchange risk on a daily basis and performed adjustments to its foreign currency position. The table below presents the indicators of the Bank’s foreign exchange risk exposure as at 31 December 2016:

Line item EUR USD CHF

Other currencie

s Total

Spot position - net Foreign currency assets 53,714,479 869,417 622,403 94,555 55,300,854 Foreign currency liabilities 53,757,818 870,732 621,731 82,313 55,332,594 Long open position - - 672 12,242 12,914 Short open position 43,339 1,315 - - 44,654 Net open position - - - - 44,654 Equity - - - - 8,502,240

F/X risk indicator 31 December 2016 0.53

F/X risk indicator 31 December 2015 1.86

In managing foreign exchange risk, the Group simulates both expected and extreme changes in foreign exchange rates and makes projections of their effect on the income statement. The tables below present the impact of expected changes in interest rates on the Group’s profit, with all other variables remaining unchanged: Income statement sensitivity to changes in foreign exchange rates as at 31 December 2016:

Currency F/X rate change

Impact on income

statement in RSD 000

F/X rate change

Impact on income


EUR -15% (6,501) 5% 2,167 USD -15% (197) 5% 66 CHF 15% 101 5% (34) Income statement sensitivity to changes in foreign exchange rates as at 31 December 2015 :

Currency F/X rate change

Impact on income


F/X rate change

Impact on income


EUR -15% 21,238 5% (7,079) USD -15% 384 5% (128) CHF 15% 26 5% (9)



83

34 FINANCIAL RISK MANAGEMENT (continued) 34.4 Market risk (continued) c) Operational risk Operational risk is the risk of loss resulting from systems failure, human error, fraud or external events. The operational risk may cause damage to the Group’s reputation, have legal implications, or lead to financial losses. The Group cannot expect to eliminate all operational risks, however, by introducing a rigorous control framework and by monitoring and responding to potential risks, the Group is able to manage these risks. Controls comprise effective segregation of duties, access, authorization and reconciliation procedures, staff education and monitoring process, including the use of internal audit. d) Investment risks Investment risks of the Group comprise risks relating to the Group’s investments in other legal entities and in fixed assets. In accordance with the National Bank of Serbia regulations, the Group monitors the amount of investments as well as the amount of regulatory capital. The Group has defined the scope and the dynamics of investments in accordance with its business strategy. The Group invests in fixed assets in accordance with its business needs. It is the Group’s strategy to invest only in fixed assets necessary to support the Group's operations. Additionally, the Group’s strategy is to limit these investments against the level of the Group's capital and to comply with the requirements of the National Bank of Serbia. However, the Group has no strategy to invest in other entities in financial and non-financial sectors. e) Country risk The risk relating to the country of origin of an entity to which the Group is exposed includes adverse effects which may impact the Group’s financial result and capital due to the Group's inability to collect receivables from that counterparty as a consequence of political, economic or social situation in its country of origin. With respect to the legal entities which are not financial institutions, the Group grants funds only to those registered in the Republic of Serbia. In the event of the entities registered outside the Republic of Serbia, the Group cannot do business with those registered in the countries with credit rating below the rating of the Republic of Serbia. f) Reputational risk Reputational risk is the risk of loss of current or future income and capital due to negative public opinion about the way the Group is doing business. The Group limits exposure to this risk through its internal policy for managing this risk which is consistently applied. 31.5 Capital management The Group’s objectives when managing capital, which is a concept broader than the equity on the face of the income statement, are:

