cs vz en prezentacni i 09 - Česká spořitelna

ČESKÁ SPOŘITELNA

Annual Report 2007

Consolidated Financial Highlights under International Financial Reporting Standards (IFRS)

Balance Sheet Highlights

MCZK 2007 2006 2005 2004 2003

Total assets 814,125 728,393 654,064 581,780 555,417

Loans and advances to fi nancial institutions 65,688 73,179 97,846 77,112 82,121

Loans and advances to customers 418,415 329,105 283,420 239,289 214,903

Securities 226,813 230,354 192,210 191,627 180,738

Amounts owed to fi nancial institutions 58,482 46,361 34,898 32,905 29,641

Amounts owed to customers 588,526 537,487 481,556 444,771 428,572

Shareholders’ equity 55,576 48,594 43,322 39,299 34,408

Profi t and Loss Account Highlights

MCZK 2007 2006 2005 2004 2003

Net interest income 24,727 21,206 18,719 17,416 15,874

Net fee and commission income 9,639 8,997 8,384 8,238 7,915

Operating income 36,724 32,471 28,834 27,217 25,268

Operating expenses (18,349) (17,316) (16,395) (15,883) (15,073)

Operating profi t 18,375 15,155 12,439 11,334 10,195

Net profi t net of minority interests 12,148 10,385 9,134 8,137 7,615

Basic Ratios

2007 2006 2005 2004 2003

ROE 23.8% 23.0% 22.3% 21.8% 23.7%

ROA 1.5% 1.5% 1.4% 1.4% 1.4%

Cost/income 50.0% 53.3% 56.9% 58.4% 59.7%

Non-interest income/operating income 32.7% 34.7% 35.1% 36.0% 37.2%

Net interest margin to gross assets 3.2% 3.0% 3.0% 3.0% 2.9%

Customer loans/customer deposits 71.1% 61.2% 58.9% 53.8% 50.1%

Capital adequacy* 9.4% 11.1% 11.1% 13.3% 14.6%

*in 2003–2006 BIS, in 2007 Basel II

Key Operating Indicators

Number 2007 2006 2005 2004 2003

Staff (average headcount) 10,897 10,809 11,406 11,805 12,786

Česká spořitelna’s branches 636 637 646 647 666

Clients 5,294,470 5,276,897 5,326,378 5,353,923 5,519,627

Sporogiro accounts 2,838,173 2,789,076 2,761,062 2,757,929 2,755,113

Active cards 3,340,180 3,095,614 2,941,843 2,758,486 2,576,552

of which: credit cards 622,161 447,089 340,510 204,564 101,155

Active users of SERVIS 24 and BUSINESS 24 1,142,170 1,033,198 934,874 772,185 609,563

ATMs 1,124 1,090 1,076 1,071 1,067

Rating

Rating agency Long-term rating Short-term rating Outlook

Fitch A F1 positive

Moody's A1 Prime-1 stable

Standard & Poor's A A1 stable

1

Content

Key Figures

2 Company Profi le

4 The Year 2007 Review

6 Opening Statement by the Chairman of the Board of Directors and CEO

7 Board of Directors as of 31 December 2007

12 Česká spořitelna’s Supervisory Board as of 31 December 2007

17 Macroeconomic Development of the Czech Republic in 2007

18 Report on Performance and Business Activities

46 Strategic Plans for the Year 2008

48 Risk Management in 2007

55 Other Information for Shareholders

58 Corporate Social Responsibility (CSR) in Česká spořitelna

59 Česká spořitelna’s Declaration Regarding the Compliance of its Governance with the Corporate Governance Code Based on OECD Principles

66 Organizational structure of ČS as of 31. 12. 2007

68 Report of the Supervisory Board

69 Financial Section I 70 Independent Auditor’s Report 71 Consolidated Financial Statements Prepared in Accordance with IFRS

173 Financial Section II 174 Independent Auditor’s Report 175 Unconsolidated Financial Statements Prepared in Accordance with IFRS

265 Report on Relations between Related Parties

277 Česká spořitelna’s Financial Group

287 Auditor’s Report

290 Česká spořitelna Selected Consolidated Financial Performance fi gures in 1. Quarter 2008

291 Conclusions of the Annual General Meeting of Shareholders Held on 23 April 2008

292 Index

2

Company Profi le

MarketWith 5.3 million clients, Česká spořitelna is the largest

fi nancial institution and also has the longest history among

banking institutions on the Czech market. The Bank has been

included in the esteemed Central European Erste Bank Group,

which has 16 million clients in eight European countries

(Czech Republic, Slovakia, Austria, Hungary, Croatia, Serbia,

Romania and Ukraine), since 2000.

Česká spořitelna is seen as a modern but credible bank offering

a whole range of services for all client groups on the Czech

market. Retail banking services have traditionally constituted

its core activity, but small, medium-sized and large fi rms are

also among Česká spořitelna’s key clients. More importantly,

Česká spořitelna has been the fi nancial partner of Czech cities

and municipalities, as well as a services provider in the area

of fi nancial markets. In the last few years, the Bank has won

a leading position on the market in modern banking disciplines

such as credit cards, internet banking, mortgage and consumer

lending and other services.

The fi nancial group manages clients’ fi nancial assets exceed-

ing CZK 814 billion. The Bank generated a net profi t of

CZK 12.15 billion in 2007, which makes Česká spořitelna one of

the leading Erste Bank Group companies in terms of profi tability.

HistoryThe roots of Česká spořitelna date back to 1825, when

Spořitelna Česká, the oldest legal predecessor of today’s Česká

spořitelna, began its activities. One of the most important

objectives of the Bank since then has been emphasis on a close

relationship with clients intrusting the Bank with their savings.

The Bank therefore focused on building a broad network of

branches in the past and continues to focus on this objective.

Česká spořitelna decided to follow the tradition of the Czech

and later Czechoslovak savings institutions, when it arose as

a newly-established joint stock company in 1992. In 2000

Česká spořitelna became a member of the Erste Bank Group,

which was a break from the past and the beginning of Česká

spořitelna's modern history. This union with a strong partner

on the highly competitive European market provided Česká

spořitelna with a solid basis for the fulfi lment of their vision

of a strong and competitive bank.

The Bank undertook an ambitious transformation from

July 2000 to December 2001 which affected all areas of the

Bank’s life. Česká spořitelna was gradually transformed into

a modern, client-oriented fi nancial institution with a broad

offering of quality products. One of the most important steps

was the reinforcement of rentability and profi tability of the

whole fi nancial group and also the adoption of the Erste Bank

Group’s corporate design.

Products Our clients may use standard banking services provided at

Česká spořitelna’s branches, but they also conclude contracts

of building savings, pension insurance, life insurance, leasing

or contracts on collective investing in mutual funds. Česká

spořitelna also offers advisory, leasing and factoring services

to corporate clients. The Bank’s close cooperation with its

fourteen subsidiaries facilitates the provision of this compre-

hensive offering.

Česká spořitelna believes that there is no such thing as an

average client. All clients are unique and have specifi c wishes

and needs. The Bank is ready to individually advise a client

on loans, so that the repayment schedule and the drawn

amount perfectly suit the client's needs and possibilities. Česká

spořitelna offers fl exible personal accounts for transactions

which vary according to the clients’ needs. The Bank provides

a detailed investment profi le according to the specifi c pos-

sibilities and needs of each client interested in investing. Our

experts then recommend each client a method of deposit which

suits the client’s individual needs and approach to risks.

Česká spořitelna is primarily a bank for retail clients, but

the support of small and medium-sized enterprises in their

development is part of the Bank's programmes. In the last few

years, Česká spořitelna has succeeded in building one of the

best and most dynamic growing corporate banking services on

the market. Besides programmes for retail and medium-sized

enterprises, Česká spořitelna is a strong player in fi nancing

large enterprises and corporations, and the Bank’s share in this

closely watched segment of the market is still growing.

Services provided for cities and municipalities constitute

a key area for Česká spořitelna. The Bank manages complex

accounts of budget management and secures systems of

3

ContentCompany Profi leThe Year 2007 Review

payment for most of them. Advantageous fi nancial services

enable the municipalities to accelerate a number of investment

transactions principally concerning the reconstruction and

construction of infrastructure or new fl ats.

Česká spořitelna also facilitates the drawing of funding from

the European Union. The Bank offers cities, municipalities and

fi rms a complex programme, and prepares and helps imple-

ment projects that are fi nanced by this funding.

Česká spořitelna is the leading player in introducing new

services and technologies. More and more clients use the Bank’s

modern direct banking services thanks to this approach, both

over the phone and through the internet. Over a million clients

use our direct banking services, i. e. SERVIS 24 for retail clients

and BUSINESS 24 for fi rms. Česká spořitelna holds a leading

position in the area of payment and credit cards. The number

of payment cards with Česká spořitelna’s logo has exceeded

3.3 million, of whichmore than 620 thousand are credit cards.

Česká spořitelna’s specialised centres have facilitated faster and

more convenient access to new services and support of their

cohesion over the last few years of their existence. Mortgage

centres, offering comprehensive services for the fi nancing of

housing or investments in real estate, including offers of suitable

property, are established throughout the territory of the Czech

Republic. Česká spořitelna has also been opening commercial

centres – affi liated service points of branches specialised in

services for corporate clients. The Bank has opened the Expat

Centre in Prague, which is the fi rst specialised point of business

for foreign-language clients in the Czech Republic.

Česká spořitelna is expanding its services provided through the

ATM network. These have become multifunctional appliances

that clients can use for both cash withdrawals and also mobile

phone recharges or placing of payment orders. Česká spořitelna

introduced the very fi rst ATM for the visually impaired in the

Czech Republic at the beginning of 2005, of which now there

are a total 51 available throughout the country.

4

The Year 2007 Review

January• Česká spořitelna provides a guarantee against unauthorised

transactions performed with lost or stolen credit cards that

exceed CZK 4,500 in the 48 hour period before the card is

blocked. The Bank also expanded insurance to cover card

misuse 96 hours before the card is blocked and includes

PIN transactions.

• SERVIS 24 provided a new START service for clients who

do not have any account with Česká spořitelna and want

to be informed about their products provided by Česká

spořitelna’s subsidiaries.

February• Česká spořitelna introduced a Price List providing

a summary of prices for the most frequently used products

and services, primarily relating to every-day transactions.

Thanks to the Price List it is not necessary to add up

individual tariff rates of which the fi nal cost is composed.

In the same period, the Bank fundamentally modifi ed and

simplifi ed its tariff structure.

March• Clients can invest in the fi rst real estate fund in the Czech Re-

public for retail investors – 1st Real Estate Fund administered

by the Bank’s subsidiary, REICO investiční společnost ČS.

April• The number of issued credit cards exceeded half a million.

• Over 430 branches extended their working hours by more

than 800 hours a week. The working hours were extended

based on research of client needs.

• At the General Meeting, Česká spořitelna’s sharehold-

ers approved payment of dividends in the amount of

CZK 4,560 million from the 2006 profi t, which represents

CZK 30 per share.

• Moody’s increased the rating of Česká spořitelna’s long-

term deposits in a foreign currency from A2 to A1.

May• Gernot Mittendorfer became the new CEO and the Chair-

man of the Board of Directors of Česká spořitelna replacing

Jack Stack who was elected a member of the Supervisory

Board of Erste Bank.

• The fi rst offi cial Day for Charity with Česká spořitelna was

organised on 18 May. The Česká spořitelna Financial Group

joined leading global fi rms in providing their employees

with an opportunity to dedicate two working days to

charity, help to people in need, and publicly benefi cial

projects. Days for Charity with Česká spořitelna follows

the long-term projects and activities of the Česká spořitelna

Foundation and are closely related to the First Choice Bank

concept and the Corporate Social Responsibility strategy in

Česká spořitelna.

• Česká spořitelna was elected the Employer of the Region

in 2007 in the Prague region in the fi fth annual Employer

of the Year competition organised by AXA; at the national

level, a professional jury awarded the Bank a silver medal

in the main category – Employer of the Year 2007.

• The TOP Energy Programme is designed for clients

from among small and medium-sized enterprises. The

programme supports the preparation and implementation of

innovative energy projects in energy saving and production

from renewable sources. The services range from providing

initial information and funding to project management.

June• SERVIS 24 Internetbanking provides clients with the

opportunity to model a personal investment portfolio

with the most appropriate allocation of investments and

subsequently purchase, sell or exchange selected investment

products directly via internet banking.

• RAVEN EU Advisory became Česká spořitelna’s subsidiary

providing comprehensive consulting services within the

Group in the Czech and EU subsidy policy.

• Česká spořitelna received a bronze medal in the 2007 Cor-

porate Bank of the Year contest organised by MasterCard.

The decision was made based on the polling of over 150

CFOs of the most important fi rms in the Czech Republic

associated in the Czech Top 100.

• Fitch Ratings increased Česká spořitelna’s long-term rating

from A- to A and its short-term rating from F2 to F1.

5

Company Profi leThe Year 2007 ReviewOpening Statement by the Chairman of the Board of Directors and CEO

July• Česká spořitelna is the fi rst bank in the Czech market to

introduce a unique new product, @FAKTURA 24, which

allows electronic invoices between individual fi rms to be

exchanged. The electronic invoicing service provides the

advantage of sending electronic invoices safely while elimi-

nating the signifi cant time and costs required to administer

hard copy invoices.

• A new concept of comprehensive private banking services

was established under the Erste Private Banking brand.

This concept follows the standards of the Austrian Erste

Bank Group’s private banking and is targeted to clients with

fi nancial assets over CZK 5 million.

• Fitch Ratings improved the rating of Česká spořitelna’s

outlook from ‘stable’ to ‘positive’.

August• Česká spořitelna introduced a revolutionary new account to

the market – the Personal Account. Clients can now form

their own personal account by selecting the exact products

and services they want to use. The Personal Account

comprises up to 30 various levels of products and services

and clients can change and add products and services as

required.

• The total volume of the retail mortgage loan portfolio

exceeded CZK 100 billion.

September• Česká spořitelna introduced the fi rst four life cycle funds

with various investment horizons. Life cycle funds represent

a very liquid alternative to the private fi nance administration

when taking into account retirement. The key advantage of

the funds is active administration based on a fl exible mix

of money market investments, bonds, commodities and

equities during the fund period.

• In early September, Private Accounts were used by the fi rst

100 thousand clients.

October• In the sixth year of the 2007 MasterCard Bank of the Year

competition, Česká spořitelna won the Most Credible Bank

of the Year award for the fourth time in a row. The Private

Account placed fi rst in the Account of the Year category.

A professional jury named Česká spořitelna the second best

bank in the Czech Republic, and Pojišťovna ČS received

a silver medal for the Flexi life insurance. The Bank was

awarded third place in the Mortgage of the Year category

and Buřinka became third in the Construction Savings Bank

category.

• The number of giro accounts with an overdraft facility

exceeded CZK 1 million.

• In the TOP Firemní Filantrop 2007 List prepared by the

Donor Forum, Česká spořitelna placed second in the

Absolute Volume of Provided Funds category and with

CZK 59 million it was the most generous bank in the Czech

Republic.

• Standard and Poor’s improved Česká spořitelna‘s long-term

rating from A- to A and its short-term rating from A2 to A1.

November• Penzijní fond České spořitelny achieved 600 thousand

clients, and with its 16 percent share, it supported its

position as the second largest pension fund in terms of the

number of participants.

• In order to support real estate funding, the Bank established

nine specialised Development Centres which promote

the development of project fi nancing loans in Prague and

individual regions of the Czech Republic and support the

development of private mortgages from fi nanced housing

projects.

• The total volume of the client loan portfolio exceeded

CZK 400 billion.

December• ČS Real Estate Fund expanded its portfolio by four build-

ings located in Prague, Ostrava and České Budějovice.

• In December, collections from ATMs exceed their historic

maxima: on 14 December, over CZK 1.6 billion was

withdrawn from ATMs.

• The number of Private Accounts reached 400 thousand and

continues to grow.

6

Opening Statement by the Chairman of the Board of Directors and CEO

Gernot Mittendorfer, Chairman of the Board of Directors and CEO

Dear Shareholders, Ladies and Gentlemen, Clients, and Colleagues,

When I replaced Jack Stack as Česká sporitelna’s CEO last May,

I became the chief executive of a well-functioning and highly

respected fi nancial institution which had been making systematic

efforts to maintain its leading position on the Czech market, and

offer its clients top quality products and services. We will naturally

continue with this strategy and approach, thus keeping up with the

demands of today’s globally competitive environment.

Hopefully, you will not think of me as boastful when I say that

2007 was a very successful year. This success was primarily

due to the various initiatives implemented in previous years,

specifi cally the First Choice Bank programme, which reached

numerous milestones in 2007. All the measures carried out under

the Programme were specifi cally aimed at strengthening Česká

spořitelna’s leading position in retail banking and fi nancial

markets, as well as increasing its signifi cance as a bank for small

and medium-sized businesses.

To be more specifi c, last year we offered the revolutionary

‘Personal Account’, which allows our clients to customize

their accounts according to their exact needs. We extended the

opening hours of more than four hundred of our branches, and

began offering life cycle funds, as well as a new real estate fund.

We also increased the Bank’s liability for unauthorised transac-

tions made via lost cards and simplifi ed our pricing rates. These

are just some of the many examples of how we are continuously

striving to meet and exceed client expectations. The client comes

fi rst at Česká spořitelna, and we work to prove to our clients that

they benefi t by doing business with us.

Our client satisfaction survey clearly shows a long-term increas-

ing trend in the level of customer satisfaction, which just con-

fi rms that we are on the right track in providing great products,

services and value to our clients Our clients have once again

voiced their confi dence in us by giving us their highest award for

the fourth time in a row: Česká spořitelna won the 2007 “Most

Trustworthy Bank” award at the prestigious MasterCard Bank

of the Year annual awards ceremony. In addition, the ‘Personal

Account’ ranked fi rst in the “Account of the Year” category,

demonstrating that our competitors and reputable fi nancial

professionals also recognize and appreciate the quality of Česká

spořitelna’s products and services.

Another very signifi cant aspect confi rming that our strategy is

on the right track is the Bank’s fi nancial results. In 2007, we

reported a record net consolidated profi t of CZK 12.15 billion,

which is 17 percent more than in 2006, and the highest profi t

achieved in the history of our bank.

Details about Česká spořitelna’s operating results and many

other key events of 2007 are provided in the Annual Report,

which you are currently holding. All of the positive news

contained within, would not have been possible without the tire-

less efforts of the employees of the Česká spořitelna Financial

Group, who did a tremendous amount of work in 2007, and

have every right to be proud of the excellent results that we have

achieved. I am confi dent that I will be in a position to report just

as much, if not more, positive information to you next year.

April 2008

Gernot Mittendorfer

7

Opening Statement by the Chairman of the Board of Directors and CEOBoard of Directors as of 31 December 2007Česká spořitelna’s Supervisory Board as of 31 December, 2007

Board of Directors as of 31 December 2007

PAVEL KYSILKAMember of the Board of Directors and Deputy CEO

DUŠAN BARAN Vice Chairman of the Board of Directors and First Deputy CEO

JOHN JAMES STACK Chairman of the Board of Directors and CEO

Mr. Stack resigned from his positions in Česká spořitelna, a. s. as of 30 May 2007.

GERNOT MITTENDORFER Chairman of the Board of Directors and CEO

8

PETR HLAVÁČEK Member of the Board of Directors and Deputy CEO

JIŘÍ ŠKORVAGAMember of the Board of Directors and Deputy CEO

HEINZ KNOTZERMember of the Board of Directors and Deputy CEO

DANIEL HELER Member of the Board of Directors and Deputy CEO

9


GERNOT MITTENDORFER born on 2 July 1964Chairman of the Board of Directors and CEOReference Address: Olbrachtova 62, Prague 4, CZ

Mr. Mittendorfer studied law at the University of Linz and is

a graduate of Webster University in Vienna (Master of Busi-

ness Administration, specialization in fi nance). He joined Erste

Österreichische Spar-Casse Bank AG in 1990. In 1997, he was

appointed to the Board of Directors of Sparkasse Mühlviertel

West Bank AG. In 1999 he was appointed as a member of the

Board of Directors of Erste Bank Sparkassen (CR), where

he was responsible for retail banking. From July 2000 he

has been the member of the Board of Directors of Česká

spořitelna, responsible for corporate banking. He resigned

from all his functions in Financial Group of Česká spořitelna

as of 31 July 2004 after accepting the offer to become the CEO

of Salzburger Sparkasse, a member of the Erste Bank Group

family. He resigned from this function and as of 31 May 2007

he became the Chairman of the Board of Directors and CEO of

Česká spořitelna.

JOHN JAMES STACKBorn on 4 August 1946Chairman of the Board of Directors and CEOReference Address: Olbrachtova 62, Prague 4, CZ

Mr. Stack is an American citizen. He studied at Iona College

majoring in mathematics and economics (BA, 1968) and the

Harvard Graduate School of Business Administration specialis-

ing in fi nance and management (MBA, 1970).

From 1970 until 1976, Mr. Stack worked in municipal

government in New York. From 1977 until 1999 he served at

Chemical Bank, which merged into Chase Manhattan Bank,

in a variety of increasingly important positions. Before joining

Česká spořitelna he was an Executive Vice President at Chase

Manhattan Bank.

On 1 March 2000, Mr. Stack became Deputy Chairman of the

Board of Directors of Česká spořitelna. On 4 July 2000, he was

elected Chairman of the Board of Directors and CEO of Česká

spořitelna and re-elected into the function in 2004. Since 2005

Mr. Stack is a member of the Czech Banking Association.

Mr. Stack resigned from his positions in Česká spořitelna, a. s.

as of 30 May 2007.

DUŠAN BARANBorn on 6 April 1965Vice Chairman of the Board of Directors and First Deputy CEO Reference Address: Olbrachtova 62, Prague 4, CZ

Mr. Baran is a graduate of the Mathematics and Physics

Faculty of Charles University in Prague; an International

Executive MBA program at Katz Graduate School of Business,

the University of Pittsburgh together with the CMC Graduate

School of Business in Čelákovice and a banking course at

the Graduate School of Banking, University of Colorado,

Colorado, USA. During 1991–1993 he worked for Agrobanka,

a. s. in the treasury function. He joined Česká spořitelna in

November 1993, where he held various managerial positions

in Treasury and Risk Management division. He was appointed

a member of the Board of Directors and Deputy CEO of Česká

spořitelna in May 1998 and was promoted to Chairman of the

Board of Directors and CEO in March 1999. On 4 July 2000

he was elected Vice Chairman of the Board of Directors of

Česká spořitelna and appointed the First Deputy CEO. He is

also the Chief Financial Offi cer of Česká spořitelna. Mr. Baran

is a Vice Chairman of the Steering Committee of the Czech

Institute of Directors and a Treasurer of the Board of Directors

of the European Savings Banks Group (ESBG) in Brussels.

DANIEL HELERBorn on 12 December 1960Member of the Board of Directors and Deputy CEO Reference Address: Na Perštýně 1, Prague 1, CZ

Mr. Heler is a graduate of the Prague University of Econom-

ics, Faculty of International Trade. He held internships with

J. P. Morgan, Goldman Sachs, S. Montagu, UBS, N. M.

Rothschild, Shearson and Bayerische Hypobank. He has also

attended a number of courses focused on global banking,

profi tability in banking, retail banking strategy, treasury and

risk management. He has worked in the banking sector since

1983. First he held various positions in the Department of

Foreign Exchange and Money Markets and then, in 1990,

he became the Director of the Financial Markets Division

10

of Československá obchodní banka Praha. In 1992 he was

appointed as Treasurer and member of the Board of Directors

of Crédit Lyonnais Bank Praha. In 1998, he was appointed as

a member of the Board of Directors of Erste Bank Sparkassen

(CR) and assumed the responsibility for the Financial Markets.

In 1999, he became the Vice Chairman of the Board of Direc-

tors of Erste Bank Sparkassen (CR) and since 1 July 2000

he has been the member of the Board of Directors of Česká

spořitelna responsible for asset management and retail invest-

ment products, corporate fi nance and investment banking,

treasury sales and trading, capital markets, balance sheet

management, fi nancial institutions and corresponding banking.

Mr. Heler is additionally a member of the bodies of the follow-

ing companies: Nadace České spořitelny, Brokerjet ČS, Erste

Corporate Finance, a. s., RAVEN EU Advisory a. s., REICO

investment copany of ČS, the Stock Exchange Chamber and

the Deposit Insurance Fund.

HEINZ KNOTZERBorn on 8 April 1960Member of the Board of Directors and Deputy CEOReference Address: Olbrachtova 62, Prague 4, CZ

Mr. Heinz Knotzer is a graduate of the University of Vienna

where he obtained the title of JUDr. (Doctor of Jurisprudence).

He started his career in banking in after practicing as legal

assistant at courts in Austria. He worked in the legal division of

Österreichische Investitionkredit AG (Investkredit) and joined

later Girozentrale und Bank der Österreichischen Sparkassen

AG (which, after a merger in 1997, became a part of Erste

Bank), where he worked in the Investment Banking Division.

Beginning 1996 he was seconded to Creditanstalt, a. s., Prague,

after successfully completing special professional training at

Creditanstalt AG, Vienna, and assumed at fi rst the position

Manager of the Division for Corporate Customers. Later, he

became the Assistant General Director / the Corporate Custom-

ers Division. In the merged Bank Austria Creditanstalt Czech

Republic, a. s., (1988) he became director of the Corporate

Customers II Division / International Business Division / Loans

Division. In June 1999 he joined Erste Bank Sparkassen (CR),

a. s. and was appointed as a Member of the Board of Directors

and Executive Director. After privatization and acquisition of

Česká spořitelna by Erste Bank and the transfer of Erste Bank

CR into Česká spořitelna in 2000 he was named Director of the

Commercial Centers Section of Česká spořitelna. Since July

2003 he is a member of the bank’s Senior Management Team.

From August 2004 till June 2007 he was appointed Member of

the Board of Directors and a Deputy CEO of Česká spořitelna,

responsible for corporate and commercial banking, mortgages

and real estate fi nance and the municipalities section. Since July

2007 he leads the newly formed Risk Division of the bank.

He is the Chairman of the Supervisory Board of

s Autoleasing, a. s., Leasing Česke spořitelny, a. s., Factoring

Česke spořitelny, a. s., and a Member of the Supervisory

Board of Erste Corporate Finance, a. s.

PETR HLAVÁČEK Born on 19 November 1955Member of the Board of Directors and Deputy CEOReference Address: Olbrachtova 62, Prague 4, CZ

Mr. Petr Hlaváček graduated from the Prague University of

Economics and the University of Toronto. He has been active

in the banking sector since 1984. After nine years of work for

the Canadian Imperial Bank of Commerce, he joined the Czech

National Bank as an advisor to a member of the Banking Board

in 1993. In 1994 he joined Česká spořitelna where he held the

post of Director of the Capital Investment Division. In June 1999

he was appointed as the member of the Board of Directors of

Česká spořitelna responsible for the preparation of privatisation

and investment banking. In 2000 he joined the Senior Manage-

ment Team and became Director of the Transformation Program

‘Naše spořitelna.’ In his capacity as a Board member, he is

responsible for project management and IT area.

Mr. Hlaváček is additionally a member of the bodies of the

following companies: Consulting České spořitelny, a. s. and

Informatika České spořitelny, a. s.

11


JIŘÍ ŠKORVAGABorn on 26 April 1963Member of the Board of Directors and Deputy CEOReference Address: Olbrachtova 62, Prague 4, CZ

Mr. Jiří Škorvaga is a graduate from the Institute of Chemi-

cal Technology in Prague and from the post-gradual studies

at Czechoslovak Academy of Sciences. He joined Česká

spořitelna Financial Group in 1994, as a project manager. In

1998 he took over the position of Card Center Head and in

1999 he was appointed as a Head Manager of retail banking.

Since 2000 he was responsible for business management of

retail business and was a member of Senior Management

Team. In November 2006 Mr. Škorvaga became a member of

the Board of Directors and a Deputy CEO of Česká spořitelna.

He is responsible for retail banking.

Mr. Škorvaga is a member of the Supervisory Board of

Stavební spořitelna České spořitelny, a. s. and Investiční

společnost České spořitelny, a. s and brokerjet České

spořitelny, a. s. and he is a member of the Managing Board of

Prague Spring, o. p. s.

PAVEL KYSILKABorn 5 September 1958Member of the Board of Directors and Deputy CEOReference Address: Olbrachtova 62, Prague 4, CZ

Mr. Kysilka is a graduate of Faculty of Economics of the

University of Economics in Prague; in 1986 he passed internal

postgraduate research there. In 1986–1990 he worked at the

Institute of Economics of the Czechoslovak Academy of

Sciences.

In 1990–1991 Mr. Kysilka worked in the Ministry for Eco-

nomic Policy as the Chief economic advisor to the Minister for

economic policy. In the 1990s he held various positions up to

the post of Executive Governor in the Czech National Bank,

where he also managed the splitting of the Czechoslovak cur-

rency in 1993. At the same time in 1994–1997 he acted as an

expert of International Monetary Fund and he participated in

implementation of national currencies in several East European

countries. In the 90’s he was President of Česká ekonomická

společnost. Before joining Česká spořitelna Mr. Kysilka

worked in Erste Bank Sparkassen (CR) in Prague as Executive

Director responsible for IT, Organization, Human Resources,

and Services. He started to work for Česká spořitelna in 2000

as Chief Economist and Member of the Senior Management

Team. On 5 October 2004, the Supervisory Board of Česká

spořitelna appointed him a Member of the Board of Directors.

Mr. Kysilka is responsible for payment systems, fi nancial

market analyses, security, EU Offi ce and corporate cash

management and pooling. Among others he is member of the

Scientifi c Board and the Managing Board of University of

Economics in Prague.

12

Česká spořitelna’s Supervisory Board as of 31 December, 2007ANDREAS TREICHLBorn on 16 June 1952Chairman of the Supervisory BoardReference Address: Am Graben 21, Vienna, Austria

Mr. Andreas Treichl studied economic sciences at Vienna

University in 1971–1975. After completing a training program

in New York, he began his career at Chase Manhattan Bank in

1977. In 1983 he began to work at Die Erste for the fi rst time.

In 1986 he accepted a General Manager position with Chase

Manhattan Bank Vienna. In 1994 Mr Treichl was appointed

to the Management Board of Die Erste. In July 1997, he was

appointed as CEO.

He became a member of the Supervisory Board of Česká

spořitelna at the Extraordinary General Meeting in June 2000;

subsequently he was elected its Chairman. The General Meet-

ing in April 2006 re-elected Mr. Treichl in his function.

Mr. Treichl is additionally a member of the bodies of the fol-

lowing companies: Erste Bank der österreichischen Sparkas-

sen AG, Banca Comerciala Romana SA, Donau Versicherung

AG, Sparkassen Versicherung AG, MAK – Österreischisches

Museum für Angewandte Kunst, Die Erste oesterreischische

Spar-Casse Privatstiftung, Österrichischen Sparkassenver-

band, Felima Privatstiftung, Ferdima Privatstiftung, Dritte

Wiener Vereins-Sparkasse AG, s Haftungs – und Kundenab-

sicherungs GmbH.

CHRISTIAN CORETH, Born on 31 March 1946Member of the Supervisory BoardReference Address: Am Graben 21, Vienna, Austria

Mr Coreth graduated from the University of Vienna in 1972

with a Law Degree. In the period from 1972 to 1982, he

worked for Creditanstalt-Bankverein, Vienna. From the

Deputy Head of the International Loan Department, where

he started in 1982, he moved to New York to European

American Bank (EAB) as Senior Vice President. In 1985, Mr

Coreth returned to Creditanstalt. Since 1998, Mr Coreth has

worked as Head of the International Division of Erste Bank

der oesterreichischen Sparkassen AG in Vienna. In July 2004

he was appointed to the Managing Board of Erste Bank der

österreichischen Sparkassen AG with responsibility for Group

Risk Management.

He was elected a member of Česká spořitelna’s Supervisory

Board on 22 May 2002.

Mr. Coreth resigned upon his function as of 7 February 2007.

MAXIMILIAN HARDEGGBorn on 26 February 1966Member of the Supervisory BoardReference Address: Am Graben 21, Vienna, Austria

Mr. Hardegg graduated from Agricultural Sciences in

Weihenstephan, Germany. In the period 1991–1993, he

worked at AWT Trade and Finance Corp, which is part of

the Creditanstalt Group. He also worked as an advisor to the

Czech Ministry of Agriculture in respect of the privatisation of

agriculture.

Since 1993, he has been engaged in agriculture management.

He has participated in the Phare, Sapard and Leader+ titles

projects, which are designed to support the cooperation

among agricultural systems within the EU. He is also

a member of lobbyist groups in Austria and the EU, which

are focused on supporting sustainable development in land

use and agriculture. He was elected a member of Česká

spořitelna’s Supervisory Board on 22 May 2002 and re-

elected in April 2005.

Mr. Hardegg is a member of the Supervisory Board of DIE

ERSTE österreichische Spar-Casse Privatstiftung, Sparkassen

Pruefungsverband.

MONIKA HOUŠTECKÁBorn on 6 December 1963Member of the Supervisory BoardReference Address: Budějovická 1912, Prague 4, CZ

Mrs. Houštecká graduated from the Economic University,

Faculty of Domestic Trade. After completion of her studies,

she worked in the area of trade and in 1994 she started to work

in Česká spořitelna. Since 1997 Mrs. Houštecká is working

in the HQ in the area of Financing of Foreign Trade. As of

13

Board of Directors as of 31 December 2007Česká spořitelna’s Supervisory Board as of 31 December, 2007Macroeconomic Development of the Czech Republic in 2007

August 2000 Mrs. Houštecká was appointed into the function

of Director of Trade Finance Department.

With effect from 28 November 2003 Mrs Houštecká has been

elected by the ČS employees into the function of a Supervisory

Board Member.

The term of offi ce of Mrs. Houštecká expired as of 28 Febru-

ary 2007.

HERBERT JURANEKBorn on 13 November 1966Member of the Supervisory BoardReference Address: Am Graben 21, Vienna, Austria

Mr. Juranek graduated from the Commercial College in Austria

– Bruck/Leitha. He began his career in Girozentrale der

österreichischen Sparkassen in the area of securities. During

years 1996–1998 in Reuters Ges. m.b.H., he lead all sales and

risk management activities of Reuters Austria. Since 1999 he

performed various functions in Erste Bank der österreichischen

Sparkassen AG – mainly leading operations activities with

securities. As the CEO of “ecetra Central European e-Finance”

and “ecetra Internet Services AG” he took overall responsibil-

ity for the online broker and internet bank of Erste Bank

Group. In the meantime, Mr. Juranek as the General Manager

Group IT is in charge of all IT, project management and bank-

organization related activities within Erste Bank Group with

a direct reporting hierarchy in Austrian and a matrix structure

on a Group level.

Mr. Juranek was elected by the General Meeting into the func-

tion of a Supervisory Board Member as of 29 April 2005.

Additionally he is a member of the bodies of the following

companies: Slovenská sporiteľna, a. s. s IT Solutions AT

Spardat G.m.b.H., IT Austria Ges.m.b.H., ecetra Central

European e-Finance, ecetra Internet Services AG , Dezentrale

IT – Infrastruktur Services GmbH; Banca Comerciala Romana

SA; s IT Solutions SK, spol. s r.o., IT Services SK, spol. s r.o.,

Erste Bank der örsterreichischen Sparkassen AG.

MONIKA LAUŠMANOVÁBorn on 30 October 1962Member of the Supervisory BoardReference Address: Na Perštýně 1, Prague 1, CZ

Mrs. Laušmanová graduated from the Faculty of Mathematics

and Physics. Her carrier started on the Faculty of Matheamtics

where she worked as an assistant in the area of fi nance and

insurance mathematics.

In 1997 she worked as a risk manager and analyst in Expandia

Finance. In 1998 she joined Erste Bank (CR) in the position

of Head of Risk Management. Since the merger of Česká

spořitelna and Erste Bank Mrs. Laušmanová is responsible

for the Central Risk Management in ČS. Mrs. Laušmanová

is a member of Czech Banking Association, she is Head of

Commission for the Bank regulation.

As of 12 August 2005 she was elected by the ČS employees as

a Member of the Supervisory Board of Česká spořitelna, a. s.

REINHARD ORTNERBorn on 6 January 1949Vice Chairman of the Supervisory BoardReference Address: Am Graben 21, Vienna, Austria

Mr Reinhard Ortner completed studies of social and economic

sciences at Vienna University in 1971. In 1971, he joined Erste

oesterreichische Spar-Casse, where he has held various posi-

tions in the accounting and controlling functions since 1973.

He has been a member of the Board of Directors of Erste Bank

der österreichischen Sparkassen AG since 1984.

He was elected as a member of the Supervisory Board of

Česká spořitelna at the Extraordinary General Meeting that

was held on 27 June 2000; the General Meeting in 2006

re-elected Mr. Ortner into the function of a Member of the

Supervisory Board.

Mr. Ortner resigned upon his function as of 26 April 2007.

14

MAREK POSPĚCHBorn on 1 October 1967Member of the Supervisory BoardReference Address: Nám. Dr. Beneše 6, Ostrava, CZ

Following graduation from a secondary professional school of

construction in Valašské Meziříčí, Mr. Pospěch worked with

Tesla Rožnov in the control and quality assurance department

for six years. In 1992, he joined Česká spořitelna’s branch

offi ce in Ostrava where he worked in the operations security

department. From 1995, he worked in the general administra-

tion department and is currently a head offi ce manager of the

property management department. With effect from 1994, he

has sat on the Organisation-wide Committee of the CS Labour

Union. Since 2006 he is a member of Czech Institute of Direc-

tors within certifi cation of Corporate Governance Program.

With effect from 1 April 2002, he has been elected by the

employees of Česká spořitelna as a member of the Supervisory

Board, and re-elected in July 2005.

BERNHARD SPALTBorn on 25 June 1968 Member of the Supervisory BoardReference Address: Am Graben 21, Vienna, Austria

Mr. Spalt graduated from the Law Faculty of Vienna University

where he specialised in European law.

During his studies in 1991, he joined DIE ERSTE österreichische

Spar-Casse Bank AG, where he started to work in the Legal

Department. From September 1994 to June 1997, he performed

various positions in the Work Out Department. Following the sale

of Erste Bank Sparkassen (CR), a. s. to Česká spořitelna, a. s., Mr.

Spalt took over the responsibility of the Work Out Department

in Česká spořitelna, a. s. In June 2002, he returned to Erste Bank,

Vienna where he was responsible for Strategic Risk Management

until Oct. 2006. In Nov. 2006 he was appointed to the Managing

Board of Erste Bank der österreichischen Sparkassen AG with

responsibility for Group Risk Management.

Mr. Spalt was elected into the function of a Supervisory Board

member as of 15 May 2003 and re-elected in 2006 by the

General Meeting.

Mr. Spalt is a member of the bodies of the following com-

panies: Erste Bank Hungary Nyrt., Erste Reinsurance S. A.,

Open, Joint Stock Company Erste Bank, Erste Bank der

oesterreichischen Sparkassen AG, Erste Bank Ukraine, Banca

Commerciala Romana SA, ecetra Central European e-Finance

AG, ecetra Internet Services AG, Slovenská sporiteľna, a. s.,

s Haftungs- und Kundenabsicherungs GmbH.

JITKA ŠROTÝŘOVÁBorn on 18 November 1948Member of the Supervisory BoardReference Address: Olbrachtova 62, Prague 4, CZ

Mrs. Šrotýrová graduated from the secondary school of

general education in Prague. In 1967, she joined Tesla Prague

as a specialist. From 1970 to 1984 she worked as a supply

manager for Tesla Eltos and the Project and Engineering

Organisation. She has worked with Česká spořitelna since

1985, largely as a senior professional offi cial of the recrea-

tion department where she is in charge of the operation of

recreation facilities. Since 1986, she has been a member of the

Organisation-wide Committee of the CS Labour Union. She is

also chairwoman of the Sports Committee at Česká spořitelna.

With effect from 1 April 2002, she has been elected by the

employees of Česká spořitelna as a member of the Supervisory

Board and re-elected in 2005.

MANFRED WIMMERBorn on 31 January 1956Member of the Supervisory BoardReference Address: Am Graben 21, Vienna, Austria

Mr. Wimmer graduated from the Law Faculty of the University

of Innsbruck where he was awarded the Doctor of Law degree.

From 1978 to 1982, he worked as an academic assistant in

private law. From 1982 to 1998, he worked in the International

Division of Creditanstalt. In 1998, he joined the International

Division of Erste Bank der österreichischen Sparkassen AG.

Since February 2002 Mr. Wimmer was Head of the Strategic

Group Development Division of Erste Bank. Since August

2005 Mr. Wimmer was Executive Director Group Architecture

and Group Program Mng.

15

Board of Directors as of 31 December 2007Česká spořitelna’s Supervisory Board as of 31 December, 2007Macroeconomic Development of the Czech Republic in 2007

He has been a member of the Supervisory Board of Česká

spořitelna since 27 June 2000; the General Meeting in 2006

re-elected Mr. Wimmer into the function of a Member of the

Supervisory Board.

Mr. Wimmer resigned upon his function as of 26 April 2007.

HEINZ KESSLERBorn on 19 August 1938Member of the Supervisory BoardReference Address: Am Graben 21, Vienna, Austria

Immediately after fi nishing his studies, in 1964 Dr. Kessler

became employed by Nettingsdorfer Papierfabrik AG,

became a member of the Board from 1974 and Chairman of

the Board from 1982.

Mr. Kessler was elected by the General Meeting into the func-

tion of Supervisory Board Member on April 2007.

Mr. Kessler is member of the bodies in following companies:

Erste Bank der österreichischen Sparkassen AG, Die Erste

oesterreichische Spar-Casse Privatstifung AG, Allegemeine

Sparkasse Oberösterreich Bankaktiengesellschaft, AVS Beteil-

ligungsgesellschaft m.b.H, Tiroler Sparkasse Bankaktienge,

Dritte Wiener Vereins-Sparcasse AG.

JOHANNES KINSKYBorn on 7 August 1964Vice Chairman of the Supervisory BoardReference Address: Am Graben 21, Vienna, Austria

Mr. Kinsky studied on the Institut d´Etudes politiques de

Paris, where he graduated in 1988 in fi nance, law, history and

political science. His career started at Deutsche bank, where

he performed various positions as credit analyst, Head of Debt

Capital Market and fi nally as a country manager for the Czech

Republic, Slovakia and Croatia. Since 1999 Mr. Kinsky was

Managing Director and Head of CEE at JP Morgan. In July

2007 Mr. Kinsky became a member of the Erste Bank Group

Executive Board.

Mr. Kinsky was elected by the General Meeting into the

function of a Supervisory Board Member in April 2007 and

Vice Chairman of the Supervisory Board in May 2007.

Mr. Kinsky is member of the bodies in following companies:

Österreichische Kontrollbank Aktiengesellschaft, IMMORENT

Aktiengesellschaft, Erste Bank AD Novi Sad, Erste

Steiermärkische bank d.d. Rijeka, Erste Bank der oesterreich-

ischen Sparkassen AG, Erste Corporate Finance GmbH, Dritte

Wiener Vereins-Sparkasse AG, Erste Securities Polska S. A.

PÉTER KISBENEDEKBorn on 12 September 1964Member of the Supervisory BoardReference Address: Am Graben 21, Vienna, Austria

Mr. Kisbenedek graduated from University of Economics

in Budapest in 1988 with specialization in Foreign Trade

and Marketing Line. In 1988 he began to work for Sancella

Hungary as a Product Manager and further as Sales Director.

From 1991 until 1995 he performed various managing posi-

tions in Philip Morris. In 1995 Mr. Kisbenedek was appointed

into the function of Deputy CEO of Sales and Marketing in

ÁB – AEGON General Insurance. Within the Company he

was appointed as a Head of Retail Division and Deputy CEO

of Non-life Insurance. Since 2000 he has been working in the

Erste Bank Group, till 31. 12. 2006 he was CEO of Erste Bank

Hungary with responsibilities especially for Strategic Manage-

ment, Human resources, Legal, Marketing. Since 1st July

2007 is Mr. Kisbenedek a Chief Financial Offi cer, CPO (Chief

Performance Offi cer) and Member of the Board of Directors of

the Erste Bank Group.

Mr. Kisbenédek was elected by the General Meeting into the

function of Supervisory Board Member in April 2007.

Mr. Kisbenédek is member of the bodies in following compa-

nies: Open Joint-Stock Company Erste Bank, Banca Comer-

ciala Romana SA, Erste Steiermärkische Bank d.d. Rijeka,

PayLife Bank gmbH, Slovenská sporiteľna, a. s. Sparkassen

Versicherung AG, Erste Bank AD Novi Sad, Erste Bank der

oesterreichsichen Sparkassen AG, Dritte Wiener Vereins-Spar-

kasse AG, JSC Erste Bank Ukraine.

16

ANDREAS KLINGEN Born on 18 August 1964Member of the Supervisory BoardReference Address: Am Graben 21, Vienna, Austria

Mr. Klingen is a graduate of Technische Universität in Berlin

with specialization in physics and philosophy and a graduate

of Rotterdam School of Management. His professional

career started as a researcher in Festkörper – Laser-Institut in

Germany. During years 1993–1998 he worked as an analyst

and associate in Lazard Freres, afterwards until 2005 as senior

Associate and senior Vice President of JP Morgan in London.

He joined Erste Bank der österreichischen Sparkassen AG in

2005 as a General manager for Strategic Group Development.

Mr. Klingen was elected by the General Meeting into the

function of Supervisory Board Member in April 2007.

Mr. Klingen is member of the bodies in following compa-

nies: Open Joint Stock Company Erste Bank, Erste Bank

Hungary Nyrt.

JOLANA DYKOVÁBorn on 23 July 1966Member of the Supervisory BoardReference Address: Malé nám. 219, Rokycany, CZ

Mrs. Dyková is a graduate from the secondary technical

college for machinery in Kladno and completed a term at the

Czech Technical University in Prague. She started her profes-

sional career in 1985 at Czech Radio where she worked as an

assistant to the editor-in-chief. Then she held the position of

a deputy manager in the company Západočeské kamenolomy

(West Czech Stone Quarries) for two years. In 1991 she joined

Česká spořitelna as a bank offi cer, later she became the head

of the branch in Zbiroh. Since 2002 she has been a manager

at the advisory branch in Rokycany and since October 2007

a manager of microregion Rokycany.

Mrs. Dyková was elected to the Supervisory Board by ČS

employees as of November 2007.

Members of Managing and Supervisory Boards declares not

to be aware of possible confl ict of business, private and other

interests or duties.

17

Česká spořitelna’s Supervisory Board as of 31 December, 2007Macroeconomic Development of the Czech Republic in 2007Report on Performance and Business Activities

Macroeconomic Development of the Czech Republic in 2007Economy Above 6%, Slowdown in 2008 Due to ReformsThe Czech economy grew by an estimated 6.6 percent in 2007,

which was about the same rate as in 2006 (6.4 percent). The key

driver was the increase in domestic consumption, which, based

on the Bank’s estimates, grew by approximately 6 percent in

real terms due to both the growth in real wages and employment

(the average unemployment rate in 2007 was 6.6 percent) and

low interest rates. Other components of the gross domestic

product (GDP) developed as in 2006 – export growth was in

double digits (15 percent) due to massive demand from the

European Union; however, faster consumption pulled imports

up as well (13.1 percent), which made the contribution of net

exports to GDP positive, though not signifi cant. With a surplus

of CZK 86 billion, the fi nal trade balance was the fundamental

factor behind the strengthened Czech crown. Compared to

the Eurozone (where the GDP growth rate was 2.6 percent),

the Czech Republic keeps growing at a pace that is allowing

the Czech Republic to gradually catch up with the economic

standards of the Eurozone (in terms of PPP per capita, the Czech

economy has reached 68 percent of the Eurozone’s GDP).

In 2008, the Bank expects the economy to slow down to 4.3 per-

cent, mainly because of the government reforms that contributed

to the growth of infl ation to 7.5 percent in January 2008, which

will limit the growth of real wages and consumption this year.

The available net household income will be further decreased

by cuts in the government’s social spending. In the short-term,

tax changes and cuts in social spending are bad news for most

individuals and fi rms. Nevertheless, this effect is expected

to disappear in 2009 and be replaced by a moderate growth

stimulus (shift in taxation to indirect taxes, lower corporate taxes

etc.). The Bank forecasts growth above 5 percent in 2009.

Infl ation – The Top Story The average rate of infl ation accelerated to 2.9 percent in 2007.

Early 2007 faced a threat of demand-driven infl ation caused by

the rapid growth of consumption, which forced the Czech Na-

tional Bank (ČNB) to take further action to tighten the monetary

policy (rates were fi nally raised by 1 percentage point in 2007).

In the second half of 2007, the strengthening of the Czech crown

helped reduce infl ation; however, cost shocks (food and energy

prices) towards the end of 2007 coupled with the administrative

measures in January 2008 sent infl ation soaring to a 10-year

high in January 2008 (7.5 percent). The Bank expects infl ation

to stay high in 2008 (6.1 percent on average) and fall only at

the beginning of 2009. The infl ation structure will continue to

threaten infl ation expectations.

The Czech Crown’s Rollercoaster RideThe Czech crown gained 2 percent against the euro in 2007.

In comparison to 2006, the trade balance surplus doubled and

was the fundamental force behind the strengthened crown (the

infl ow of foreign direct investments roughly covered the outfl ow

of dividends). The development of the Czech crown’s exchange

rate was heavily infl uenced by the situation in the USA where

the subprime mortgage crisis erupted in mid-2007, which had

implications for other fi nancial market segments (loans, money

market etc.). While in the fi rst half of 2007 the Czech crown

weakened consistently, most likely due to the build-up of carry

trade positions (taking loans in low interest currencies and saving

in currencies bearing higher interest rates), aversion to these posi-

tions increased with the outbreak of the crisis, which led to their

termination and strengthened leaps in the Czech crown. In autumn

2007, the problems on the other side of the Atlantic escalated and

the Czech crown, riding on its reputation as a quasi safe-haven

currency and having solid macro and rising interest rates, became

an attractive substitute for the US dollar and in several leaps

strengthened to as high as CZK 25/EUR 1. The crown diverted

from its long-term trend and its fundamentally justifi able level by

approximately 5 percent. In line with a more favourable outlook

for the US economy and a higher outfl ow of dividends, the Bank

expects the Czech crown to weaken to 26.8 crowns to the euro

towards the middle of 2008 and then strengthen towards the end

of 2008. The average exchange rate is estimated to be 26.4 against

the euro and 18.6 against the US dollar.

The CNB Normalises Rates, 25 Basis Points Are Expected This Year The Czech National Bank responded to the expected rise in

infl ation and fi scal expansion (increase in social spending) by

raising the rates four times in 2007 from 2.5 to 3.5 percent.

Higher headline infl ation and the public’s perception thereof,

e.g. higher food prices, will constitute a threat to infl ation ex-

pectations and to achieving the target infl ation rate (2 percent

by 2010). The expected weakening of the Czech crown will

eliminate one of the strongest obstacles to increasing interest

rates. With one more hike expected by the Bank in 2008, the

rates are thus estimated to be 4 percent at the end of 2008.

18

Report on Performance and Business ActivitiesCONSOLIDATED RESULTS OF OPERATIONS(INTERNATIONAL FINANCIAL REPORTING STANDARDS)

The Česká spořitelna Financial Group reported another very successful year, all of the important indicators of good performance have improved. The record results refl ect the

continuous expansion of lending transactions, growing deposits

and assets under management, increased volumes and numbers

of transactions, professional conduct of staff, growing interest

and non-interest income, effi cient cost management, new

innovative products, increased quality of provided services and

client satisfaction. Clients voted Česká spořitelna the Most Credible Bank of the Year for the fourth time in a row.

PROFIT AND LOSS ACCOUNT

For the year ended 31 December 2007, Česká spořitelna reported, under International Financial Reporting Standards

(IFRS), a consolidated net profi t, net of minority interest,

of CZK 12,148 million. Compared to 2006 when the net

profi t amounted to CZK 10,385 million the net profi t grew by

1,763 million, i. e. 17 percent. The key indicator of return on equity (ROE) improved to 23.8 percent due to the increase in net profi t. In 2006, ROE was 23 percent. Return

on assets (ROA) remained on the same level, 1.5 percent, due

to the massive growth in the asset volume. Profi t before taxes

and minority interest (gross profi t) increased by 11 percent to

CZK 15,589 million year on year.

The Bank achieved another signifi cant success in reaching high

effectiveness – the key cost/income ratio was successfully decreased to 50 percent thanks to the considerable growth in operating income, which is a year-on-year improvement of

33 basis points. Operating profi t, determined as the difference

between operating income and expenses, reported marked growth of CZK 3,220 million to CZK 18,375 million, which is

a 21 percent increase.

Total operating income, comprising net interest income,

net fee and commission income, net profi t on fi nancial

operations and net insurance income, rose by 13 percent to CZK 36,724 million. Non-interest income accounts for

33 percent of the total operating income, which is a moderate

decrease. Operating expenses, comprising staff costs, other

administrative expenses and depreciation/amortisation charges

on property and equipme nt and intangible assets, increased by 6 percent to CZK 18,349 million.

The signifi cant operating income was predominantly driven

by net interest income. Despite a revival in interest rates in

the latter half of 2007, the interest rates in the Czech Republic

were below the level of interest rates in the Eurozone (the

two-week repo rate announced by the Czech National Bank in

2007 increased gradually in June, July and August by 25 basis

points from 2.5 percent to 3.5 percent at the end of November).

Operating profi t Net profi t

Net profi t and operating profi t (CZK mil)

16,000

8,000

0

4,000

12,000

20,000

11,334

8,1379 ,134

12,439

10,195

7,615

10,385

15,155

2003 2004 2005 2006 2007

12,148

18,375

2003 2004 2005 2006 2007

Cost/Income (%)

80

40

0

20

60 58.459.7

56.953.3 50.0

19

Macroeconomic Development of the Czech Republic in 2007Report on Performance and Business ActivitiesStrategic Plans for the Year 2008

Net interest income for the year ended 31 December 2007 amounted to CZK 24,727 million, which represents

a signifi cant year-on-year increase of 17 percent.

The successful result was primarily attributable to a mas-sive increase in lending to individuals and corporate clients

of 27 percent (CZK 89.3 billion) giving rise to a notable

26-percent increase in interest income on client receivables that

represent 65 percent of interest income. The fastest growing

component of interest income was income from rental of real

estate owned by real estate funds that increased by 47 percent.

The interest rate growth supported growth in income from

inter-bank loans and debt securities in spite of the absolute

year-on-year decrease in the volume of their portfolio. In total, interest income grew by 21 percent to CZK 34,601 million.

The growth of interest expenses refl ected the increased

volume of passive products as well as growing interest rates.

Principally, interest expenses on client deposits, amounts owed

to banks and issued bonds, including the fair value of hedging

derivatives relating to certain issues of mortgage bonds and

subordinated debt increased. The total interest expenses represent CZK 9,874 million, which is a 32 percent

year-on-year increase.

The net interest margin in relation to interest-earning assets

improved by 14 basis points to 3.72 percent.

Net fee and commission income increased by 7 percent year on

year, reaching CZK 9,639 million. The achieved year-on-year growth in net fee and commission income was primarily driven by the expansion of loan transactions, and an increase

in the volume and number of fi nancial transactions effected by

the Group’s clients.

The favourable performance primarily resulted from the fee from lending activities which increased by 23 percent due to the

continuing expansion of lending transactions, e.g. the total number

of mortgage loans grew by 25 percent. Securities transaction fees

and commissions increased by 14 percent in connection with

trading with mutual funds administered primarily by Investiční

společnost ČS, the increase of brokerage services provided by the

parent bank and Brokerjet ČS, and the increase in the volume of

assets under management. Income from transaction fees, which are the largest income component, rose by 4 percent due to the

increase in the volume and number of payment transactions (e. g.

the volume of card transactions grew by 20 percent, the number of

withdrawals through ATMs rose by 5 percent, and the number of

giro account transactions grew by 5 percent).

The proportion of net income from fees and commissions to

total operating income has been gradually decreasing, from

31 percent in 2004 to 26 percent in 2007.

The net profi t on fi nancial operations for the year ended

31 December 2007 totalled CZK 1,709 million, a moderate

decrease of 2 percent year on year. The net profi t on fi nancial operations was specifi cally driven by income on foreign currency transactions that reported a 35-percent year-on-year

increase attributable to the growing importance of structured

products with a currency component and the continuous growth

in trading for corporate clients. The growing interest rates had

a markedly adverse effect on securities held for trading, predomi-

nantly bonds, but increased interest derivative income. Income

from the revaluation of equity derivatives in the trading book

decreased year-on-year due to turbulent market developments.

Net insurance income represented CZK 649 million of profi t,

an increase of 23 percent compared to the previous period.

18,719

8,3848,997

21,206

2003 2004 2005 2006 2007

Net interest income Net fee and commission income

Other non-interest operating income

Net interest income and other operating income (CZK mil)

17,416

8,2387,915

15,87416,000

8,000

0

4,000

12,000

20,000

9,639

24,727

1,7312,268

1,5631,479

2,358

24,000

20

Structure of operating expenses (CZK mil)

3,272 (18%)Depreciation and amortisation of tangible and intangible assets

6,654 (36%)Administrative expenses

8,423 (46%)Staff costs

Structure of operating income (CZK mil)

649 (2%)Net insurance income

1,709 (5%)Net profi t on fi nancial operations

9,639 (26%)Net fee and commission income

24,727 (67%)Net interest income

The increased volume of net insurance income was attribut-able primarily to the growth of received insurance premiums due to the successful performance of Pojišťovna ČS in 2007.

The general administrative expenses (operating expenses)

grew by 6 percent year-on-year in 2007 but compared to the half-year results, the growth pace of operating expenses was reduced due to the measures aimed at reducing expenses

incurred in the latter half of 2007. The total amount of general

administrative costs was CZK 18,349 million.

Staff costs of CZK 8,423 million represented nearly a half

of the total general administrative expenses. In comparison with 2006, staff costs rose by 9 percent owing to the growth in wages arising from, among other things, the extension of

working hours and the increase in the staff bonus fund relating

to excellent performance, including compensation linked to the

Erste Bank Group’s results.

Other administrative expenses, the second largest compo-nent of operating expenses, grew by 7 percent to CZK 6,654

million. The year-on-year growth is attributable namely to the

increase in data processing expenses of 19 percent relating to the

outsourcing of IT services. Offi ce space costs and advertising

and marketing expenses also grew as a result of the continuous

business expansion of the Bank, new subsidiaries and real estate

funds. Trading transaction costs grew in line with the ongoing

implementation of the Group’s central procurement focused

on using synergies within the entire Erste Bank Group. Costs

associated with advisory and legal services decreased.

The largest item within administrative expenses is data

processing expenses representing 30 percent. Other signifi cant

expenses relate to offi ce space (21 percent), trading transac-

tions (18 percent) and advertising and marketing (14 percent).

The volume of depreciation/amortisation of tangible and intangible assets, primarily hardware, was reduced by

2 percent to CZK 3,272 million due to the outsourcing of

IT services. The depreciation/amortisation structure slightly

changed as amortisation of intangible assets grew by 6 percent

to CZK 1,736 million due to the investment in information

systems (software). Depreciation of tangible assets fell by

10 percent to CZK 1,536 million.

The net charge for provisions for credit risks reported

a negative balance of CZK (2,211) million which represents

nearly a one-third increase compared to the previous period.

Of the total net charge for provisions for the year ended

31 December 2007, the parent bank represents 96 percent.

The principle reason for the year-on-year increase in the net charge was loan expansion, resulting in the increase in provisioning, principally for receivables – consumer loans.

The comparison with the previous period is partially distorted

by the one-off release of provisions in 2006 due to a change

in methodology.

The net balance of other operating income and expenses of

CZK (575) million at the end of 2007 markedly decreased

compared to 2006. The key reasons for the decrease include

the signifi cantly lower balance of the sale and revaluation of real estate owned by real estate funds and the lower income

21


2003 2004 2005 2006 2007

Total assets (CZK billion)

800

400

0

200

600 581.8555.4

654.1

728.4

814.1

from the sale and revaluation of securities available for sale and at-fair-value-through-profi t-or-loss securities due

to the adverse development in fi nancial markets in the latter

half of 2007. The contribution to the Deposit Insurance Fund

increased by 11 percent due to the growth of the insured client

deposits volume. The elimination of profi t allocated to clients

of Penzijní fond ČS also increased.

The tax liability of the Česká spořitelna Financial Group for the year ended 31 December 2007 decreased by 8 percent to CZK 3,213 million, which represents an effective tax

rate of 20.6 percent. This amount comprises the current year

tax charge of CZK 3,908 million and the aggregate impact

of movements in deferred taxation resulting primarily from

the change in the income tax rate in the aggregate amount of

CZK 695 million.

BALANCE SHEET

Liabilities Client (primary) deposits have traditionally formed the key resource of Česká spořitelna’s funding in respect of active

trading, which makes Česká spořitelna substantially independ-

ent of inter-bank funding.

Client deposits amounted to CZK 588.5 billion representing

a year-on-year increase of 9 percent, i. e. CZK 51 billion. Client

deposits accounted for 72 percent of all liabilities. All client segments contributed to the year-on-year increase in deposits. Deposits made by private individuals, which account for

76 percent of all client deposits, increased by 8 percent to CZK 446.1 billion. The largest increase in deposits was noted

in respect of giro accounts, retirement benefi t deposits and term

deposits. By contrast, deposits in savings books suffered a slight

decline. Deposits made by corporate clients rose by 17 percent to CZK 91.3 billion, particularly on current accounts and foreign

currency accounts. Deposits made by the public sector reached CZK 51 billion, which represents an increase of 13 percent. Deposits denominated in foreign currencies represent a stable

4 percent portion of the total client deposit volume.

As of 31 December 2007, the consolidated assets of Česká

spořitelna amounted to CZK 814.1 billion. Compared to 2006, the consolidated assets markedly increased by 12 percent, which, in absolute terms, represents an increase of

CZK 85.7 billion, primarily due to amounts owed to customers

and fi nancial institutions and issued bonds on the liabilities

side of the balance sheet and the increase in customer loans on

the assets side.

The total volume of client funds under the Group’s management (i. e. deposits made by clients and mutual funds

of Investiční společnost ČS and REICO ČS) increased year

on year by 10 percent, totalling CZK 671.5 billion, of which

29 percent is managed by subsidiaries.

2003 2004 2005 2006 2007

Clients deposits (CZK billion)

600

300

0

150

450 444.8428.6

481.6537.5

588.5

22

52.9 (7%)Bonds in issue and subordinated debt

Structure of liabilities (CZK billion)

55.6 (7%)Shareholders’ equity

58.7 (7%)Other liabilities

58.5 (7%)Amounts owed to fi nancial institutions

588.5 (72%)Amounts owed to customers

The balance of amounts owed to fi nancial institutions, comprising loans, term placements and current account balances,

increased year on year by 26 percent (CZK 12.1 billion) and

was CZK 58.5 billion as of 31 December 2007, of which loans

under repo transactions accounted for CZK 12 billion. Only nearly

a half of the year-on-year increase (CZK 5.7 billion) resulted from

Česká spořitelna’s inter-bank market transactions, otherwise it

was due to the increase in funds for business activities of certain

subsidiaries, primarily in leasing (growth of CZK 3.2 billion) and

real estate funds (growth of CZK 3.3 billion).

The total volume of issued bonds increased year on year by

37 percent to CZK 47.3 billion, excluding the issued structured

bonds at fair value. In 2007, Česká spořitelna used tax allow-ances and issued a number of mortgage bonds, especially towards the year’s end. The total volume of mortgage bonds,

representing a stable and long-term source of funding for

increasing mortgage transactions within the balance sheet of the

consolidated group, accounts for CZK 38.6 billion. The volume

of issued bonds and depository bills was CZK 3.7 billion and

CZK 5 billion, respectively.

In the context of dynamic lending growth, Česká spořitelna

issued subordinated bonds to strengthen its capital base in

2005 and 2006. As of 31 December 2007, the subordinated

debt totalled CZK 5.6 billion.

and exchange rate differences), retained earnings and profi t for the

period, grew by 14 percent to CZK 55.6 billion year-on--year, which was primarily attributable to the generated profi t. By

contrast, the balance of equity decreased as a result of the payment

of dividends for 2006 amounting to CZK 4.6 billion.

The individual capital adequacy of Česká spořitelna calculated

in compliance with the Basel II directive was 9.6 percent as of 31 December 2007. The total capital used to calculate the

capital adequacy (Tier 1 and Tier 2 net of deductible items)

was CZK 36.7 billion and the total capital requirements

amounted to CZK 30.7 billion.

Assets Česká spořitelna’s active transactions that generate the pre-

dominant portion of operating income are loans and advances

to customers. In 2007, massive lending growth continued; the total volume of loans and advances to customers grew by

an impressive 27 percent, which accounts for CZK 89.3 billion

in absolute terms, reaching CZK 418.4 billion. Česká spořitelna was successful in boosting the proportion of client loans relative to client deposits by nearly 10 percent

and achieving 71.1 percent. In all active transactions, net loans

and advances to customers account for 51 percent while at the

end of 2003 their proportion represented only 32 percent.

The signifi cant growth in lending transactions was attributable

primarily to mortgage loans and also to construction savings

2003 2004 2005 2006 2007

Proportion of client loans relative to client deposits

80

40

0

20

6053.8

50.1

58.961.2

71.1

100

The balance of shareholders' equity, comprising share capital,

share premium, the statutory reserve fund, the revaluation reserve

(especially securities carried within the available-for-sale portfolio

23


loans, business loans and consumer loans. The portfolio of

mortgage loans to private individuals and corporate clients

markedly increased by 39 percent to CZK 159.9 billion (by

CZK 44.5 billion); mortgage loans represent 38 percent of the total loan portfolio and Česká spořitelna continues to be

the largest mortgage lender in the Czech Republic.

The volume of loans to private individuals, including

mortgage loans, reached CZK 223 billion, a notable in-crease of 32 percent over the previous period (an increase of

CZK 54.2 billion). This exceptional achievement was mainly attributable to housing loans. The retail mortgage loan

portfolio rose by 38 percent to CZK 114.8 billion. Bridging

loans and construction savings loans grew considerably by 38

percent to CZK 33.4 billion over the previous year. Signifi cant

growth of 23 percent, i. e. to CZK 61.9 billion, was also noted in

respect of consumer loans to private individuals. The proportion

of retail loans to private individuals to total loans and advances

to customers rose from 47 percent in 2005 to 53 percent in 2007.

Česká spořitelna also experienced substantial growth in the volume of loans and advances, including mortgage loans, to customers in the business and corporate segment where the aggregate loan portfolio increased by 28 percent to

CZK 178 billion. The Group’s offering includes both standard

loan products and special projects focused on syndicated or

investment loans, export support, factoring or leasing. Česká

spořitelna provides its corporate clients with sound support in

using guarantee funds or drawing subsidies from EU funds.

Similarly, as in the private individual segment, the most sig-

nifi cant increases were attributable to mortgage loans advanced

to corporate clients primarily for development projects, the

volume of which reached CZK 42.7 billion ¬– a year-on-year

increase of 43 percent. The portfolio of loans and advances

to large corporate clients represented over CZK 61 billion

at the end of 2007, an increase of 24 percent; loans and

advances to small and medium sized enterprises accounted for

CZK 47.6 billion, an increase of 19 percent; and receivables of

the Group’s lease companies from the business sector grew by

13 percent to CZK 9.4 billion.

The public sector is a long-term partner of Česká spořitelna. The aggregate balance of loans issued to this seg-

ment was CZK 17.4 billion, a decrease of 16 percent over the

previous period, which was due to the settlement of all receiva-

bles by the Czech Consolidation Agency (ČKA) as a result of

its winding up. The total volume of loans to the public sector,

net of the amounts due from ČKA representing CZK 5 billion

at the end of 2006, grew by 10 percent year-on-year.

The quality of the Group’s loan portfolio improved compared

to the end of 2006 as the proportion of high-risk loans decreased from 2.7 percent to 2.5 percent and the propor-

tion of loans in default for over 90 days decreased also by

0.2 percentage points to 1.6 percent. The reason for the

portfolio’s improvement was a strong increase in quality

loans, and the sale of selected bad assets of CZK 0.9 billion

at the end of 2007.

Loans and advances to fi nancial institutions decreased, year

on year, by 10 percent to CZK 65.7 billion; in particular,

the volume of reverse repo transactions fell by 77 percent

to CZK 6.1 billion. Of the total balance, placements with

fi nancial institutions and loans provided to banks amounted to

CZK 52.8 billion and CZK 12.3 billion, respectively.

The aggregate balance of the portfolio of securities at

fair value, securities available for sale, and securities held to

maturity was CZK 226.8 billion, a moderate decrease of 2 per-

cent compared to 2006. Only the portfolio of securities at fair

2003 2004 2005 2006 2007

Total loans and advances to customers

Of which: amounts due from private individuals

Total loans and advances to customers (CZK billion)

400

200

0

100

300

500

283.4

132.1

168.7

329.1

239.3

98.473.0

214.9223.0

418.4

24

65.7 (8 )Loans and advances to fi nancial institutions

Structure of assets (CZK billion)

90.2 (11%)Other assets

19.8 (2%)Property and equipment and intangible assets

226.8 (28%)Securities portfolio

411.6 (51%)Net loans and advances

to customers

value whose volume amounted to CZK 53.8 billion reported

a slight increase. The available-for-sale portfolio decreased

to CZK 35.5 billion and securities held to maturity reported

a moderate decrease to CZK 137.5 billion. Stagnation of the securities portfolios is attributable to the successful alloca-tion of funds to lending transactions.

Bonds accounted for 94 percent of the securities portfolios.

In investing in securities, Česká spořitelna focused on

acquiring debt securities issued by government institutions

of the Czech Republic which accounted for 57 percent of

the portfolio, bonds issued by foreign fi nancial institutions

comprised 27 percent of the portfolio, bonds issued by

fi nancial institutions in the Czech Republic accounted for

7 percent. Other bonds were issued by foreign government

institutions, other entities in the Czech Republic with an

implicit state guarantee and other foreign entities which

carry the minimum rating of A.

Investments in real estate, including assets under construc-

tion, grew by CZK 6.8 billion (61 percent) compared to 2006,

totalling CZK 17.9 billion. New acquisitions amounted to

CZK 4.7 billion. Real estate fi nancing is one of the key areas

of interest to Česká spořitelna. The Bank also fi nances real

estate investment funds, operating as part of the Group, for in-

stitutional investors focused on the Czech and Slovak markets.

Real estate investments were aimed at achieving rental income

or capital appreciation.

The aggregate balance of property and equipment and intangible fi xed assets, of which land and structures ac-

counted for 65 percent, increased year on year by 8 percent to

CZK 19.8 billion. The balance of intangible assets moderately

fell to CZK 4.5 billion. By contrast, the balance of property

and equipment grew by 12 percent to CZK 15.3 billion due to

a new IT centre building in Prague. The aggregate proportion

of property and equipment and intangible fi xed assets to total

assets was 2 percent.

25


Business Activities and Operations

Česká spořitelna continues to fulfi l its plans defi ned in the First

Choice Bank strategic programme, the aim of which is to make Česká spořitelna the most respected and most dynamic bank in the Czech Republic. As part of the programme, the Bank

gradually changes its corporate culture so as to achieve high

level professionalism and gain the confi dence of its employees.

PRIVATE CLIENTELE

Private clientele – citizens of the Czech Republic as well as

foreign clients who reside in the Czech Republic, students,

entrepreneurs, sole traders and independent profession-

als – represent the Bank’s key client segments. Not only

for them, the Bank actively searches to simplify its offering

for its clients, and to make it better arranged and reduce the

paperwork required for individual processes.

In February 2007, the Bank introduced the Price List which

summarises the prices of the most popular products and

services of primarily day-to-day transactions. The Price List enables the end prices of selected products to be compared easily for its clients. As a result, it is not neces-

sary to add individual items of the tariff list, of which the

resulting price is composed. In the same period, the Bank

signifi cantly reworked and simplifi ed the structure of the

Price List. As compared to the previous period, the list was

shortened by more than 100 individual price items, which

constitutes more than one-fi fth of the previous scope of the

Price List, naturally without impacting prices. The Price

List is currently well organised and makes it easier to locate

individual price items.

In addition, the Bank also simplifi ed the product range and made it better organised on the basis of a systematic

evaluation of the product and service quality and an analysis

of client use thereof. The representative of these changes is the

Private Account (‘Osobní účet’) of Česká spořitelna, which

allows clients to set their own personal requirements. The

Private Account will gradually replace nine original products

and signifi cantly improve the value of use for the clients.

In the fi rst half of 2007, the Bank introduced a customer care system for new private clients with the aim of facilitating

their orientation with the Bank's offer. The system will help the

Bank to identify client’s fi nancial needs and to prepare an op-

timal solution for the interaction of the clients and the advisor.

The care system involves the processes and communication

rules used by the advisor and the headquarters of the Bank.

Each new client will receive a welcome letter which, among

other things, includes a practical summary of the key contacts

for various divisions of the Bank, including the information

line and its ombudsman.

Financing the Housing of IndividualsCooperation in providing fi nancing of housing for individuals

is one of the key activities for the Bank. The most signifi cant

sources of funding are mortgages. In 2007, the Bank pro-vided more than 29,000 new mortgages on the mortgage loan market for individuals in an aggregate volume exceeding CZK 45.3 billion, of which the customers used

93 percent for the purchase or construction of housing. The

aggregate year-on-year increase in new transactions amounts

to almost 27 percent. The average amount of the contracted

loan increased to CZK 1.7 million and the average repay-

ment period of the entire portfolio increased to 20.7 years.

The holders of mortgage loans responded to the increase in

interest rates by selecting a longer interest rate fi xing period.

The aggregate balance of the retail mortgage portfolio thus

increased by 38 percent to CZK 114.8 billion in 2007 and the Bank confi rmed its leading position as the most important mortgage bank in the Czech Republic.

The signifi cant interest of the customers, to which the Bank

responded through a rapid and fl exible attitude, was predomi-

nantly triggered by the increase in interest rates and VAT

on the construction of new apartments starting from 1 Janu-

ary 2008. In addition, the Bank introduced new types of mortgage loans, changed the interest rate principle, introduced

a customer individual rate in place of providing the guaran-

teed interest rate for all customers, which better refl ects the

quality of the transaction and the overall fi nancial situation of

individual customers, and simplifi ed the process of advancing

loans for the purchase of apartments from developer projects as

well as accelerated their drawing.

The mortgage products of the Bank (Mortgage for housing)

ranked third in the MasterCard Competition for the 2007

Mortgage of the Year.

26

In fourteen Mortgage Centres located throughout the Czech

Republic, customers may use the comprehensive services at one location, ranging from the selection of appropriate real

estate and its fi nancing to the additional fi nancial services re-

lating to the insurance of the mortgage and the real estate. The

Mortgage Centres closely cooperate with Realitní společnost

České spořitelny in providing real estate and fi nancial services

to individuals and developers, which accelerates the entire

process of selecting real estate and providing fi nances to

a maximum degree.

As part of the Česká spořitelna fi nancial group, the customers signifi cantly use the services of Stavební spořitelna České spořitelny for fi nancing their housing. The simplicity, speed

and competitive price form the basis of the Buřinka offer. In

addition, the constructing savings bank introduced a new Hypo

Trend bridging loan with a fi xed interest rate.

In close cooperation with the parent company, Stavební spořitelna ČS provided more than 40,000 new loans in the aggregate amount of CZK 15 billion in 2007, which

is a year-on-year increase of almost 70 percent. As of

31 December 2007, Stavební spořitelna ČS maintained

more than 188,000 loan accounts and the aggregate volume

of loans provided to customers for the improvement of

their housing amounted to CZK 33.4 billion, which is

a signifi cant year-on-year increase of 38 percent. Of the

aggregate loan portfolio of Stavební spořitelna ČS, bridging

loans amount to 72 percent. Buřinka ranked third in the

MasterCard competition in the Construction Savings Bank

(Stavební spořitelna) category.

Financing the Needs of Private Individuals Financing the needs of private individuals through consumer

loans continues to increase in the Czech Republic and Česká spořitelna is the most successful provider of consumer loans in the Czech Republic. The aggregate amount of the

portfolio of commercial loans advanced to individuals, includ-

ing loans on credit cards and overdraft loans on giro accounts,

as of 31 December 2007 amounted to CZK 61.9 billion and the number of such loans was 2.5 million, which represents

year-on-year growth of 23 percent and 18 percent, respectively.

Every year, the number of credit cards and the volume of loans advanced through these credit cards increases.

The aggregate volume of the balances of loans on more

than 620,000 credit cards amounted to approximately

CZK 3.2 billion as of 31 December 2007, which represents

a year-on-year increase of 27 percent. After offering insur-

ance against the inability to repay a consumer or cash loan

to its customers for more than one year, the Bank introduced

similar insurance for credit cards.

In addition to credit cards, cash loans and “American

mortgages’ represent the most signifi cant growth for the

Bank. The number of cash loans increased by 10 percent to

2003 2004 2005 2006 2007

Total volume of the commercial consumer loans portfolio in CZK billion

80

40

0

20

60

33.128.3

43.150.2

61.9

Portfolio of retail mortgages to individuals in CZK billion

Portfolio of loans of Stavební spořitelna ČS

80

40

0

20

60

100

39.9

15.519.5

59.1

24.2

10.5

24.2

83.3

2003 2004 2005 2006 2007

33.4

114.8

27


August September October November December

Number of Private Accounts in CZK thousand

400

200

0

100

300

176

99

272

361

426

500

0.7 million, whereas the volume increased by 31 percent and

exceeded CZK 42 billion. The favourable results refl ect the

efforts of Česká spořitelna to make the loans as accessible as

possible. In addition to competitive interest rates, the Bank

offers a simple and rapid process of advancing loans. The

cash consumer “Půjčka” loan became a customer favourite:

98 percent of these loans were advanced within one minute.

The average cash consumer loan amounted to CZK 90

thousand with a six-year maturity on average.

The cash and consumer loans collateralised by real estate, “American mortgages”, continue their dynamic expansion, which is confi rmed by a 31 percent increase in the number

of advanced loans amounting to more than 14,000 and

a 36 percent increase in the volume of the portfolio to the

present amount of CZK 7.5 billion. Concurrently, the process

of advancing “American mortgages” is being simplifi ed and

accelerated. In addition, “American mortgages” have the

advantage of a signifi cantly lower interest rate and a long-

term repayment period as compared to typical consumer or

cash loans.

In 2007, Česká spořitelna focused on overdraft loans on giro accounts, which can be arranged via telephone and the ar-

rangement of which takes merely 1.5 minutes. The number of overdrafts on giro accounts, specifi cally in relation to Osobní

účet, exceeded 1 million, which represents growth of 18 per-

cent. The aggregate drawn volume of overdraft loans at the end

of 2007 grew by approximately 6 percent to CZK 5.9 billion.

The maximum amount of a non-collateralised overdraft loan

was CZK 100 thousand.

The decrease in balances of historical social loans continued,

while their volume decreased by 15 percent to CZK 3.6 billion.

The slow trend in the decreasing volume of social loans is

a result of their composition, as the residual portfolio is solely

composed of long-term loans used to fi nance investments in

housing construction.

Private Account (‘Osobní účet’)In August 2007, Česká spořitelna came up with a revolu-tionary offer in transaction accounts. In the past, customers

were able to choose from predefi ned and unchangeable product

packages of which several products were often not used. This

changed, however, with the introduction of the Private Ac-

count. Each customer now has the possibility to prepare his/her

individual account based on his/her own choice of products and

services. The Private Account includes almost 30 various levels of products and services, where each customer can

change and modify the selected products and services as and

when needed.

The high variability of the Private Account is confi rmed by the fact that only 16 percent of all customers have the same combination of products and services (debit card,

overdraft with a start limit with no necessity to document

income and free of charge withdrawals from the 1,100 ATMs

of the Bank). Services popular with customers include an

unlimited number of transfers in the Czech Republic free of

charge and SERVIS 24 internet banking. Specialised services

include those which protect customer expenses in the event

of the loss of a job or illness, and services which will ensure

complex legal service for complaints in stores.

The Private Account has been very successful. Customers

have welcomed the Bank’s offer of customised solutions for

the management of their fi nances. As of 31 December 2007, i. e. less than fi ve months after the launch date, more than 425,000 Private Accounts were opened with the

aggregate volume of deposited funds at CZK 18.9 billion.

More than 20 percent of Private Account owners are new

customers.

28

The Private Account of Česká spořitelna was appreciated by

the general public, and was also awarded the 2007 Account of the Year prize in the MasterCard Bank of the Year competition.

Other AccountsČeská spořitelna continues to offer accounts for children

and students. Czech and foreign students between the ages

of 15 and 30 in high school or at university can open the popular Student+ programme. The number of high school

and university students who use the Student+ account

increased by 5 percent to almost 180,000 and the volume

of funds increased by 12 percent to CZK 2.7 billion. Česká

spořitelna offers quality fi nancial products at student prices

to students and young people. X Account (‘Xkonto’) is a special account for children between the ages of 10

and 15 and allows them to gain fi rst hand experience in the

administration of their fi nances. Used by 8,000 children, the

volume of the X Account balance increased by more than

a quarter as compared to 2006.

The ideal product for wealthy customers is the Exclusive Account (‘Exclusive konto’), which is outstanding because

of its scope of provided services and the high appreciation

of liquid funds. The number of customers who opened an

Exclusive Account increased year-on-year by 83 percent and

the volume of deposited funds increased at a similar pace, to

CZK 3.6 billion.

At the end of 2007, the Bank maintained 2.84 million giro accounts with a balance of CZK 160.2 billion and the volume

increased by 16 percent year-on-year. Giro accounts have the

largest deposit amount placed by customers in the entire fi nan-

cial group. More and more people use additional products which

relate to giro accounts. The proportion of giro accounts having

overdraft service amounts to 37 percent. The number of private

product packages amounts to 57 percent and the proportion of

payment cards issued for giro accounts amounts to 92 percent.

The number of transactions on giro accounts experienced a year-

on-year increase of 5 percent to 604 million.

Investment ProductsCustomers who expect higher appreciation of deposited funds

seek investment products. Interest in investment services and products in the distribution network of Česká spořitelna

in 2007 was remarkable despite the adverse capital market

developments at the end of the year.

With respect to possible risks and potential income, the optimal

solution is the distribution of investments. Česká spořitelna in close cooperation with Investiční společnost České spořitelny offers its customers a complete solution for investment such as:

qualifi ed distribution to various types of assets in order to decrease

possible risks and increase income; the possibility to participate in

multiple investment opportunities; and liquidity or the possibility

to exchange assets for cash. The basis of the offer is open- ended

mutual funds from Investiční společnost ČS, which is number one

on the local market of mutual funds in the Czech Republic.

Investiční společnost ČS administers a wide range of mutual funds. As of 31 December 2007, the Company had 26 funds.

During 2007, the volume of the funds administered by Investiční

společnost increased by 10 percent to CZK 81.8 billion.

The most signifi cant increase in assets was experienced by

mixed (profi le) funds. Mixed funds invest in participation

certifi cates of other mutual funds according to their investment

focus, and derive benefi ts from the signifi cant diversifi cation of the risks. In addition, all profi le funds are currency hedged;

therefore, investors do not suffer from the strengthening of the

Czech crown. The volume of the funds in the equity funds seg-

ment also increased signifi cantly due to the low interest rates

on which the profi tability of deposits and funds of the money

2003 2004 2005 2006 2007

Number of giro accounts Of which number of giro accounts with overdraft

Number of giro accounts in CZK thousand

2,400

1,200

0

600

1,800

3,0002,759

832 891

2,7892,762

821794

2,755

1,052

2,838

29


market is based, and the development on equity markets which

was positive throughout 2007. In contrast, the bond funds were

not successful, given the development on the bond markets, the

performance of which decreased due to gradual growth in the

interest rates around the world. Most funds are administered

by the largest fund in the Czech Republic – Sporoinvest, which

focuses on the money market.

Other important news on the Czech market of investment

products is the possibility to invest in the fi rst real estate fund in the Czech Republic intended for retail investors – ČS nemovitostní fond offered by Česká spořitelna in cooperation

with the new subsidiary REICO investiční společnost ČS.

Investments in real estate represent a relatively safe method

of investing with an anticipated yield slightly above the level

of bond funds and are an ideal instrument for diversifi cation

of the investment portfolio. ČS nemovitostní fond invests in all principal sectors of the real estate market and their combinations: offi ce real estate, real estate for retail, logistics

areas and industrial real estate, residential real estate and hotels

on the Czech market. In addition, the funds will use the potential

of all countries in the Erste Bank group. In the nine months of its

operation, ČS nemovitostní fond generated CZK 1.2 billion.

The offer of structured investments with a guarantee of

deposited funds included guaranteed funds. The Bank newly

issued guaranteed funds with the guarantee of 90 percent of

deposited funds. The aggregate volume of investments in

guaranteed funds amounted to approximately CZK 2.5 billion.

For investors interested in a shorter investment period, Česká

spořitelna continued to distribute currency and equity premium

deposits. The aggregate volume of all issued premium deposits

amounted to nearly CZK 7.5 billion, up from CZK 4 billion

in 2006. The investors of Česká spořitelna positively assessed

two issues of the Quatro and Quatro II structured bonds and

investments in mortgage bonds, the aggregate sales of which

amounted to CZK 2.2 billion.

Savings ProductsČeská spořitelna is aware of the importance of an individual approach to customers which is based on a comprehensive

advisory approach based on the analysis of a customer’s

fi nancial needs, his fi nancial possibilities and requirements for

liquidity, and yield of funds. For this reason, the Bank offers

the Personal Financial Plan to its customers which helps

them to determine their fi nancial reserve, support their family

and children, defi ne a pension plan, fulfi l mid-term wishes and

effi ciently appreciate their current funds.