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

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

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

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



84

31 FINANCIAL RISK MANAGEMENT (continued) 31.5 Capital management (continued) The Group’s management regularly monitors its capital adequacy ratios and other performance indicators established by the National Bank of Serbia and quarterly reports to the NBS on the imposed ratios. Under the Law on Banks of the Republic of Serbia, banks are obliged to maintain a minimum capital amount of EUR 10 million in RSD equivalent calculated at the NBS official middle exchange rate and a minimum capital adequacy ratio of 12%, as well as to maintain the volume and the structure of their activities in accordance with performance indicators prescribed by the Decision on Risk Management by Banks (Official Gazette of the Republic of Serbia, Nos. 45/11, 94/11, 119/12 ,123/12, 23/13, 43/13, 92/13 33/15 and 61/15) and the Decision on Capital Adequacy of Banks (Official Gazette of the Republic of Serbia, Nos. 46/11, 6/13 and 51/14). The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or make adjustments to the capital structure, the Group may adjust the amount of dividend payment to shareholders, return capital to shareholders, or issue securities. No changes were made with respect to objectives, policies and processes compared to the previous year. The NBS Decision on Capital Adequacy of Banks (Official Gazette of the Republic of Serbia, Nos. 46/11, 6/13 and 51/14) sets out the method of calculation of the Group’s capital and capital adequacy ratio. The above Decision defines the basic capital of the Group as the amount comprising at least 50% of the Group’s capital. The capital adequacy ratio of the Group equals the ratio of the Group’s capital and the sum of: credit risk weighted assets, capital requirements relating to foreign exchange risk multiplied by the reciprocal value of the capital adequacy ratio (statutory 12%), capital requirements relating to other market risks multiplied by the reciprocal value indicators of capital adequacy, and capital requirements relating to operational risk multiplied by the reciprocal value of the capital adequacy ratio. The Group implements the Internal Capital Adequacy Assessment Process (ICAAP), determines the available internal capital and performs its distribution, and develops the strategy and the plan for managing capital in accordance with the Risk Management Decision. Provision for estimated potential losses on financial assets in accordance with the National Bank of Serbia requirements Under the Decision on the Classification of Balance Sheet Assets and Off-Balance Sheet Items (RS Official Gazette, Nos. 94/11, 57/12, 123/12, 43/13,113/13, 135/14, 25/15 and 38/15), the Group makes provisions against potential losses on balance sheet and off-balance sheet assets in accordance with the criteria defined therein. The provisions of this decision prescribe the conditions under which the Group is obligated to set up a reserve

fund for estimated losses which is calculated as a sum of: 0% of receivables classified in category A 2% of receivables classified in category B 15% of receivables classified in category C 30% of receivables classified in category D 100% of receivables classified in category E

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



85


31.5 Capital management (continued)

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

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

Special reserves for estimated losses arising from the credit risk present in the Group’s credit portfolio are calculated in accordance with the Decision on the Classification of Balance Sheet Assets and Off-Balance Sheet Items (RS Official Gazette, Nos. 94/11, 57/12, 123/12, 113/13, 135/14, 25/15 and 38/15). As at 31 December 2016 the required reserves for estimated losses amounted to RSD 2,367,372 thousand (2015: RSD 2,488,491 thousand).

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

The required reserves for balance sheet estimated losses and off-balance sheet items are deducted from the Group’s capital in accordance with the Decision on the Capital Adequacy of Banks.

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

31 December

2016 31 December

2015

Tier 1 capital: Nominal value of paid-in shares, other than preferred cumulative shares 8,420,500 8,420,500 Retained earning from previous years 102,054 - Intangible assets (124,249) (150,698) Required reserves from profit for estimated losses on balance sheet assets and off-balance sheet items (2,367,372) (2,488,491)

6,030,933 5,781,311

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

2,471,307 2,432,523

Equity as at 31 December (1) 8,502,240 8,213,834



86

31 FINANCIAL RISK MANAGEMENT (continued) 31.5 Capital management (continued) Reserves for estimated potential losses on financial assets in accordance with the National Bank of Serbia requirements (continued) 31.12.2016. 31.12.2015.

Risk bearing balance sheet assets and off balance sheet items Capital requirement - credit risk, counterparty risk and settlement / delivery risk based on free deliveries 6,356,236 5,600,332 Capital requirements - foreign exchange risk 5,358 18,313 Capital requirements - operational risk 654,400 618,925

Total capital requirements (2) 7,015,994 6,237,570

Capital adequacy (Capital / Total capital requirements)*12 14.54 15.80

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

Performance indicator Prescribed

value Achieved

value 2016 Achieved

value 2015

Investments in fixed assets and non-financial sector Maximum 60% 19.32% 19.43%

The sum of large exposures Maximum

400% 59.61% 59.37% Average monthly liquidity ratio: – in the first quarter of the reporting period Minimum 1.00 1.11 1.21 – in the second quarter of the reporting period Minimum 1.00 1.25 1.21 – in the third quarter of the reporting period Minimum 1.00 1.09 1.17 – in the fourth quarter of the reporting period Minimum 1.00 1.25 1.22 F/X risk indicator Maximum 20% 0.53% 1.86% Exposure to a single party or a group of related parties Maximum 25% 19.80% 14.51% Capital adequacy Minimum 12% 14.54% 15.80%