Traditional savings books remain a saving product with the

largest volume of deposited funds; however, construction

savings is catching up. In 2007, the increasing trend in

2003 2004 2005 2006 2007

Volume of assets administered byInvestiční společnost ČS in CZK million

80

40

0

20

60 58.9

48.3

71.674.1

81.8

The topic of 2007 was the unique offering of investment products for an active administration of long-term reserves – life-cycle funds with various investment periods. Given the

long postponed reform of the pension system, life cycle funds

offer another, highly liquid alternative to the administration of personal fi nances with the perspective of retirement and

thereby the possibility to maintain the life standard even after

the end of the productive life. Life cycle funds are constructed in a unique way which is based on the variable proportion of

the money market, bonds, commodities and shares during the

term of the fund. The proportion of individual components

changes as the target date approaches, from the prevailing equity

component, which historically generates the most important

yields, to the most conservative composition with regard to the

planned year of the retirement of the investor. Life cycle funds

are instruments for regular and long-term investments, even in

smaller amounts, and represent an addition to pension insurance

and life insurance. Unlike pension and life insurance schemes,

however, life cycle funds are also investments in shares and

commodities.

30

160.2 (30%)Giro accounts24.4 (5%)

Pension insurance

Savings and investments of individuals in CZK billion

83.0 (15%)Mutual funds of Investiční společnost and REICO ČS

33.1 (6%)Other deposits

89.8 (17%)Construction savings deposits

94.3 (18%)Savings books

47.2 (9%)Term deposits

the volume of deposited funds continued. The aggregate

customer deposits on construction savings accounts in

Stavební spořitena ĆS increased year-on-year by 3 percent and

amounted to CZK 89.8 billion, with the number of custom-

ers at 1.1 million. The number of newly-concluded contracts

on construction savings increased by 18 percent; customers

concluded deposits with the aggregate amount of 42.4 billion

in 2007, i. e. by 13 percent higher than in 2006.

The number of savings books and the volume of deposits

continues to slightly decrease (by 5 percent as compared to

2006). Despite this fact, Česká spořitelna maintained more

than 1.8 million registered savings books with a balance of

CZK 94.3 billion.

Pension insurance is among the most sought after long-term

forms of savings. Penzijní fond České spořitelny experienced further dynamic growth of deposited funds by customers,

the volume of which increased by 27 percent and amounted

to CZK 24.4 billion. The number of customers increased by

15 percent and amounted to CZK 634,000 at the end of 2007.

The profi t of Penzijní fond also largely benefi ted from coopera-

tion with employers; Penzijní fond ČS cooperates with more

than 7,000 employers as part of the corporate programme who

actively contribute to pension insurance of their employees.

Although the interest of customers in sophisticated products

with higher added value is increasing, interest in term ac-counts for individuals, specifi cally in deposit accounts which

provide a safe form of savings with an advantageous interest

rate for customers and ensure partial liquidity without sanc-

tion fees, did not decrease. The volume of balances on term

deposits at the end of 2007 amounted to CZK 47.2 billion. Of

this amount, term deposits in foreign currencies amounted to

CZK 5.1 billion. Preferred currencies are EUR and USD.

One interesting investment opportunity is the combination

of insurance and long-term savings in the form of capital

or investment life insurance Flexi from Pojišťovna České

spořitelny. In 2007, premiums written by Pojišťovna ČS

amounted to CZK 6.5 billion. As compared to 2006, an

81 percent increase occurred, predominantly in relation to the

increase in sales of single paid insurance.

Independent Profession Clients Česká spořitelna continues to cooperate with professional cham-

bers which associate independent profession clients – general

partnership with the Czech Medical Chamber, partnership with

the Czech Dental Chamber, the Czech Pharmacy Chamber, the

Czech Bar Association, the Chamber of Tax Advisors, etc. These long-term partnerships help Česká spořitelna to recognise the individual fi nancial needs of independent profession clients to which it responds with its specifi c product offer.

The services to independent profession clients are based on an individual approach offered by specialised advisors for inde-

pendent professions. Trained professional advisors provide clients

with comprehensive information in private and corporate fi nance.

Independent profession clients can use the Professional programme which is attractive predominantly due to its

variability and possibilities to combine products according to

individual client needs. As compared to the prior period, the

number of Professional programmes increased by 15 percent

to more than 4,000. The volume of balances increased by

28 percent to CZK 1.4 billion.

Card Programme2007 was a very successful year in respect of card transac-

tions. Česká spořitelna’s dominant position in this

signifi cant market was refl ected by the increased number

and higher volume of completed transactions, the ongoing

expansion of credit cards and the great success of loyalty

programmes.

31


Compared to 2006 the total number of payment cards grew by nearly a quarter million to over 3.3 million cards. As in

previous years, the increase is largely attributable to the rising

number of credit cards, the number of which reached 622,000

and represents a 39 percent increase year-on-year.

spořitelna is also participating in a new service – the Tank&Go

petrol station system. In participating stations, customers

insert their payment card into an automatic fuelling machine

(a ‘tankomat’) and select the amount of the required fuel purchase.

They can then fi ll up their fuel tanks to the selected amount.

Card activation for non-cash payments in shops successfully

continued as well. The number of card transactions performed

with Česká spořitelna’s contractual partners grew by 21 percent to

nearly 26.4 million payments and the volume of card transac-tions, which is a critical factor in terms of income from fees and

commissions, increased by 20 percent to CZK 35.5 billion.

The number of establishments belonging to Česká spořitelna’s

contractual partners that now accept payment cards grew to nearly

13,000. Lidl, the discount chain, and Baumax were included in

the portfolio of signifi cant business partners. Compared to 2006,

E-commerce grew signifi cantly by 50 percent with 207 completed

transactions in the volume of CZK 0.4 billion.

The key activities increasing the number and volume of card

payments comprise the Bonus Loyalty Programme for payment

card holders, which has been the only programme of its kind of-

fered on the domestic banking market for the last four years. The Bonus Programme was subject to a change in 2007: the original

2003 2004 2005 2006 2007

Number of active cards Of which are credit cards

Number of active cards in thousands

2,800

1,400

0

700

2,100

3,500

2,942

341447

3,0962,758

205101

2,577

622

3,340

2003 2004 2005 2006 2007

Volume of card transactions in ČS’s network in CZK billion

Number of card transactions in ČS’s network in CZK million

Card transactions in ČS’s network

24

12

0

6

18

30

26.2

20.9 21.7

29.5

25.8

21.9

15.6

19.8

26.4

35.536

The Bank, as well as its clients, considers safe and secure payment card use a top priority. Česká spořitelna is the fi rst bank in the Czech Republic to provide a guarantee against transactions performed with lost or stolen credit cards in the 48-hour period before the card is blocked. Insurance was also expanded by the Bank to cover PIN trans-

actions and card misuse 96 hours before the card is blocked.

In 2007, migration of the existing portfolio of electronic and

embossed cards to safer chip cards continued. Additionally, in

order to safeguard client payment cards against skimming the Bank installed a new security system in all of its ATMs.

The Bank has been improving and expanding its services. Clients

can now purchase insurance against the inability to pay a credit

card loan. In addition, electronic credit cards can now be sent

to their holders’ addresses by mail. In July 2007, a cash back

service was launched (cash withdrawal during payment by card in

a shop), which can be used by owners of all Visa and MasterCard

payment cards in the Czech Republic. The service is useful

predominantly in locations where access to cash is limited. Česká

32

2003 2004 2005 2006 2007

Number of SERVIS 24 active clients in thousands*

1,200

600

0

300

900

765610

9301,031

* Note: Clients using multiple Servis 24 clients are included only once.

1,139

automatic membership was changed to registered membership

only. At present, only registered members can collect loyalty

points and use new services, such as: point transfers to another

account; automatic monitoring of point balances; or selection of

interests by which communication with clients is arranged.

At the end of 2007, Česká spořitelna operated 1,124 ATMs of

which 51 are adjusted to the needs of the visually impaired.

Česká spořitelna’s ATMs are operated as multifunctional centres which, in addition to standard functions, provide for sin-

gle payment orders, post money order payments, mobile phone

recharging, PIN changes, information on account balances etc.

The volume of cash collection in Česká spořitelna‘s ATM

network amounted to CZK 280.4 billion in 2007, an increase

of 9 percent year-on-year, whereas the number of withdrawals

grew by 5 percent to 82.5 million. The number of mobile

phone recharges was 2.9 million and the volume of recharges

totalled nearly CZK 0.9 billion.

Internet and Telephone Banking SERVIS 24SERVIS 24 is the fl agship product of Česká spořitelna’s

direct banking service, which is refl ected in the ever-growing

interest of active users whose number grew by 10 percent

to over 1.1 million clients and who completed 31.5 million

electronic transactions in 2007, which represents a 39-percent

increase year-on-year. In the 2007 Golden Crown contest, SERVIS 24 was again awarded the Silver Crown in the electronic banking category.

In expanding and improving the quality of SERVIS 24, Česká

spořitelna has focused predominantly on sales activities and

connecting SERVIS 24 Internetbanking with other products of Česká spořitelna and its subsidiaries, such as investments

through SERVIS 24. In an internet application, clients can model

their own portfolio with the most suitable allocation of invest-

ments and subsequently purchase, sell or exchange selected investment products directly through internet banking. The offer comprises products of Investiční společnost ČS

(open-ended mutual funds), Česká spořitelna (equity premium

deposits, currency premium deposits and structured bonds),

Erste Sparinvest (open-ended mutual funds and guarantee funds)

and ČS nemovitostní fond. The Bank increased security by requiring higher quality of client passwords.

At the end of 2007, Česká spořitelna prepared extensive

innovations of direct banking, including SERVIS 24, in a pilot

operation with the intention to go live in January 2008. Clients

will be offered six completely new products and a range of

minor improvements. The most notable new products include

electronic confi guration of the Private Account, electronic loan

agreements, statement of transactions with payment cards and

electronic invoicing for small clients.

SERVIS 24-Start was created for clients who do not have an

account with Česká spořitelna and want to be informed about their

products provided by Česká spořitelna’s subsidiaries. This service

comprises Telebanking, Internetbanking and GSM banking.

Over 80 percent of the transactions completed through

SERVIS 24 are attributable to the dynamically developing

SERVIS 24 Internetbanking. The total number of users grew

to 822,000, which means 135,000 new users in 2007. SERVIS

24 Telebanking was newly activated in 2007 by 60,000 users,

who completed 2.9 million transactions; the total number of

users increased to 832,000. The number of the SERVIS 24

GSM banking clients reported moderate growth, rising to

76,000; the number of transactions totalled 1.3 million in 2007.

COMPANY AND CORPORATE CLIENTELE, PUBLIC AND NON-PROFIT SECTOR

The company and corporate clientele is the second pillar on which the Česká spořitelna Financial Group focuses.

33


The Group’s range of offerings includes classic products for

account administration and provision of loans, special projects

focusing on investment loans, exports, equity participation,

leasing, factoring, real estate funding, syndicated loans, etc.

The Bank provides company clientele with extensive assistance

in using guarantee funds or drawing subsidies from EU funds.

Real Estate Financing As in previous years, Česká spořitelna places emphasis on

the comprehensive fi nancing of housing projects within its

Mortgage Loan Centres. In order to promote this portion of

a dynamically developing mortgage loan market, the Bank es-

tablished nine specialised Developer Centres at the end of 2007

where project fi nancing worth CZK 4.2 billion was transferred.

The Developer Centres should support the development of project fi nancing loans in Prague and individual regions

in the Czech Republic and strengthen private mortgage loans

from funded housing projects.

Compared to the previous year, 2007 resulted in a 40 percent increase in corporate and municipal loans for real estate fi nancing totalling CZK 45.1 billion. The total balance

of Česká spořitelna’s mortgage loans advanced to all cli-

ent segments was CZK 159.9 billion, which represents an

increase of 39 percent. The total number of mortgage loans exceeded 100,000.

The Bank also continued to support real estate investment funds for institutional investors, CEE Property Development

Portfolio B. V. and Czech & Slovak Property Fund B. V., where

Česká spořitelna is a founder and an important investor. Both

funds, whose managers are major real estate groups operating

in the Central European region, are focused on the Czech and

Slovak markets and are organised as close ended funds. The

Bank also invested in the close ended Endurance Fund, a real

estate fund established and managed by Orco Property Group

and Discovery Group Fund 3C L.P.

In 2007, REICO investiční společnost ČS actively entered

local and foreign markets and created the ČS Real Estate

Fund where it held the position of exclusive administrator.

The ČS Real Estate Fund is the fi rst local open-ended real estate investment fund which provides private clientele with the opportunity to invest in real estate.

Realitní společnost České spořitelny combines support in the

sale of fi nancial products and services with real estate services,

namely in housing. With the assistance of its contractual

partners – a franchise network – Realitní společnost ČS expanded in all regions in the Czech Republic. At the end of

2007, it was represented in 50 cities. In 2007, it completed over

2,000 real estate transactions totalling CZK 5.5 billion, thus

strengthening its leading position in the real estate agent market.

Česká spořitelna continues to be the general partner of the

main organisation of real estate professionals, the Association

for Real Estate Market Development, and the largest central

European real estate market conference, CEDEM.

Small Businesses and Entrepreneurs Products offered to small businesses and entrepreneurs with turnover up to CZK 30 million expanded by three types of easily and quickly achievable loans in 2007: the Mini

Profi t term loan, the Mini Profi t overdraft loan and business

credit cards. Clients receive an offer of a pre-approved loan

based on the transaction history in their current account. The

loan is advanced under extremely fast and simple conditions as

it requires no additional approval process.

In the segment of company clientele with turnover up to CZK 30 million, nearly 13,000 special-purpose loans were

2003 2004 2005 2006 2007

Total mortgage loan portfolio in CZK billion

120

60

0

30

90

150

80.9

115.4

55.6

33.6

159.9

180

34

registered as of 31 December 2007 with the portfolio balance of

CZK 13.9 billion and over 14,000 overdraft loans with a balance

of CZK 2.8 billion. The aggregate balance was CZK 16.7 billion, which represents a 23 percent increase year-on-year.

In 2007, new clients from the small business and entrepreneur

segment could use three-month ‘fee holidays’ to test the most

frequently used Česká spořitelna products and services free

of charge. The Bank confi rmed that this opportunity was

a continued positive approach to company clientele rather than

a single marketing event.

The popular Profi t and Profi t Light programmes targeted

entrepreneurs and small and micro businesses. While the Profi t

programme is based on a module approach where clients make

their choice of services according to their individual needs,

the Profi t Light programme is a package based on a robust

price advantage for fi xed products and services. The number of

Profi t and Profi t Light programmes increased by 10 percent in

2007 and exceeded 36,000. Clients deposited CZK 9.6 billion

into their current accounts managed in the Profi t and Profi t

Light mode at the end of 2007.

Small and Medium-Sized Enterprises In addition to its network of branches, Česká spořitelna also

operates a network of 15 commercial centres located in all

regions of the Czech Republic which are mainly targeted at

small and medium-sized enterprises (SME) with a turnover

from CZK 30 million to 1.5 billion. Commercial centres provide the enterprises with complex services of the entire Česká spořitelna Financial Group.

In terms of all products in 2007, Česká spořitelna provided small and medium-sized enterprises with new loans totalling CZK 22.6 billion, which represents

year-on-year growth of 16 percent. The aggregate portfolio of drawn loans went up by 19 percent compared to 2006

totalling CZK 47.6 billion.

In 2007, Česká spořitelna continued to provide TOP Programmes

focused on fi nancing small and medium-sized enterprises. The

TOP Podnik programme provides long-term investment loans

for corporate development projects while TOP Kapitál focuses

on fi nancing through venture and development capital. Both pro-

grammes won a signifi cant position on the market and allocation

of funds within these programmes exceeded CZK 12 billion.

Following the accession of the Czech Republic to the

European Union, Česká spořitelna began to offer programmes

designed to support clients in the realisation of projects

funded from the structural funds of the EU – the EU business programme for entrepreneurs and companies and the EU

Region programme for towns, municipalities and non-profi t

organisations. Both programmes involve comprehensive

services related to support in obtaining grants from structural

funds including the identifi cation of a suitable grant pro-gramme, drafting applications for grants from a subsid-

iary, RAVEN EU Advisory, and of course the fi nancing of projects which require the grants. The programme was

impacted by the unavailability of most funds in 2007. As

the programmes were re-set for a new time period, the Bank

thus concentrated on setting up client support processes and

information seminars.

Česká spořitelna continues its successful cooperation with the European Investment Bank (EIB). The cooperation

focuses on supporting small and medium-sized fi rms and

funding the needs of public and non-profi t sectors. Involve-

ment in the EIB projects was initiated in 2004 by obtaining

a global loan and joining the follow-up programme of the

European Commission known as the Municipal Infrastruc-

ture Facility. In 2007, Česká spořitelna was advanced EUR

150 million of the global loan. From the beginning of the

programme to the end of 2007, EIB confi rmed the funding

of 211 projects for small and medium-sized enterprises and

municipalities for which EUR 145 million was used from

the global loan.

A TOP Energy programme was developed based on the experience with the FINESA programme that has

fi nanced a number of projects in energy savings and

renewable energy sources since 2003. This programme

offers fi nancing for the projects mentioned above as well as

comprehensive consulting support in project preparation,

drafting a request for a subsidy etc. Česká spořitelna forms

its energy project know-how using the knowledge manage-

ment principles; its data on projects are focussed on a single

place available to all affected employees.

35


Česká spořitelna was the fi rst bank in the Czech market to intro-

duce a new unique product, @FAKTURA 24, which allows

electronic invoices to be sent between individual fi rms. Elec-tronic invoicing provides the advantage of sending electronic invoices safely while saving considerable time and costs. The service enables electronic invoices to be sent and received,

accounting systems to be integrated and simplifi ed payments

through direct banking. The model offered by Česká spořitelna

uses a consolidation principle, which means that an issuer sends

an invoice in his own data format to Česká spořitelna which

converts it into a required format and sends it to a recipient

together with the invoice‘s graphic format. The recipient as the

end user may be a fi rm as well as a private person.

The German Desk serves as Česká spořitelna’s contact

and information centre for companies from Germany or

German-speaking representatives of companies from other

countries, and provides potential clients with German-

speaking relationship managers in each of the 15 com-

mercial centres and other bank units. Česká spořitelna is

a member of the Czech-German Chamber of Commerce

and Industry. Activities supporting foreign investors in the

Czech Republic were expanded to support Czech fi rms

expanding abroad. The International Desk now provides

support to Česká spořitelna’s clients in countries where the

parent Erste Bank owns subsidiaries.

In 2007, a segment analysis of clients, profi tability and Česká

spořitelna‘s penetration in individual client segments contin-

ued. The segment management was subsequently followed by

other activities, such as central management of client acquisi-

tions, targeted segment campaigns or the application of a client

data analysis on improving service quality.

Corporate ClientsThe Bank continued a strong growing trend in the segment of large businesses and corporate clients with

annual sales over CZK 1.5 billion while maintaining

a balanced proportion of income, return of assets and return

on equity. The volume of new loans advanced in 2007

signifi cantly increased by 66 percent to CZK 26.7 billion. As

of 31 December 2007, the total portfolio of loans provided

to corporate clients increased by 24 percent year-on-year to CZK 61.1 billion.

Bank guarantees saw a record achievement with the year-on-

year volume increase of over 120 percent to CZK 38.9 billion.

Collected commissions amounted to CZK 134 million.

The syndicated loan market experienced a moderate increase

in the volume of fi nancing in 2007. The Bank continued to

hold a leading position in club and syndicated transactions where club transactions achieved the largest volumes. At

the end of 2007, Česká spořitelna reported CZK 16.5 billion

arising from agent or arranger activities or participation in

syndicated loans, which is a 14 percent increase year-on-year.

Quality client service and the intensive use of a wide range

of products and services of the ČS Financial Group promoted

a 22 percent increase in income from fees and commissions

from the corporate client segment.

Services for Public and Non-Profi t Centres In 2007, Česká spořitelna continued to improve its compre-

hensive fi nancial services for its traditional partners from

municipalities, towns and regions, thus successfully develop-

ing the achievements of previous years. Nearly 75 percent of municipalities, towns and regions in the Czech Republic are Česká spořitelna clients. The Bank pays signifi cant

53.7

33.9

40.1

49.3

2003 2004 2005 2006 2007

Large enterprise loan portfolio Medium-sized enterprise loan portfolio

Small enterprise loan portfolio

Corporate loan portfolio in CZK billion

43.5

27.1

21.4

42.740

20

0

10

30

5047.6

61.1

10.7

13.6

8.46.3

16.7

60

36

attention to its business relationships with the City of Prague,

chartered cities, and regions. At the end of 2007, the volume

of deposits from municipalities and the public sector grew by

13 percent to CZK 51.2 billion, of which CZK 12.2 billion

represents term deposits. In public sector fi nancing, com-

pared to 2006 the volume of loans net of receivables from

the Czech Consolidation Agency increased by 10 percent to CZK 17.4 billion, of which mortgage loans represent

CZK 2.4 billion.

In 2007, Česká spořitelna developed its partnership with clients from the non-profi t sector, particularly in fi nanc-

ing modernisation and renovations of apartment buildings

performed by housing cooperatives and housing associa-

tions of apartment unit owners. The volume of loan balances

advanced to housing cooperatives and housing associations

of apartment unit owners more than doubled in 2007 and

amounted to CZK 8.0 billion while the volume of deposits

of these clients grew by 40 percent to CZK 5.4 billion

year-on-year. The Bank continues to be a partner for other

non-profi t organisations such as citizens’ associations,

foundations, foundation funds, subsidised organisations,

professional chambers, public universities, health insurance

companies, etc.

Česká spořitelna has a team of specialised regional advisors for

the public and non-profi t sectors covering the entire territory

of the Czech Republic. These specialists provide their clients with qualifi ed fi nancial consulting and services, including

assistance in preparing documentation for drawing subsidies,

primarily from EU funds. To support consulting and service

offerings in 2007, the renowned RAVEN EU Advisory merged

with the Česká spořitelna Financial Group. RAVEN EU Advi-

sory provides comprehensive consulting and services relating

to fi nancing projects supported by EU funds throughout the

entire life cycle of project implementation.

Investment projects in the public sector may be implemented

through the involvement of private sector funds and capabili-

ties. This approach, known as a Public Private Partnership, has also started to be applied in the Czech Republic. Česká

spořitelna is the founder of the PPP Association and promotes

introducing PPP in the Czech Republic. Česká spořitelna is the

only bank on the Czech market with teams specialised in PPP

project preparation, consulting and funding. In 2007, Česká

spořitelna, as a member of a consortium with Mott MacDonald

and CMS Cameron McKenna, was an advisor to the Ministry

of Justice of the Czech Republic in preparing a project

concerning the construction of court houses.

BUSINESS 24 and MultiCash Electronic Banking BUSINESS 24 is one of two strategic platforms assigned to corporate clients in respect of Česká spořitelna’s direct banking service. In 2007, BUSINESS 24 was expanded by

a number of new functionalities in lending, such as outlines

on client loan burdens, a list on loan products and changes

resulting in the complete automation of loan requests in

2008. The changes in BUSINESS 24 were also transactional,

such as the introduction of express foreign payments, online

administration of deposit accounts and PDF format support

for statements. For clients involved in fi nancial market trad-

ing, BUSINESS 24 provides new types of transactions known

as block operations. Česká spořitelna was one of the fi rst

banks to introduce SEPA and PRIERO foreign payments in internet banking, thus providing standard compatibility

with most banks in the European economic environment. At

the end of 2007, the number of active users of BUSINESS

24 exceeded 29,000 and the number of selected transactions

increased nearly eight fold to 7.1 million.

The year 2007 saw a considerable development of the

MultiCash service. Česká spořitelna‘s clients were the fi rst

clients on the Czech market to use a new version of the

application which provides information on current (on-line)

account balances, information on the status of a transaction

processed by the Bank, notices to foreign payments,

overviews of non-completed collection requests and full

compatibility with SEPA and PRIEURO payments. The

new application version supports USB fl ash discs for saving

electronic signatures. In parallel, clients can use new signing

categories for payment fi le authorisation.

As of 31 December 2007, the Bank registered 2,730 MultiCash

clients, which represents a 30 percent growth compared to

2006. In December 2007, MultiCash users completed over

1,000,000 local transactions, which is twice as many as in

December 2006. The majority of foreign payment transactions

are performed through MultiCash.

37


The volume of transactions made on the Prague Stock Exchange in 2007 in CZK billion

197.9 (47%)Equity and participation certifi cates

220.2 (53%)Bonds

FINANCIAL MARKETS

Česká spořitelna reconfi rmed its position as a major investment bank in the Czech Republic as well as in Central

and Eastern Europe and as a key player in the capital markets.

In investment banking, Česká spořitelna provides special and

well-performing consulting services in acquisitions, advises

issuers preparing for equity and bond issues and participates in

issuing shares and bonds.

In addition, the Bank offers and provides tailored services

and consulting to small and institutional investors interested

in investing in securities, open-ended mutual funds, or other

instruments of the capital market in Czech crowns or foreign

currencies. The clients may also use information from Česká

spořitelna’s EU Offi ce as well as reports and analyses of the

Chief Economist Department of Česká spořitelna.

The Sale of Investments Products In 2007, the successful trend in terms of fi nancial market

product sales continued. In addition to the traditional currency

and interest rate hedging, the Bank provides commodity hedg-

ing products. The Bank’s forecasts of a long-term strengthen-

ing of the Czech crown were confi rmed, which placed great

demands on the hedging policy of a number of corporate

entities. Česká spořitelna’s long-term strategy, which is

focused on providing a wide range of tailored products for an acceptable price, proves to be correct, generates increased

transaction volumes and results in client satisfaction with

provided services.

Despite the considerable decrease and high volatility of

international fi nancial markets in the latter half of 2007, Česká spořitelna strengthened its exceptional position as one of the leading players in regional capital markets. Thanks to its strong

position in all of the key market areas, i. e. transaction structuring

and timing, distribution to institutional and retail customers, and

services relating to the period immediately following the introduc-

tion of a product on the market, Česká spořitelna successfully

continued in its 2006 development and once again became

a partner of all signifi cant fi rms entering the Czech capital market

in 2007. At the same time, the Bank was one of the fi rst institu-

tions to begin trading as a market maker on the Prague Energy

Exchange attached to the Prague Stock Exchange.

Česká spořitelna traditionally belongs to the three major bond, equity and participation certifi cate traders on the Prague Stock Exchange. In 2007, the Bank completed

transactions amounting to CZK 418.1 billion. Compared to

2006, the portion of bond transactions slightly increased.

Erste Private BankingIn the latter half of 2007, Česká spořitelna introduced a new concept of private banking services under the Erste Private Banking brand which was based on the standards of Austrian

private banking of the Erste Bank Group and was targeted at

clients with fi nancial assets equal to or over CZK 5 million. For

clients that continue to be served by private advisors in branches

the offer is based on individual care and proactive management

of assets tailored to client needs. The development of Česká

spořitelna‘s Private Banking initiated the gradual expansion of the private banker team and the opening of new regional private banking offi ces in branches in Brno and Ostrava.

The core private banking products in the fi rst half of 2007 were

managed portfolio and investment products of retail business

networks, namely open-ended mutual funds, guarantee funds,

investments in foreign mutual funds, currency and equity pre-

mium deposits or issues of structured premium deposits linked

to a diverse spectrum of underlying assets. In the latter half of 2007, Česká spořitelna introduced new special private bank-ing funds, the AR25, AR50 and AR75 absolute income funds, which became a noticeable product for clients with assets from

CZK 5 to 20 million as evidenced by their signifi cant sales. For

nearly six months, AR funds generated over CZK 1.2 billion.

The achievements at the end of 2007 comprised a special bond

38

programme under which new mortgage bonds in the volume of

CZK 1.5 billion were issued (6M fl oater).

The number of Erste Private Banking clients grew by 64 percent in 2007 and the volume of assets under manage-

ment increased by 102 percent to a total of CZK 7.3 billion.

In 2007, Česká spořitelna started a Wealth Creation / Wealth Management project aimed at providing clients in segments

outside private banking with professional assistance in gener-ating and managing monetary reserves. A pilot project which

tested fi nancial planning services in Česká spořitelna‘s branches

was launched for the ‘Upper Mass Affl uent‘ client segment.

Financial InstitutionsIn 2007, Česká spořitelna continued to strengthen its position of

a bank providing value added services to fi nancial institutions.

Česká spořitelna considers cash management to be the ‘anchor‘

for other more specialised products required by banks, insurance

companies, investment companies, pension funds and other

fi nancial institutions. The number of clients from interna-tional banks using cash management services grew by nearly 20 percent. In terms of the number of non-bank fi nancial institu-

tions, substantial growth was achieved compared to the previous

year, partially resulting from the increase in the volume of funds

managed by, and deposited with Česká spořitelna.

In 2007, Česká spořitelna continued to improve the conditions

of foreign banks with regard to standard currencies. The scope

of less common currencies was increased and custody services

were strengthened in order to provide a wider range of invest-

ment opportunities to Česká spořitelna clients.

In 2007, the Prague Energy Exchange was established and Česká

spořitelna became the Exchange’s clearing bank for its clients.

Asset Management for Institutional ClientsČeská spořitelna offers a comprehensive range of asset

management products for both individual and institutional

investors. Asset management activities include assets of institutional clients, specifi cally pension funds and insur-ance companies, and assets of non-profi t organisations and municipalities. The Bank offers its clients asset management

services as an integral component of its products.

In 2007, Česká spořitelna continued to operate as a mutual

fund investment advisor for certain mutual funds managed by

its fellow subsidiary Erste Sparinvest in Austria. The mutual

funds are designed for investments in Czech crowns and

therefore meet the requirements of domestic Czech investors.

DepositaryIn 2007, Česká spořitelna held a very strong position in the

provision of depository services for investment companies and

their mutual funds, investment and pension funds. At the end of

2007, the Bank provided these services to 32 mutual and pension

funds, which largely comprised the open-ended mutual funds of

Investiční společnost České spořitelny. The assets managed by

2003 2004 2005 2006 2007

Development of the volume of client assets mana-ged by Erste Private Banking CZ in CZK billion

8

4

0

2

6

1.6

0

2.33.6

7.3

Initial Offerings of SecuritiesČeská spořitelna has again confi rmed its strong position

in the market of initial offerings of equities and bonds.

Included among the signifi cant successes in 2007 is the

position of an arranger of the ČEZ, a. s. bond issue. Česká

spořitelna was the lead manager of the ECM REAL ESTATE

INVESTMENTS A. G. bonds and Senior Co-Lead issue

of Telefónica Emisiones S. A. U. bonds in the total volume

of CZK 8 billion. The Bank established its new offering

programme of investment certifi cates and warranties. Due

to the fast-growing mortgage loan market in 2007, Česká

spořitelna issued and successfully placed CZK 32.7 billion in

mortgage bonds and became the largest issuer of mortgage bonds in the local crown market in 2007.

39


1.3 (2%)SERVIS 24 GSM banking

Number of electronic debit transactions in millions

22.1 (36%)Homebanking

2.9 (5%)SERVIS 24 Telebanking

27.2 (45%)SERVIS 24 Internetbanking

7.1 (11%)BUSINESS 24

0.7 (1%)Transaction ATMs

the Bank amounted to CZK 106.9 billion, which represents an increase of 10 percent compared to 2006.

DISTRIBUTION CHANNELS

Branch NetworkWith its 636 branches Česká spořitelna represents one of the

largest bank networks in the Czech Republic with good regional

coverage and availability to all clients. The branch network continues to be the basic executive component of the Bank’s multi-channel sales model. Long-term relationships with all cli-

ents are developed through advisors. The branch network provides

a broad and comprehensive offering of services and products

of the Česká spořitelna Financial Group to its private clientele

as well as SMEs and individual entrepreneurs. Its specialised

consulting service responds to the needs of municipalities and of-

fers solutions for both the corporate and private fi nancial needs of

independent professional clients. Bank halls in existing branches

have been gradually modernised, and new components have been

implemented which should increase client satisfaction.

Since 1 October 2007, Česká spořitelna‘s branch network has

operated a new, more effi cient management and organisation

model. Due to the ‘hub and spoke’ system, all 636 branches

forming the branch network (within 25 regional branches) were

grouped into 202 micro-regions based on their service areas.

The organisational change is designed to improve management

effi ciency and quality, and increase the use of micro-regions for

business purposes under the control of a micro-region manager

who is always responsible for several branches.

Also in 2007, the Bank continued its trend of adjusting

its working hours to refl ect client needs. In April, Česká spořitelna extended working hours in over 430 branches by more than 800 hours a week. The adjustments were made on

an individual basis with respect to the operating experience of

individual branches.

Direct BankingThe rapid development of direct banking continued in 2007.

Over 100,000 clients selected online communication with the

Bank (through SERVIS 24 or BUSINESS 24) as the key com-

munication channel while the total number of clients exceeded

1.1 million. Internet banking was the most requested service

and is now used by over 800 thousand clients. As such, internet

banking even managed to reach the level of the most frequently

used communication medium – the telephone.

In 2007, Česká spořitelna‘s clients ordered over 61.3 million

transactions. In addition to standard transactions, such as payment

orders, clients tend to use direct channels for new services more

frequently, for example for mobile phone credit recharging. Client

demands have increased as clients desire permanent control over

their accounts and use text messages to send/receive information.

In November 2007, the number of SMSs exceeded six million for

the fi rst time and reached nearly 70 million in 2007.

Transaction ATMs have also found their users as Česká

spořitelna expanded the menu of pre-defi ned payments, e.g. in

telecommunications (local mobile operators), charity contribu-

tions, credit card payments etc. The Bank also implemented

tools for direct addressing clients.

Client CentreČeská spořitelna’s Client Centre predominantly provides

telephone services in Czech and English to clients of the Group via a 24/7 system. In 2007, Česká spořitelna com-

pleted reconstruction of its new premises in Prostějov, where

55 new positions for telephone bankers were established.

The number of outgoing calls grew by 67 percent year-

on-year. In the latter half of 2007, the Bank signifi cantly

increased its success rate of phone reminders. Due to the

increasing popularity of internet banking, the total number

40

of incoming calls received by the Client Centre’s systems

decreased by 7 percent compared to 2006. In total, nearly

5 million calls were registered. The portion of calls answered

by telephone bankers is stable year-on-year (2.8 million);

however, the calls are becoming more comprehensive and,

thus, their length is growing moderately. The Client Centre

continues to maintain high availability of its services. In total, 77.1 percent of all calls were answered by telephone bankers within 20 seconds. The quality of provided services

also remained high, which is confi rmed by independent

agencies’ rating.

In addition to telephone services, the Client Centre administers

Česká spořitelna‘s email boxes Napište nám (Write to Us)

([email protected]) and other service sites. In 2007, 50,000 emails

were answered, of which over 99 percent were answered by

the next day.

External Sale and CooperationAn integral component of the Bank’s distribution model

involves making sales via external partners which fi nd the

Bank attractive due to its signifi cant position on the market and

high quality sale support. The relationship with the external partners is built upon long-term cooperation and preferred exclusivity in respect of the sale of the Česká spořitelna Financial Group’s banking products. Traditionally, external

sales have played the most signifi cant role in housing fi nancing

and the products of Stavební spořitelna ČS. The number of

the Bank’s exclusive partners exceeded one thousand during

2007 and the role enjoyed by state-wide partners increased,

for example, in respect of mortgage loans where more than

30 percent of the production was covered by external vendors.

In the latter half of 2007, the Bank expanded the portfolio of

the products sold via external partners to include investment

products while boosting the proportion of retail loans origi-

nated through external vendors.

Web PortalsThe increasing number of visitors to Česká spořitelna‘s web

portals shows that the importance of web service for the Bank's

clients and other visitors has grown. The visit rate of the www.csas.cz portal grew to 1.5 million individual users per month who visit ten web sites on average. Client feedback

shows that web portals are the key source of information on the

Bank‘s products and services for almost all user groups. The

number of visitors has been growing together with the number

of users who repeatedly visit the sites.

As in previous years, Česká spořitelna expanded the amount

of information provided on its web portals and added several

unique applications. For a long time, the Internet was

perceived as an information medium; however, today it is an

interactive and sales tool. A client interested in a consumer

or mortgage loan can fi nd detailed information on the web

site, calculate an ideal amount of payments and make an

online request for a loan. A growing number of visitors use

these opportunities to order a product and the Bank expects

further growth. Other interesting applications include: an

IBAN calculator; a Private Account Confi gurator; credit card

requests; identifi cation of ATMs by numbers; or display of

the nearest ATM. A part of the web portal covers services and

products for fi nancial institutions.

NON-COMMERCIAL ACTIVITIES

Human ResourcesEmployees are the most important element for the Bank‘s

appropriate direction and success in the highly competitive

environment of the labour market. Employees are in direct contact with clients and have a major impact on their satisfaction with the Bank’s products and services. There-

fore, Česká spořitelna fi nds it necessary to provide them with

equal opportunities, a friendly work environment, education

opportunities and motivation. Suitable forms, methods and

targets of educational activities support the improvement of

staff qualifi cations and professionalism.

Internal and external educational systems are the basic pillars of the education and development process. In 2007,

Česká spořitelna focused on areas relating to the First Choice

Bank strategic programme, education in process improve-

ment and service quality. In internal education, attention was

paid namely to staff training in new product lines and bank

application innovations as well as regulatory requirements of

staff education.

Educational activities were performed centrally in Česká

spořitelna‘s training centres and in individual units and

41


branches as well as through e-learning which provided for

company-wide remote training. Thousands of employees

were trained in various areas; the Bank registered 21,000 participants in internal educational activities and 8,000 participants in external activities.

Česká spořitelna implemented special programmes for

various target groups. The successful programme for the

graduates of the Prague School of Economics prepared them

for a professional career in commercial banking and credit

risk management. Attention was paid to young talented

professionals in the fourth year of the “Special Trainee”

programme. In developing management skills, the “Manage-

ment Development Programme” was completed after several

years and several leadership workshops were organised in

line with the First Choice Bank strategic programme.

In close cooperation with the newly-established structure of

the Erste Bank Group, the Talent Management programme

was organised in the entire Group. Selected talented

employees underwent a year-long development programme

to prepare them for career promotion across the Erste Bank

Group. The next stage is to launch the Leadership Develop-

ment Programme, which is targeted at talented employees in

managerial positions.

Thanks to these activities, Česká spořitelna was awarded the

Employer of the Prague Region in the 2007 Employer of the

Year contest organised by AXA. In addition, in the national round, Česká spořitelna placed second in the main cat-egory of the 2007 Employer of the Year.

The average number of Group employees increased by nearly 1 percent to 10,897 compared to 2006 as a result

of expanding the Česká spořitelna Financial Group. Nearly

24 percent of Bank employees have university education. The

portion of men exceeds one-fourth of all staff (26 percent),

and the average age of employees is stable at 39.3 years.

52 percent of staff have been employed in Česká spořitelna

for at least ten years, which is a moderate decline compared

to 2006. Since 1 August 2007, employees‘ working hours

have been extended to a standard 40 hour work week.

The aggregate average pay of parent bank staff members in-cluding bank performance bonuses amounted to CZK 43,862

in 2007, which represents an increase of 7 percent year-on-year.

Quality of ServicesIn 2007, Česká spořitelna implemented further stages of the

First Choice Bank initiative leading, in addition to a change of

corporate culture, to developing the Bank’s ability to provide

top European and global services using Six sigma and Kaizen

methodologies.

The Bank compared the results of client satisfaction assessment

in the Czech Republic to the European Performance Satisfaction

Index (EPSI). The output confi rmed that client satisfaction

improved for the third year in a row, which means that Česká

spořitelna has a unique position on the Czech banking market.

At the European level, Česká spořitelna placed seventh out of twenty-eight banks compared with the Finality model.

As in previous years, Česká spořitelna measured the quality of its services using the Customer Satisfaction Index. After two years, the Bank searched new client expectations

form banks on the Czech market. The interview methodology

changed so that results could be compared with market infor-

mation. In spite of the more demanding method of comparison,

the index grew signifi cantly compared to 2006.

2003 2004 2005 2006 2007

Number of ČSFG* employees Number of Česká spořitelna* employees

Number of employees

12,000

6,000

0

3,000

9,000

15,000

11,40610,689 10,097

10,809

11,80511,019

11,23412,823

* average recalculated headcount

10,09810,897

42

Through telephone research, Česká spořitelna‘s clients

expressed that they highly appreciated services provided at

branches. The Bank assumes that this is attributable to the

projects aimed at shortening waiting periods, speeding up

fi ling solutions and improving the interior of the branches, as

well as the more extensive knowledge of staff members who

are trained in professional services. Some branches were granted the Family Friendly Society award thanks to children’s rooms and easy-access entrances.

For the seventh year, Česká spořitelna‘s clients can use services of an ombudsman team accessible by various

communication channels, such as the blue line 844 117 118,

email address [email protected], personal consultations

and mail. The team members solve client problems in Czech, English and German every business day from 8.30 a.m. to 5 p.m. In 2007, they received and solved over

5,000 issues. Client issues range from claims to comments,

suggestions, complaints, praises and inquiries. Based on

these incentives, a number of measures and system changes

were implemented in 2007.

Česká spořitelna also measures the quality of internal serv-

ices provided between bank units. Internal client satisfaction

is considered a key precondition for providing quality serv-

ices to external clients and thus, the internal service quality is

measured on a regular basis using the Service Level Index. In

2007, the value of the new (after the change of methodology)

SLI Index grew by over one and a half percentage points

from 76.18 to 77.86. For further development and improve-

ment, a Key Client Index was introduced which refl ects the

satisfaction of selected key clients receiving internal services

from relevant units.

Economic and Strategic AnalysisThe responsibilities of the Economic and Strategic Analysis

team of Česká spořitelna were extended in three areas.

First, the strategic planning and banking sector analyses

are performed. Second, wider coverage was provided to

the equities analysis, which now comprises three sectors:

real estate, media, and gas and oil. In aggregate, the team

provides analysis relating to eighteen companies. The third

area addressed by the team covers macroeconomic analyses

used to estimate foreign exchange and interest rates. In equity

and macroeconomic sectors, the team also offers investment

strategies to its clients. Analyses are published on the Bank’s

website under the analytical reports section and online

data service (www.csas.cz/analyza). The regular set of analytical reports issued at daily to quarterly intervals in Czech and English now comprises 15 different products. Analysts and strategists are available to a selected number of

clients of the Česká spořitelna Financial Group for personal

and telephone consultations.

EU Offi ce of Česká spořitelnaIn 2007, the EU Offi ce of Česká spořitelna developed a wide

range of activities that have been performed since the estab-

lishment of the Offi ce such as monitoring, analysing, and

providing information about current events in the European

Union to the Bank’s internal and external clients as well as to

the general public through regular or single deliverables.

The EU Offi ce played a very important role in the selection

and acquisition of RAVEN Consulting, which became part of

the Česká spořitelna Financial Group in 2007 and changed its

name to RAVEN EU Advisory. The EU Offi ce presented its

activities in numerous seminars, conferences and discussion

forums locally and abroad. The EU Offi ce staff members

were appointed to the working groups preparing the Czech

Republic's presidency in the EU Council in the fi rst half

of 2009. Notable events include a speech of an EU Offi ce

representative in the conference organised within the Open

Days in Brussels in October 2007, a speech in the conference

2003 2004 2005 2006 2007

Client satisfaction (CSI in points, spring – autumn average)

80

40

0

20

60

78.2473.39

77.5074.86 76.55

43


of the UN Economic Commission for Europe in Geneva

in June and a lecture in a highly prestigious globalisation

conference organised by the French Prime Minister in Paris

in November.

In 2007, the EU Offi ce representatives continued working

within the EuroTeam platform, an independent expert group

operating under the European Commission. Consulting and

advisory for public and regional entities developed – the EU

Offi ce representatives worked in a consortium representing

the Zlín and Olomouc Regions in the EU institutions in

Brussels. Other consulting services were provided to the Ústí

nad Labem Region and governmental institutions such as the

Ministry of Environment, the State Environmental Fund and

many others.

Project Management Česká spořitelna’s projects are an important driver of changes

in many areas of the Bank’s life. In 2007, the projects were aimed at improving products and services for all client

segments, sharing synergies within the entire Erste Bank

Group and strengthening the Bank’s infrastructure and internal effi ciency. The projects played a signifi cant role in

complying with applicable legal requirements and interna-

tional regulations in fi nancial services.

The Wealth Creation project started a pilot operation of

a new client service in the area of fi nancial consulting in

selected branches. Clients are advised by an investment

advisor, who is a professional specialist in fi nancial consult-

ing and passive bank products and cooperates with a private

advisor and offers a tailored service to clients – a Personal Financial Plan. The Bank continued extensive develop-

ment of electronic banking through the CIC IV project that

resulted in substantial improvements of SERVIS 24 and BUSINESS 24, which comprise namely electronic loan

agreements for retail clients, electronic invoicing for retail

clients and databanking or administration of client accounts

directly from client accounting software. The Chip Card project introduced a new service – cash back, which allows

for cash withdrawals when paying by card in a shop. In the

project, production of all payment cards was outsourced to

AustriaCard. Other achievements of the project include the

transfer to issuing chip-based technology payment cards. The

Credit Card Development II project optimised the PowerCard

system, which can process up to 1 million credit cards and

supports new functionalities, e.g. simplifi cation of credit card

contracts, business partner logo on the card, insurance of the

inability to make repayments, prepaid cards, sending credit

cards by mail or credit cards for private entrepreneurs. The WebDON project was successful in preparing new function-

alities for selling local mutual funds, foreign ESPA crown funds and hedged products (premium deposits, guaranteed

funds and bonds) through SERVIS 24, branches and the

Bank‘s web site. The Real Estate Centres project successfully

completed preparation of nine branches of new Developer

Centres in November 2007, which support the fi nancing of

development projects in Prague and selected regions.

The Group Payment Initiative is one of the programmes

which generate synergistic effects for the Erste Bank Group,

which wants to achieve European-competitive strength in the

precisely defi ned areas of the payment system. The programme

includes the following projects: SWIFT centralisation for the

Erste Bank Group; Group Payment Function aimed at estab-

lishing a single entry point for a foreign payment system in the

Erste Bank Group; Products & Services for Corporates that

will create remote access to an account through the MultiCash

system from a single central point and will introduce a global

real euro cash pooling; and Single Euro Payment Area which

will provide the Bank’s clients with the opportunity to make

and accept payments in euros under the same conditions

regardless of whether the payment is made within a single

country or to another country of the European Economic Area.

Owing to the centralisation of s Autoleasing and s Autoúvěr,

the NGA CORE SAP completed the centralisation and

harmonisation of selected activities (accounting, controlling,

asset management, procurement, HR, marketing, corporate

communication, and internal audit) using SAP of all of the

Bank‘s subsidiaries, except for Pojišťovna ČS. The Collec-

tions project installed a new Tallyman system providing call

centre operators and regional work-out centre staff with a tool

for increasing the effectiveness and effi ciency of the work-

out process in respect of loan products. Towards the end of

August 2007, a move to a new IT building in Prague 4 was

completed as part of the Technical Centre project. Other cost

savings were facilitated by specifi c actions implemented by

44

the Effi ciency Programme project, e.g. sale of ineffi ciently

used buildings or changes in telecommunication services.

The Cognos Reporting Platform II project put into operation

a hardware infrastructure for the Cognos reporting tool and

provided access to reports on top of certain key application

levels in the Bank. The Data Quality 3 project continued to

implement changes aimed at increasing the quality of data

in the Bank‘s systems. A new Enterprise Service Bus project

was launched which is designed to adjust the Bank’s integra-

tion platform for data exchange between individual applica-

tions using the support of advanced IT standards.

In meeting legal requirements, the Basel II Regulatory

Conditions project provided for compliance with all of the

regulator's additional requirements relating to the Basel II

regulation. The Insolvency Act Application project integrated

activities relating to the Insolvency Act. A technical solution

was prepared in an extremely short period of time and the

Bank entered 2008 in full compliance with the new legal

requirement.

Information Technologies (IT)The principal objectives of all IT areas involve supporting

and playing an active role in the implementation of the

Bank’s key development activities with the objective of

putting in place a fl exible and stable IT environment which

facilitates the implementation of the Bank’s set business

strategy while optimising investment and operating expenses

and supporting legislation and internal changes.

In back-end applications, the key task was to develop

conditions for optimum functionality of the Private Account.

Work on speeding up the payment system continued, and the

online functionality of the key backend systems, Starbank

and Symbols, was developed. Other online interfaces

between giro accounts and other systems, e.g. DON, CPS or

Tallyman, were installed and cash back transaction support

was provided. Substantial attention was paid to continuously

increasing the robustness of the internet banking system so

that the system is stable and the enormous increase in users

and transactions is covered while expanding the offering

of a wide range of banking products. A new version of the

branch system was successfully launched in November 2007

as well as a new version of the XEF electronic forms.

A new Datawarehouse with the required functionality was

introduced in the production environment in November

2007 (fi nancial reconciliation, data for Collections, online

integration with SERVIS 24 and information on credit cards).

Simultaneously, development of a new product was started

that will contain a data mart for a signifi cant project of Česká

spořitelna, Wealth Creation, which will expand investment con-

sulting services. The process of IT and other cost optimisation

continued in the form of centralising selected activities within

the ČS Financial Group (a central SAP for Erste Corporate

Finance, Factoring ČS, s Autoleasing and s Autoúvěr).

In 2007, Česká spořitelna upgraded over 30 percent of IT,

thus developing new models or information technologies,

implemented a cluster technology (Oracle RAC), and

adjusted related operation models accordingly. Thanks to

these changes, the availability of operated systems is being

increased on an ongoing basis.

Security Policy Česká spořitelna attaches a great deal of importance to

its security policy. The Bank operates an independent and

stand-alone security department, which has been charged

with overseeing fi nancial security, investigating incidents of

operational risks, and maintaining IT and physical security.

The Bank’s operations are primarily focused on prevent-ing all harmful action or improper conduct that could jeopardise the security of clients, staff and assets of the companies within the Česká spořitelna Financial Group.

A security policy of Česká spořitelna monitors the mitigation

of operational risk. The potential criminal activity of clients

or employees of the Bank is a priority reference point in

evaluating and administering warnings in software applica-

tions, assessing methodological procedures, and evaluating

new development projects in the Bank. Major attention has

been paid to the issues of preventing the legalisation of pro-

ceeds from criminal activities, the fi nancing of terrorism and

compliance with regulations on the execution of international

sanctions (AML/CFT). The system set in this area conforms

to the applicable legislation, requirements of regulatory bod-

ies and international standards. In 2007, Česká spořitelna was

subject to a comprehensive AML/CFT audit by the Czech

National Bank, the results of which were very positive.

45


In IT security, the Bank primarily focused its attention

on security monitoring in 2007, including the alternative

internet-based channels (SERVIS 24 etc.). With regard

to phishing and other similar client attacks , the Bank

launched an information campaign aimed at increasing

clients’ awareness of possible threats relating to the internet

banking service and client opportunities to eliminate them.

In physical and technical security, Česká spořitelna has

implemented a Security Integration project. The aim is

to fully centralise physical security at the required level,

ensure that it is fi nancially balanced with the primary goal

being the protection of the life and health of the Bank’s

staff, clients, and assets.

Internal Audit Internal audit is an independent, objective, assurance and

consulting activity designed to add value and improve the

Bank’s processes. It helps the Bank accomplish its objectives

by bringing a systematic, disciplined approach to evaluate

and improve the effectiveness of risk management, control,

and governance processes. In all of the Bank’s functions,

Internal Audit monitors processes and activities, reviews

the implementation of actions highlighted by internal and

external audits and reviews. In 2007, Internal Audit provided

the Bank’s management, Audit Committee and Supervisory

Board with objective information and assurance on the level

of risks faced by the Bank.

46

Strategic Plans for the Year 2008

Strategic ObjectivesOur basic strategic objective is to become the First-Choice

Bank for all our client groups and branch partners, as well

as our employees. In order to achieve this objective, Česká

spořitelna commenced the First-Choice Bank Programme in

the middle of 2006, which aims to make Česká spořitelna the

most dynamic and respected bank in the Czech Republic.

In order to achieve this vision, Česká spořitelna will predomi-

nantly focus on the following key areas: client satisfaction,

employee development and improvement of processes; i. e.:

• Providing high quality products and services enabling all

our clients to achieve their specifi c wishes and needs;

• Supporting client confi dence and loyalty;

• Providing multiple products and services per household,

• Providing comprehensive services and distribution channels

to retail clients targeted closely to specifi c client segment

needs;

• Building a competitive advantage in housing, wealth

management, and sale of services;

• Offering a full range of services to large corporations,

small- and medium-sized enterprises (SMEs), public enti-

ties and non-profi t organisations;

• Increasing the effi ciency and accessibility of information

technology, building platforms to support both clients and

own employees;

• Expanding client awareness of all possibilities of the

services and products offered by Česká spořitelna that may

be found useful; and

• Being a responsible and valuable part of the group, in which

Česká spořitelna is included.

Macroeconomic ForecastThe measures taken by the Czech Republic in order to stabilise

public budgets will impact the economic results of Česká

spořitelna in 2008. The full impact of the reform on Česká

spořitelna cannot yet be determined with reasonable accuracy.

The majority of retail clients of Česká spořitelna will have to

face the negative impact of the reform, which may specifi cally

affect the implementation of the retail banking strategy. On

the other hand, these negative impacts are expected to be

compensated, for example, in connection with the decrease in

the corporate income taxes rate, anticipated continued increase

in interest rates, etc.

The Business Plans and Budget for 2008 are based upon the

following macroeconomic forecasts:

• Slight slowdown of the pace of economic growth in the

Czech Republic;

• Growing infl ation;

• Declining rate of unemployment,

• Growth of interest rates; and

• Further strengthening of the CZK/EUR exchange rate.

BUSINESS PRIORITIES

In 2008, Česká spořitelna’s business divisions will have the

following business priorities:

Retail BankingThe strategic vision of retail banking is included in the

BAROKO programme to be implemented within the next three

years. The programme is based upon the following four pillars:

product distribution, client satisfaction, product assessment,

and improvement of processes. The retail banking priority

will thus principally involve further growth of mortgage loans,

while the marketing support will also focus on the growth of

consumer loans provided to individuals. In the segment of

small- and medium-sized enterprises and freelance profes-

sions, special attention will be paid to attracting new clients.

In all client segments, alternative distribution channels will be

supported in order to facilitate the client access to the accounts

and services even outside the branches’ opening hours. In

the card business, support will be given to achieve further

growth in the number of credit cards and in the use of cards for

cash-free payments through further development of the Bonus

Programme.

Corporate BankingThe strategic goal of corporate banking involves becoming

the First-Choice Bank of all corporate clients based on the

comprehensive services offered to them, knowledge of their

individual needs and offers of solutions best suited for these

corporate clients. The main objective is to develop Česká

spořitelna’s image as a “prestigious corporate bank“. In the

corporate banking segment, Česká spořitelna will signifi -

cantly broaden the offer of cash management and complex

fi nancial solutions for clients on the Erste fi nancial group

market. In the Czech Republic, Česká spořitelna will focus

47

Report on Performance and Business ActivitiesStrategic Plans for the Year 2008Risk Management in 2007

on the Electronic Bill Payment and Presentment project,

whereby the Bank, as the fi rst bank on the market to offer

such services, facilitates a signifi cant reduction of the costs

of billing. Česká spořitelna will be involved in the areas of

advisory, mergers and acquisitions and long-term hedging

of foreign exchange and interest rate risks. In the segment of

small and medium-sized enterprises, the Bank will further

develop a strategy of providing its clients with comprehensive

services. In addition to regular banking products, the Bank

will offer its clients other fi nancial and non-fi nancial services,

such as advisory support of clients in the area of utilising

the EU funds or fi nancing of projects focused on energy

savings and production of energy from renewable resources.

Signifi cant emphasis is placed on the quality of services and

improvement of the customer service process. In respect of

real estate activities, the Bank will continue its strategy as

a provider of comprehensive services for developers and

investors and it will support regional real estate transactions.

Our strategy will also consist of developing real estate funds

for the general public as well as institutional and qualifi ed

investors. In providing services to the public and non-profi t

sectors, Česká spořitelna’s goal is to maintain its leading

position on the market and enhance its participation in the

fi nancing of projects and provision of advisory services for

the use of the EU funds. The Bank will also focus on the

health care sector and broadening of project fi nancing.

Financial MarketsThe goal of fi nancial markets trading is to maintain a leading

position among domestic market makers. The Bank will

continue to focus on the development of services for fi nancial

institutions and enhance its position as a signifi cant regional

fi nancing partner through the placement of bonds and equities.

Signifi cant loan potential in the area of retail and corporate

banking will be used in order to realise cross-selling of

fi nancial markets products with an emphasis on complex

solutions and automation of selected products. The potential

areas for growth include medium-term structured products

(premium debt-securities and deposits) and investment consult-

ing. Transactions with foreign currencies of Eastern European

countries are expected to grow as well as the services for

securities portfolio administrators. Česká spořitelna will

continue organising primary placements and developing new

investment products for existing clients.

ANTICIPATED ECONOMIC AND FINANCIAL POSITION (Consolidated fi gures under IFRS)

In 2008 Česká spořitelna will predominantly focus on continu-

ing to improve the quality of services and products in line with

implementing the First-Choice Bank Programme. Attention

will also be given to further increasing the volume and number

of loans in all client segments, and to boosting effi ciency by

thoroughly managing operating costs and making highly selec-

tive investments. Česká spořitelna will continue implementing

projects that are designed to centralise certain services at the

level of the entire Erste Bank Group (IT services, centralised

purchases, etc.).

Česká spořitelna’s fi nancial targets for 2008 are very ambi-

tious. In the year ending 31 December 2008, the Bank projects a year-on-year increase in net profi t of 15 to 20 percent, Return on Equity (ROE) exceeding 20 percent, and the Cost/Income Ratio is anticipated below 50 percent. The planned increase in net interest income is based on the

assumption of a continuing moderate increase in interest rates

throughout 2008. Fee and commission income should grow

primarily due to the increasing number and volume of transac-

tions both on the assets and liabilities side of the balance sheet.

Staff costs are expected to grow at a rate corresponding to the

anticipated infl ation rate and purchased performances will

principally be impacted year-round by the implementation of

certain group projects (IT and procurement centralisation).

The expected decrease in depreciation/amortisation charges for tangible and intangible assets in 2008 is also linked to

the implementation of Group-wide projects whereby selected

activities will be outsourced outside of the Česká spořitelna

Financial Group.

Česká spořitelna expects its consolidated total assets to grow

year-on-year by approximately 6 percent in 2008. With respect to assets, the Bank plans a 20 percent increase in client loans

in 2008. With respect to liabilities, the Bank expects a 5 to 10 percent increase in client deposits in 2008, which will

result in a further increase in the client loan/deposit ratio.

48

Risk Management in 2007

One of the key elements of the Bank’s internal management and

control system is its risk management processes. As a result of

its business and other activities, the Bank is inevitably exposed

to a variety of risks, such as credit, market, liquidity, and opera-

tional risks. Česká spořitelna’s attention to risk management is

commensurate with its size, complexity and the number of prod-

ucts and business activities and other operations. As approved by

the Board of Directors, the Bank has a risk management strategy

in place which consists of risk management principles including

risk identifi cation, monitoring and measuring processes as well

as sets of limits and restrictions. By adopting these principles

the Bank has maintained its risk exposure at an acceptable level,

thereby keeping its management processes effective.

The following departments at Česká spořitelna are involved in

managing risk:

• The Central Risk Management department, which is

primarily responsible for market and operational risks and

for managing risks taken by the whole Česká spořitelna

Financial Group on a consolidated basis

• The Credit Risk Management department, which assumes

responsibility for credit risk within the Group

• The Balance Sheet Management department, which man-

ages interest rate risk inherent in the banking book (invest-

ment portfolio) and liquidity risk based upon the decisions

of the Assets and Liabilities Management Committee.

The activities of the Risk Management departments are

additionally complemented by the activities of:

• The Security department, which is responsible for risk

management in respect of physical security, IT security, anti-

money laundering and early warning system management

• The Legal Services and Compliance department, which is

responsible for compliance risk management.

In addition to the Board of Directors, approval authority relat-

ing to risk management rests with the following committees:

• The Assets and Liabilities Management Committee

• The Česká spořitelna Board of Directors’ Credit Committee

• The Financial Markets and Risk Management Committee

• The Compliance, Operational Risk and Security Committee

(CORB) – a body of the Bank’s Board of Directors that

makes decisions regarding the management of operational

risk, compliance risk and security.

CREDIT RISK

The Bank is exposed to credit risk, which is the risk that

a counterparty will be unable to pay amounts in full when due.

In managing credit risk, the Bank applies a unifi ed methodology,

which is adopted on a Group-wide basis and sets out applicable

procedures, roles and authorities. The lending policy includes:

• Prudent credit process guidelines, including procedures for

the prevention of money laundering and fraudulent activities

• General guidelines regulating the acceptability of client

segments on the basis of their principal activities, geo-

graphical areas, maximum maturity period, product and

purpose of the loan

• Basic framework of the rating system and of setting up and

revising borrower ratings

• Basic principles underlying the system of limits and the

structure of approval authorities

• Rules of loan collateral management

• Structure of basic product categories

• Methodology for provisioning calculations.

Collection of Key Risk Management Information In managing credit risk, the Bank not only refers to its own portfo-

lio information but also the portfolio information of other members

of the Česká spořitelna Financial Group. In addition, the Bank uses

information obtained from external sources such as the Credit Bu-

reau or ratings provided by reputable rating agencies. As part of the

preparation for Basel II, the collected data were expanded and their

quality markedly improved in the past. These data provide a basis

for modelling credit risk and as support during debt recovery, the

valuation of receivables and calculation of losses.

Internal Rating ToolsRating is perceived as a key risk management tool. The Bank uses

a client’s rating to measure counterparty risk profi le. The client

rating refl ects the likelihood of debtor default in the subsequent

12 month period. The evaluation of the debtor and the determina-

tion of the internal rating is part of either the approval process of

each loan or signifi cant changes in lending terms. The evaluation

of the client refl ects their fi nancial situation and non-fi nancial

characteristics. For corporate debtors, the evaluation predomi-

nantly involves an analysis of strengths and weaknesses, e. g.

management quality, competitiveness, etc. For retail debtors, the

evaluation predominantly involves demographic and behavioural

49

Strategic Plans for the Year 2008Risk Management in 2007Other Information for Shareholders

indicators. As part of risk management, the Bank categorises its

client as “clients in default” and “clients without default”. For the

clients, private individuals, the Bank uses an 8-grade rating scale

and 13-grade rating scale for other clients. For all clients in default

the Bank uses one rating grade – “R”.

All information essential for assessing clients is collected and

stored centrally. The Bank performs regular revisions (at least

annually) of internal ratings. The internal rating methodology

is validated based on historical data using statistical models.

In accordance with the requirements of the regulator, the

Bank ensures supervision over the internal rating validation

methodology process by an independent entity of the Bank in

the form of internal audit. Key milestones in 2007 included the

improvement of the scoring function for the data evaluation

from the loan register for private individuals.

Exposure Limits Exposure limits are defi ned as the maximum exposure that the

Bank may accept in respect of a client with a given rating and

underlying collateral. In setting the system of limits, the Bank

strives to protect its revenues and capital from concentration

risk. Concentration risk is measured as the capital required for

a given portfolio.

Structure of Approval Authorities The structure of approval authorities is derived from the

principle of the materiality of the impact of a potential loss from

a provided loan on the Bank’s fi nancial performance and the

risk profi le of the relevant loan transaction. The highest approval

authorities rest with the Credit Committee of the Supervisory

Board and the Credit Committee of the Board of Directors.

Lower approval authorities are categorised while taking into ac-

count the seniority of Credit Risk Management department staff.

The Bank uses its own internal models in determining risk

parameters such as the probability of default (PD), loss given

default (LGD) and credit conversion factors (CCF). In 2007,

the Bank applied these models to its subsidiaries. All of the

models are developed according to Basel II requirements.

Monitoring and predicting historical risk parameters serves as

a basis for the quantitative management of the portfolio. The

Bank currently uses risk parameters in monitoring portfolio

risks, in-default loans portfolio management, portfolio protec-

tion measurement and risk valuation. The active use of the risk

parameters in managing the Bank makes it possible to obtain

detailed information about the possible sensitivity of basic

portfolio segments to both internal and external changes.

Provisions for Loan LossesThe Bank has been using a provisioning policy that complies with

International Financial Reporting Standards. Portfolio provisions

are determined for portfolios of receivables where no individual

impairment has been identifi ed. The level of portfolio provi-

sions is established using models based on the Bank’s historical

experience. The risk parameters PD and LGD form a signifi cant

component of these models. Receivables where impairment

has been identifi ed are provided for individually. Impairment of

non-retail receivables and retail receivables with a value exceeding

CZK 5 million is measured using the discounted expected cash

fl ow method. The degree of impairment of other retail receivables

is determined statistically on the basis of experience with defaults

and the potential recovery of a similar type of receivables, and the

Bank again uses the derived risk parameters. Provisions against all

receivables are reassessed on a monthly basis.

Concentration Risk and Risk Weighted AssetsThe Bank manages loan portfolio concentration risk through

a system of large exposure limits. Large exposure limits are

established as the maximum exposure that the Bank may

accept in respect of a client with a given rating and underlying

collateral. In setting the system of limits, the Bank strives to

protect its revenues and capital from risk concentration. Risk

concentration is measured as the capital required for a given

portfolio. The credit VaR technique is based on a simulation

of a potential development of debtors using the Monte Carlo

method, which draws upon the Bank’s internal experience with

debtor failures and the related correlations.

With regard to the capital requirement calculation, the Bank

complied with the conditions for the use of the IRB approach

and since July 2007, the risk weighted assets and the capital

requirement have been based on the internal rating and the

Bank’s own estimates of the PD, LGD and CCF parameters.

The risk weighted assets are calculated on a monthly basis. The

standard calculation is regularly completed by stress testing,

which involves modelling the impacts of sudden changes in the

market environment.

50

MARKET RISKS

Market risks undertaken by the Bank principally relate to

transactions in fi nancial markets that are traded in both the

trading and banking books, and interest rate risk associated

with assets and liabilities in the banking book. Trading book

transactions in the capital, money and derivative markets can

be segmented as follows:

• Client quotations and client transactions, and the execution

of client orders

• Interbank market quotations

• Active trading in the interbank market

• Distribution of fi nancial market products to small clients.

Derivative transactions are also entered into to hedge against

interest rate risk inherent in the banking book and to refi nance

the gap between foreign currency assets and liabilities.

Market risk inherent in the trading and banking books is monitored

and measured by the Central Risk Management department, which

is independent and separate from the Financial Markets Division, in

order to avoid a confl ict of interest and to ensure that the reports on

the risks taken by the Bank are correct and free of bias.

The Central Risk Management department ensures an inde-

pendent valuation of all fi nancial market transactions for both

the Group and client portfolios administered by the Group is

conducted. Central Risk Management is also responsible for man-

aging operational risks involved in trading on fi nancial markets

and managing market risks. It pays signifi cant attention to control

activities and reconciliations to ensure that complete and accurate

instrument records held in the Bank’s portfolios are available.

All limits for market risks inherent in the trading book are

proposed by the Central Risk Management department and

business departments, and approved by the Financial Markets

and Risk Management Committee. The set of market limits

must comply with the maximum risk exposure (measured via

the VaR method) as approved by the Bank’s Board of Direc-

tors and must also be confi rmed by the parent company, Erste

Bank. The VaR method is used to quantify aggregate risk with

respect to the banking book as well as the Bank’s subsidiaries,

following specifi c procedures which model the behaviour of

assets and liabilities in those portfolios.

In order to measure the interest rate risk exposure in respect

of fi nancial market transactions, the Bank uses the ‘PVBP

gap’, which is defi ned as a matrix of interest rate sensitivity

factors by currency for the individual portfolios of interest

rate products. These factors measure the portfolio market

value sensitivity with a parallel shift of the yield curve of the

relevant currency within the predefi ned period to maturity.

The system of PVBP limits is set for each interest rate

product trading portfolio by currency. The limits are com-

pared to the value that represents the greater of the sum of the

positive PVBP values or the sum of the negative PVBP values

in absolute terms for each period to maturity. By adopting

this approach, the Bank manages not only the risk attached

to a parallel shift of the yield curve, but also any possible

‘fl ip’ of the yield curve. A limit for the simple sum of PVBP

values is set for major currencies such as CZK, EUR, USD.

In addition, the Bank monitors other special limits for interest

rate option contracts, such as the gamma and vega limits for

interest rates and their volatility.

The sensitivities of foreign currency derivative contracts to

foreign exchange rate movements are measured in the form

of delta equivalents and are refl ected in the Bank’s foreign

currency position. The Bank monitors special limits for foreign

currency option contracts, such as limits for the delta equivalent

sensitivity to the exchange rate change in the form of the gamma

equivalent, and limits for option contract value sensitivity to

exchange rate volatility in the form of the vega equivalent. In

addition, the Bank monitors the sensitivity of the value to the

period to maturity (theta) as well as interest rate sensitivity (rho)

which is measured, together with other interest rate instruments,

in the form of PVBP.

The equity risk of the trading book is monitored using the delta

sensitivities of portfolio market values to equity price move-

ments both by equity issue and in aggregate for each of the

markets and the entire portfolio.

The commodity risk of the trading book is monitored using

the delta sensitivities of portfolio market values to commodity

price movements for individual commodities.

The Central Risk Management department uses other sophisti-

cated procedures to assess the value and risks inherent in struc-

51


tured products, including credit investment instruments, whose

explicit valuation is not feasible. Monte Carlo is the method used

most frequently to simulate the probability distribution for the

price and future development of complex transactions, including

price sensitivities, to changes in market factors.

In order to measure the market risk inherent in the trading

and banking books on an aggregate basis, the Bank uses

the Value at Risk concept. Value at Risk is calculated with

a confi dence level of 99 percent over the holding period

of one trading day. The calculation is performed using the

KvaR+ system and historical simulations based on histori-

cal data over the most recent 500 trading days. VaR limits

are established for individual trading desks/portfolios. The

VaR method is complemented with ‘back testing’ which is

designed to review the model for correctness. Back testing

involves comparing daily estimates of VaR to the hypothetical

results of the portfolio on the assumption that the positions

within the portfolio remain unchanged for one trading date.

Back testing results have, to date, confi rmed the correctness

of the setting of the VaR calculation model.

Following an approval by the Czech National Bank (ČNB),

the Value at Risk concept is also used to calculate the capital

requirement in respect of foreign currency risk, general interest

rate risk, general and specifi c equity risk and risk associated with

trading book option contracts. Value at Risk calculations are also

applied when assessing the risks inherent in the asset portfolios

of the Bank’s subsidiaries (for Investiční společnost ČS, Penzijní

fond ČS and Pojišťovna ČS) and in assessing market risks in the

banking book of Stavební spořitelna ČS using special models for

the mapping of the Bank’s balance sheet.

The Bank’s trading book undergoes regular monthly stress

testing. The following scenarios are applied:

• Scenarios derived from 10–15 year historical data using

maximum positive and negative changes (one-day and

ten-day) for interest rates, equity prices, exchange rates and

volatilities separately

• Value at Risk with a confi dence level of 99.8 percent (the

worst historical scenario over a series of the most recent

500 scenarios)

• Stress scenarios on the basis of monthly forecasts by the

Economic Analysis department.

The results of the stress scenarios are compared to the capital

requirement from market risks. In addition to the sensitivity

limits and VaR, stop-loss limits are determined and monitored on

a daily basis for individual trading desks. The monthly stop-loss

limit is compared to the actual monthly results of the relevant

trading desk, the annual stop-loss limit is compared to the dif-

ference between the best result (realised or unrealised profi t) in

the year and the most recent result of the trading desk. The Risk

Management department also monitors the market conformity

of transactions concluded on fi nancial markets with the aim of

revealing market manipulations and avoiding operational risks.

The sensitivity limits, VaR and stop-loss limits, including the

method of the determination thereof, and measures that will be

applied when the limit is breached, are stipulated by the Bank's

internal directive – the Risk Management Manual which is part

of the risk management strategy.

The information on the Bank's exposure to market risks and

on the compliance with the established limits is reported to:

the responsible managers of the Bank on a daily basis; the

members of the Board of Directors via the Assets and Liabili-

ties Management Committee and the Committee for Financial

Markets and Risk Management on a monthly basis.

INTEREST RATE RISK

The Bank manages the interest rate risk inherent in the banking

book by using the following techniques: simulating the net

interest income; simulating the sensitivity of net interest

income to changes in market interest rates (parallel/non-paral-

lel discreet shift in market yield curves, stochastic simulation

of the yield curve); and simulating changes in the theoretical

market value of the banking book when a market yield curve

shifts by +100/+200/-200 basis points (including key rate

duration), and duration and gap analyses. The most recent

interest rate risk exposure undertaken by the Bank is assessed

on a monthly basis by the Assets and Liabilities Management

Committee within the context of the overall developments in

fi nancial markets, the Czech banking sector, and structural

changes in the Bank’s balance sheet.

The key parameter monitored in respect of the Bank’s interest rate

sensitivity involves the relative change in the Bank’s projected

52

net interest income should the market interest rates immediately

show a parallel decrease/increase of +100/-100 basis points over

the horizon of the subsequent 36 months on the assumption of

a stable balance sheet structure (i. e. the product structure of assets

and liabilities). At the end of 2007, the sensitivity of the Bank’s

net interest income of the banking book to a parallel increase in

market interest rates of 100 basis points was +2.4 percent. In other

words, if the market interest rate levels increased by 100 basis

points, Česká spořitelna’s net interest income over a period of

three years would increase by +2.4 percent. If market interest rate

levels decreased by 100 basis points, the sensitivity of net interest

income would be -2.4 percent.

LIQUIDITY RISK

Liquidity risk is the risk that the Bank will encounter diffi culties

in meeting its fi nancial commitments when they fall due, or in

raising funds to fi nance its assets. The Bank’s liquidity position

is monitored and managed based on expected cash infl ows and

outfl ows and by adjusting the structure of liabilities accordingly.

In terms of liquidity management, the key trend for the year

ended 31 December 2007 involved the continued growth of

the volume of medium-term and long-term assets, particularly

client loans (year-on-year increase of 27 percent – mainly

mortgage loans and retail loans grew) and bonds held in the

held-to-maturity portfolio (increase of 1 percent). On the

liabilities side, the volume of client deposits rose by 11 percent

year-on-year. Both trends resulted in the declining current

liquidity ratio throughout 2007. The internal limit set for the

current liquidity ratio was met during 2007. The current liquid-

ity ratio is defi ned as the proportion of highly liquid assets

and highly liquid liabilities. For illustration, the highly liquid

assets as of 31 December 2007 amounted to CZK 39.7 billion;

the denominator used in calculating current liquidity included

CZK 491 billion in liabilities.

Current Liquidity Ratio in 2006 and 2007

31 March 30 June 30 September 31 December

Actual status 2006 14.21% 15.93% 14.10% 12.17%

Actual status 2007 21.61% 15.25% 17.54% 8.09%

During 2007, the medium-term liquidity was strengthened by the

issues of mortgage bonds (year-on-year increase of 70 percent).

OPERATIONAL RISKS

In accordance with the Regulation of the Czech National

Bank which gives guidance on bank’s internal control and

management systems, the Bank defi nes operational risk as the

risk of loss arising from the inappropriateness or failure of

internal processes, human error, system failure, or the risk of

loss resulting from external events. The Bank’s management is

informed of developments in, and levels of, operational risks at

regular intervals.

Česká spořitelna uses a ‘Risk Book’, developed by the Risk

Management and Internal Audit functions, as a tool to unify risk

identifi cation for the purposes of the whole Česká spořitelna

Financial Group and to standardise risk categorisation, the aim

being to achieve consistency in risk monitoring and assessment.

The Bank manages operational risk in compliance with

the requirements of the new regulatory concept of capital

adequacy – Basel II. The Bank uses a special software

application that is used not only to collect data on operational

risk with a view to quantifying operational risks and calculat-

ing the capital requirement but also serves as a database of

valuable information for managing risk, preventing recur-

rences of operational risks, and streamlining the processes

for harmful event record-keeping including insurance

claims and payments. Information about operational risk

incidents in the Česká spořitelna Financial Group is assessed

at regular monthly intervals in terms of the frequency and

level of fi nancial losses for individual departments, products

and types of operational risks. With regard to any negative

trends, specialist groups are called to deal with the incidents

and outline adequate measures to mitigate the impacts of

53


the operational risks. The collection and assessment of data

regarding improper dealings on the part of the Bank’s clients

is of specifi c importance to prevent losses.

Česká spořitelna does not rely only on data obtained from real op-

erational risk events to assess and manage operational risks. Another

valuable source is the expert views of the management regarding

risks in their areas of concern. The internal risk assessments are

collected and expert risk scenarios are evaluated regularly.

A tool of importance in mitigating losses arising from

operational risks is the Bank’s insurance programme, which

was put in place in 2002. This programme involves insurance

of property damage as well as risks arising from banking

activities and liability risks. Since 1 March 2004, the Bank

has joined the Erste Bank Group joint insurance programme,

which has substantially expanded the Bank’s insurance cover-

age specifi cally with regard to damage that may materially

impact its profi t or loss.

With regard to the going concern, the Bank has introduced

methodology and procedures based on the internationally rec-

ognised standards and Best Practice. The Bank systematically

analyses key processes and threats with respect to the risk of

process failure, including the evaluation of the effi ciency of

the adopted measures and testing of the existing emergency

plans. In addition, the Bank participates in the activities of

the Interbank Emergency Committee, which involves the key

banks under the umbrella of the Czech National Bank.

Capital Adequacy The Bank’s capital adequacy exceeded 8 percent as required by

the Czech National Bank in 2007. In March 2007, the equity

was increased by including the retained earnings of 2006 to

the regulatory capital (CZK 4.4 billion) and thus the capital

adequacy was increased. In July 2007, the Bank started to

calculate the capital adequacy using Basel II. As of 31 Decem-

ber 2007, the unconsolidated capital adequacy using the CNB

methodology was 9.55 percent.

2007 2006 2005 2004 2003

Capital adequacy* 9.55% 9.26% 8.70% 8.97% 10.30%*Figures reported under the rules of the Czech National Bank.

DATA ON THE CAPITAL AND RATIO INDICATORS IN ACCORDANCE WITH REGULATION 123/2007 COLL.

Information on Capital

The share capital of the Bank is composed of 11,211,213 priority registered shares in the nominal value of CZK 100 and 140,788,787

ordinary bearer shares with the nominal value of CZK 100. The shares are in book entry form and are not traded on public markets.

To enhance its capital basis, the Bank issued two issues of subordinated bonds that are added to the additional capital Tier 2 in the

aggregate amount of CZK 5,605,166 thousand with the maturity on 16 May 2015 and 2 October 2016. Ceska Sporitelna determines

its capital on an individual and consolidated basis.

54

31 Dec 2007 (CZK thousand) Consolidated Individual

Capital 40,268,797 36,679,749

Aggregate amount of original capital (tier 1) 40,373,278 36,786,225

Paid up share capital recorded in the Register of Companies 15,200,000 15,200,000

Share premium 1,688 1,688

Obligatory reserve funds 2,814,080 2,639,462

Other fonds from profi t distribution 205,700 0

Retained earnings brought forward 26,023,541 23,329,823

Minority interests 924,818 0

Goodwill acquired –9,649, 0

Intangible assets other than goodwill –4,403,171 –4,314,443

Equity securities issued by the person with qualifi ed investment in the Bank –383,730 –70,305

Additional capital (tier 2) 5,605,166 5,605,166

Capital to cover market risk (tier 3) 0 0

Deductible items from the original and additional capital (Tier1+Tier2) –5,709,647 –5,711,642

Capital investments over 10 percent in banks and other fi nancial institutions –900,000 –938,008

Capital investment over 10 % in insurers –1,363,080 –1,363,080

Lack in coverage of the anticipated loan losses in IRB –3,446,567 –3,410,554

Data on capital requirements31 Dec 2007 (CZK thousand) Consolidated Individual

Total capital requirements 34,305,552 30,733,207

Total capital requirement to the credit risk 28,360,508 25,669,281

Total capital requirement to the credit risk in STA 6,309,182 3,292,006

Total capital requirement to the loan risk with STA in IRB to exposures 6,309,182 3,292,006

Total capital requirement to the credit risk with IRB 22,051,326 22,377,275

Total capital requirement to the credit risk with IRB to selected exposures 21,966,745 22,292,694

Capital requirement to the credit risk with IRB to securitised exposures 84,581 84,581

Capital requirement to the settlement risk 0 0

Total capital requirement to the position, currency and commodity risk 543,116 4,168,903

Total capital requirement to the operational risk 4,875,336 3,876,514

Capital requirement to the risk of the exposure of the trading portfolio 526,592 526,592

Capital requirement to other instruments of the trading portfolio 0 0

Ratios31 Dec 2007 Consolidated Individual

Capital adequacy (%) 9.39 9.55

Return on average assets (ROAA) (%) 1.5 1.6

Return of average equity tier 1 (ROAE) (%) 30.8 29.4

Assets per employee in CZK thousand 74,021 64,324

Administrative expenses per employee in CZK thousand 1,414 1,353

Profi t or loss after tax per employee in CZK thousand 1,114 1,028

55

Risk Management in 2007Other Information for ShareholdersCorporate Social Responsibility (CSR) in Česká spořitelna

Other Information for Shareholders

1.57%Municipalities and local governments of the Czech Republic

Structure of Shareholders of Česká spořitelna as of 31 December 2007 – Ownership percentage

0.45%Other legal persons and individuals

97.98%Erste Bank der österreichischen

Sparkassen AG, Graben 21, Vienna, Austria

Structure of Shareholders of Česká spořitelna as of 31 December 2007 – Share of voting power

99.52%Erste Bank der österreichischen

Sparkassen AG, Graben 21, Vienna, Austria

0.00%Municipalities and local governments of the Czech Republic

0.48%Other legal persons and individuals

Česká spořitelna, a. s. with its registered offi ce address at Olbrach-

tova 1929/62, Prague 4, 140 00, Corporate ID 45244782, is the

legal successor of the Czech State Savings Bank and was founded

as a joint stock company in the Czech Republic following its reg-

istration in the Register of Companies held at the Municipal Court

in Prague, Section B, Enclosure 1171 on 30 December 1991.

Shares of Česká spořitelna, a. s.• Class: Ordinary and priority shares

• Type: 140,788,787 ordinary bearer shares

11,211,213 priority registered shares

• Form: Book-entry

• Number of shares: 152,000,000

• Total issue volume: 15,200,000,000

• Nominal value per shares: CZK 100

• Marketability of shares: Shares are not traded on any

public markets.

The members of Česká spořitelna’s Board of Directors and

Supervisory Board held no shares in Česká spořitelna as of

31 December 2007.

Erste Bank der österreichischen Sparkassen AG is the control-

ling entity of Česká spořitelna, a. s. The measures to prevent

the controlling entity from misusing its control are governed

by the Commercial Code. The measures primarily include

the following: a restriction on misusing the majority of votes

in a company (Section 56(a)(1) of the Commercial Code);

a restriction on abusing a controlling entity’s infl uence through

enforcing an approval of actions or conclusion of contracts that

could cause damage to a controlled entity’s property unless the

damage is compensated at the latest by the end of the account-

ing period in which the damage was suffered, or a contract is

signed stipulating a reasonable period and a method relating

to the compensation to be paid by a controlling entity (Section

66(a)(8) of the Commercial Code); an obligation to prepare

a Report on Related Party Transactions in compliance with

Section 66(a)(9) and the following of the Commercial Code

(refer to page 265 of the Annual Report); the obligation of

a controlling entity to pay damages to a controlled entity in

compliance with Section 66(a)(14) of the Commercial Code;

and guarantees provided by members of statutory bodies of the

controlling and controlled entities in compliance with Section

66(a) (15) of the Commercial Code.

INFORMATION ON THE ACQUISITION OF TREASURY SHARES AND SHARES OF ERSTE BANK

During the year ended 31 December 2007, Česká spořitelna

did not hold or trade any treasury shares, and acted as the

market maker in respect of the shares of its controlling entity,

Erste Bank, on the Prague Stock Exchange. For this purpose,

Česká spořitelna acquired, under normal market conditions,

5,938 thousand shares with an aggregate purchase price value

of CZK 8,818 million and sold 5,935 thousand shares with

an aggregate selling price value of CZK 8,813 million. The

lowest and the highest purchase prices per share in 2007 were

CZK 1,152 and CZK 1,743, respectively. At the start of 2007,

Česká spořitelna held – 567 shares; at the end of 2007, it held

2,100 shares, which represents a 0.001 percent share of Erste

Bank’s issued share capital. The average nominal value of

one share of Erste Bank was EUR 2 at the end of 2007.

56

FEES PAID TO DELOITTE FOR THE YEAR ENDED 31 DECEMBER 2007

CZK mil. Audit services Tax services Other Total

Česká spořitelna 23 2 2 27

Consolidated group 24 0 3 27

Total 47 2 5 54

REMUNERATION PRINCIPLES OF EXECUTIVE MANAGERS AND MEMBERS OF THE SUPERVISORY BOARD

Executive Managers of the Issuer The executive managers of Česká spořitelna, a. s. include the

Chairman of the Board of Directors, acting simultaneously

as the CEO, and members of the Board of Directors, acting

simultaneously as Deputy CEOs.