87

31 FINANCIAL RISK MANAGEMENT (continued) 31.6 Fair value of financial assets and liabilities

The policy of the Group is to disclose the information on the fair value on those components of assets and liabilities for which the published market information is readily and reliably available, and the fair value of which is materially different from their recorded amounts. In the Republic of Serbia, there is a lack of sufficient market experience, stability and liquidity for the purchase and sale of loans and other financial assets or liabilities since the published market information is not readily available. As a result, the fair value cannot be determined reliably in the absence of an active market. The management of the Group assesses its overall risk exposure, and where it estimates that the value of assets stated in its books may not be achieved, it recognizes a provision. Financial instruments stated at amortized cost generally have short maturity period and variable interest rates that reflect current market conditions. Accordingly, the Group believes that the value of the above financial assets match their market value. Initially, currency forwards are recognized at contractual price due to the fact that in Serbia there is no active market for derivatives, however, their value is adjusted to the market value at the end of each month, and the effect of changes in the fair value is recorded in the income statement as unrealized foreign exchange translation differences, in other words as fair value increase/decrease. The increase in the fair value of derivatives is recorded within assets, whereas the decrease in the fair value of derivatives is recorded within liabilities in the balance sheet. The valuation technique applied by the Group to measure the fair value of derivatives is consistent with the generally accepted valuation techniques in the market and it incorporates to the greatest extent possible market factors such as the official middle exchange rate and interest rates. The performance of contractual rights and obligations arising from derivatives execution agreements or the exchange of contractual cash flows shall cease its recognition through the balance sheet and the income statement. The ultimate effect of foreign exchange differences at that moment is recorded within the realised FX differences account, whereas all earlier entries of the fair value and its movements are reversed. The fair value of loans and advances to customers approximated their carrying amount less provision for impairment. Available-for-sale securities comprise equity investments in companies. Available-for-sale securities are carried at fair value. The fair values of securities are based on current bid prices. Bank and customer deposits comprise mainly demand deposits or short-term deposits with contracted variable interest rates. Therefore, management of the Group believes that the values presented in the balance sheet correspond to their market values. In the opinion of the Management, the reported amounts approximate the fair value which represent the most valid and useful reporting value, given the existing market conditions. Financial instruments (such as available-for-sale securities) are measured at fair value which is based on observable market data or quoted market prices at the reporting date. If this information is not available, other techniques are used.



88


31.6 Fair value of financial assets and liabilities (continued)

The Group applies the following hierarchy for determining and disclosing the fair value of financial instruments:

Level 1: Market quotations for identical financial instruments

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

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

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

Financial assets as at 31 December 2016 :

Financial assets Level 1 Level 2 Level 3 Total

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

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

Financial liabilities as at 31 December 2016 :

Financial liabilities Level 1 Level 2 Level 3 Total

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

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



89

31 FINANCIAL RISK MANAGEMENT (continued) 31.6 Fair value of financial assets and liabilities (continued)

Financial assets as at 31 December 2015 :

Financial assets Level 1 Level 2 Level 3 Total

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

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

Financial liabilities as at 31 December 2015: Financial liabilities Level 1 Level 2 Level 3 Total

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

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

32 COMMITMENTS AND CONTINGENT LIABILITIES AND LEASES a) Operating lease liabilities The Group has concluded agreements on operating leases. Future minimum lease payables under operating lease agreements were as follows:

2016. 2015.

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

36,260 31,240

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

2016. 2015.

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

36,260 31,240



32. COMMITMENTS AND CONTINGENT LIABILITIES AND LEASES (continued)

c) Litigations

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

There have been 99 litigations initiated against the Group with the total value of disputes amounting to RSD 623,463 thousand (2015: 101 disputes the value of which amounted to RSD 672,635 thousand). Provisions for litigations are presented within the Provisions (Note 25). The management of the Group estimates that significant losses arising from the remaining litigations will not be incurred, other than those provided for.

d) Tax risks

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

In Serbia, the tax liability expires after a period of 5 years. In various circumstances, the tax authorities may have different approaches to certain issues, and assess additional tax liabilities, together with late payment interest and penalties. The management believes the tax liabilities in the accompanying financial statements to be fairly presented.

33. ADDITIONAL INFORMATION ON CASH FLOWS

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

As at 31.12.2016 7,558,113 9,277,089

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

34. EVENTS AFTER THE BALANCE SHEET DATE

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


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