Pursuant to the law, the Board of Directors is a statutory body

which manages the operations of the Company and acts on its

behalf. Members of the Board of Directors of Česká spořitelna

exercise their powers with due professional care, in good faith,

with due care and diligence and in the best interests of the

Company and its shareholders. They are experts in managing

large corporations and have international experience and the

ability to work as a team. Their position calls for ongoing

perfection of their industry knowledge and corporate governance

skills, a proactive approach to the discharging of their duties, the

ability to participate in developing corporate strategy and, last

but not least, loyalty to the Company. Members of the Board of

Directors observe high ethical standards and are responsible for

ensuring that the Company complies with applicable laws. They

are also personally liable for damage arising from the breach of

legal obligations, and are responsible in their capacity as Board

members to the Company as represented by shareholders.

Members of the Board of Directors are remunerated based

on the “Contract for the Performance of Duties of a Member

of the Board of Directors” concluded in accordance with the

applicable provisions of Commercial Code 513/1991 Coll.

This Contract was approved by a General Meeting of the

Company’s shareholders. The amount of Board members’

remuneration is subject to the approval of a General Meeting.

The remuneration of the CEO and Deputy CEOs is paid in the

form of a salary for performed work. In accordance with the

Company’s Articles of Association, the amount of salary is

approved by the Supervisory Board and is principally based

on qualifi ed benchmarking analyses of remuneration in the

fi nancial sector. In addition, the CEO and Deputy CEOs are

remunerated with regard to their performance evaluation

undertaken based on the fulfi lment of defi ned performance

criteria. These criteria refl ect the overall fi nancial objectives

of the Česká spořitelna and Erste Bank Financial Groups.

Performance criteria are set for each calendar year and are

approved and subsequently assessed by the Supervisory Board.

Based on their management and professional expertise,

experience and contribution to the Company, the Board

members received the following remuneration arising from

the position of the CEO and Deputy CEO: monetary income

in an aggregate amount of CZK 47 million; bonuses in an

aggregate amount of CZK 70.2 million; income in kind in

an aggregate amount of CZK 2.2 million; shares of Erste

Bank in the amount of EUR 1.2 million; and remunera-

tion including income in kind in an aggregate amount of

CZK 0.8 million. These amounts were paid out in con-

nection with meeting fi nancial, qualitative, development

and effectiveness criteria. In 2007, the Board members

subscribed for 50,432 shares of Erste Bank under the

ESOP programme, and received 36,000 options under the

MSOP programme.

Members of the Board of Directors or persons closely related

to them do not own shares or call options to purchase shares

in Česká spořitelna. Since August 2002, the shares of Česká

spořitelna have not been publicly tradable.

57

Risk Management in 2007Other Information for ShareholdersCorporate Social Responsibility (CSR) in Česká spořitelna

Supervisory Board The Supervisory Board is the Company’s control body, which

supervises the Board of Directors’ exercise of power and

the performance of business activities of the Company. The

Supervisory Board checks, in particular, whether the Board

of Directors performs its duties in compliance with legisla-

tion and Articles of Association of the Company and whether

the members of the Board of Directors act in the interests

of the Company with due professional care. Members of the

Supervisory Board perform their duties with due professional

care. Members on the Supervisory Board are required to have

professional skills, be loyal to the Company and maintain

the confi dentiality of confi dential information and matters.

Supervisory Board members are liable for damage arising

from the breach of legal obligations, and are responsible in

their capacity as members of the Company’s Supervisory

Board as represented by shareholders.

Members of the Supervisory Board are remunerated in ac-

cordance with the applicable provisions of Commercial Code

513/1991 Coll. The amount of remuneration of Supervisory

Board members is subject to the approval of a General Meeting

of the shareholders.

Members of the Supervisory Board or persons closely related

to them do not own shares or call options to purchase shares

in Česká spořitelna. Since August 2002, the shares of Česká

spořitelna have not been publicly tradable

.

Members of the Supervisory Board are entitled to remunera-

tion, including payments in kind, of CZK 3.5 million for

their work in the Supervisory Board of Česká spořitelna

during 2007.

AFFIDAVIT

The person’s signing below do hereby declare that, with all

reasonable care, the information stated in the Annual Report

of Česká spořitelna, a. s. for the year ended 31 December 2007

refl ects the true state of affairs and that no material circum-

stances that may impact the accurate and correct assessment of

Česká spořitelna, a. s. have been omitted.

Dušan Baran Jiří Škorvaga

Vice Chairman of the Board Member of the Board

and First Deputy CEO and Deputy CEO

58

CSR in Česká spořitelnaTraditionally Česká spořitelna has been among the most

important donators in its marketplace. Corporate Social Re-

sponsibility and appropriate and benefi cial behaviour towards

the bank’s key stakeholders -- including the society in which it

operates -- are also a part of the bank’s core strategies.

In 2002 Česká spořitelna launched its own foundation, Nadace

České spořitelny. The foundation is the backbone of the Bank’s

CSR activities, focusing on the areas of social development

that are otherwise and often neglected by other donators: be

it care for old people or care for drug addicts that are trying

to overcome their addiction. Besides these activities, the

foundation is also focused on the handicapped, environmental

activities and education. All in all, Česká spořitelna and its

foundation have donated fi nancial support for sport, cultural,

educational and social projects to a total of CZK 80 million

in 2007. Česká spořitelna was praised for its recent social

activities and donations by the Czech Donors Forum and was

awarded as one of the most philanthropic companies in the

Czech Republic.

Aside from the foundation, Česká spořitelna sees a fully

transparent and open approach towards all its key stake-

holders as another part of its corporate responsibility. For

instance, in early 2007 the Bank issued an amended and

easy-to-understand version of its Price List, updated its guide

to loan products for retail clients, and offered a ‘First Aid’

guide – a booklet which advises clients on how to behave in

certain uneasy fi nancial situations.

Involving People Česká spořitelna and its foundation believe that the most

fruitful and valuable projects are those that not only offer

fi nancial donations but also involve the active participation of

its people – employees and clients of the Bank – in socially

benefi cial activities.

That is why Česká spořitelna and the foundation are for a third

straight year continuing to develop a special programme for

clients. Generally, each Česká spořitelna payment card holder

receives special loyalty points for using their card which can

be used to purchase various gifts – from magazine subscrip-

tions to fl ight tickets. Česká spořitelna has recently however

broadened this service to allow clients to use their loyalty

points to make donations to various specifi c charity projects.

In 2007 six projects such as this were completed totalling

CZK 850,000.

New activities in 2007 2007 was also important from the CSR point of view because

Česká spořitelna launched Charity Day for its employees.

Beginning in 2007 each of Česká spořitelna Financial Group’s

10,800 employees can work two days per year for a charity.

Employees are able to work during two collective Charity Day

organised by the Bank or can choose to work independently. In

2007 it was estimated that nearly 600 employees participated

in a Charity Day.

In 2007 the Bank also launched preparatory work to establish

the Debt Advisory Centre. The Centre is expected to be put

into operation in early 2008 and will serve as an independent

consultancy offi ce for clients who either want to take out

a loan or who drew a loan and subsequently fell into fi nancial

hardship. The Centre is being established along with the Czech

Consumer Association and will serve both clients of Česká

spořitelna as well as clients of other banks and non-banking

fi nancial institutions. By establishing the Centre, Česká

spořitelna further demonstrates how much it cares about

responsible lending and responsible client treatment.

Corporate Social Responsibility (CSR) in Česká spořitelna

59

Corporate Social Responsibility (CSR) in Česká spořitelnaČeská spořitelna’s DeclarationOrganizational structureof ČS as of 31. 12. 2007

Česká spořitelna’s DeclarationRegarding the Compliance of its Governance with the Corporate Governance Code Based on OECD PrinciplesIn compliance with Česká spořitelna, a. s.’s (henceforth the

“Company”) statements in its previous annual reports, the

members of the Company’s Board of Directors continuously

make every effort to generally improve the Company’s

corporate governance standards and ensure, to the extent set

out hereunder, compliance with the Corporate Governance

Code based on OECD principles. The Company continues

to develop and enhance the Company’s governance prac-

tices at all times. No major changes adversely affecting the

Company’s corporate governance standards were effected

in 2007. The principles of the Company’s governance are

indicated below.

A. ORGANISATION OF THE COMPANY

As of 31 December 2007, the Company’s Board of Directors seated seven members. In accordance with the Banking Act, all

members of the Board of Directors are also executive mem-

bers. All members of the Board of Directors possess personal

and professional qualifi cations as required to be a member of

the Board of Directors.

In May 2007, Gernot Mittendorfer replaced the head of the

Bank, John James Stack, and became the new Chairman of

the Board of Directors and CEO of the Company. Mr Mitten-

dorfer has long-term experience in banking and management

in the Czech Republic and Austria. Dušan Baran, Vice-

chairman of the Board of Directors and First Deputy CEO,

has long-standing experience in the fi nancial sphere. The

Board of Directors is composed of the following members all

serving as Deputy CEOs: Daniel Heler, who has worked in

banking since 1983 and is, therefore, a distinguished expert

in fi nancial markets in particular; Heinz Knotzer, who has

wide ranging banking experience both in the Czech Republic

and Austria where his professional career started; Jiří Škorvaga has numerous years of experience in business man-

agement and retail banking; Petr Hlaváček is an experienced

banker whose professional career includes a Czech as well as

Canadian banking background; Pavel Kysilka is a recognised

economist with a deep insight into both the private and public

sectors. Detailed biographical data of the members of the

Board of Directors proving their capabilities, professional

skills and experience is published in the Annual Report on

page 9–11.

The Company’s Board of Directors is a statutory body of the

Company which manages and acts on the Company’s behalf

while being responsible for its long-term strategic direction

and operational management. Its range of powers and duties

is defi ned under the Company’s Statutes and internal rules as

well as the legal regulations of the Czech Republic. The Board

of Directors exercises its powers and duties with due care and

diligence; in discharging its activities, it is accountable to the

extent set out by the legal regulations of the Czech Republic.

All members of the Board of Directors are internationally

experienced professionals who are skilled in managing large

corporations and have the ability to work in a team. The

members of the Board of Directors comply with legal rules and

ethical standards.

Pursuant to the Company’s Statutes, the Board of Directors

must obtain a prior opinion or approval from the Supervisory

Board for a number of acts; in cases determined in a resolution

adopted by the Supervisory Board, the Board of Directors

must solicit the prior opinion of a committee established by the

Supervisory Board. The Board of Directors regularly presents

reports on the Company’s activities to the Supervisory Board

and its committees. In compliance with the Banking Act, the

Board of Directors is responsible for the establishment, main-

tenance and evaluation of an effi cient and effective internal

management and control system of the Company.

The Board of Directors meets on a regular basis no less than

twice a month in compliance with the Company’s Statutes.

However, regular weekly sessions have become common

practice. Last year, the Board of Directors held, altogether,

41 meetings.

The Supervisory Board of the Company comprises twelve

members. In 2007, there were signifi cant changes in the com-

position of the Supervisory Board. In February 2007, Christian

Coreth resigned form his position and Reinhard Ordner and

Manfred Sommer resigned at the General Meeting in April.

The General Meeting appointed new members Heinz Kessler, Johannes Kinský, Péter Kisbenedek and Andreas Klingen. All these new members, including Andreas Treichl, chairman

of the Supervisory Board and current members – Herbert Juranek, and Bernhard Spalt represent the principal share-

holder which is Erste Bank der österreichischen Sparkassen AG.

60

Maximillian Hardegg is an independent member. In compli-

ance with the legislation, the Supervisory Board includes

representatives of the Company’s employees; they are: Jitka Šrotýřová, Marek Pospěch and Monika Laušmanová. In November 2007, employees elected Jolana Dyková to the

Supervisory Board who replaced Monika Houštecká upon the

expiration of her term of offi ce. All members of the Supervi-

sory Board are professionals guaranteeing and ensuring the

high-quality functioning of the Supervisory Board; they have

the personal and professional qualifi cations required to hold

the position of a Supervisory Board member. A full list of all

members of the Supervisory Board, including their profes-

sional biographical data, is published in the Annual Report on

page 12–16.

The Supervisory Board overseas the execution of the Board

of Directors’ powers and duties as well as the performance of

the Company’s business activities. In addition to its duties and

powers ensuing from law, the Supervisory Board has, pursuant

to the Statutes, the right to give, in advance, its opinion on cer-

tain acts having an impact on the Company’s assets (including,

among other things, the making of construction investments

and plans (projects) in acquiring tangible and intangible fi xed

assets of the Company beyond the designated limit, the transfer

of an ownership title to the Company’s assets, the Company’s

equity investments, etc). The Supervisory Board also gives, in

advance, its opinion on the strategic concept of the Company’s

activities and development, planning tools and regular fi nancial

information. Furthermore, the Supervisory Board gives, in

advance, its opinion on the appointment and removal of the

Internal Audit Department Director and gives its opinion in

selecting an external auditor. To support its activities, the Su-

pervisory Board may establish Supervisory Board committees.

Last year, the Supervisory Board met four times altogether.

Pursuant to the Statutes, two thirds of the members of the

Supervisory Board are elected by the General Meeting, and

one third by the Company’s employees. The term of offi ce of

a member of the Supervisory Board is three years. Members of

the Board of Directors are elected and removed by the Supervi-

sory Board. In compliance with the Banking Act, nominees for

membership of the Board of Directors are consulted in advance

with the Czech National Bank, which assesses the professional

qualifi cations, credibility and experience of the nominees. The

term of offi ce of a member of the Board of Directors is four

years; members of the Board of Directors may be re-elected.

In July 2007, the following management bodies were also estab-

lished within the Erste Bank group: Group Supervisory Board,

Group Board of Directors and Group Executive Committee.

These bodies are active throughout the Erste Bank group while

not affecting the current authorities of the Board of Directors

and the Supervisory Board of Česká spořitelna.

As noted above, the position of Chairman of the Board of Di-rectors in the Company is combined with the position of CEO, and the position of member of the Board of Directors is combined

with the position of Deputy CEO. This combination is necessary

for a bank because it is directly stated in the Banking Act.

The Company is consistent in ensuring that the members of

the Board of Directors and the Supervisory Board are kept up to date at all times; the Company has a well-administered and

well-developed system supporting the performance of corporate

governance.

The Company’s supreme bodies, i. e. the Board of Directors

and the Supervisory Board, have adopted binding Rules of

Procedure for the bodies. These Rules of Procedure deal in

great detail with organisational and process issues related to

the activities of the relevant body. The Rules of Procedure of

both bodies regulate the technical processes of the convening

of meetings and the voting of the bodies, the preparation of

meeting minutes, the activities of the body outside of meetings,

and the procedures addressing the potential bias of a member of

the body. In addition to the members of the Supervisory Board,

the members of the Board of Directors take part in the Supervi-

sory Board’s meetings. All members of the Board of Directors

participate in the meetings of the Board of Directors and the

authors of presented materials introduced to the members of the

Board of Directors. The members of the Board of Directors and

the Supervisory Board may solicit a legal opinion on individual,

discussed materials from the Company’s Legal Services

Department, or use the services of independent advisors. The

Company’s Secretary Offi ce organises, on a regular basis,

legal seminars for the members of the Boards of Directors

and Supervisory Boards of the Company and other companies

within the Česká spořitelna Financial Group, where members of

61


these bodies are introduced to new legislation applicable to the

performance of the position of corporate body member.

The Company has had the position of Secretary in place for

a long time. The Secretary of the bodies of the Company man-

ages administrative and organisational matters for the Board of

Directors and the Supervisory Board, including the organisation

of General Meetings. The Secretary acquaints new members of

administrative bodies with the activities of these bodies and with

the Company’s process of corporate governance. The Compa-

ny’s Secretary ensures mutual co-operation among the Compa-

ny’s bodies. The Secretary is appointed by the Company’s Board

of Directors and reports directly to the CEO and Chairman of

the Board of Directors. The Secretary is responsible for due and

timely distribution of invitations and materials for the meetings

of the Company’s Board of Directors and the Supervisory

Board. Materials are delivered in person to the members of the

Company’s Board of Directors and the Supervisory Board at

least 5 days ahead of the meeting. The Company has binding

regulations in place for the presentation of materials to be dis-

cussed at the meetings of the Supervisory Board and the Board

of Directors, which stipulate basic rules for the preparation of

materials, the presentation thereof, comment procedures prior

to the presentation of materials, and conditions for the archiving

of materials. The Secretary takes the minutes of all meetings of

the Board of Directors and Supervisory Board both in English

and Czech. The Company maintains an electronic database of

all minutes from the meetings of its bodies; these are available

to authorised persons on the Intranet – the Company’s internal

Internet portal. The Company’s Secretary is, inter alia, a member

of the Czech Institute of Corporate Secretaries (ČITOS) and the

Steering Committee thereof. ČITOS’s mission is to promote and

support the professional development of due practices exercised

by the secretaries of administrative bodies.

B. COMPANY’S RELATIONSHIPS WITH SHAREHOLDERS

The Company diligently ensures compliance with all the legal

rights of shareholders and with the principle of equitable

treatment of all shareholders.

The Company’s shares are held in the book-entry form. A list

of all shareholders is maintained by the Securities Centre.

In addition to ordinary shares, the Company has also issued

registered priority shares. The transferability of these shares

is restricted to municipalities of the Czech Republic; transfers

to other entities are subject to the approval of the Company’s

Board of Directors. A preference right to receive dividends

is attached to priority shares. Decisions regarding share

transfers are given by the Board of Directors following detailed

information on the assignee.

The Company complies with all duties to inform with respect

to its shareholders and other entities to the extent imposed by

legal regulations; the Company keeps shareholders updated

throughout the year, on a regular basis, through the press and

the website of the Company. The website, created mainly

for the purposes of shareholders and investors (www.csas.cz/Investor relations), provides information on the Company’s

current operational results to date, the structure of sharehold-

ers, planned events, etc. Press releases covering material facts

about the Company are issued on a regular basis; the members

of the Board of Directors organise regular road shows for

investors and shareholders. All material information that the

Company publishes on its website is available in both Czech

and English.

The Company, in compliance with the law, convenes its General Meetings by making an announcement in the press; such notices

are published in Hospodářské noviny and Obchodní věstník. The

notice always includes basic information for shareholders about

the conditions of participation at the General Meeting and the

exercising of shareholders’ rights. The Company sends notices

of the General Meeting, including basic fi nancial indicators,

to all shareholders holding registered shares. The publication

of notices of the General Meeting on the Company’s website

goes without saying. Shareholders may acquaint themselves

in advance, within the statutory period, with the basic materi-

als (such as fi nancial statements, the Report on Relations or

proposed changes to the Statutes) which will form the subject

matter of the General Meeting. The Company always organises

its General Meetings at venues which are within the reach of all

shareholders; the recent practice is that General Meetings are

held at the Company’s registered offi ce.

Before the General Meeting commences, at registration,

shareholders receive all supporting documents for the General

62

Meeting. Such supporting documents always include the

Rules of Procedure of the General Meeting to be approved by

the General Meeting. If members of the Supervisory Board

are being elected, shareholders are provided with detailed

biographical data of all nominees proving their professional

and personal qualifi cations required to hold such an offi ce. The

bodies of the General Meeting are set up by the Board of Di-

rectors in such a way as to ensure that all the bodies are able to

perform their functions with due and professional care. In most

cases, a notary is present at the Company’s General Meetings.

In compliance with the Rules of Procedure, shareholders may,

in person or by proxy, exercise their shareholder rights, i. e.

vote on the proposed items on the agenda, solicit and receive

explanations on such items, and put forward proposals and

counter-proposals.

The members of the Board of Directors and the Supervisory

Board take part in General Meetings (there must be at least

as many members as required for a quorum) as well as the

members of the committees of the Supervisory Board who

answer shareholders’ questions. The Company provides

enough time for shareholders to raise their questions on agenda

items prior to the vote being taken. All shareholders’ ques-

tions and answers are recorded in the minutes of the General

Meeting. Each item on the agenda of the General Meeting is

subject to a separate vote taken after the debate is closed on

the given item. All shareholders registered in the attendance

list and present at the General Meeting when the vote is being

taken are entitled to vote except for those shareholders who

hold priority shares. A right to vote at General Meetings is

not attached to the Company’s priority shares. In addition,

shares whose holders’ voting rights for General Meetings were

suspended by a decision of the Czech National Bank are not

considered voting shares; the shareholder is informed of such

a suspension on his/her registration in the attendance list and

the Company indicates this fact in the attendance list, including

the reasons for such suspension.

C. DISCLOSURE AND TRANSPARENCY OF INFORMATION

The Company is consistent in preventing the misuse of insider information of the Company which might allow persons who

have special relations with the Bank to make unauthorised

gains in dealing with the Company’s securities (insider deal-

ing). The members of the Board of Directors and their related

parties are obliged to promptly notify the Czech National Bank

of transactions with securities issued by the Company or with

investment instruments derived from such securities, which

they perform on their own account. To ensure identical terms

and conditions for all members of the Boards of Directors

of the companies within the Erste Bank Group, it is Erste

Bank’s rules for securities trading that apply – the members of

the Company’s Board of Directors are obliged to inform the

Company’s Compliance Department of dealings with Erste

Bank’s shares or derivatives and to comply with an imposed

trading embargo during a designated period.

The Company has a Compliance Department in place

whose principal activities include ensuring compliance of the

Company’s internal regulations with valid legal and regula-

tory requirements and their observance and ensuring compli-

ance of the employees’ behaviour with legal regulations,

internal regulations, the Code of Ethics and other adopted

standards and employee rules of conducts. Compliance

engages in all of the Company’s activities and organisation

and is part of its corporate culture. The Compliance Depart-

ment evaluates insider information included in the Watch

List and the Restricted List of investment instruments as

well as any dealings with investment instruments recorded

in the above Lists. The Compliance Department informs the

Company’s Board of Directors and Supervisory Board of its

activities on a regular basis. A list of persons with access to

inside information is available with the Company’s Secretary;

the list is regularly updated.

The Company diligently fulfi ls and complies with all appli-

cable legal regulations under Czech law, the principles of the

Corporate Governance Code based on OECD principles, the

recommendations of the EU Commission regarding corporate

governance and, on an ongoing basis, provides shareholders and investors with all signifi cant information on its business

activities as well as the Company’s fi nancial and operational

results, the ownership structure, and other major events. All

information is prepared and disclosed in compliance with high

quality standards of accounting and fi nancial and non-fi nancial

disclosure. In addition, the Company discloses a great deal

of information beyond statutory requirements so as to allow

63


shareholders and investors to make well-founded decisions on

the ownership of the Company’s securities and the voting at

General Meetings. To publish such information the Company

uses various distribution channels such as the press or the

Company’s website where information is published both in

Czech and English to allow equal participation of foreign

investors and shareholders in decisions regarding the Compa-

ny’s business and development.

The Company regularly publishes annual and semi-annual

reports. The annual report principally includes audited

fi nancial statements and gives a picture of the fi nancial situa-

tion, business activities and operating results of the Company;

in addition, in compliance with new legal regulations, the

report gives information on the remuneration policy of the members of the Board of Directors and the Supervisory Board. The level of remuneration for the members of the

Board of Directors and the Supervisory Board is approved

on an annual basis by the General Meeting; the remuneration

of the members of the Board of Directors, who are Company

employees serving as Deputies, is determined by the Super-

visory Board. The Company has no equity option scheme for

remuneration either for the members of the Board of Directors

or the Supervisory Board.

Based on the recommendation of the Audit Committee, the

Supervisory Board approves an independent external auditor

annually. In 2007, Deloitte Audit s.r.o. was appointed to carry

out an external audit of the Company.

ČS’s majority shareholder, Erste Bank, as a company whose

shares are publicly traded, stringently follows the principles

of the Austrian Corporate Governance Code. In 2006, there

was a ACGC implementation audit at Česká spořitelna which

concluded that ACGC is accepted in internal guidelines of

Česká spořitelna and Česká spořitelna follows most of the

ACGC principles.

D. COMMITTEES OF THE COMPANY’S ADMINISTRATIVE BODIES

To support the Company’s activities and to ensure the internal

management and accountability of the Board of Directors

and the Supervisory Board, the Company has established

committees under these bodies. The rules of procedure of the

individual committees defi ne the range of their powers and

duties including a precise description of the applicable rules

and tasks.

COMMITTEES OF THE SUPERVISORY BOARD

The powers of the Supervisory Board include the ability to es-

tablish committees and to defi ne the content of their activities.

In compliance with corporate governance rules the Company

has established the following Supervisory Board Committees:

Audit Committee The Audit Committee is an advisory body of the Company’s

Supervisory Board cooperating with the Company’s Board

of Directors and with the internal and external auditors.

Its principal role is to participate in the direction, planning

and evaluation of the Company’s internal audit activities.

The Committee discusses material fi ndings and risks result-

ing from internal and external audits including corrective

measures, gives its opinion on the selection of an external

auditor, monitors the procedures and processes pertaining to

the audit of the annual fi nancial statements, requires informa-

tion on risk management, and discusses and approved the

report on the functioning and effectiveness of the Company’s

internal management and control system. With effect from

27 April 2007, the Audit Committee comprised the following

members: Maximilian Hardegg as Committee Chairman and

Péter Kisbenedek and Andreas Klingen as members, and

Mario Catasta as a substitute member. In compliance with the

rules of procedure, the Committee informs the Supervisory

Board of its activities at least every 6 months; in 2007, the

Committee met three times in total.

Financial Markets CommitteeThe principal role of the Financial Markets Committee is to

oversee the activities and risk management system of the Fi-

nancial Markets Division. The Committee is regularly updated

on business activities, results and risk exposure; it reassesses

the management and control system, and key principles of

the business strategy and the risk management strategy for

the Financial Markets Division. The Committee may set out

medium- and long-term objectives for the activities and risk

management of the Financial Markets Division.

64

Since mid-2007 the Committee has had the following composi-

tion – Johannes Kinsky, Chairman; Bernhard Spalt and Monika

Laušmanová, members; and Andreas Klingen, substitute

member. They all serve as members of the Supervisory Board.

The Committee meets at least twice a year; at least once a year

it reports on its activities to the Supervisory Board. In 2007,

the Committee met twice in total.

Credit Committee The Credit Committee is mainly an advisory and confi rmation

body for credit exposures beyond the limits of the approval

authorities of the Board of Directors’ Credit Committee.

The Committee meets at least twice a year; during the year

the Committee in most cases makes its decisions based on

per rollam voting. The Committee comprises the following

members – Bernhard Spalt, Chairman; Johannes Kinsky and

Péter Kisbenedek, members; and Andreas Treichl, substitute

member. They all serve as members of the Company’s Supervi-

sory Board. In 2007, the Committee met twice.

COMMITTEES OF THE BOARD OF DIRECTORS

Committees of the Board of Directors are advisory bodies of

the Board of Directors established by resolution of the Board

of Directors. The purpose of the committees is to initiate

and present to the Board of Directors recommendations for

technical issues; the committees comprise the members of the

Board of Directors and selected employees of the Company.

All committees are accountable to the Board of Directors and

report on their activities at least once a year.

Credit CommitteeThe Credit Committee is the highest body assessing and approv-

ing credit transactions and products as well as assessing and

approving the business policy process, the system of credit risk

measurement and management, and the level of the Company’s

credit portfolio structure, aimed at achieving the designated

fi nancial objectives, i. e. achieving the designated level of profi t-

ability while maintaining the defi ned level of credit risk.

Assets and Liabilities Management CommitteeThe Assets and Liabilities Committee is the highest body as-

sessing and approving the process of planning, managing and

controlling fi nancial fl ows and the structure of the Company’s

assets and liabilities, which is aimed at achieving the optimum

combination of the bank’s profi tability and fi nancial risks

taken. The Committee sets out the Company’s strategy in this

respect and assigns tasks to the Company’s organisational units

to fulfi l the strategy.

Financial Markets and Risk Management Committee The Financial Markets and Risk Management Committee is

a body dealing with decisions on the operational issues of risk

management processes related to fi nancial markets.

Investment Committee The Investment Committee is a body assessing the effective-

ness and effi ciency of capital expenditure and purchased

services.

ATM CommitteeThe ATM Committee is a body assessing and making decisions

regarding ATM issues (strategies, investments, locations, serv-

ices, income, etc) aimed at ensuring a standard and complex

approach to the ATM network development.

IT Change Management Committee

The IT Change Management Committee deals with decisions

on changes to ‘legacy systems’ (in the go-live phase), including

changes resulting from projects.

Customer Services CommitteeThe Customer Services Committee is a body supporting the

quality of services provided to both external and internal

customers by means of regular monitoring of internal and

external indicators.

Marketing Committee for the Česká spořitelna Financial Group The Marketing Committee of the Česká spořitelna Financial

Group is a body dealing mainly with the long-term marketing

strategy of the Company and the Česká spořitelna Financial

Group, the assessment of the effectiveness and effi ciency

of marketing costs, and the discussing of strategic business

objectives with respect to marketing support.

65


Retail Committee The Retail Committee is a body assessing and approving

innovations and the launching or withdrawal of retail banking

products and services.

Sponsoring Committee The Sponsoring Committee is an advisory body of the Board

of Directors on issues regarding the general sponsoring

strategy.

Compliance, Operational Risk and Security CommitteeThe Compliance, Operational Risk and Security Committee is

an advisory body of the Board of Directors on issues regard-

ing the management of operational risk, compliance risk and

security in relation to compliance in the Bank.

Permanent Process Improvement CommitteeThe Permanent Process Improvement Committee is a body

involved in the promotion of process management and process

improvement.

Capital Investments CommitteeThe Capital Investments Committee is an advisory body of the

Board of Directors on issues regarding assessment and deci-

sion-making on capital investments of the Bank in real estate

funds/venture capital companies.

E. THE COMPANY’S POLICY WITH RESPECT TO STAKEHOLDERS

For the further information see the Chapter “Corporate Social

Responsibility (CSR) in Česká spořitelna“ (page 58).

66

Business Development Section

5100

Member of the Board of and Deputy C. E. O.Jiří Škorvaga

Remote Delivery Section

5300

Card Centre Section

5400

West Region Section

5600

District Branches in Region

East Region Section

5700

District Branches in Region

External Sales Force and Co-operation Section5800

Support Sub-department

5001

Organizational structureof ČS as of 31. 12. 2007

Offi ce of the Board and the Supervisory Board Section1001

Chairman of the Board and C. E. O. Gernot Mittendorfer

Internal Audit Section

1400

Human Resources Section

1600

Marketing Section

1700

Corporate Communication Department1010

Service Quality Management Department1310

Corporate Customers Section

4100

Commercial Banking Centres Section4200

Accounting and Taxes Department

2100

Deputy Chairman of the Board of Directors and 1st Deputy C. E. O. Dušan Baran

Controlling and Planning Section

2200

Property Management Section

2300

Investors Relations Department

2010

Financial Markets Back-offi ce Department2020

CS Financial Group and Capital Participations Development Department 2030

CS Financial Group Balance Sheet Management Section3100

Member of the Board and Deputy C. E. O.Daniel Heler

Investment Banking Section

3600

Financial Markets – Wholesale and Trading Section3700

Financial Markets – Retail Distribution Section3800

Business Support Sub-department

3001

Real Estate and Mortgages Section4300

Municipalities Section

4400

Trade Finance Department

4010

Business Development Department

4040

Business Processing Section

5500

67

Česká spořitelna’s DeclarationOrganizational structureof ČS as of 31. 12. 2007Report of the Supervisory Board

Org-IT Section

7300

Member of the Board and Deputy C. E. O.Petr Hlaváček

IT Development Section

7500

IT Decentralized Systems Section

7600

Payment System and Settlement Section8100

Member of the Board and Deputy C. E. O.Pavel Kysilka

Security Section

8200

Economic and Strategic Research Department8010

Corporate Cash Management Department8020

EU Offi ce

8001

Legal Services and Compliance Section6100

Member of the Board and Deputy C. E. O.Heinz Knotzer

Central Risk Management Section

6200

Credit Risk Management and Credit Services Section6300

Support Sub-department

6001

68

During 2007 the Supervisory Board of Česká spořitelna, a. s.

regularly discharged its duties in accordance with the law and the

company’s Articles of Association. As the company’s oversight

body, the Supervisory Board monitored the Board of Directors’

exercise of its powers as well as the Bank’s operations, fi nances

and the realization of its strategic plans. The Supervisory Board

was kept up to date on the bank’s operations, its fi nancial situa-

tion, and other material and important Bank matters.

In accordance with the legal provision, the Supervisory Board

at its meetings reviewed the individual and consolidated

fi nancial statements as of 31 December 2007 and came to

the conclusion that the books and accounting records were

kept in a transparent manner in accordance with accounting

regulations and that the accounts and year-end individual and

consolidated fi nancial statements fairly and faithfully refl ect

the fi nancial situation of Česká spořitelna, a. s. and consoli-

dated unit as of 31 December 2007. The audit of the year-end

fi nancial statements was performed by Deloitte Audit s. r. o.

Report of the Supervisory Board

who confi rmed that according to their opinion the Bank’s

separate and consolidated fi nancial statements give a true and

fair view of the fi nancial position of the Česká spořitelna, a. s.

as of 31 December 2007 and of its fi nancial performance and

its cash fl ows operations for the year ended 31 December 2007

in accordance with International Financial Reporting Standards

as adopted by the EU. The Supervisory Board with agreement

took account of the auditor’s statement.

The Supervisory Board also reviewed the Report on Relations

between connected persons and in accordance with the provi-

sion 66a para 10 of the Commercial Code states that it took

account of this Report without comments.

In view of all above facts, the Supervisory Board recommends

that the General Meeting approves the fi nancial statements of

Česká spořitelna, a. s. for the year ended 31 December 2007

and the proposed profi t allocation as submitted by the Board of

Directors.

Andreas Treichl

Chairman of the Supervisory Board

69

Consolidated Financial Statements Prepared in Accordance with International Financial Reporting Standards as Adopted by the European Union for the Years Ended 31 December 2007 and 2006

70 Auditors’ Report to the Shareholders of Česká spořitelna, a. s.

71 Consolidated Balance Sheets as of 31 December 2007 and 2006

72 Consolidated Profi t and Loss Accounts for the Years Ended 31 December 2007 and 2006

73 Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended 31 December 2007 and 2006

74 Consolidated Statements of Cash Flows for the Years Ended 31 December 2007 and 2006

76 Notes to the Consolidated Financial Statements

70

Having its registered offi ce at: Prague 4, Olbrachtova 1929/62, 140 00

Identifi cation number: 45244782

Principal activities: Retail, corporate and investment banking services

We have audited the accompanying consolidated fi nancial statements of Česká spořitelna, a.s., which comprise the balance sheet as

of 31 December 2007, and the income statement, statement of changes in equity and cash fl ow statement for the year then ended, and

a summary of signifi cant accounting policies and other explanatory notes.

Statutory Body’s Responsibility for the Financial StatementsThe Statutory Body is responsible for the preparation and fair presentation of these consolidated fi nancial statements in accordance

with International Financial Reporting Standards as adopted by the EU. This responsibility includes: designing, implementing

and maintaining internal control relevant to the preparation and fair presentation of fi nancial statements that are free from material

misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates

that are reasonable in the circumstances.

Auditor’s ResponsibilityOur responsibility is to express an opinion on these consolidated fi nancial statements based on our audit. We conducted our audit in

accordance with the Act on Auditors and International Standards on Auditing and the related application guidelines issued by the Chamber of

Auditors of the Czech Republic. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain

reasonable assurance whether the fi nancial statements are free from material misstatement. An audit involves performing procedures to ob-

tain audit evidence about the amounts and disclosures in the fi nancial statements. The procedures selected depend on the auditor's judgment,

including the assessment of the risks of material misstatement of the fi nancial 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 fi nancial 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 fi nancial statements.

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

OpinionIn our opinion, the consolidated fi nancial statements give a true and fair view of the fi nancial position of Česká spořitelna, a.s. as

of 31 December 2007, and of its fi nancial performance and its cash fl ows for the year then ended in accordance with International

Financial Reporting Standards as adopted by the EU.

In Prague on 12 March 2008

Audit fi rm:

Deloitte Audit s. r. o., Certifi cate no. 79

Represented by: Statutory auditor:

Michal Petrman, statutory executive Michal Petrman, Certifi cate no. 1105

Independent Auditor’s Reportto the Shareholders of Česká spořitelna, a. s.

Audit. Tax. Consulting. Financial Advisory. Member of Deloitte Touche Tohmatsu

Offi ce Address:Nile HouseKarolinská 654/2186 00 Prague 8Czech Republic

Tel.: +420 246 042 500Fax: +420 246 042 [email protected]

Deloitte Audit s. r. o., Registered address:Týn 641/4110 00 Prague 1Czech Republic

Registered at the Municipal Courtin Prague, Section C, File 24349Id Nr.: 49620592Tax Id. Nr.: CZ49620592

71

Independent Auditor’s ReportConsolidated Balance Sheets as of 31 December 2007 and 2006Consolidated Profi t and Loss Accounts for the Years Ended 31 December 2007 and 2006

Consolidated Balance Sheets as of 31 December 2007 and 2006

CZK mil. Note 31 December 2007 31 December 2006

ASSETS1. Cash and balances with the CNB 6 20,394 23,151

2. Loans and advances to fi nancial institutions 7 65,688 73,179

3. Loans and advances to customers 8 418,415 329,105

4. Provisions for losses on loans and advances 9 (6,810) (6,339)

5. Securities at fair value through profi t or loss 53,841 49,540(a) Securities held for trading 10 28,436 27,803(b) Securities designated upon initial recognition as at fair value through profi t or

loss 11 25,405 21,737

6. Positive fair value of fi nancial derivative transactions 12 17,674 18,433

7. Securities available for sale 13 35,486 39,385

8. Assets held for sale 14 78 320

9. Securities held to maturity 15 137,486 141,429

10. Financial placements of insurance companies 16 15,808 13,878

11. Investments in associates 5 1 –

12. Unconsolidated investments 5 373 451

13. Investment property 17 13,626 8,772

14. Property under construction 18 4,319 2,374

15. Intangible fi xed assets 19 4,491 4,579

16. Property and equipment 20 15,264 13,637

17. Other assets 21 17,991 16,499

Total assets 814,125 728,393

LIABILITIES AND SHAREHOLDERS’ EQUITY1. Amounts owed to fi nancial institutions 22 58,482 46,361

2. Amounts owed to customers 23 588,526 537,487

3. Liabilities at fair value 24 7,609 5,450

4. Negative fair value of fi nancial derivative transactions 25 11,081 12,684

5. Bonds in issue 26 47,275 34,408

6. Technical insurance provisions 27 15,385 13,434

7. Provisions for liabilities and other reserves 28 3,024 2,675

8. Other liabilities 29 19,929 20,146

9. Subordinated debt 31 5,605 5,886

10. Shareholders’ equity 57,209 49,862

(a) Minority interests 32 1,633 1,268

(b) Equity attributable to the Bank’s shareholders 33, 34 55,576 48,594

Total liabilities and shareholders’ equity 814,125 728,393

The accompanying notes are an integral part of these consolidated fi nancial statements.These consolidated fi nancial statements were prepared by the Bank and approved by the Board of Directors on 11 March 2008.

Gernot Mittendorfer Dušan Baran

Chairman of the Board and Chief Executive Offi cer Vice Chairman of the Board 1st Deputy Chief Executive Offi cer

72

Consolidated Profi t and Loss Accountsfor the Years Ended 31 December 2007 and 2006

CZK mil. Note Year ended

31 December 2007

Year ended

31 December 2006

1. Interest income and similar income 35 34,601 28,680

2. Interest expense and similar expense 36 (9,874) (7,474)

Net interest income 24,727 21,206

3. Provisions for credit risks 37 (2,211) (1,683)

Net interest income after provisions for credit risks 22,516 19,523

4. Fee and commission income 38 11,043 10,046

5. Fee and commission expense 39 (1,404) (1,049)

Net fee and commission income 9,639 8,997

6. Net trading result 40 1,709 1,740

7. General administrative expenses 41 (18,349) (17,316)

8. Net insurance income 42 649 528

9. Other operating income/(expenses), net 43 (575) 585

Profi t before taxes 15,589 14,057

10. Income tax expense 44 (3,213) (3,498)

Profi t after taxes 12,376 10,559

11. Minority interests 32 (228) (174)

Net profi t for the year attributable to the Bank’s shareholders 12,148 10,385

The accompanying notes are an integral part of these consolidated fi nancial statements.

73

Consolidated Profi t and Loss Accounts for the Years Ended 31 December 2007 and 2006Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended 31 December 2007 and 2006Consolidated Statements of Cash Flows for the Years Ended 31 December 2007 and 2006

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended 31 December 2007 and 2006

CZK mil. Net

profi t

for the

period

Retained

earnings

Valu-

ation

gains or

losses

Total

recog-

nised

income

and

expen-

ses for

the

period

Statu-

tory

reserve

fund

Share

premium

Share

capital

Total

equity

attribu-

table

to the

Bank’s

share-

holders

Minority

interests

Total

At 1 January 2006 9,134 16,105 712 25,951 2,170 1 15,200 43,322 849 44,171

Dividends (4,560) – – – – – (4,560) (98) (4,658)

Minority interest in newly

consolidated entities, capital

increase (52) – – – – (52) 190 138

Sale of an equity investment to

minority shareholders – – – – – – 152 152

Transfer to reserve funds (592) – – 592 – – – – –

Use of funds – – (8) – – (8) – (8)

Revaluation gains or losses – (383) – – – (383) (2) (385)

Foreign exchange differences – (110) – – – (110) 3 (107)

Allocation to retained earnings (3,982) 3,982

Net profi t for the year 10,385 – – – – – 10,385 174 10,559

At 31 December 2006 10,385 20,035 219 30,639 2,754 1 15,200 48,594 1,268 49,862

At 1 January 2007 10,385 20,035 219 30,639 2,754 1 15,200 48,594 1,268 49,862

Dividends (4,560) – – – – – (4,560) (153) (4,713)

Minority interest in newly

consolidated entities, capital

increase 4 – – – – 4 274 278

Transfer to reserve funds (486) – – 486 – – – – –

Use of funds – – (4) – – (4) – (4)

Revaluation gains or losses – (399) – – – (399) (3) (402)

Foreign exchange differences

arising upon consolidation

(retranslation reserve) – (142) – – – (142) 19 (123)

Hedge of a net investment in

foreign operations – (65) – – – (65) – (65)

Allocation to retained earnings (5,339) 5,339 0

Net profi t for the year 12,148 ,– – – – – 12,148 228 12,376

At 31 December 2007 12,148 25,378 (387) 37,139 3,236 1 15,200 55,576 1,633 57,209


74

Consolidated Statements of Cash Flowsfor the Years Ended 31 December 2007 and 2006

CZK mil. Note 2007 2006


Adjustments for non-cash transactions

Creation of provisions for losses on loans, advances and other assets 2,285 1,519

Depreciation and amortisation of assets 3,307 3,354

Impairment of tangible and intangible fi xed assets 2 72

Revaluation of investment property (162) (755)

Unrealised profi t on securities at fair value through profi t or loss and liabilities at fair value (1,280) 46

Creation of provisions against equity investments 35 5

Net (gain) on the sale/revaluation of equity investments (90) (91)

Creation of other reserves, including technical insurance provisions 2,293 2,988

Change in fair values of fi nancial derivatives (845) (2,470)

Income from statute-barred savings books (1) (2)

Gain on the sale of tangible assets (161) (301)

Accrued interest, amortisation of discount and premium and fair value remeasurement of debt securities 627 (64)

Increase/(decrease) in minority interests 290 345

Operating profi t before changes in operating assets and liabilities 21,889 18,703

Cash fl ows from operating activities

(Increase)/decrease in operating assets

Minimum reserve deposits with the CNB 3,396 (4,447)

Loans and advances to fi nancial institutions 7,527 24,712

Loans and advances to customers (91,095) (47,817)

Securities at fair value through profi t or loss (3,419) (13,215)

Securities available for sale 2,676 (5,926)

Other assets (1,225) (1,221)

Increase/(decrease) in operating liabilities

Amounts owed to fi nancial institutions 11,581 11,616

Amounts owed to customers 51,040 56,193

Liabilities at fair value 2,159 (1,912)

Other liabilities (1,446) 3,275

Net cash fl ow from operating activities before income tax 3,103 39,961

Income taxes paid (2,636) (2,914)

Net cash fl ow from operating activities 467 37,047

75

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended 31 December 2007 and 2006Consolidated Statements of Cash Flows for the Years Ended 31 December 2007 and 2006Notes to the Consolidated Financial Statements


Cash fl ows from investing activities

Net increase in securities and other assets held to maturity 3,250 (19,965)

Financial placements of insurance companies (1,761) (3,553)

Investment property (4,692) (1,638)

Net increase in investments in subsidiaries and associates 199 (81)

Net cash fl ow from the (purchase)/sale of an investment in a subsidiary or associate (45) 172

Property under construction (1,945) (1,837)

Purchase of tangible and intangible fi xed assets (5,038) (3,825)

Proceeds from the sale of tangible and intangible fi xed assets 628 1,202

Net cash fl ow from investing activities (9,404) (29,525)

Cash fl ows from fi nancing activities

Dividends paid (4,560) (4,560)

Dividends paid to minority shareholders (153) (98)

Bonds in issue 12,574 (4,564)

Receipt of subordinated debt (281) 2,888

Net cash fl ow from fi nancing activities 7,580 (6,334)

Net increase/(decrease) in cash and cash equivalents (1,357) 1,188

Cash and cash equivalents at beginning of year 24,289 23,101

Cash and cash equivalents at end of year 45 22,932 24,289


76

Notes to the Consolidated Financial Statements1. INTRODUCTION

Česká spořitelna, a. s. (henceforth the “Bank”), having its

registered offi ce address at Olbrachtova 1929/62, Prague 4,

140 00, Corporate ID 45244782, is the legal successor of the

Czech State Savings Bank and was founded as a joint stock

company in the Czech Republic on 30 December 1991. The

Bank is a universal savings bank offering retail, corporate

and investment banking services on the territory of the

Czech Republic.

The principal activities of the Bank are as follows:

• Acceptance of deposits from the general public;

• Extension of credit;

• Investing in securities on its own account;

• Payments and clearing;

• Issuance of payment facilities, e.g. payment cards,

traveller’s cheques;

• Issuance of guarantees;

• Opening of letters of credit;

• Collection services;

• Proprietary or client-oriented trading with foreign currency

assets, forward and option contracts, including foreign

currency and interest rate transactions, and transferable

securities;

• Management of clients’ securities on clients’ accounts and

provision of advisory services;

• Participation in the issuance of shares and provision of

related services;

• Safe-keeping and administration of securities or other

assets;

• Rental of safe-deposit boxes;

• Provision of business advisory services;

• Issuance of mortgage bonds under special legislation;

• Financial brokerage;

• Depositary activities;

• Foreign exchange services (foreign currency purchases);

• Provision of banking information; and

• Maintenance of a separate part of the Securities Centre’s

records.

The Bank provides the following additional services through

its subsidiaries (together the “Group”):

• Funds management;

• Building society savings and loans;

• Pension insurance;

• Insurance;

• Finance leasing;

• Factoring;

• Consulting services;

• Provision of investment services;

• Real estate activities;

• Lease of information technology, installation and repair of

electronic equipment;

• Provision of software and advisory services in relation to

hardware and software; and

• Corporate management and fi nance.

The Group is subject to the regulatory requirements of the

Czech National Bank (henceforth the “CNB”). These regula-

tions include those pertaining to minimum capital adequacy

requirements, categorisation of exposures and off balance sheet

commitments, credit risk connected with clients of the Group,

liquidity, interest rate risk and foreign currency position.

Similarly, the Group companies are subject to regulatory

requirements, specifi cally in relation to insurance and colle-

ctive investment.

2. BASIS OF PREPARATION

These consolidated fi nancial statements comprise the accounts

of the Bank and its subsidiaries and have been prepared in

accordance with International Financial Reporting Standards

(IFRS) and interpretations approved by the International

Accounting Standards Board (IASB) as adopted by the

European Union.

All fi gures are in millions of Czech crowns (MCZK), unless

stated otherwise.

These consolidated fi nancial statements have been prepared

under the historical cost convention as modifi ed by the remea-

surement to fair value of available for sale securities, fi nancial

assets and liabilities at fair value through profi t or loss, all

fi nancial derivatives, issued debt securities which are hedged

against interest rate risk and assets held for sale. Assets held

for sale are measured at fair value if this value is greater than

77

Consolidated Statements of Cash Flows for the Years Ended 31 December 2007 and 2006Notes to the Consolidated Financial StatementsFinancial Section II

their carrying amount (i. e. cost less accumulated depreciation

and cumulative impairment losses).

The accounting policies have been consistently applied by the

entities in the Group.

The presentation of consolidated fi nancial statements in

conformity with IFRS requires management of the Group

to make estimates and assumptions that affect the reported

amounts of assets and liabilities and disclosure of contingent

assets and liabilities as of the date of the fi nancial statements

and their reported amounts of revenues and expenses during

the reporting period (refer to Note 4). Actual results could

differ from those estimates.

Comparative information has been restated, where necessary,

on a basis consistent with the current year presentation. These

changes relate to the adoption of IFRS 7 Financial Instruments:

Disclosures (refer to Note 3cc) and the fi rst-time recognition of

interest on impaired loans – unwinding of discounts (refer to Note

3dd).

3. SIGNIFICANT ACCOUNTING POLICIES

The signifi cant accounting policies adopted in the preparation

of the consolidated fi nancial statements are set out below:

(a) Principles of Consolidation

The consolidated fi nancial statements present the accounts and

results of the Bank and, to the extent that they are material to the

Group as a whole, of its subsidiaries and associated companies.

The Group accounts for all business combinations using the

purchase method. The Group, as the acquirer, measures the

cost of a business combination as the aggregate of the fair

values, at the date of exchange, of assets given in exchange for

control of the acquiree and any costs directly attributable to the

business combination.

At the acquisition date, the Group allocates the cost of

a business combination by recognising the acquiree’s identifi -

able assets, liabilities and contingent liabilities that satisfy the

recognition criteria at the fair values at that date. Any diffe-

rence between the cost of the business combination and the

acquirer’s interest in the net fair value of the identifi able assets,

liabilities and contingent liabilities is accounted for as goodwill

or negative goodwill (gain on a business combination).

If the initial accounting for a business combination can be

determined only provisionally by the end of the period in

which the combination is effected because either the fair values

to be assigned to the acquiree’s identifi able assets, liabilities

or contingent liabilities or the cost of the combination can be

determined only provisionally, the Group accounts for the

combination using those provisional values.

The Group recognises any adjustments to those provisional

values within twelve months of the acquisition date, with effect

from the acquisition date, ie, retrospectively.

Subsidiary UndertakingsAn investment in a subsidiary is one in which the Group holds,

directly or indirectly, more than 50 percent of its share capital

or in which the Group can exercise more than 50 percent of

the voting rights or where the Group can appoint or dismiss

a majority of the Board of Directors or Supervisory Board

members. An investment in a subsidiary is also one in which

the Group holds, directly or indirectly, less than 50 percent of

its share capital but has the power to govern the fi nancial and

operating policies of the company.

Where an entity either began or ceased to be controlled during

the year, the results are included only from the date control

commenced or up to the date control ceased.

All intercompany balances and transactions, including intercom-

pany profi ts are eliminated on consolidation. Where necessary,

accounting policies for subsidiaries have been changed to ensure

consistency with the policies adopted by the Bank.

Minority interests in the equity and results of companies that

are controlled by the Group are shown as a separate item in the

consolidated fi nancial statements.

Associate UndertakingsAssociates are accounted for under the equity method of

accounting. An investment in an associate is one in which the

78

Group holds, directly or indirectly, 20 percent to 50 percent of

its share capital and over which the Group exercises signifi cant

infl uence, but which it does not control.

Unconsolidated Subsidiaries and Associated CompaniesSubsidiaries and associates whose results, equity and fi nan-

cial position are, in aggregate, not material to the fi nancial

statements are not consolidated. These unconsolidated equity

investments in subsidiary and associated undertakings are

recorded at acquisition cost including transaction costs less

provisions for their impairment. These investments in uncon-

solidated subsidiaries and associated companies are presented

in the balance sheet in “Unconsolidated investments”. Impair-

ment of equity investments in subsidiaries and associates is

recognised in “Other operating income/(expenses), net”.

Joint Venture Joint ventures are consolidated using the equity method of

accounting (share of equity of the joint venture).

Minority Interests Minority interests are reported as part of equity in the balance

sheet. The Group’s profi t is allocated between minority interests

and the Group’s shareholders in the profi t and loss account.

Minority shareholders do not receive a share of the accounting

losses of subsidiaries. In certain cases (development companies),

the Group enjoys a preferential right to seek payment of its share

of the reported profi ts of these subsidiaries. No profi t shares

of minority shareholders are recognised in respect of these

companies unless the Group’s claim is fully satisfi ed.

Associates Held Via Venture Funds Investments held in associates via venture funds are recognised

at fair value in the profi t and loss account in accordance

with IAS 28 Investments in Associates and IAS 39 Financial

Instruments: Recognition and Measurement. These investments

are reported in “Investments in associates”.

b) Loans and Advances, Other Off Balance Sheet Credit Exposures and Provisions for Losses on Loans and AdvancesLoans and advances are stated at the amount of outstanding

principal and overdue interest and fees. All loans and advances

are recognised when cash is advanced to borrowers.

The Group classifi es its loan receivables according to several

criteria.

In terms of market segments, loan receivables are split into

retail receivables and corporate receivables. Retail receivables

include amounts due from individuals/households and sole

traders and amounts due from individuals–businessmen, small

businesses with the annual turnover of less than CZK 30 million

and small municipalities (the MSE category), receivables arising

from construction savings loans, receivables arising instalment

sale, loans issued to fi nance acquisition of securities, and lease

receivables. Corporate loans include amounts due from small

and medium sized businesses with the annual turnover between

CZK 30 million and CZK 1,000 million (the SME category),

amounts due from large corporations (with turnover over

CZK 1,000 million), the public sector, factoring receivables and

lease receivables.

In risk management terms, loan receivables are segmented into

non-default (performing) loans where the principal and interest

is not past due for more than 90 days and default (non-per-

forming) loans. Within these loans, two large sub-portfolios

are defi ned – individually signifi cant loans, which include

corporate loans or receivables where the Group’s loan exposure

exceeds CZK 5 million, and individually insignifi cant loans.

As part of these two sub-portfolios, the Group additionally

monitors fi ve client portfolios for individually signifi cant loans

and 15 product portfolios for individually insignifi cant loans.

The Group monitors risk parameters (PD – probability of

default, LGD – loss given default, and CCF – credit conversion

factors) in respect of these portfolios. PD is additionally moni-

tored in individual internal rating grades. Additional details can

be found in Note 51.

The Group additionally splits its client and product portfolios

according to individual internal rating grades (refer to Note

51); there are 13 plus 1 (default) internal rating grades.

79


In accounting and provisioning terms, loans are segmented into

individually impaired, where objective evidence demonstrates

that a loss event occurred subsequent to their initial recognition

which impacts future anticipated cash fl ows arising from these

loans and these loans are therefore impaired on an individual

basis, and collectively impaired loans where such circumstan-

ces were not demonstrated on an individual basis and unimpai-

red loans with no indication of impairment.

Non-performing loans match individually impaired loans.

Performing loans with the 1–6 internal rating are unimpaired

loans; loans with 7–8 internal rating are collectively impaired.

Provisions for losses on loans and advances are recorded

when there are reasonable doubts over the recoverability of

the loan balance. Provisions for losses on loans and advances

represent management’s assessment of realised losses in

relation to the Group’s on and off balance sheet activities.

Amounts are set aside to cover losses on loans and advances

that have been specifi cally identifi ed (individually impaired

loans) and for potential losses which may be present based

on portfolio performance (collectively impaired loans and

unimpaired loans). The level of provisions is established by

comparing the carrying amount of the loan and the present

value of future expected cash fl ows using the effective

interest rate. The level of provisions for individually insigni-

fi cant loans is always determined statistically at the product

portfolio level. Individually signifi cant loans are assessed

individually to determine if they are individually impaired.

The provisioning percentage in respect of individually signifi -

cant loans which are collectively impaired or unimpaired is

established on a portfolio basis. The amount of the realised

loss, i. e., impairment loss adjusting the provisions to their

assessed levels, after write-offs, is charged to the profi t and

loss account line “Provisions for credit risks.” Additional

details can be found in Note 46.

Write-offs are generally recorded after all reasonable restructu-

ring or collection activities have taken place and the possibility

of further recovery is considered to be remote. The loan is

written off against the related account “Provisions for credit

risks” in the profi t and loss account. If the reason for provisi-

oning is no longer deemed appropriate, the redundant provi-

sioning charge is released into income. The relevant amount

and recoveries of loans and advances previously written off are

refl ected in the profi t and loss account through “Provisions for

credit risks.”

Restructured loans are those loans whose terms have been

renegotiated because of a debtor’s distress. Restructuring may

proceed solely on the basis of a new contract. Restructured

loans are initially assigned the internal rating of 8. This rating

can be upgraded no sooner than six months after the restructu-

ring date.

(c) Debt and Equity Securities (including Participating Interests Excluded from the Consolidation)Securities held by the Group are categorised into portfolios

in accordance with the Group’s intent on the acquisition of

the securities and pursuant to the Group’s security investment

strategy. In accordance with IAS 39 Financial Instruments:

Recognition and Measurement, the Group categorises its

securities into the “Securities at fair value through profi t or

loss” portfolio, the “Securities available for sale” portfolio

and the “Securities held to maturity” portfolio. The principal

difference among the portfolios relates to the approach to the

measurement of securities and the recognition of their fair

values in the fi nancial statements.

All securities held by the Group are recognised using trade

date accounting and initially recorded at their cost including

transaction costs (acquisition cost), the only exception

being securities at fair value through profi t or loss which are

recognised at cost net of transaction costs.

Securities at Fair Value through Profi t or Loss The portfolio includes debt and equity securities held for

trading, that is, securities held by the Group with the inten-

tion of reselling them, thereby generating profi ts on price

fl uctuations in the short-term, and debt and equity securities

that were designated, upon initial recognition, as at fair

value through profi t or loss. Securities at fair value through

profi t or loss are recognised at cost at the acquisition date

and subsequently remeasured at fair value. Changes in the

fair values of assets held for trading are recognised in the

profi t and loss account as “Net trading result”. Changes in

the fair values of securities not held for trading are reported

as “Other operating income/(expenses), net” in the profi t and

80

loss account. Interest on securities at fair value through profi t

or loss is presented as “Interest income”.

Fair Value OptionIn addition to securities, the portfolio of instruments at fair

value through profi t or loss includes, upon origination or

acquisition, other fi nancial assets, liabilities and derivatives

if such classifi cation reduces the mismatch in reporting

fi nancial expenses or income or if it is a group of fi nancial

assets and liabilities which are typically managed and asses-

sed according to fair value changes and such a management

and presentation treatment complies with the investment

strategy and/or the assets and liabilities management

strategy.

For debt and equity securities traded on the Prague Stock

Exchange (‘PSE’) and other stock exchanges, fair values are

derived from quoted prices. In respect of securities which

are publicly traded but the volumes or frequency are small,

management assesses the identifi ed market prices on an indi-

vidual basis to determine if they provide an actual indication

of the fair value. In exceptional cases, management uses

its own estimates to make adjustments or uses the Group’s

own valuation models. The fair values of securities that are

not publicly traded are estimated by the management of the

Group as the best estimation of the cash fl ow projection

refl ecting the set of economic conditions that will exist over

the remaining maturity of the securities, taking into account

the issuer’s credit risk.

Securities Available for SaleSecurities available for sale are securities held by the Group

for an indefi nite period of time that are available for sale as

liquidity requirements arise or market conditions change.

Securities available for sale are carried at acquisition cost and

subsequently remeasured at fair value. Changes in the fair

values of available for sale securities are recognised in equity

as “Revaluation gains or losses”, with the exception of their

impairment and interest income and foreign exchange diffe-

rences on debt securities. Impairment of securities available

for sale is accounted for on the same basis as impairment of

securities held to maturity (see below). When realised, the

relevant revaluation gains or losses are taken to the profi t and

loss account as “Other operating income/(expenses), net”.

Interest income on coupons, amortisation of discounts or

premiums, and dividends are included in “Interest income

and similar income”. Foreign exchange differences are

reported within “Net trading result”.

Securities Held to MaturitySecurities held to maturity are fi nancial assets with fi xed

maturity and determinable payments that the Group has the

positive intent and ability to hold to maturity.

Securities held to maturity are initially measured at acquisition

cost. Securities held to maturity are subsequently reported

at amortised cost using the effective interest rate, less any

provision for impairment. The amortisation of premiums and

discounts is included in “Interest income and similar income”.

A fi nancial asset including securities held to maturity (as

defi ned in IAS 39 Financial Instruments: Recognition and

Measurement) is impaired if its carrying amount is greater than

its estimated recoverable amount. The amount of the impair-

ment loss for assets carried at amortised cost is calculated as

the difference between the asset’s carrying amount and the

present value of the expected future cash fl ows discounted at

the fi nancial instrument’s original effective interest rate. When

an impairment of assets is identifi ed, the Group recognises

provisions through the profi t and loss account line “Other

operating income/(expenses), net.”

At the reporting dates as a minimum, the Group makes an

assessment to determine if events occurred indicating that

an investment has suffered impairment/other-than-temporary

impairment. The criteria indicating impairment of a security

include, but are not limited to:

• There are signifi cant changes with an adverse impact on the

investment in the market, economic or legislative environ-

ments or such are expected to occur in the nearest future

(e.g., absence of an active market).

• Signifi cant fi nancial diffi culties of the issuer or the commit-

ted party; contract breach such as the non-payment of the

principal, interest or delayed payments.

81


(d) Sale and Repurchase AgreementsWhere debt or equity securities are sold under a concurrent

commitment to repurchase them at a pre-determined price,

they remain at fair value or amortised cost (refer to Note

3c) within the relevant portfolio on the balance sheet and

the consideration received is recorded in “Amounts owed to

fi nancial institutions” or “Amounts owed to customers.” Con-

versely, debt or equity securities purchased under a concurrent

commitment to resell are not recognised in the balance sheet

and the consideration paid is recorded in “Loans and advances

to fi nancial institutions” or “Loans and advances to customers.”

Interest is accrued evenly over the life of the agreement.

(e) Liabilities at Fair ValueThe Group classifi es as liabilities at fair value liabilities held

for trading and liabilities for which it uses the fair value option

as set out in IAS 39 Financial Instruments: Recognition and

Measurement.

Securities borrowed are not recognised in the fi nancial

statements, unless they are sold to third parties, in which

case the Group records an obligation to return them which is

recognised at fair value as a trading liability and is presented

in the balance sheet line “Liabilities at fair value”. Upon the

repurchase of securities, the difference between the carrying

amount of the obligation and the contracted purchase price is

recognised in “Net trading result”.

The Group additionally classifi es as liabilities at fair value

certain issued bonds and deposits with embedded derivatives

because management believes that this classifi cation materially

reduces the inconsistency in valuing these liabilities.

(f) Investment PropertyInvestment property is property (land or a building – or part of

a building – or both) held to earn rentals and/or for capital appreci-

ation or both. Property used by the lessees from within the Group

are not treated and presented as investment property. The Group

states investment property at fair value and gains or losses arising

from changes in the fair value are included in the profi t and loss

account line “Other operating income/(expenses), net”.

The fair value is the estimated amount for which an asset could

be exchanged between knowledgeable, willing parties in an

arm’s length transaction at the remeasurement date.

The valuation is based upon the calculation of expected yearly

net income by using a permanent (expected) yield method. The

expected yield is determined using the comparison method

(similar realised transactions on the same market). Given that

the valuation was performed on a post tax basis, the fair value

was increased by the effect of the tax.

The Group also invests in real estate under construction

(investment property under construction). This real estate is

classifi ed as real estate held for sale in the ordinary course of

business or property that is being constructed or developed

for future use as investment property and is measured at the

lower of cost and net realisable value in accordance with IAS

2 Inventories or IAS 16 Property, Plant and Equipment at

cost less any accumulated depreciation and any accumulated

impairment losses.

The cost of acquiring (acquisition cost) assets under construc-

tion not only includes the purchase price but also all other

directly attributable expenses, such as transportation costs,

customs duties, other taxes and costs of conversion of invento-

ries, etc. Borrowing costs are capitalised only to the extent to

which they directly relate to the acquisition of real estate.

Such assets under construction are presented as “Property

under construction” until their completion. Until 2006, these

assets under construction were presented as “Other assets” and,

therefore, comparative information has been restated on a basis

consistent with the current year presentation.

In determining the net realisable value of assets under construc-

tion the Group refers to the most recent budget and the current

state of completion which is compared to the future value of

fl ats and/or offi ce and commercial premises. In circumstances

where the anticipated effect of the sale of these assets under

construction falls below their cost, the Group writes down the

assets under construction to their net realisable value.

Sales of these assets/fl ats are recognised as revenues through

“Other operating income/(expenses), net” when a statement is

82

received from the Cadastral Offi ce regarding the registration of

the fl ats in the name of a new owner. The same profi t and loss

account line refl ects the costs incurred in selling the fl ats, that

is, the value of the asset and other expenses associated with the

sale of the fl ats (which are not capitalised).

(g) GoodwillGoodwill represents the excess of the acquisition cost over the

fair value of identifi able assets of the acquired subsidiary/as-

sociated undertaking at the date of acquisition. Goodwill is

reported in the balance sheet as a component of “Intangible

fi xed assets”. Goodwill is not amortised and is tested for

impairment at least on an annual basis.

Goodwill is impaired if its carrying amount is greater than

its estimated recoverable amount. The recoverable amount is

defi ned as the estimated future economic benefi ts arising from

the acquisition of an equity investment. When an impairment

of assets is identifi ed, the Group recognises the impairment

through the profi t and loss account line “Other operating

income /(expenses), net.”

(h) Intangible Fixed AssetsIntangible fi xed assets include identifi able assets without

physical substance and with an estimated useful life excee-

ding one year. The Group has determined that, in addition to

fulfi lling these criteria, intangible fi xed assets must include

assets with a cost greater than CZK 60,000. Intangible fi xed

assets are carried at cost less accumulated amortisation and

provisions and are amortised on a straight line basis through

“General administrative expenses – amortisation of intan-

gible assets” over an estimated useful life not exceeding

four years. Software acquisition, valuable rights and other

intangible assets are treated as intangible assets. Costs asso-

ciated with the maintenance of intangible assets (software)

are expensed through “General administrative expenses

– other administrative expenses” as incurred whilst costs of

technical improvements, if they exceed CZK 40,000 per one

asset for the period and are completed, are capitalised and

increase the acquisition cost of the intangible fi xed asset.

(i) Property and EquipmentProperty and equipment includes identifi able tangible assets

with physical substance and with an estimated useful life

exceeding one year. The Group has determined that, in

addition to fulfi lling these criteria, tangible fi xed assets must

include assets with a cost greater than CZK 13,000. Property

and equipment also includes selected low value tangible assets

with a cost between CZK 1,000 and CZK 12,999. Property

and equipment is stated at historical cost less accumulated

depreciation and impairment provisions and is depreciated

when ready for use through the profi t and loss account line

“General administrative expenses – depreciation of property

and equipment” on a straight line basis over their estimated

useful lives. Depreciation periods for individual categories of

assets are as follows:

Buildings and structures 20–50 years

Electronic machines and equipment 6–12 years

Tools and other equipment 4–12 years

Equipment, fi xtures and fi ttings 4–6 years

Selected low value machines and equipment 2 years

Leasehold improvements Period of the lease

Land and works of art (irrespective of their cost) and assets

under construction are not depreciated. The gain and loss

arising on the disposal of property and equipment is determi-

ned based on its carrying value and is recognised in the profi t

and loss account line “Other operating income/(expenses), net”

in the year of disposal.

Property and equipment costing less than CZK 13,000 that are

not the selected low value fi xed assets, technical improvements

costing less than CZK 40,000 and intangible fi xed assets

costing less than CZK 60,000 are charged to the profi t and loss

account line “General administrative expenses – other adminis-

trative expenses” in the period of acquisition.

Repairs and maintenance of property and equipment are char-

ged to the profi t and loss account line “General administrative

expenses – other administrative expenses” in the year in which

the expenditure is incurred.

(j) Assets Held for SaleThe category of ‘assets held for sale’ includes non-current assets

that are taken out of active use at the date on which criteria

for sale are met, that is, the sale is approved by an authorised

person, steps to locate a buyer have been initiated, and a draft of

83


a purchase contract and other documentation is being prepared.

At the same date, the assets held for sale are measured at the

lower of carrying amount and fair value less selling costs. At the

same time, depreciation on such assets ceases. The fair value

less selling costs is determined based on an expert appraisal

(refer to Note 4g). In circumstances where the fair value less

selling costs is lower than the carrying amount, the difference

is accounted for through the recognition of an extraordinary

write-off in the profi t and loss account line “Other operating

income/(expenses), net”. Any subsequent revaluation of assets

arising from the change in the fair value less selling costs is

presented in the same profi t and loss account line.

(k) Impairment of AssetsWhere the carrying amount of an asset stated at net book value

is greater than its estimated recoverable amount, it is written

down immediately to its recoverable amount in accordance

with IAS 36 Impairment of Assets. The recoverable amount is

the greater of the following amounts: the market value which

can be recovered from the sale of an asset under normal con-

ditions, net of selling costs, and the estimated future economic

benefi ts arising from the use of the asset and its disposal at the

end of its service life.

The largest components of the Group’s assets are periodi-

cally tested for impairment and temporary impairments are

provisioned through the profi t and loss account line “Other

operating income/(expenses), net”. An increased carrying

amount arising from the reversal of a temporary impairment

loss must not exceed the carrying amount that would have

been determined (net of amortisation or accumulated

amortisation) had no impairment loss been recognised for the

asset in prior years.

Financial assets, including securities held to maturity (as


Measurement), are impaired when their carrying amount is

greater than the estimated recoverable value (refer to Note 3b).

Signifi cant accounting estimates and decisions in the applica-

tion of accounting policies are additionally disclosed in Note 4.

The Group determines the fair value of investment property

under construction on the basis of its estimate of discounted

future cash infl ows to be derived from the future sale of the

property and outfl ows associated with the sale and construction

of the property. The Group uses budgeted future cash infl ows

and outfl ows which are regularly assessed for reliability by

comparing the budget and the actual condition. The budgeted

infl ows arising from the sale and outfl ows associated with

construction and sale are also regularly reviewed by reference

to estimated real estate market developments.

(l) Provisions Provisions are recognised when the Group has a present legal

or constructive obligation as a result of past events and it is

probable that an outfl ow of resources embodying economic

benefi ts will be required to settle the obligation and a reliable

estimate of the amount of the obligation can be made.

(m) Provisions for Guarantees and Other Off Balance Sheet Credit Related CommitmentsIn the normal course of business, the Group enters into

credit related commitments which are recorded in off

balance sheet accounts and primarily include guarantees,

loan commitments, undrawn loan facilities and letters of

credit. Provisions are made for estimated losses on these

commitments on the same basis as set out at Note 3b in

respect of on balance sheet loan exposures. In estimating

the losses, the Group refers to the historical data regarding

risk parameters (credit conversion factors, probability of

default and loss-given default). Additional details can be

found in Note 46.

(n) Shareholders’ EquityThe statutory reserve fund comprises funds that the Group is

required to retain according to current legislation. Use of the

statutory reserve fund is limited by legislation and the articles

of the Group. The fund is not available for distribution to the

shareholders.

On acquisition of a business when the acquirer and the

acquiree are under common control, the difference between the

purchase price and net assets of the enterprise on the date of

acquisition is recognised as a reduction in equity in “Retained

earnings.”

84

Where the Bank or its subsidiaries purchase the Bank’s

treasury shares or obtain rights to purchase its treasury shares,

the consideration paid including any attributable transaction

costs net of income taxes, is shown as a deduction from total

shareholders’ equity. In selling treasury shares, the Bank

recognises the difference between their selling price and cost

as share premium.

Dividends reduce retained earnings in the period in which they

are declared by the Annual General Meeting

(o) Accrued InterestInterest receivable and payable accrued using the effective inte-

rest rate on outstanding loan balances, debt securities, deposit

products, bonds in issue and subordinated debt is reported

within “Other assets” and “Other liabilities,” respectively.

(p) Foreign CurrencyThe Group’s functional currency is the Czech crown. Transac-

tions denominated in foreign currencies, which are monetary

items, are recorded in the local currency at offi cial exchange

rates as announced by the CNB on the date of transaction. Assets

and liabilities denominated in foreign currencies are translated

into the local currency at the CNB exchange rate prevailing at

the balance sheet date. Realised and unrealised gains and losses

on foreign exchange are recognised in the profi t and loss account

in “Net trading result”, with the exception of foreign exchange

rate differences on equity investments denominated in foreign

currencies which are reported at the historical exchange rate,

foreign exchange rate differences on equity securities included

in the available-for-sale portfolio which are reported as a com-

ponent of a change in the fair value and foreign exchange rate

differences on derivatives entered into with a view to hedging

currency risk associated with assets or liabilities whose foreign

exchange rate differences are not reported in the profi t and loss

account.

The Group accounts for foreign exchange rate differences

arising from the fair values of investment property determined

in currencies other than the Group’s functional currency. This

involves real estate the fair value of which is EUR-denominated

because most proceeds of real estate are denominated in EUR.

Upon consolidation, the balance sheet items of entities that

report in other than the Group’s currency are translated into the

local currency at the offi cial exchange rate announced by the

CNB at the balance sheet date, with the exception of foreign

exchange rate differences which are reported at the historical

exchange rate. Profi t and loss account items are translated using

an average annual exchange rate announced by the CNB. Dif-

ferences arising from the use of the balance sheet and average

exchange rates are recognised in equity as “Foreign exchange

differences”. The same line is used to account for differences

arising from the consolidation of equity and the recognition of

equity investments at the historical exchange rate.

(q) Interest Income and Interest ExpenseInterest income and expense are recognised, on an accruals

basis, in the profi t and loss account lines “Interest income and

similar income” and “Interest expense and similar expense”

when earned or incurred, the only exception being securities

held for trading which recognised in “Net trading result”. The

Group accounts for the accruals of interest using the effective

interest rate method. Outstanding penalties, contractual

sanctions and interest on non-performing loans, which are

those loans that have overdue interest and/or principal, or

for which management of the Group otherwise believes the

contractual interest or principal due may not be received, are

only recognised on their collection.

The Group also recognises interest income on non-performing

loans in accordance with IAS 39 Financial Instruments:

Recognition and Measurement, Paragraph 93 of the IAS 39

Implementation Guidance. This interest income represents

interest income using the effective interest rate in respect of the

assets less a provision.

The Group uses the capitalisation model for borrowing costs

in respect of investment property in accordance with IAS 23

Borrowing Costs.

(r) Fees and CommissionsFees and commissions are recognised in the profi t and loss

account lines “Fee and commission income” and “Fee and

commission expense” on an accruals basis, with the exception

of fees that are included in the effective interest rate.

85


The effective interest rate includes the fees directly associated

with the provision of the loan, such as loan origination fees,

loan application processing fees, etc. These fees are reduced to

refl ect the Group’s direct external transaction costs involved in

issuing loans.

(s) Finance Leases

A Group Company as the LesseeLeases of property and equipment under which the Group

assumes substantially all the rewards incidental to ownership

(fi nance leases) are recognised in the balance sheet by recording

an asset and liability equal to the present value of all future lease

payments. Leasehold improvements on leased assets are depreci-

ated in accordance with the depreciation policy noted above. The

depreciation period is the estimated useful life of the asset, or the

lease term if shorter. Lease liabilities are reduced by repayments

of principal, whilst the fi nance charge component of the lease

payment is charged directly to the profi t and loss account.

A Group Company as the LessorFinance lease income is calculated under an effective interest

method to provide a constant rate of return on the net invest-

ment in the leases.

(t) Insurance BusinessInsurance premiums are recognised in the accounting period in

which they incept and are recorded in “Net insurance income.”

Provisions are established for unearned premiums which relate

to periods after the balance sheet date. Amounts in respect of

insurance business include reinsurance costs.

Financial placements representing assets of an insurance

company which it uses to guarantee its payables arising from

insurance and reinsurance activities are reported in a separate

line “Financial placements of insurance companies” and other

assets, including tangible and intangible assets, are presented

in “Other assets”. All other liabilities, except for provisions,

are included in “Other liabilities”. The pre-tax profi t generated

by Pojišťovna České spořitelny, a. s. is included in a separate

profi t and loss account line “Net insurance income”.

Technical Insurance Provisions

Life Insurance ProvisionThe life insurance provision is created as a sum of provisions

calculated under individual life insurance policies. The life

insurance provision represents the amount of payables, calcula-

ted by actuarial methods including the awarded and declared

profi t shares and provisions for costs connected with policy

management, net of the value of future premiums.

Provision for Insurance ClaimsProvisions for insurance claims under life and non-life

insurance policies are as follows:

• Provisions for insurance claims reported but not settled

during the year (‘RBNS provisions’);

• Provisions for insurance claims incurred but not reported

during the year (‘IBNR provisions’).

The RBNS provision is calculated as equal to the sum of

provisions established in respect of individual insured events.

The provision is also recorded for all estimated costs involved

in processing claims. The RBNS provision also comprises

provisions established in respect of legal disputes where the

company acts as a defendant.

Provisions for all claims that were incurred prior to the

year-end but were not reported are determined using the chain-

ladder method.

Provision for the Fulfi lment of Liabilities from the Used Technical Interest RateA provision for the fulfi lment of liabilities from the used

technical interest rate pursuant to Section 13 (2) (f) as set out

in Section 18 (a) of the Insurance Act, is created when it is

noted that the current or anticipated yield on the assets will not

be suffi cient to settle liabilities arising from the used technical

interest rate in respect of insurance policies sold in the past.

The approved methodology of calculating this provision is

based on Expert Guideline No. 3 of the Czech Society of

Actuaries – Test of the Suffi ciency of Life Insurance Technical

Provisions.

86

(u) Pension BusinessContributions of participants, together with their appreciation

and State contribution claims in pension funds are included in

“Amounts owed to customers.” Pension policy costs are amortised

over four years, the average duration of the pension policies.

Technical Provision for Retirement Pension SchemesThe level of the charged provision is determined on the basis

of the present actuarial value of committed retirement benefi ts

to be paid decreased to refl ect the amount of funds recorded on

behalf of pension recipients.

Up to 10 percent of the profi ts from the pension fund can be

distributed to the shareholders and no less than 5 percent of the

profi ts is allocated to the reserve fund. Refl ecting this fact the

Group accounts for the profi t attributable to participants of the

retirement pension schemes as amounts owed to customers.

(v) Factoring

Recourse Factoring The Group recognises funding/prepayments made to its

factoring clients as loans. Invoices/receivables received as part

of factoring transactions are maintained off balance sheet. At

the same time, the Group accounts for the commitment to pay

the prepayment to the factoring client.

Non-recourse Factoring The Group recognises receivables arising from invoices/re-

ceivables received as part of factoring transactions in “Other

assets”.

(w) TaxationTax on the profi t or loss for the year comprises the current year

tax charge, adjusted for deferred taxation. Current tax comprises

the tax payable calculated on the basis of the taxable income for

the year, using the tax rate enacted by the balance sheet date, and

any adjustment of the tax payable for previous years.

Deferred tax is provided using the balance sheet liability

method on all temporary differences between the carrying

amounts for fi nancial reporting purposes and the amounts used

for taxation purposes. The principal temporary differences

arise from certain non-tax deductible reserves and provisions,

tax and accounting depreciation on tangible and intangible

fi xed assets and revaluation of other assets.

The estimated value of tax losses expected to be available for

utilisation against future taxable income and tax deductible

temporary differences are offset against the deferred tax

liability within the same legal tax unit to the extent that the

Group has a legally enforceable right to set off the recognised

amounts and intends either to settle on a net basis, or to realise

the asset and settle the liability simultaneously.

Deferred tax assets are recognised only to the extent that it is

probable that suffi cient taxable profi t will be available to allow

the asset to be recovered.

Deferred tax is calculated on the basis of the tax rates that are

expected to apply to the period when the asset is realised or the

liability is settled. The effect on deferred tax of any changes

in tax rates is charged to the profi t and loss account, except to

the extent that it relates to items previously charged or credited

directly to equity.

(x) Financial Derivative InstrumentsFinancial derivatives include foreign currency and interest rate

swaps, currency forwards, forward rate agreements, foreign

currency and interest rate options (both purchased and sold),

futures and other derivative fi nancial instruments. The Group

uses various types of derivative instruments in both its trading

and hedging activities.

Financial derivative instruments entered into for trading or

hedging purposes are recognised at fair value as “Positive

fair value of fi nancial derivative transactions” and “Negative

fair value of fi nancial derivative transactions.” Realised and

unrealised gains and losses are recognised in the profi t and

loss account line “Net trading result”, the only exception

being unrealised gains and losses on cash fl ow hedges which

are recognised in equity. Fair values of derivatives are based

upon quoted market prices or pricing models which take into

account current market and contractual prices of the underlying

instruments, as well as the time value and yield curve or

volatility factors underlying the positions.

87


Certain derivatives embedded in other fi nancial instruments are

treated as separate derivatives when their risks and characteris-

tics are not closely related to those of the host contract and the

host contract is not carried at fair value with gains and losses

reported in the profi t and loss account.

Hedging derivatives are defi ned as derivatives that comply with

the Group’s risk management strategy, the hedging relationship

is formally documented and the hedge is effective, that is, at

inception and throughout the period, changes in the fair value or

cash fl ows of the hedged and hedging items are almost fully offset

and the results are within a range of 80 percent to 125 percent.

If the Group uses a fair value hedge, the hedged item is

remeasured at fair value and the gain or loss from the remea-

surement (in respect of an interest rate risk exposure hedge) is

recognised as an expense or income in “Interest income and

similar income” or “Interest expense and similar expense” as

appropriate. The same accounts of expense and income that

refl ect the gain or loss from remeasuring the hedged item at

fair value are also used in accounting for changes in fair values

of hedging derivatives that are attributable to the hedged risk.

If the Group uses a cash fl ow hedge, the gains or losses

from changes in fair values of hedging derivatives that are

attributable to the hedged risk are retained in equity on the

balance sheet and are recognised as an expense or income in

the periods in which the expense or income associated with the

hedged items are recognised.

Certain derivative transactions, while providing effective econo-

mic hedges under the Group’s risk management positions, do not

qualify for hedge accounting under the specifi c rules in IAS 39

Financial Instruments: Recognition and Measurement and are

therefore treated as derivatives held for trading with fair value

remeasurement gains and losses reported in “Net trading result”.

If the Group uses a hedge of a net investment in foreign

operations, the changes in fair values of hedging derivatives

that are attributable to the foreign currency risk are recognised

as “Foreign exchange differences arising upon consolidation

(retranslation reserve)” in equity.

(y) Transactions with Securities Undertaken on behalf of ClientsSecurities received by the Group into custody, administration,

management or safe-keeping are typically recorded at market

or nominal values if the market value is not available and

maintained off balance sheet. “Other liabilities” include the

Group’s payables to clients arising from cash received to

purchase securities or cash to be refunded to the client.

(z) Segment ReportingSegment information is based on two segment formats. The

primary format represents business segments – retail banking

(including construction savings products), corporate banking,

investment banking and other operations. The secondary format

represents the Group’s geographical markets – the Czech Repub-

lic, EU countries, other European countries and other regions.

Segment results include revenue and expenses directly

attributable to a segment and the relevant portion of revenue

and expenses that can be allocated to a segment, whether from

external transactions or from transactions with other segments

of the Group. Inter-segment transfer pricing is based on cost

plus an appropriate margin, as specifi ed by the Group’s policy.

Unallocated items mainly comprise administrative expenses.

Segment results are determined before any adjustments for

minority interest.

Segment assets and liabilities comprise those operating assets

and liabilities that are directly attributable to the segment or

can be allocated to the segment on a reasonable basis. Segment

assets are determined after deducting related adjustments

that are reported as direct offsets in the Group’s consolidated

balance sheet. Segment assets and liabilities do not include

income tax items.

(aa) Cash and Cash EquivalentsThe Group considers cash and deposits with the CNB, treasury

bills with a residual maturity of three months or less, nostro

accounts with fi nancial institutions and loro accounts with

fi nancial institutions to be cash equivalents. For the purposes of

determining cash and cash equivalents, the minimum reserve

deposit with the CNB is not included as a cash equivalent due

to restrictions on its availability.

88

(bb) Changes in Accounting Policies arising from the Adoption of New IFRSs and Amendments to IASs effective 1 January 2007 The Group has adopted IFRSs in the wording in effect as of 31

December 2007, namely the following standards:

• IFRS 7 ‘Financial Instruments: Disclosures’ (effective 1

January 2007); and

• Amendments to IAS 1 ‘Presentation of Financial Statements’

on capital disclosures (effective 1 January 2007). Additional

disclosure requirements are presented in Note 46e.

At the date of authorisation of these fi nancial statements, the

following standards were in issue and endorsed by the EU but

not yet effective:

• IFRS 8 Operating Segments (effective 1 January 2009); and

• IFRIC 11 – IFRS 2 on Group and treasury shares trans-

actions (effective for the period commencing after 31

March 2007). The impact of adopting this interpretation

would be CZK 99 million, representing an increase in the

Group’s costs and equity (an additional capital investment

of the parent company) arising from the fair value of the

options under the Employee Erste Bank Stock Ownership

Programme and the Management Erste Bank Stock Option

Programme.

The adoption of these standards in the future periods is not

expected to have a material impact on the consolidated profi t

or equity.

The following standards or interpretations have been issued by

IASB but not yet endorsed by the EU:

• IAS 1 (Revised) Presentation of Financial Statements

including the requirement to disclose comprehensive

income (effective 1 January 2009);

• Amendments to IAS 23 Borrowing Costs relating to

qualifying assets (effective 1 January 2009);

• IFRIC 12 Service Concession Arrangements (effective 1

January 2008);

• IFRIC 13 Customer Loyalty Programmes (effective for

accounting periods beginning on or after 1 July 2008). The

Group did not adopt this interpretation for the year ended

31 December 2007. The adoption would have resulted

in a presentation change in the profi t and loss account

involving a decrease in “Other operating income/(expen-

ses), net” of CZK 331 million and an increase in “Fee and

commission income” in the same amount; and

• IFRIC 14 IAS 19 The Limit on a Defi ned Benefi t Asset,

Minimum Funding Requirements and their Interaction

(effective 1 January 2008).

These standards are not yet effective as of the reporting date.

Endorsement by the EU is expected by the time the standards

and interpretations become effective. The Group believes that

the adoption of these standards will not have a material impact

on the consolidated profi t or equity.

(cc) Presentation Changes resulting from the Adoption of IFRS 7 Financial Instruments: DisclosuresThe adoption of IFRS 7 Financial Instruments: Disclosures

resulted in the following presentation changes in the annual

fi nancial statements. Comparative information for 2006 has

been restated accordingly.

• The Group segments its fi nancial instruments into the

following categories in accordance with IAS 39 Financial

Instruments: Recognition and Measurement:

• Loans and receivables not held for trading;

• Held-to-maturity investments;

• Financial assets/liabilities at fair value through profi t or

loss;

• Available-for-sale fi nancial assets;

• Financial liabilities measured at amortised cost; and

• Financial liabilities measured at fair value.

• The Group discloses the following classes of fi nancial

instruments:

• Cash and balances with the CNB;

• Loans and advances to fi nancial institutions;

• Loans and advances to customers, of which retail loans

and corporate loans;

• Securities held for trading;

• Securities designated upon initial recognition as at fair

value through profi t or loss;

• Financial derivative instruments;

• Securities available for sale;

• Securities held to maturity;

• Financial placements of insurance companies;

• Other assets;

• Amounts owed to fi nancial institutions;

89


• Amounts owed to customers;

• Liabilities at fair value;


• Bonds in issue;

• Other liabilities; and

• Subordinated debt.

Set out below are the values of fi nancial instruments in individual classes. The table presents a comparison between the classes of

recognised fi nancial assets and liabilities under IFRS 7 Financial Instruments: Disclosures, and the categories of fi nancial assets and

liabilities under IAS 39 Financial Instruments: Recognition and Measurement:

At 31 Dec 2007 Financial

assets at fair

value

Held-to-

maturity

investments

Loans and

receivables

not held for

trading

Available-for-

sale fi nancial

assets

Financial

liabilities

measured at

amortised cost

Financial

liabilities

measured at

fair value

FINANCIAL ASSETS

Cash and balances with the CNB 20,394

Loans and advances to fi nancial

institutions 65,688

Loans and advances to customers 411,605

Securities held for trading 28,436

Securities designated upon initial

recognition as at fair value through

profi t or loss 25,405

Financial derivative instruments 17,674

Securities available for sale 35,486

Securities held to maturity 137,860

Financial placements of insurance

companies 6,341 9,392 31

FINANCIAL LIABILITIES

Amounts owed to fi nancial institutions 54,482

Amounts owed to customers 588,526

Liabilities at fair value 7,609


Bonds in issue 47,275

Other liabilities 19,928

Subordinated debt 5,605

90

At 31 Dec 2006 Financial

assets at fair

value

Held-to-

maturity

investments

Loans and

receivables

not held for

trading

Available-for-

sale fi nancial

assets

Financial

liabilities

measured at

amortised cost

Financial

liabilities

measured at

fair value

FINANCIAL ASSETS

Cash and balances with the CNB 23,151


institutions 73,179









Financial placements of insurance

companies 6,538 7,266 31

Other assets 16,499

FINANCIAL LIABILITIES

Amounts owed to fi nancial institutions 46,361







• Qualitative disclosures about risks (refer to Note 45).

• Quantitative disclosures about each type of risk – maximum exposure to credit risk (refer to Note 50), loan collateralisation (refer

to Note 8), quality of assets (refer to Note 51), loan restructuring, past due loans (refer to Note 8), analysis of sensitivity to market

risks (interest rate risk refer to Note 49, foreign currency risk refer to Note 46).

• Disclosure of interest income and expenses by class (refer to Notes 35 and 36).

• Disclosure of impairment losses for individual classes of fi nancial assets (refer to Note 37).

• Disclosure of fees from trust and other fi duciary activities (refer to Note 38).

(dd) Changes of Accounting Policies and Accounting Estimates Changes in provisioning were made only by the Bank; these changes had no impact on the Bank’s subsidiaries. In 2007, the Bank

revised its methodological treatment of recognising provisions for loan receivables. For the fi rst time in 2007, the Bank recognised

provisions for unimpaired loans, i. e., performing loans with the 1–6 internal rating, both individually signifi cant and individually

insignifi cant. These provisions are recognised on a portfolio basis as the product of probability of default (PD), loss given default

(LGD) and loss identifi cation period (LIP) which represents the period for the which the Bank anticipates being able to identify

the loss event on an individual basis. All of the risk parameters are derived from the Bank’s historical experience. Management of

91


the Bank believes that this approach results in a more faithful presentation of the risk the Bank is exposed to and the related costs.

Pursuant to historical experience and current business practices in lending, the Bank does not expect that a certain portion of loans

will be fully recoverable, including accrued interest. Refl ecting this expectation, the Bank calculates a risk margin charged to clients

which is part of the Bank’s interest income and also recognises a provision which takes into account the losses realised by the Bank

by providing loans which cannot be allocated to individual loan receivables. These provisions are classifi ed as collective impairment

provisions.

For the fi rst time, the Bank reports the unwinding of discount within provisions. The unwinding of discount represents interest income

on impaired loans on the basis of the effective interest rate in respect of the discounted value of individually impaired loans.

Set out below is the impact of the change in the accounting estimate on the Bank’s fi nancial statements:

2007 2006 Net change

Provisions for performing loans with the 1–6 internal rating 972 208 764

Provisions for performing loans with the 7–8 internal rating 304 720 (416)

Total provisions for performing loans (collective impairment) 1,276 928 348

Provisions for non-performing loans (individually impaired) 4,578 4,051 527

Unwinding of discount 251 196 55

Total provisions 6,105 5,175 930

In 2007, the Group revised its treatment of accounting for receivables arising from recourse factoring transactions.

In 2006, the Group recognised non-recourse factoring funding/prepayments made to clients in respect of ceded receivables as loans

and presented the value of invoices/ceded receivables in “Other assets”.

Since 2007, the Group has not reported the value of invoices/ceded receivables in “Other assets” and maintains the balances off

balance sheet. The Group believes that this treatment leads to a truer and fairer view of the actual state of affairs.

At 31 December 2006

Ceded receivables/invoices at nominal value “Other assets”: 2,440 “Other liabilities”: 2,440

Prepayments made to factoring clients in the item “Loans and advances to customers”: 2,442 “Other liabilities“: 2,442

At 31 December 2007

Prepayments made to factoring clients in the item “Loans and advances to customers”: 2,251 “Other liabilities“: 2,251

92

4. SIGNIFICANT ACCOUNTING ESTIMATES AND DECISIONS IN THE APPLICATION OF ACCOUNTING POLICIES

(a) Impairment of Loans and Advances The Group regularly assesses its loan portfolio for possible

impairment. As part of this analysis, the Group splits all loans

into two categories: non-performing loans, i. e., a larger than

insignifi cant part of the principal and interest is past due for

more than 90 days, and performing loans. In respect of the fi rst

category of loans, the Group believes that there is objective

evidence demonstrating that a loss event occurred subsequent

to the initial recognition of these loans which impacts future

anticipated cash fl ows arising from these loans and these loans

are therefore impaired on an individual basis. The Group makes

an estimates of realised losses on an individual basis for indivi-

dually signifi cant loans, and on a portfolio basis for individually

insignifi cant loans by reference to historical indicators.

The Group additionally splits performing loans into collecti-

vely impaired (the 7–8 internal rating) where an indication

of impairment on a portfolio basis exists, and unimpaired

(the 1–6 internal rating). With regard to all performing (i. e.,

including unimpaired) loans, the Group assesses whether

there are observable data indicating that there is a measurable

decrease in the estimated future cash fl ows from the portfolio

although the decrease cannot yet be identifi ed with individual

loans. Management of the Group uses estimates based on

historical experience of losses on loans that have similar risk

characteristics. The methods and assumptions adopted in

estimating amounts and the timing of future cash fl ows are

regularly reviewed to reduce differences between the estimated

and actual data. Details about provisioning can be found in

Note 46.

With regard to receivables from customers arising from other

loan products such as factoring, leasing, construction savings

and instalment sale, the Group has the option to adopt modifi ed

methods refl ecting the specifi cs of these products.

(b) Debt Securities Held to Maturity Based upon the model of the development of future cash fl ows

and its balance sheet structure, the Group invests in securities

and categorises a portion of purchased securities in the held-

to-maturity portfolio. The key criterion driving this decision is

the Group’s ability to hold the security to maturity assuming

suffi cient fi nancial coverage throughout the whole term of the

investment. Should the sale of a signifi cant volume of the held-

to-maturity debt securities before their maturity take place,

pursuant to IAS 39 Financial Instruments: Recognition and

Measurement, the Group would be required to reallocate the

held-to-maturity securities into one of the remaining portfolios.

In terms of the Group’s asset management policy, the purchase

of a debt security into the portfolio of the held-to-maturity

debt securities is primarily considered as a tool of the banking

book interest rate risk management, the ability to hold such

a debt security to maturity is a pre-condition for using the debt

security as a banking book interest rate risk management tool.

(c) Impairment of Securities Securities held by the Group, the only exception being debt

securities in the held-to-maturity portfolio, are regularly marked

to market and the marked-to-market revaluation is recognised

in the profi t and loss account (the at-fair-value-through-profi t-

or-loss portfolio) or in equity (the available-for-sale portfolio)

which refl ects impairment, if any, of the securities (for instance,

as a result of the bankruptcy of their issuer).

If the Group concludes that some of its securities held to

maturity suffered impairment (for instance, a full redemption

of the nominal value of a debt security cannot be anticipated

with a suffi cient degree of certainty), the carrying amount of

the security is written down and the incurred loss is taken to the

profi t and loss account. The same treatment applies to securities

available for sale, impairment is refl ected in the profi t and loss

account instead of equity where current fl uctuations in the

market value of the security are recognised.

(d) Valuation of Instruments without Direct Quotations Financial instruments without direct quotations in an active

market are valued using the mark-to-model technique. The

models are regularly reviewed by a skilled employee of the

Risk Management Department that is different from the

preparer of the model. Each model is calibrated for the most

recent available market data. While the models are built only

on available data, their use is subject to certain assumptions

and estimates (e. g., for correlations, volatilities, etc). Changes

93


in the model assumptions may affect the reported market value

of the relevant fi nancial instruments.

The valuation of structured bonds, the yields of which are

linked to the underlying assets (asset backed securities) is

performed monthly on the basis of quotations requested from

listing agents. With assistance from the parent company, the

Group analyses the quoted prices by reference to the results

of internal valuation models and other facts. Based on this

analysis, the Group can value its bonds at other than the quoted

price. Where multiple quotations are available, the Group uses

the lowest quotation.

(e) ProvisionsThe Group is involved in a number of ongoing legal disputes,

the resolution of which may have an adverse fi nancial impact

on the Group. Based upon historical experience and expert

reports, the Group assesses the developments in these cases,

and the likelihood and the amount of potential fi nancial losses

which are appropriately provided for.

(f) Investment PropertyThe fair value of investment property is determined by an inde-

pendent real estate appraiser and is based upon expected yearly

net income by using a permanent (expected) yield method. The

expected yield is determined using the comparison method

(similar realised transactions on the same market).

(g) Fair Value of Immovable Assets Held for SaleImmovable assets held for sale are valued based on expert

appraisals prepared by independent real estate appraisers

and the valuation refl ects anticipated prices on the real estate

market. The Group carries only immovable assets as assets

held for sale.

(h) Impairment of AssetsThe Group tests its assets for impairment at least on an annual

basis to determine whether there is any indication that those

assets have suffered impairment. If any such indication exists,

the Group compares the carrying amount of the assets with

their recoverable amount defi ned as the higher of fair value less

costs to sell and value in use.

With regard to equity investments in subsidiaries and

associates that are within the scope of IAS 27 Consolidated

and Separate Financial Statements and IFRS 3 Business

Combinations, the Group determines value in use, the only

exception being investments in the real estate funds CEE

Property Development Portfolio B. V. and Czech and Slovak

Property Fund B. V. In respect of real estate funds, the Group

determines the fair values of individual equity investments held

via these funds less costs to sell. The fair value of the entire

fund represents the sum of the fair values of all individual

investments. In determining the fair value of equity invest-

ments held via the real estate funds, the Group uses estimates

prepared by recognised real estate appraisers. The value in use

is established as equal to the discounted value of the projected

cash fl ows from individual investments. The discount rate used

by the Group matches the zero-risk rate increased by a credit

mark-up refl ecting the Group’s external rating.

The Group determines the fair value of investment property

under construction on the basis of its estimate of discounted

future cash infl ows to be derived from the sale of the property

net of the outfl ows associated with the sale and construction of

the property.

With regard to tangible assets within the scope of IAS 16

Property, Plant and Equipment, the Group determines the fair

value less costs to sell. The fair value is arrived at on the basis

of expert appraisals prepared by certifi ed appraisers.

Depreciation periods applicable to individual categories

of property, plant and equipment and intangible assets are

disclosed in Notes 3e and 3f, respectively.

The Group determines the value in use of intangible assets by

estimating discounted future cash infl ows and outfl ows to be

derived from continuing use of the asset and from its ultimate

disposal.

The fair value of securities held to maturity and securities

available for sale that fall within the scope of IAS 39 Financial

instruments: Recognition and Measurement is determined on

the basis of standard market parameters or valuation models as

appropriate.

94

(i) Fair Value of Collateral In the course of its lending business, the Group accepts

movable and immovable assets and securities pledged as

collateral. The Group also uses various forms of guarantee

statements to collateralise its loan receivables. Movable and

immovable assets pledged as collateral are carried off balance

sheet and are initially valued on the basis of an expert appraisal

(nominal value of collateral) which is reduced, based on the

Group’s experience, to the realisable (fair) value using the

collateral discount coeffi cient which is derived from the type of

collateral. Guarantees are valued at the nominal value reduced

by the collateral coeffi cient which is derived from the guaran-

tor’s solvency. Subsequently, the Group regularly assesses the

realisable value of collateral for impairment. This assessment

is mostly conducted as part of the regular (at least annual)

monitoring of loan receivables. With respect to a large amount

of collateral of the same type, the Group uses portfolio models

to determine if the realisable value of the collateral decreased.

The Group takes into account the realisable value of collateral

in calculating provisions for loan receivables. Details about

the determination of the realisable (fair) value of collateral are

provided in Note 46.

(j) Technical Insurance ProvisionsThe level of technical insurance provisions carried by the

insurance company depends on the assumptions used in

determining individual provisions. The key assumptions that

the insurance company makes on the basis of its experience

and current market conditions principally include:

• Provision for insurance claims – estimate of future develop-

ments of damage

• Provision for the fulfi lment of liabilities from the used

technical interest rate

In accordance with the approved methodology of calculating

this provision based on Expert Guideline No. 3 of the Czech

Society of Actuaries – Test of the Suffi ciency of Life Insurance

Technical Provisions, the key assumptions primarily include

the zero-risk interest rate curve, anticipated rate of cancellation

of insurance policies, anticipated death rates of the insured as

compared to the mortality tables used in determining insurance

premiums and expected level of future administrative costs.

(k) Retirement Pension ProvisionsTechnical Provision for Retirement Pension Schemes

The level of the charged provision is determined on the

basis of the present actuarial value of committed retirement

benefi ts to be paid decreased to refl ect the amount of funds

recorded on behalf of pension recipients. For the purpose of

calculating this provision, the key assumptions include the es-

timated future rate of return of the portfolio and the estimated

survival rate of the retirement benefi t policy holders to whom

pensions were awarded.

95


5. COMPANIES INCLUDED IN CONSOLIDATION

The consolidated fi nancial statements include the following subsidiaries:

Companies held via Česká spořitelna, a. s.

Name of the company Registered offi ce Principal activities Group interest

2007 2006

brokerjet České spořitelny, a. s. Prague Investment services 51.0% 51.0%

CEE Property Development Portfolio B. V. (“CPDP B. V.“) Netherlands Investing in real estate 100.0% 100.0%

CS Investment Limited Guernsey Investing and investment holding 100.0% 100.0%

CS Property Investment Limited Cyprus Investing and investment holding 100.0% 100.0%

Czech and Slovak Property Fund B. V. (“CSPF B. V.“) Netherlands Investing and investment holding 66.7% 66.7%

Czech TOP Venture Fund B. V. Netherlands Management and corporate fi nance 84.3% 84.3%

Factoring České spořitelny, a. s. Prague Factoring 100.0% 100.0%

Informatika České Spořitelny, a. s. Prague IT services 100.0% 100.0%

Investiční společnost České spořitelny, a. s. Prague Investment management 100.0% 100.0%

Leasing České spořitelny, a. s. Prague Leasing 100.0% 100.0%

Penzijní fond České spořitelny, a. s. Prague Pension business 100.0% 100.0%

Pojišťovna České spořitelny, a.s Pardubice Insurance 55.3% 55.3%

RAVEN EU Advisory, a. s. Brno Corporate advisory 65.7% –

REICO investiční společnost České spořitelny, a. s. Prague Investment management 100.0% 100.0%

s Autoleasing, a. s. Prague Leasing 100.0% 100.0%

Stavební spořitelna České spořitelny, a. s. Prague Building savings bank 95.0% 95.0%

96

Companies held via Czech and Slovak Property Fund B. V.


2007 2006

Czech and Slovak Property Fund B. V. (“CSPF B. V.“) Netherlands Investing and investment holding 66.7% 66.7%

Atrium Center s. r. o. Slovakia Investing in real estate 66.7% 66.7%

BECON s. r. o. Prague Investing in real estate 66.7% –

BGA Czech, s. r. o. Prague Investing in real estate 66.7% 66.7%

Nové Butovice Development s. r. o. Prague Investing in real estate 66.7% –

P.B.E., a. s. Prague Investing in real estate – 66.7%

Smíchov Real Estate a. s. Prague Investing in real estate 66.7% 66.7 %

Solitaire Real Estate a. s. Prague Investing in real estate 66.7% 66.7%

Stodůlky Real Estate s. r. o. Prague Investing in real estate 66.7% 66.7%

Jegeho Residential s. r. o. Slovakia Investing in real estate 66.7% 66.7%

Trenčín Retail Park a. s. Slovakia Investing in real estate 60.0% 60.0%

Trenčín Property a. s. Slovakia Investing in real estate 66.7% 66.7%

CSPF Residential B. V. Netherlands Investing and investment holding 66.7% 66.7%

SATPO Jeseniova s. r. o. Prague Investing in real estate 33.3% 33.3%

SATPO Královská vyhlídka, s. r. o. Prague Investing in real estate 33.3% –

SATPO Na Malvazinkách, a. s. Prague Investing in real estate 33.3% –

SATPO Sacre Coeur s. r. o. Prague Investing in real estate 33.3% 33.3%

SATPO Sacre Coeur II, s. r. o. Prague Investing in real estate 33.3% –

SATPO Švédská s. r. o. Prague Investing in real estate 33.3% –

NHS CZECH s. r. o. Prague Investing in real estate 66.7% –

Zahradní čtvrť, a. s. Prague Investing in real estate 33.7% 33.7%

Companies held via CEE Property Development Portfolio B. V.


2007 2006

CEE Property Development Portfolio B. V. (“CPDP B. V.“) Netherlands Investing in real estate 100.0% 100.0%

CP Praha s. r. o. Prague Investing in real estate 20.0% –

CPDP 2003 s. r. o. Prague Investing in real estate 100.0% 99.3%

CPDP IT Centrum s. r. o. Prague Investing in real estate 100.0% –

CPDP Jungmannova s. r. o. Prague Investing in real estate 100.0% –

CPDP Polygon, s. r. o. Prague Investing in real estate 100.0% 100.0%

CPDP Prievozska, a. s. Slovakia Investing in real estate 100.0% 100.0%

CPDP Shopping Mall Kladno, a. s. Prague Investing in real estate 100.0% –

Gallery MYŠÁK a. s. Prague Investing in real estate 100.0% 100.0%

TAVARESA a. s. Prague Investing in real estate 100.0% 100.0%

97


Companies held via RAVEN EU Advisory, a. s.


2007 2006

RAVEN EU Advisory, a. s. Brno Corporate advisory 65.7% –

RAVEN Training, s. r. o. Prague Education 65.7% –

Euro Dotácie, s. r. o. Slovakia Education 43.8% –

Companies held via s Autoleasing, a. s.


2007 2006

s Autoleasing, a. s. Prague Leasing 100.0% 100.0%

s Autoúvěr, a. s. Prague Lending 100.0% 100.0%

The Group owns less than 50 percent of the share capital of CP Praha s. r. o., Euro Dotácie, s. r. o., SATPO Jeseniova s. r. o., SATPO

Královská vyhlídka, s. r. o., SATPO Sacre Coeur II, s. r. o., and Zahradní čtvrť, a. s. but has the power to govern the fi nancial and

operating policies of these entities. As such, these entities are treated as subsidiaries and are consolidated in full.

The joint ventures, SATPO Na Malvazinkách, a. s., SATPO Sacre Coeur s. r. o. and SATPO Švédská s. r. o., are consolidated using the

equity method of accounting.

(a) Penzijní fond České spořitelny, a. s. Up to 10 percent of the profi ts from the pension fund can be distributed to the shareholders and no less than 5 percent of the profi ts is alloca-

ted to the reserve fund. The shareholders incur the entire loss, if any. All other profi t is available for distribution to participants (customers).

(b) RAVEN EU Advisory, a. s. In 2007, the Bank acquired 65.7 percent of the issued share capital of RAVEN EU Advisory, a. s. The purchase price was determined on the

basis of an expert appraisal using the discounted future cash fl ows method. The difference on valuation gave rise to goodwill of CZK 33 million.

The structure of the purchased assets and liabilities at the acquisition date is as follows:

CZK mil.

Cash and cash equivalents 1

Other assets 20

Liabilities (8)

Subtotal 13

Goodwill 33

Purchase price 46

Less: cash and cash equivalents (1)

Net cash fl ow from the purchase of the 65.7 percent investment 45

98

Following the acquisition of the investment in RAVEN EU Advisory, a. s., the investments held by the entity in its subsidiaries

RAVEN Training, s. r. o. and Euro Dotácie, s. r. o. were also consolidated.

(c) Companies Consolidated since 2007For the year ended 31 December 2007, the consolidated fi nancial statements have included, for the fi rst time, RAVEN EU Advisory, a. s.,

RAVEN Training, s. r. o. and Euro Dotácie, s. r. o. (refer to Note 5 b), and the following entities acquired by real estate funds during 2007:

CZK mil.

Name of the entity

Acquisition

date

Owner Voting

power

in %

Costs of

acquisition

Profi t/(loss) since

the acquisition

date

Profi t/ (loss)

for 2006

CP Praha s. r. o. 16 April 2007 CPDP B. V. 20.0% 419 11 (19)

CPDP IT Centrum s. r. o. 29 Aug 2007 CPDP B. V. 100.0% 300 312 266

CPDP Jungmannova s. r. o. 28 Aug 2006 CPDP B. V. 100.0% – (12) (12)

CPDP Shopping Mall Kladno, a. s. 23 May 2007 CPDP B. V. 100.0% 133 (152) (152)

BECON s. r. o. 28 Feb 2007 CSPF B. V. 66.7% 487 (28) –

NHS CZECH s. r. o. 28 March 2007 CSPF Residential B. V. 66.7% – – –

Nové Butovice Development s. r. o. 28 Feb 2007 CSPF B. V. 66.7% 50 1 –

SATPO Královská vyhlídka, s. r. o. 20 March 2007 CSPF Residential B. V. 33.3% – (5) (8)

SATPO Na Malvazinkách, a. s. 18 May 2007 CSPF Residential B. V. 33.3% 1 (1) (1)

SATPO Sacre Coeur II, s. r. o. 24 April 2007 CSPF Residential B. V. 33.3% – (3) (4)

SATPO Švédská s. r. o. 13 June 2007 CSPF Residential B. V. 33.3% – – (1)

The Bank fully consolidates the investments in the real-estate funds in its consolidated fi nancial statements. While the Bank holds 20

percent and 10 percent of the issued share capital of the funds, respectively, and does not have a majority of voting rights or Board

representation, it has provided signifi cant additional funding to the funds for investment purposes which results in the Bank receiving

substantially all of the returns and bearing substantially all of the risks of the investment. The second shareholder bears minimal risks

and receives minimal returns from its investment in the funds.

The acquisition cost of the above stated companies was equal to the fair value of net assets at the acquisition date.

(d) Unconsolidated InvestmentsThe following subsidiary undertakings: Genesis Private Equity Fund B L.P., Consulting ČS, a. s., Realitní společnost ČS, a. s., Erste

Corporate Finance, a. s., CF Danube Leasing, s. r. o., Corfi na Trade, s. r. o., and RVG Czech s. r. o., are excluded from consolidation due

to immateriality. The total unconsolidated assets of these unconsolidated investments amounted to CZK 648 million as of 31 Decem-

ber 2007 (31 December 2006: CZK 638 million).

The following associate undertakings: FNE B. V., NewsTin a. s., CBCB-Czech Banking Credit Bureau, a. s., První certifi kační

autorita, a. s., s IT Solutions SK, spol. s r. o. , and s IT Services CZ, s. r. o., are excluded from consolidation due to immateriality. The

aggregate value of the Group’s share of the equity of these unconsolidated investments was CZK 11 million as of 31 December 2007

(31 December 2006: CZK 79 million).

99


6. CASH AND BALANCES WITH THE CNB

CZK mil. 2007 2006

Cash 14,699 14,076

Nostro accounts with the CNB 461 445

Minimum reserve deposits with the CNB 5,234 8,630

Total 20,394 23,151

Minimum reserve deposits represent mandatory deposits calculated in accordance with regulations promulgated by the CNB, and

whose withdrawal is restricted. Minimum reserve deposits accrue interest at the Czech National Bank’s two week repo rate. The

Bank is authorised to make withdrawals of minimum reserve deposits in an amount that exceeds the actual average level of minimum

reserve deposits for the relevant holding period calculated pursuant to the CNB’s regulation. The nostro balances represent balances

with the CNB relating to settlement activities and were available for withdrawal at the year-end.

7. LOANS AND ADVANCES TO FINANCIAL INSTITUTIONS

CZK mil. 2007 2006

Nostro accounts 592 556


Placements with fi nancial institutions 52,803 40,416

Total 65,688 73,179

As of 31 December 2007, the Group provided certain fi nancial institutions with loans of CZK 6,123 million (2006: CZK

26,814 million) under reverse repurchase transactions which were collateralised by securities amounting to CZK 6,842 million

(2006: CZK 26,339 million).

8. LOANS AND ADVANCES TO CUSTOMERS

(a) Analysis of Loans and Advances to Customers by Type of Loan

CZK mil. 2007 2006

Corporate loans 124,770 99,387

Mortgage loans (both retail and corporate customers) 159,904 115,411

Retail loans 74,805 61,349

Public sector loans 15,040 18,543

Construction savings loans 33,437 24,151

Factoring 2,251 2,442

Finance lease 8,208 7,822

Total 418,415 329,105

100

The principal loans and advances to customers are held by the Bank. As of 31 December 2007, the Czech Consolidation Agency

ceased to exist. All of the Bank’s receivables were collected in the context of the transfer of the Czech Consolidation Agency’s assets

to the Finance Ministry of the Czech Republic. At the end of 2006, the Bank reported receivables from the Czech Consolidation

Agency of CZK 5,000 million which are included in the ‘Public sector’ loans (a year-on-year change of presentation).

(b) Industry Sector AnalysisThe table below details the breakdown of loans and advances to customers by industry sector:

CZK mil. 2007 2006

Non-fi nancial institutions 147,353 113,118

Financial institutions 20,257 17,943

Government sector 17,452 20,761

Not-for-profi t organisations 5,311 2,423

Households (self employed) 14,893 14,444

Resident individuals 213,148 160,416

Total 418,415 329,105

As of 31 December 2007, the Bank provided certain customers with loans of CZK 4,203 million (2006: CZK nil) under reverse

repurchase transactions which were collateralised by securities amounting to CZK 4,249 million (2006: CZK nil).

The Group recognised interest on impaired loans in the amount of CZK 251 million (2006: CZK 196 million) in the profi t and loss account.

(c) Analysis of Loans and Advances to Customers according to Credit Risk Assessment Policies

31 December 2007

CZK mil.

Individually

signifi cant loans

Individually

insignifi cant loans

Total

Individually impaired 4,881 5,830 10,711

Collectively impaired 8,786 8,491 17,277

Unimpaired 167,980 222,448 390,427

Total 181,646 236,769 418,415

31 December 2006

CZK mil.

Individually

signifi cant loans

Individually

insignifi cant loans Total


Collectively impaired 224 29,382 29,606

Unimpaired 138,600 144,623 283,223

Total 148,446 180,659 329,105

101


Individually signifi cant loans represent corporate loans or loans where the Group’s exposure exceeds CZK 5 million. Individually

impaired loans are those loans where objective evidence demonstrates that the associated cash fl ow is at risk (loss event). The Group

defi nes the loss event in accordance with BASEL II. This classifi cation corresponds to the ‘R’ internal rating (default). Collectively

impaired loans are loans that show an indication of impairment on a collective basis, which corresponds to the 7–8 internal rating, but

are not non-performing. Unimpaired loans are loans with the 1–6 internal rating.

The Group uses various types of collateral in order to mitigate credit risk exposure. The list of collateral instruments is set out in an

internal regulation which also outlines the guidance to be followed in determining the values of individual types of collateral. The

Group establishes the nominal value of collateral based upon a market valuation which is subsequently used as a basis for arriving at

the realisable value by applying a discount factor set for each type of collateral. Collateral that is valued at the realisable value is taken

into account in provisioning (refer to Note 3b). Collateral valuation rules also set out when and how often the valuations of individual

collateral instruments are updated.

(d) Analysis of individually impaired receivables

(da) Retail Receivables

CZK mil. Retail receivables from individuals/households

Overdraft

loans

Credit

cards

Other

loans

Mortgage

loans

Construc-

tion savings

loans

Finance

leases

Total

31 December 2007

Individually impaired 257 248 2,323 1,543 440 37 4,848

Fair value of collateral – – 219 1,034 83 20 1,356

31 December 2006

Individually impaired 218 158 2,278 918 333 60 3,966

Fair value of collateral – – 202 653 59 – 914

CZK mil. MSE x) Other Total retail

receivablesOverdraft

loans

Other

loans

Mortgage

loans

Construct-

ion savings

loans

Finance

leases

31 December 2007

Individually impaired 219 602 417 2 262 13 6,363

Fair value of collateral 29 291 258 – 113 0 2,047

31 December 2006

Individually impaired 167 159 406 1 478 4 5,180

Fair value of collateral 12 106 242 – – – 1,274x) MSE – individuals-businessmen and small enterprises with the annual turnover of less than CZK 30 million.

102

(db) Corporate Receivables

CZK mil. Corporate receivables

Corporate customers SME x) Corporate mortgages Municipalities Total

31 December 2007

Individually impaired 1,199 2,349 800 – 4,348

Fair value of collateral 308 1,325 523 – 2,156

31 December 2006

Individually impaired 1,493 1,823 177 – 3,493

Fair value of collateral 136 1,056 2 – 1,193x) SME – small and medium size enterprises with the annual turnover of CZK 30 – 1,000 million.

(e) Restructuring of LoansThe Group restructured the loans of CZK 970 million (2006: CZK 1,144 million) that would otherwise be past due or impaired. None

of these loans triggered a recognition of new assets on the Group’s balance sheet.

CZK mil. 2007 2006

Other loans 412 651

Construction savings loans 37 59

Finance leases 33 6

Mortgage loans 488 428

Total 970 1,144

103


(f) Past Due LoansAs of 31 December 2007 and 2006, the Group records the following retail loans that are past their due dates but not impaired:

CZK mil. Retail loans to individuals/households

Overdraft

loans

Credit

cards

Other

loans

Mortgage

loans

Construc-

tion savings

loans

Finance

leases

Total

31 December 2007

Past due less than 30 days 244 337 2,519 415 532 – 4,047

Past due between 30–60 days 51 38 563 687 – – 1,339

Past due between 60–90 days 26 16 209 289 – – 540

Total 321 391 3,291 1,391 532 – 5,926

Fair value of collateral 1 – 10,345 88,282 177 34 98,839

31 December 2006

Past due less than 30 days 2 207 1,987 244 350 – 2,790

Past due between 30–60 days 1 31 398 389 – – 819

Past due between 60–90 days – 13 146 139 – – 298

Total 3 251 2,531 772 350 – 3,907

Fair value of collateral 1 – 10,273 66,224 129 – 76,627

CZK mil. MSE x) Other Total retail

receivablesOverdraft

loans

Other

loans

Mortgage

loans

Construc-

tion savings

loans

Finance

leases

31 December 2007

Past due less than 30 days 28 486 95 – 279 10 4,945

Past due between 30–60 days 20 87 146 – – – 1,592

Past due between 60–90 days 10 52 114 – – – 716

Total 58 625 355 – 279 10 7,254

Fair value of collateral 497 7,517 11,000 – – 2,596 120,449

31 December 2006

Past due less than 30 days 25 303 78 – 279 10 3,485

Past due between 30–60 days 23 107 186 – – 5 1,140

Past due between 60–90 days 12 22 42 – – 3 377

Total 60 432 306 – 279 18 5,002

Fair value of collateral 520 6,550 10,938 – – 2,837 97,472x) MSE – individuals-businessmen and small enterprises with the annual turnover of less than CZK 30 million.

104

As of 31 December 2007 and 2006, the Group records the following corporate loans past their due dates which are not impaired:

31 December 2007 Corporate loans

CZK mil. Corporate customers SME Corporate mortgages Municipalities Total

Past due less than 30 days 1,829 1,698 350 – 3,877

Past due between 30–60 days 60 296 203 – 559

Past due between 60–90 days – 92 – 167 259

Total 1,889 2,086 553 167 4,695

Fair value of collateral 18,915 25,949 20,853 4,350 70,067



Past due less than 30 days 319 830 371 3 1,523

Past due between 30–60 days 101 104 – – 205

Past due between 60–90 days – 62 26 – 88

Total 420 996 397 3 1,816


Finance LeasesLoans and advances to customers also include net investments in fi nance leases.

2007 2006

Gross investment in fi nance leases 9,030 8,128

Of which:

– Less than 1 year 3,796 4,344

– From 1 year to 5 years 5,064 3,701

– Over 5 years 170 83

Unearned income (822) (306)

Subtotal 8,208 7,822

Provision (354) (931)

Net investment in fi nance leases 7,854 6,891

Of which:

– Less than 1 year 3,268 3,482

– From 1 year to 5 years 4,449 3,350

– Over 5 years 137 59

The principal assets held under lease arrangements include cars and other technical equipment

105


9. PROVISIONS FOR LOSSES ON LOANS AND ADVANCES

(a) Creation and use of provisions for losses on loans and advances

CZK mil. 2007 2006

At 1 January 6,339 6,672

Charge for provisions 4,811 3,656

Release of provisions (2,565) (1,882)

Net charge/(release) of provisions 2,246 1,774

Unwinding of discount (251) (196)

Use of provisions for loans written off and assigned (1,508) (1,833)

FX differences from provisions in foreign currency (16) (78)

At 31 December 6,810 6,339

Net change in amount of provisions 471 (333)

The use of provisions for loans written off and assigned of CZK 1,508 million (2006: CZK 1,833 million) has a zero impact on the

Group’s profi t.

(b) Provisions for losses on loans and advances by category

31 December 2007

CZK mil.

Individually

signifi cant loans

Individually


Total


Collectively impaired 756 611 1,367


Total 2,740 4,070 6,810

31 December 2006

CZK mil.

Individually

signifi cant loans

Individually


Total

Individually impaired 2 231 3,688 5,909

Collectively impaired – 234 234


Total 2,313 4,026 6,339

In 2007, the Group began to recognise provisions for unimpaired loans, i. e., performing loans with the 1–6 internal rating. These

provisions are recorded on a portfolio basis using the estimated PDs for individual grades of the 1–6 internal rating, LGDs for

individual product and client portfolios, and the loss identifi cation period for individual product and client portfolios. These provi-

106

sions are refl ected in collectively impaired provisions together with the provisions for performing loans with the 7–8 internal rating

(collectively impaired loan receivables).

In 2007, the Bank sold part of the non-performing loans portfolio of CZK 920 million to third parties. The Bank made a gain of

CZK 301 million on this transaction.

The unwinding of discount represents interest income on impaired loans on the basis of the effective interest rate in respect of the

discounted value of loans.

Losses from impairment by types of fi nancial assets:

2007 Retail loans to individuals/households

CZK mil. Overdraft

loans

Credit

cards

Other

loans

Mortgage

loans

Construc-

tion savings

loans

Finance

leases

Total

Balance at 1 January 183 145 1,849 492 212 35 2,915

Provisioning 171 237 1,326 468 78 3 2,283

Write-off of receivables (58) (1) (570) (1) (34) (9) (630)

Amounts recovered during the year (75) ,(138) (641) (226) – – (1,080)

Interest income from impaired loans (unwinding

of discount) (5) (18) (82) (12) – – (117)

Balance at 31 December 216 225 1,882 721 255 30 3,329

Net change in the amount of provisions 33 80 33 229 44 (6) 414

2007 Other retail loans Total other

retail loansCZK mil. MSE Other

Overdraft

loans

Other

loans

Mortgage

loans

Finance

leases

Balance at 1 January 219 286 67 881 9 1,462

Provisioning 137 268 134 (89) – 450

Write-off of receivables (36) (27) (0) (508) – (571)

Amounts recovered during the year (93) (57) (37) – (9) (196)


of discount) – (12) (11) – – (23)

Balance at 31 December 227 458 153 284 – 1,122

Net change in the amount of provisions 8 172 86 (597) (9) (340)

107


2007 Corporate loans

CZK mil. Corporate customers SME Corporate mortgages Municipal customers Total

Balance at 1 January 564 1,237 160 – 1,961

Provisioning 272 1,010 108 9 1,399

Write-off of receivables (140) (124) – – (264)

Amounts recovered during the year (160) (424) (26) – (610)


of discount) (46) (53) (12) – (111)

FX differences (15) – – – (15)

Balance at 31 December 474 1,646 230 9 2,359

Net change in the amount of provisions (90) 409 70 9 398

2006 Retail loans to individuals/households

CZK mil. Overdraft

loans

Credit

cards

Other

loans

Mortgage

loans

Construc-

tion savings

loans

Finance

leases

Total

Balance at 1 January 132 89 2,089 169 165 33 2,677

Provisioning 187 98 1,153 407 63 12 1,920

Write-off of receivables (84) (12) (784) – (17) (9) (906)

Amounts recovered during the year (46) (18) (529) (65) – – (658)


of discount) (6) (12) (80) (19) – – (117)

Balance at 31 December 183 145 1,849 492 212 35 2,916

Net change in the amount of provisions 51 56 (240) 323 46 3 239

108

2006 Other retail loans Total other

retail loansCZK mil. MSE Other

Overdraft

loans

Other

loans

Mortgage

loans

Finance

leases

Balance at 1 January 68 188 26 1,355 14 1,651

Provisioning 170 172 65 22 2 431

Write-off of receivables (9) (12) (12) (497) – (530)

Amounts recovered during the year (9) (49) (8) – (7) (73)


of discount) (1) (13) (4) – – (17)

Balance at 31 December 219 286 67 881 9 1,462

Net change in the amount of provisions 151 98 41 (475) (5) (190)

2006 Corporate loans


Balance at 1 January 870 1,235 181 0 2,286

Provisioning 222 780 20 – 1,022

Write-off of receivables (266) (129) (1) – (396)



of discount) (36) (24) (2) – (62)



Net change in the amount of provisions (306) 2 (21) 0 (325)

10. SECURITIES HELD FOR TRADING

CZK mil. 2007 2006

Listed debt securities 26,121 25,639

Listed equity securities and other variable yield securities 2,315 2,164

Total 28,436 27,803

Listed debt securities include Government treasury bills and treasury bills of the CNB in the aggregate amount of CZK 100 million

(2006: CZK 297 million) and Government bonds in the aggregate amount of CZK 23,103 million (2006: CZK 20,782 million) which

may be used for refi nancing with the CNB (the amounts shown above do not refl ect securities that were transferred to collateralise

loans received under repurchase transactions).

109


Debt securities comprise:

CZK mil. 2007 2006

Variable yield debt securities

Issued in CZK 290 210

Issued in other currencies – –

Total 290 210

Fixed income debt securities

Issued in CZK 23,979 22,670

Issued in other currencies 1,852 2,759

Total 25,831 25,429

Total debt securities 26,121 25,639

Equity securities and other variable yield securities comprise:

CZK mil. 2007 2006

Shares and share certifi cates


Issued in other currencies 511 651

Total 2,315 2,164

Debt securities were issued by:

CZK mil. 2007 2006

Debt securities issued by

State institutions in the Czech Republic 23,297 21,810

Foreign state institutions 1,062 363

Financial institutions in the Czech Republic 832 1,052

Foreign fi nancial institutions 149 1,820

Other entities in the Czech Republic 491 84

Other foreign entities 290 510

Total 26,121 25,639

110

Equity securities and other variable yield securities held for trading were issued by the following issuers:

CZK mil. 2007 2006

Shares and share certifi cates issued by

Financial institutions in the Czech Republic 145 –

Foreign fi nancial institutions 2,041 2,070



Total 2,315 2,164

11. SECURITIES DESIGNATED UPON INITIAL RECOGNITION AS AT FAIR VALUE THROUGH PROFIT OR LOSS

CZK mil. 2007 2006

Debt securities

Listed 17,735 14,868

Unlisted – –

Equity securities and other variable yield securities

Listed 6,770 6,009

Unlisted 900 860

Total 25,405 21,737

Debt securities and other fi xed income securities do not include any Government treasury bills or treasury bills of the CNB. These

securities also do not include Government bonds which may be used for refi nancing with the CNB.

This portfolio includes asset-backed securities (‘ABS’) of CZK 3,316 million (2006: CZK 1,565 million). The response of the

market to the subprime mortgage crisis in the USA gave rise to an impairment of these securities and the Bank incurred a loss on the

revaluation of the ABSs in the amount of CZK 284 million which is reported in the profi t and loss account line “Other net operating

income/(expenses), net” (refer to Note 42). The Bank believes that this loss refl ects the current market conditions rather than any

actual deterioration of the rating of the underlying assets of these securities.

Unlisted equity securities and other variable yield securities include equity investments and holdings that are not participating inte-

rests with controlling or signifi cant infl uence in the aggregate amount of CZK 900 million (2006: CZK 860 million). The fair value of

these equity investments is not derived from the market price as these securities are not traded on an active market. The fair value was

determined based on an expert opinion based on the estimate of cash fl ows.

111



CZK mil. 2007 2006


Issued in CZK 10 10


Total 3,694 3,668




Total 14,041 11,200



CZK mil. 2007 2006




Total 7,670 6,869

Debt securities were issued by the following issuers:

CZK mil. 2007 2006


State institutions in the Czech Republic 282 88

Foreign state institutions 2,303 2,632

Financial institutions in the Czech Republic 225 255




Total 17,735 14,868

Equity securities and other variable yield securities were issued by the following issuers:

CZK mil. 2007 2006


Financial institutions in the Czech Republic 4,537 3,950


Total 7,670 6,869

112

12. POSITIVE FAIR VALUE OF FINANCIAL DERIVATIVE TRANSACTIONS

CZK mil. 2007 2006

Hedging

– Foreign currency 5 25

– Interest rate 245 383

Total hedging 250 408

Non-hedging

– Foreign currency 10,522 8,163

– Interest rate 6,667 9,698

– Other 235 164

Total non-hedging 17,424 18,025

Total positive fair value of fi nancial derivative transactions 17,674 18,433

13. SECURITIES AVAILABLE FOR SALE

CZK mil. 2007 2006

Debt securities

Listed 32,884 37,525


Listed 2,469 1,817

Unlisted 133 43

Total 35,486 39,385

Debt securities include Government treasury bills and treasury bills of the CNB in the aggregate amount of CZK 1,283 million (2006:

CZK 5,521 million) and Government bonds of CZK 5,987 million (2006: CZK 9,303 million) which may be used for refi nancing

with the CNB (the amounts shown above do not refl ect securities that were transferred to collateralise loans received under repurchase

transactions).

Unlisted equity securities and other variable yield securities include equity investments and holdings that are not participating

interests with controlling or signifi cant infl uence in the aggregate amount of CZK 133 million (2006: CZK 43 million).

113



CZK mil. 2007 2006




Total 11,489 11,245




Total 21,395 26,280



CZK mil. 2007 2006


Issued in CZK 1,104 566


Total 2,602 1,860


CZK mil. 2007 2006








Total 32,884 37,525

114


CZK mil. 2007 2006






Total 2,602 1,860

14. ASSETS HELD FOR SALE

CZK mil. 2007 2006

Cost

At 1 January 617 578

Additions 9 199

Disposals (465) (160)

At 31 December 161 617

Accumulated depreciation including impairment

At 1 January (297) (252)

Additions (5) (115)

Disposals 219 70

At 31 December (83) (297)

Net book value at 31 December 78 320

Assets are reported as held for sale due to their redundancy.

A portion of the assets held for sale as of 1 January 2007 at an aggregate carrying amount of CZK 136 million was not sold in 2007

for reasons that were beyond the Group’s control. As such, these assets were reclassifi ed as assets in use in the same amount at the

balance sheet date.

During the year ended 31 December 2007, the Group sold assets at a net book value of CZK 106 million (2006: CZK 6 million)

which were carried as assets held for sale as of 31 December 2006.

All assets held for sale are presented in the ‘Other activities’ segment.

115


15. SECURITIES HELD TO MATURITY

CZK mil. 2007 2006

Debt securities

Listed 137,176 141,119

Unlisted 310 310

Total 137,486 141,429

Listed debt securities include Government treasury bills and treasury bills of the CNB of CZK 7,255 million (2006: CZK 15,323 mil-

lion) and Government bonds of CZK 74,888 million (2006: CZK 64,938 million) which may be used for refi nancing with the CNB

(the amounts shown above do not refl ect securities that were transferred to collateralise loans received under repurchase transactions).

The portfolio additionally comprises credit linked notes issued by the parent company, Erste Bank, at a cost of CZK 310 million

(2006: CZK 310 million).


CZK mil. 2007 2006




Total 24,946 23,243


Issued in CZK 112,008 117,636


Total 112,540 118,186



CZK mil. 2007 2006





Other entities in the Czech Republic 2,071 1,113


Total 137,486 141,429

116

16. FINANCIAL PLACEMENTS OF INSURANCE COMPANIES

Financial placements of insurance companies comprise the following types of assets:

CZK mil. 2007 2006

Loans and advances to fi nancial institutions 31 31

Securities at fair value through profi t or loss


Shares and share certifi cates 2,451 2,125

Total 6,341 6,538

Securities held to maturity


Real estate 44 43

Total 15,808 13,878

17. INVESTMENT PROPERTY

CZK mil. 2007 2006

At 1 January 8,772 6,379

Additions (fair value at the date of acquisition under business combinations) 746 1,569

Purchases and capitalisation of subsequent expenditure 2,745 69

Reclassifi cation from property under construction (refer to Note 18) 1,105 –

Net gains from fair value revaluations 697 531

Deferred tax movement (refer to Note 30) (535) 224

Other 96 –

At 31 December 13,626 8,772

Rental income arising from investment property amounted to CZK 661 million (2006: CZK 451 million). Operating expenses on this

investment property amounted to CZK 119 million (2006: CZK 57 million).

18. PROPERTY UNDER CONSTRUCTION

CZK mil. 2007 2006

1 January 2,374 541

Additions from business combination (fair value at the acquisition date) 2,171 1,197

Construction 1,599, 995

Impairment loss (180) –

Sale of completed buildings (720) (359)

Reclassifi cation as investment property (refer to Note 17) (1,105) –

31 December 4,319 2,374

117


19. INTANGIBLE FIXED ASSETS CZK mil. Goodwill Software Other Total

Cost

1 January 2006 28 2,743 7,007 9,778

Additions – 1,058 736 1,794

Disposals – (40) (153) (193)

31 December 2006 28 3,761 7,590 11,379

1 January 2007 28 3,761 7,590 11,379

Additions 33 2,189 141 2,363

Disposals – (804) (541) (1,345)

31 December 2007 61 5,146 7,190 12,397

Accumulated amortisation including impairment

and provisions

1 January 2006 (17) (1,823) (3,476) (5,316)

Additions – (556) (1,095) (1,651)

Disposals – 29 138 167

31 December 2006 (17) (2,350) (4,433) (6,800)

1 January 2007 (17) (2,350) (4,433) (6,800)

Additions – (957) (903) (1,860)

Disposals – 510 244 754

31 December 2007 (17) (2,797) (5,092) (7,906)

Net book value

31 December 2006 11 1,411 3,157 4,579

31 December 2007 44 2,349 2,098 4,491

The balances as of 31 December 2007 shown above include CZK 1,520 million (2006: CZK 1,967 million) in property under

construction.

In 2007, the Group recorded asset impairment of CZK nil (2006: CZK 11 million).

118

20. PROPERTY AND EQUIPMENT

CZK mil. Land and buildings Equipment, fi xtures

and fi ttings

Total

Cost

1 January 2006 16,073 11,732 27,805

Additions 526 1,510 2,036

Disposals (593) (1,740) (2,333)

31 December 2006 16,006 11,502 27,508

1 January 2007 16,006 11,502 27,508

Additions 2,363 1,331 3,694

Disposals (13) (1,567) (1,580)

31 December 2007 18,356 11,266 29,622

Accumulated depreciation including impairment and provisions

1 January 2006 (4,961) (8,594) (13,555)

Additions (454) (1,298) (1,752)

Disposals 316 1,120 1,436

31 December 2006 (5,099) (8,772) (13,871)

1 January 2007 (5,099) (8,772) (13,871)

Additions (512) (1,090) (1,602)

Disposals 83 1,032 1,115

31 December 2007 (5,528) (8,830) (14,358)

Net book value

31 December 2006 10,907 2,730 13,637

31 December 2007 12,828 2,436 15,264

The balances as of 31 December 2007 shown above include CZK 629 million (2006: CZK 783 million) in property under construction.

In 2007, the Group recognised asset impairment of CZK nil (2006: CZK 35 million). This impairment largely relates to real estate

that is insuffi ciently used by the Group for its activities.

119


21. OTHER ASSETS

CZK mil. 2007 2006

Accrued income 5,011 5,055

Of which:

– Interest on loans and advances to fi nancial institutions 383 349

– Interest on loans and advances to customers 557 776

– Coupons on bonds 4,053 3,886

– Other 18 44

Deferred expenses 1,738 1,006

Deferred tax asset (refer to Note 30) 366 62

Receivables arising from due income taxes 96 125

Various receivables 1,358 532

Estimated receivables 637 543

State support 2,993 3,219

Other assets 1,389 816

Receivables from factoring transactions 849 4,545

Receivables from securities trading 3,447 508

Other assets from insurance services 107 88

Total 17,991 16,499

The receivable from state subsidy totalling CZK 2,993 million (2006: CZK 3,219 million) involves claims in respect of the partici-

pants of the building savings scheme offered by the Bank’s subsidiary, Stavební spořitelna České spořitelny, a. s. The state subsidy is

provided to the participants from the Finance Ministry of the Czech Republic (MF CR) based on the amount of customer deposits at

the year-end with a limit of CZK 4,500/CZK 3,000 (for contracts entered into subsequent to 1 January 2005) per participant (refer to

Note 23).

The signifi cant year-on-year change in receivables from factoring transactions is attributable to the revised treatment of accounting for

factoring transactions. Additional details can be found in Note 3dd.

22. AMOUNTS OWED TO FINANCIAL INSTITUTIONS

CZK mil. 2007 2006

Loro accounts 737 267

Term deposits 22,668 19,766

Loans received 35,077 26,328

Total 58,482 46,361

As of 31 December 2007, the Bank received from other fi nancial institutions loans of CZK 11,964 million (2006: CZK 9,206 million)

under repurchase transactions which were collateralised by securities amounting to CZK 11,787 million (2006: CZK 8,959 million).

120

23. AMOUNTS OWED TO CUSTOMERS

CZK mil. 2007 2006

Repayable on demand 366,852 326,171

Other deposits 221,674 211,316

Total 588,526 537,487

As of 31 December 2007, the Bank received from customers loans of CZK nil (2006: CZK 516 million) under repurchase transactions

which were collateralised by securities amounting to CZK nil (2006: CZK 515 million).

The fair value option has been applied in respect of part of amounts owed to customers (refer to Note 24).

Other deposits include a payable of CZK 2,993 million (2006: CZK 3,219 million) arising from state subsidy claims in respect of

building savings programme participants (refer to Note 23).

Analysis of amounts owed to customers:

CZK mil. 2007 2006

Savings deposits 181,143 183,385

Other amounts owed to customers

– Public sector 51,049 45,357

– Corporate clients 91,340 78,171

– Retail clients 264,994 230,572

– Other – 2

Total 588,526 537,487

24. LIABILITIES AT FAIR VALUE

CZK mil. 2007 2006

Payables to customers – deposits with the fair value option 3,080 –

Liabilities arising from issued securities at fair value 1,189 –

Payables arising from short sales – debt securities 3,167 5,435

Payables arising from short sales – shares 173 15

Total 7,609 5,450

121


CZK mil. 2007 2006

Change in the fair value unrelated to changes in market conditions

Payables to customers – deposits with the fair value option 2 –

Liabilities arising from issued securities at fair value 4 –

Total 6 0

Difference between the carrying amount and the contractual agreed nominal value due at maturity



Total 139 0

Short sales are short-term trading liabilities which mature between one and three months. Changes in the fair value of these trading

liabilities are not analysed since the liabilities are different at each balance sheet date.

Given that the Group did not use the fair value option in respect of liabilities in 2006, the change in the fair value arising from the

changes in the credit profi le of the issuer (the Group) is determined as equal to the difference between the fair value of the liabilities at

the issue date and the balance sheet date.

25. NEGATIVE FAIR VALUE OF FINANCIAL DERIVATIVE TRANSACTIONS

CZK mil. 2007 2006

Hedging

– Foreign currency 5 –

– Interest rate 727 254

Total hedging 732 254

Non-hedging


– Interest rate 6,004 9,257

– Other 488 381

Total non-hedging 10,349 12,430

Total negative fair value of fi nancial derivative transactions 11,081 12,684

122

26. BONDS IN ISSUE

ISIN Date of issue Maturity Interest rate 2007

CZK mil.

2006

CZK mil.

Mortgage bonds CZ0002000201 November 2002 November 2007 5.80% – 2,442

Mortgage bonds CZ0002000235 March 2003 March 2008 5.20% 1,071 3,028

Mortgage bonds CZ0002000276 August 2003 August 2008 4.50% 1,171 2,636

Mortgage bonds CZ0002000342 April 2004 April 2009 3.50% 303 298

Mortgage bonds CZ0002000409 August 2004 August 2009 3.60% 698 695

Mortgage bonds CZ0002000524 May 2005 May 2010 4.50% 1,830 1,861

Mortgage bonds CZ0002000573 June 2005 June 2010 4.05% 1,841 1,872

Mortgage bonds CZ0002000623 October 2005 October 2015 4.75% 5,403 5,441

Mortgage bonds CZ0002000755 February 2006 February 2016 4.80% 4,863 4,863

Mortgage bonds CZ0002000771 December 2005 December 2008 4.45% 2,242 2,275

Mortgage bonds CZ0002000896 October 2006 October 2011 fl oating 1,121 1,075


Mortgage bonds CZ0002000920 October 2006 October 2011 3.00% 788 201

Mortgage bonds CZ0002000995 May 2007 May 2012 5.90% 1,082 –

Mortgage bonds CZ0002001068 June 2007 October 2015 4.50% 762 –

Mortgage bonds CZ0002001084 July 2007 July 2014 fl oating 1,640 –

Mortgage bonds CZ0002001126 August 2007 August 2012 3.70% 884 –

Mortgage bonds CZ0002001274 November 2007 November 2014 fl oating 600 –

Mortgage bonds CZ0002001282 November 2007 November 2017 5.90% 2,130 –

Mortgage bonds CZ0002001415 November 2007 November 2023 6.15% 469 –

Mortgage bonds CZ0002001423 December 2007 December 2017 5.85% 5,438 –

Mortgage bonds CZ0002001613 December 2007 December 2022 fl oating 3,000 –

Mortgage bonds CZ0002001639 December 2007 December 2012 3.70% 69 –


Mortgage bonds CZ0002001654 December 2007 December 2022 fl oating 157 –

Bonds CZ0003700759 February 2004 February 2008 1.00% x) 116 116

Bonds CZ0003700767 February 2004 February 2014 3.51% x) 1,460 1,499

Bonds CZ0003701013 May 2005 June 2008 – x) 230 243

Bonds CZ0003701047 July 2005 July 2012 2.72% xx) 682 696

Bonds CZ0003701054 September 2005 September 2017 4.75% x) 211 204

Bonds CZ0003701286 March 2007 March 2012 3.49% 948 –

Depository bills of exchange 4,995 3,899

Total 47,275 34,408 x) Bonds were issued with a combined yield.

xx) If the early repayments option is not exercised, the interest rate is increased by 3.55 percent.

Of the aggregate carrying value of the mortgage bonds, CZK 14,180 million (2006: CZK 16,952 million) was hedged against interest

rate risk through interest rate swaps linked to a market fl oating rate. In accordance with applicable accounting policies, these mort-

gage bonds are remeasured at fair value.

123


The ISIN CZ0003700767 and CZ0003701047 issues of bonds carry early redemption options. In addition, these bonds are remeasu-

red at fair value because they are hedged against interest rate risk.

Of the aggregate carrying value of the bonds, CZK 2,042 million (2006: CZK 2,245 million) was hedged against interest rate risk

through interest rate swaps linked to a market fl oating rate.

The ISIN CZ0003701013, CZ0003701054 and CZ0003701062 issues were placed with a share index option which is recorded

separately and is remeasured at fair value. All mortgage bonds issues placed in 2007 were issued as part of the Česká spořitelna

bond placement programme. The ISIN CZ0002000342, CZ0002000409, CZ0002001027, CZ0002001126, CZ0002001613,

CZ0002001639, CZ0002001647 and CZ0002001654 mortgage bonds issues and the ISIN CZ0003701013 bond are not traded on any

regulated market. Other issues of mortgage bonds and bonds are traded on the offi cial free market of the Prague Stock Exchange. The

difference between the nominal values of the issued mortgage bonds and the carrying amounts of the relevant issues in the above table

arises from the difference in valuation and from the elimination of bonds held by Group companies.

The Group has also placed the following bonds which are reported as “Liabilities at fair value” (refer to Note 24):

ISIN Date of issue Maturity Interest rate 2007

CZK mil.

2006

CZK mil.

Bonds CZ0003701237 February 2007 April 2011 x) 273 –

Bonds CZ0003701278 March 2007 March 2010 xx) 746 –

Bonds CZ0003701351 September 2007 September 2011 x) 170 –

Total 1,189 – x) Bonds bear no interest, the yield of bonds increases on a one-off basis as of the fi nal maturity date.

xx) The yield depends on the development of the EUR/PLN spot exchange rate.

The ISIN CZ0003701237 and CZ0003701351 issues were placed as structured bonds, the yield of which is determined as equal to the

difference between the issue rate and ‘another value’ in accordance with the issue terms and conditions. The amount of the ‘another

value’ will be based on a set of indexes and an equity bucket and will be payable as of the fi nal maturity of the bonds. Similarly, the

ISIN CZ0003701278 issue was placed as a structured bond, the yield of which is derived from the development of the EUR/PLN spot

exchange rate. The ISIN CZ0003701237 and CZ0003701351 issues are not traded on any regulated market. The ISIN CZ0003701278

issue is traded on the offi cial free market of the Prague Stock Exchange.

27. TECHNICAL INSURANCE PROVISIONS

Charge for and use of provisions

CZK mil. 2007 2006

Balance at 1 January 13,434 10,625


Use of provisions (7,665) (2,605)

Balance at 31 December 15,385 13,434

124

28. PROVISIONS FOR LIABILITIES AND OTHER RESERVES

(a) Structure of provisions

CZK mil. 2007 2006

Provision for legal disputes relating to credit transactions 1,986 1,997

Provision for off balance sheet credit risks 143 102

Other provisions 895 576

Total 3,024 2,675

Other provisions include the provisions for the Bonus programme, legal disputes, onerous contracts and other risks. The most

signifi cant provision for the Bonus programme is maintained to cover the cost of providing clients with awards for the use of payment

cards in making cash-free payments. The level of the provision is determined by reference to the current developments in the drawing

of the awards where the average value of the point is CZK 0.81 and clients utilise 73 percent of the allocated points, on average.

(b) Charge for and use of provisions

CZK mil. 2007 2006


Charge for provisions 528 464

Use of provisions (37) (143)

Release of provisions (142) (272)


(c) Provisions for other credit risks and off balance sheet credit exposures Provisions for other credit risks and off balance sheet credit exposures are recorded to cover specifi c risks arising from pending legal

disputes relating to loan transactions and to cover losses that result from off balance sheet and other exposures.

CZK mil. 2007 2006






125


29. OTHER LIABILITIES

CZK mil. 2007 2006

Accrued expenses 1,139 912

Of which:

– Interest on amounts owed to fi nancial institutions 109 86

– Interest on amounts owed customers 266 148

– Interest on bonds in issue 704 635

– Other 60 43

Deferred income 1,744 919

Various creditors 3,020 2,093

Payables from factoring transactions 223 4,176

Payables from securities trading 3,152 711

Payables from payment transactions 2,816 4,497

Estimated payables 3,219 3,517

Other payables 2,107 1,446

Income tax liability 631 346

Deferred income tax liability (refer to Note 30) 1,878 1,529

Total 19,929 20,146

Estimated payables largely comprise estimated payables for staff and management bonuses, unbilled supplies and contributions to the

Deposit Insurance Fund. Deferred income principally includes deferred commissions and fees related to amounts due from customers

in respect of the effective interest rate.

The signifi cant year-on-year change in payables from factoring transactions is attributable to the revised treatment of accounting for

factoring transactions. Additional details can be found in Note 3dd.

30. DEFERRED INCOME TAXES

Deferred income tax is calculated from all temporary differences under the liability method using a principal tax rate of 19 to 21 per-

cent, depending on the year in which the relevant asset/liability will be realised/settled (2006: 24 percent), 5 percent for Penzijní fond

České spořitelny, a. s. (2006: 5 percent) and 19 percent for companies based in Slovakia (2006: 19 percent).

Net deferred income tax assets (liabilities) are as follows:

CZK mil. 2007 2006

Balance at the beginning of the year (1,467) (1,068)

Movements arising from acquisitions and change in minority shareholders’ holding (842) (306)

Movement for the year – equity 102 111

Movement for the year – income/(expense) 695 (204)

Net balance at the year-end – asset/(liability) (1,512) (1,467)

126

The impact of deferred tax liabilities on equity arises from changes in the fair value of securities available for sale and hedging

derivatives. The deferred tax (charge)/credit in the profi t and loss account comparises the following temporary differences:

CZK mil. 2007 2006

Tax losses carried forward 40 29

Provisions and reserves 73 52

Accelerated depreciation 51 79

Fair value of investment property (refer to Note 17) 535 (224)

Other temporary differences (4) (140)

Total (refer to Note 44) 695 (204)

Of which: impact of the change of rate 355 –

Deferred income tax assets and liabilities are attributable to the following items:

CZK mil. 2007 2006

Deferred tax assets

Tax losses carried forward 87 47

Non-tax deductible reserves and provisions 374 301

Change in the fair value of securities available for sale and hedging derivatives (refer to Note 34) 6 –

Other temporary differences 137 135

604 483

Deferred tax asset adjustment (net of liabilities) (238) (421)

Total deferred tax asset (refer to Note 21) 366 62

Deferred tax liabilities

Accelerated depreciation for tax purposes (199) (250)

Changes in fair value of securities available for sale and hedging derivatives (refer to Note 34) – (95)

Fair value of investment property (1,660) (1,326)


(2,116) (1,950)

Deferred tax liability adjustment (net of assets) 238 421

Total deferred tax liability (refer to Note 29) (1,878) (1,529)

Net deferred tax asset (liability) (1,512) (1,467)

127


31. SUBORDINATED DEBT

Date of issue Maturity of the

issue

Interest rate Nominal value Carrying amount

at 31 December

2007

Carrying amount

at 31 December

2006

16 May 2005 16 May 2015 6M PRIBOR+0.46% 3,000 2,950 2,948

2 October 2006 2 October 2016 6M PRIBOR+0.45% 3,000 2,655 2,938

Total 5,605 5,886

Both issues of subordinated debt were made in certifi cate form and placed on the free market of the Prague Stock Exchange. If the

Group does not exercise its option for premature repayment of the debt after the lapse of fi ve years, the interest rates attached to

each issue shall increase to 6M PRIBOR plus 1.4 percent p.a. Interest is payable semi-annually in arrears. The debt is unsecured and

unconditional. On 5 May 2005 and 13 September 2006, the Czech National Bank issued certifi cates confi rming that these issues of

subordinated debt are compliant with all regulatory requirements and may be included in the additional capital of the Bank and the

Group for the purposes of calculating the capital adequacy ratio.

32. MINORITY INTERESTS

CZK mil. 2007 2006

Balance at 1 January 1,268 849

Minority interest in the current year’s profi t 228 174

Sale of interest to minority shareholders – 152

Dividends paid to minority shareholders (153) (98)

Valuation gains or losses (3) (2)

Minority interests in the companies newly included in consolidation, increase in capital 320 185

Foreign exchange differences (27) 8


33. SHARE CAPITAL

Authorised, called-up and fully paid share capital was as follows:

Number of shares 2007 CZK mil. Number of shares 2006 CZK mil.

Ordinary shares of CZK 100 each 140,788,787 14,079 140,788,787 14,079

Priority shares of CZK 100 each 11,211,213 1,121 11,211,213 1,121

Total 152,000,000 15,200 152,000,000 15,200

Priority shareholders are not entitled to vote at the annual shareholders’ meeting. They have a right to receive dividends each year if

the Bank is profi table. The amount of the dividend is proposed by the Board of Directors and subject to approval at the annual share-

holders’ meeting. In the case of liquidation, priority shareholders have a right to the assets of the Bank before ordinary shareholders

128

but after other creditors. Priority shareholders have a right to purchase shares offered by the Bank when it increases its share capital

in the same proportion as the current holding. Priority registered shares can be issued only to municipalities and local governments in

the Czech Republic. The priority registered shares can be transferred to entities other than municipalities and local governments of the

Czech Republic only subject to the approval of the Board of Directors.

34. REVALUATION GAINS OR LOSSES

CZK mil. Securities

available for sale

Hedging

derivatives

FX differences Total

2007 2006 2007 2006 2007 2006 2007 2006

At 1 January

Gain on fair value changes 408 929 – – – – 408 929

Deferred tax liability (94) (209) (1) 3 – – (95) (206)

Foreign exchange differences arising upon consolidation

(retranslation reserve) – – – – (103) 7 (103) 7

Cash fl ow hedge – – 9 (18) – – 9 (18)

Total at 1 January 314 720 8 (15) (103) 7 219 712

Changes during the year

Gain/(loss) on fair value changes (506) (521) – – – – (506) (521)

Deferred tax (liability)/asset 102 115 – (4) – – 102 111


(retranslation reserve) – – – – (143) (110) (143) (110)

Application of a hedge of a net investment in foreign operations – – – – (65) – (65) –

Cash fl ow hedge – – 6 27 – – 6 27

At 31 December

Gain on fair value changes (98) 408 – – – – (98) 408

Deferred tax (liability)/asset 8 (94) (1) (1) – – 7 (95)


(retranslation reserve) – – – – (246) (103) (246) (103)

Application of a hedge of a net investment in foreign operations – – – – (65) – (65) –

Cash fl ow hedge – – 15 9 – – 15 9

Total at 31 December (90) 314 14 8 (311) (103) (387) 219

129


35. INTEREST INCOME AND SIMILAR INCOME

CZK mil. 2007 2006


Loans and advances to customers 22,353 17,758

Of which: unwinding of discount 251 196

Debt securities and other fi xed income securities 7,668 7,047

of which: Securities designated upon initial recognition as at fair value through profi t or loss 839 562

Securities available for sale 1,287 1,200

Securities held to maturity 5,542 5,285

Proceeds from shares and other variable yield securities 460 402


Securities available for sale 61 53

Unconsolidated equity investments 27 27

Other 743 540

Total 34,601 28,680

The ‘Other’ category for the year ended 31 December 2007 includes rental proceeds of CZK 661 million (2006: CZK 451 million)

arising from investment property.

36. INTEREST EXPENSE AND SIMILAR EXPENSE

CZK mil. 2007 2006

Amounts owed to fi nancial institutions 2,023 969


Bonds in issue 1,134 1,106

Subordinated debt 197 108

Fair value of hedging derivatives 103 (198)

Other 2 –

Total 9,874 7,474

The loss/(profi t) from the revaluation of hedging derivatives in the amount of CZK 103 million (2006: CZK (198) million) increases/

decreases the loss from the revaluation of the hedged part of issued bonds in the amount of CZK 16,222 million (2006: CZK 19,197

million), whose fair value is hedged by these derivatives (Refer to Note 26).

130

37. PROVISIONS FOR CREDIT RISKS

CZK mil. 2007 2006

Charge for reserves for the year (refer to Note 28) (152) (284)

Release of reserves for the year (refer to Note 28) 109 272

Net (charge)/release of reserves for the year (43) (12)

Charge for provisions for the year (refer to Note 10) (4,811) (3,656)

Release of provisions for the year (refer to Note 10) 2,565 1,882

Net (charge)/release of provisions for the year (2,246) (1,774)

Reversal of the charge for provisions for outstanding interest – 11

Write-offs of loans not covered by provisions (14) (13)

Recoveries 94 105

Total (2,211) (1,683)

38. FEE AND COMMISSION INCOME

CZK mil. 2007 2006

Lending activities 2,203 1,787

System of payment 6,126 5,885

Custody, trustee and administration of assets 847 754

Other securities transactions 498 424

Construction savings activities 908 859

Foreign exchange transactions 40 40

Other fi nancial activities 421 297

Total 11,043 10,046

39. FEE AND COMMISSION EXPENSE

CZK mil. 2007 2006

Lending activities 320 90

System of payment 598 489

Securities transactions 64 51

Construction savings activities 162 201



Total 1,404 1,049

131


40. NET TRADING RESULT

CZK mil. 2007 2006

Realised and unrealised losses on securities held for trading (853) (372)

Derivative instruments 399 527

Foreign exchange trading 1,850 1,371

Other 312 214

Total 1,709 1,740

The “Foreign exchange trading” line for 2007 includes foreign exchange rate differences of CZK 196 million (2006: CZK nil) arising

from investment property.

41. GENERAL ADMINISTRATIVE EXPENSES

(a) Composition of general administrative expenses

CZK mil. 2007 2006

Staff costs

Wages and salaries 6,003 5,526

Social security costs 2,312 2,099

Other staff costs 108 104

Total staff costs 8,423 7,729

Other administrative expenses

Data processing expenses 2,026 1,702

Building maintenance and rent 1,428 1,319

Costs of business transactions 1,177 1,079

Advertising and marketing 952 906

Advisory and legal services 468 613

Other administrative expenses 603 614

Total other administrative expenses 6,654 6,233

Depreciation

Amortisation of intangible assets 1,736 1,641

Depreciation of property and equipment 1,536 1,713

Total depreciation and amortisation 3,272 3,354

Total 18,349 17,316

132

(b) Board of Directors and Supervisory Board emoluments

CZK mil. 2007 2006

Short-term employee benefi ts 207 187

Benefi ts payable at premature termination of employment – 1

Total 207 188

(c) Average number of employees and Board members

CZK mil. 2007 2006

Board of Directors 7 7

Supervisory Board 12 12

Staff 10,897 10,856

With a view to fostering loyalty of the Group’s key employees and attracting new key managers, the Supervisory Board of Erste Bank,

resolved, based upon authorisation given by the General Meeting of Shareholders dated 8 May 2001, to implement an Employee Erste

Bank Stock Ownership Programme (‘ESOP’) and a Management Erste Bank Stock Option Programme (‘MSOP’) within the Group.

All employees of the Bank and its subsidiary companies were entitled to subscribe for shares under the Employee Stock Ownership

Programme. Each employee was entitled to subscribe for a maximum of 200 shares (2006: 200 shares). The price of one share was

established on the basis of the average rate in April 2006 decreased by a 20 percent discount. The xx percent discount is conditional

upon the shares being held for a period of one year. A total of 878 employees (2006: 562) participated in the programme and subscri-

bed for 108,027 shares (2006: 74,537).

Management of the Bank and its subsidiary companies and selected key employees were granted the second tranche of options for

subscription of shares under the Management Erste Bank Stock Option Plan 2005. In the year ended 31 December 2007, appro-

ximately 94,500 options (2006: 89,500) were granted to these employees. The following tranche of the programme in 2007 will

be approximately of the same size. These options entitle the holders to acquire Erste Bank’s shares for the price of EUR 43 which

was determined as the average price of shares ruling in April 2005 plus a 10 percent mark-up, rounded to EUR 0.5 For the options

subscribed until 2004 under the Management Erste Bank Stock Option Plan 2002, the price of the share was EUR 16.50, within fi ve

years from the issuance of each tranche of options. In 2007, 56,800 options granted under the Management Erste Bank Stock Option

Plan 2002 were exercised (2006: 73,360). 12,000 options granted under the Management Erste Bank Stock Option Plan 2005 were

exercised during the fi rst exercise period in 2007 (2006: 11,200), 1,800 options in the second exercise period (2006: 0) and 880

options during the third exercise period (2006: 4,700).

The aggregate amount of the discount in respect of both programmes was CZK 37 million (2006: CZK 12 million) and was reported

within “General administrative expenses – other staff costs”.

133


42. NET INSURANCE INCOME

CZK mil. 2007 2006

Net earned premium 6,392 4,428

Costs of insurance claims (3,742) (1,310)

Change in technical provisions (1,940) (2,682)

Operating expenses (598) (450)

Other gains/(losses) on insurance transactions 83 (21)

Technical account result 195 (35)

Financial gains 456 564

Other income of the non-technical account (2) (1)

Total net insurance income 649 528

134

43. OTHER OPERATING INCOME/(EXPENSES), NET

CZK mil. 2007 2006

Release of other reserves 33 4

Gain on the sale and revaluation of real estate 784 1,098

Income from other services 154 72

Received compensation for defi cits and damage 47 266

Release of provisions against non-credit receivables 11 10

Income from statute-barred deposits 6 2

Income from the sale of goods including sale of completed property under construction 830 380

Negative goodwill 284 –

Other operating income 158 173

Total other operating income 2,307 2,005

Charges for other reserves (374) (156)

Contribution to the Deposit Insurance Fund (480) (432)

Write-off of property under construction – (3)

Profi t share of customers of Penzijní fond České spořitelny, a. s. (712) (451)

Loss on the sale and impairment of real estate (451) (161)

Defi cits and damage, fi nes and penalties (66) (337)

Charge for provisions against non-credit receivables (29) (36)

Sponsorship contributions (40) (30)

Costs of goods sold (786) (398)

Other operating charges (188) (130)

Other taxes (51) (36)

Total other operating expense (3,177) (2,170)

Losses on the sale of securities held to maturity 12 (23)

Income from the revaluation/sale of securities at fair value through profi t or loss that are not designed for trading (312) (14)

Income from the sale of securities available for sale 489 693

Income from revaluation of hedging derivatives – 8

Gains/(losses) on the revaluation/sale of equity investments 106 86

Total other operating income/(expenses), net (575) 585

The line “Income from the revaluation/sale of securities at fair value through profi t or loss” for the year ended 31 December 2007

includes the loss from the revaluation of asset-backed securities of CZK 284 million (refer to Note 11).

The line “Gains/(losses) on the revaluation/sale of equity investments” for the year ended 31 December 2007 includes gains from the

sale of an equity investment in MasterCard Incorporated of CZK 51 million, from the sale of an equity investment in České nemo-

vitosti, a. s. of CZK 39 million and from the sale of certain investments in Genesis Private Equity Fund B L.P. of CZK 51 million,

and impairment of investments in CF Danube Leasing, Factoring Slovenskej sporitelne, a. s. and FNE B. V. in the total amount of

CZK 35 million. In the year ended 31 December 2006, it included gains from the sale of Czech and Slovak Property Fund B. V. of

CZK 91 million and impairment of the investment in CF Danube Leasing.

135


44. INCOME TAX EXPENSE

CZK mil. 2007 2006

Current tax expense (3,908) (3,294)

Deferred tax income/(expense) (Note 30) 695 (204)

Total (3,213) (3,498)

The tax on the Group’s profi t before tax differs from the theoretical amount that would arise using the basic tax rate of the home

country of the parent company as follows:

CZK mil. 2007 2006

Profi t before tax 15,589 14,057

Tax calculated at a tax rate of 24 percent (2006: 24 percent) 3,741 3,374

Income not subject to tax (1,072) (290)

Expenses not deductible for tax purposes 1,039 325

Tax allowances and credits, including the utilisation of tax losses 129 (164)

Income tax as per the fi nal tax returns for prior period 71 49


Movement in deferred taxation (Note 30) (695) 204

Income tax expense 3,213 3,498

Effective tax rate 20.61% 24.89%

Further information about deferred income tax is presented in Note 30.

45. CASH AND CASH EQUIVALENTS

Cash and cash equivalents at the end of the year as shown in the consolidated statements of cash fl ows are composed of the following

balances:

CZK mil. 2007 2006

Cash (Note 6) 14,699 14,076

Nostro accounts with the CNB (Note 6) 461 445

Treasury bills with maturity of less than three months 7,917 9,479

Nostro accounts with fi nancial institutions (Note 7) 592 556

Loro accounts with fi nancial institutions (Note 22) (737) (267)

Total cash and cash equivalents 22,932 24,289

136

46. FINANCIAL INSTRUMENTS

A fi nancial instrument is any contract that gives rise to the

right to receive cash or another fi nancial asset from another

party (fi nancial asset) or the obligation to deliver cash or

another fi nancial asset to another party (fi nancial liability).

The Group classifi es fi nancial instruments into the trading and

banking (investment) portfolios in accordance with BASEL II

rules as per CNB Regulation No. 123/2007, on the rules of prudent

business of banks, savings and lending associates and securities

traders (henceforth ‘Regulation 123/2007’). The Group uses various

risk management techniques for the banking and trading books.

Financial instruments may result in certain risks to the Group.

In addition to the credit risk, i. e. the counterparty risk, the key

risks attached to the trading portfolio include market risks,

specifi cally foreign exchange, interest rate and equity risks; the

key risks inherent in the banking/investment portfolio include

interest rate and liquidity risks. All transactions with fi nancial

instruments also carry operational risk. The Group gives

signifi cant attention to risk management.

In 2007, a division managed by the Chief Risk Offi cer was

formed as part of the reorganisation of the Bank’s structure.

This division, which is completely independent of the business

divisions of the Bank, centralises all departments tasked with

risk management such as Legal and Compliance, Central

Risk Management and Credit Risk Management, Credit Risk

Controlling and Credit Portfolio Management. Central Risk

Management is further divided into Financial Markets Risk

Management, Operational Risks and Economic Capital.

Risk management activities in the Bank’s subsidiaries are

undertaken by persons independent of the business units.

The Credit Risk Controlling and Loan Portfolio Management

Department provides specialist guidance to and oversees the

staff involved in managing credit risk in the subsidiaries and is

responsible for monitoring the subsidiaries portfolio. Market

risks within the Group are managed by the Bank.

(a) Credit Risk The Group takes on exposure to credit risk which is the risk that

a counterparty will be unable to pay amounts in full when due.

Credit Risk Management MethodologyIn managing credit risk, the Group applies a unifi ed methodo-

logy which sets out applicable procedures, roles and authori-

ties. The lending policy includes:

• Prudent credit process guidelines, including procedures

for the prevention of money laundering and fraudulent

activities;

• General guidelines regulating the acceptability of client seg-

ments on the basis of their principal activities, geographical

areas, maximum maturity period, product and purpose of

the loan;

• Principal methods for arriving at an internal rating of

a borrower and its periodic review;

• Basic principles underlying the determination of the system

of limits and the structure of approval authorities;

• Risk parameters calculation methodology;

• Rules of loan collateral management;

• Structure of basic product categories;

• Provision calculation methodology;

• Stress testing methodology; and

• Credit risk pricing methodology.

Breakdown of the Portfolio for Credit Risk Management Purposes For credit risk management purposes, the Group’s loan

portfolio is broken down as follows:

• Retail receivables are receivables from individuals and

small enterprises with the annual turnover of up to CZK

30 million. The portfolio of retail receivables is further

divided by type of counterparty and product for the purpose

of regular analyses, and it is further divided into smaller

sub-portfolios as part of ad hoc analyses. The methods of

managing the credit risk of retail receivables are based on

statistical models calibrated using historical data.

• Receivables from corporate counterparties include receiva-

bles from legal entities which do not comply with the ‘small

enterprise’ defi nition. The portfolio of corporate receivables

is further divided by counterparty type (large enterprises,

mid-size enterprises, project fi nancing and municipalities)

for the purposes of regular analyses. The methods of

managing the credit risk of corporate receivables are based

on statistical models (namely for the portfolio of receivables

from mid-size enterprises), great emphasis is also put on

regular individual analysis of individual customers.

137


• Receivables arising from specifi c products provided by the

subsidiaries represent specialised fi nancial products that

have their own risk management technique refl ecting their

specifi cs. These largely include factoring loans, lease loans,

instalment sale, loans issued to fi nance the acquisition of

securities and construction savings loans. The portfolios of

these products are regularly monitored both on an individual

basis (for individually signifi cant exposures) and a portfolio

basis.

With exception of sporadic border-line cases, the implemented

breakdown of the portfolio corresponds to the asset classes

defi ned in CNB Regulation 123/2007 which implements the

Basel II rules.

For the purpose of provisioning, monitoring and predicting losses,

the Group differentiates between individually signifi cant and indi-

vidually insignifi cant exposures when managing credit risk. The

credit risk attached to individually signifi cant exposures is mana-

ged on an individual basis with the minor use of portfolio models.

The Group aggregates individually insignifi cant exposures into

portfolios and manages the risk on a portfolio basis. The Group’s

category of individually signifi cant exposures includes corporate

loans, including small and medium sized enterprises (SME), and

private sector loans. Individually insignifi cant exposures include

retails loans to households, individuals, individuals – entreprene-

urs and small municipalities (MSE).

Individually signifi cant loans include the Group’s exposures

exceeding CZK 5 million and they encompass the Group’s cor-

porate portfolio. Corporate (individually signifi cant) loans are

additionally split into 5 portfolios: large corporate customers

(turnover over CZK 1,000 million), small and medium sized

enterprises (turnover from CZK 30 to 1,000 million), corporate

mortgages, municipality loans and loans from the Workout

department. Corporate loans additionally match the corporate

class (segment) of assets under BASEL II.

Individually insignifi cant loans, including MSE loans,

encompass the Group’s retail loans and are additionally split

into 15 product portfolios. The key portfolios include mortgage

retail loans, credit card loans, overdraft loans and consumer

loans. The Group’s retail loans additionally match the ‘indivi-

duals/households’ assets class (segment) under BASEL II.

All loans are additionally segmented into default loans (non-

performing) and non-default loans (performing). Default is

defi ned using the BASEL II criteria.

Collection of Key Risk Management Information In managing credit risk, the Group refers not only to its own portfo-

lio information but also the portfolio information of other members

of the Česká spořitelna Financial Group. The Group additionally

uses information obtained from external sources such as the Credit

Bureau or ratings provided by reputable rating agencies. As part of

the preparation for the application of Regulations 2006/48/EU and

2006/49/EU (Basel II), the collected data were expanded and their

quality markedly improved in the past. These data provide a basis

for modelling credit risk and as a support during debt recovery,

valuation of receivables and calculation of losses.

Internal Rating Tools The internal rating of the Bank refl ects the ability of counter-

parties to meet with their fi nancial liabilities. The degree of the

risk is refl ected in the internal rating as a probability of default

of the debtor in the following twelve months. This degree of

risk complies with the defi nition of new capital requirements

set out in CNB Regulation 123/2007 (BASEL II).

The Group allocates internal ratings to all loan receivables

from customers. In addition to the rating of individuals and

households, the Group uses the 13degree rating scale of non-

default categories and one group for “R” default customers.

The scale for individuals and households is 8 + R.

The defi nition of default of a debtor complies with the CNB

Regulation referred to above and thus refl ects the debt status

of any portion of the receivable with the limit of 90 days and

more past the due date, bankruptcy proceedings, insolvency or

forced restructuring of a receivable.

Individual customer segments (classes) are, under BASEL

II, subject to various rating instruments and all of them are

currently the Erste Bank Group-wide standard.

Counterparties from the sovereign and banking segments are

evaluated using a model which is unifi ed for the whole Erste

Bank Group. The model places great emphasis on independent

external ratings of reputable counterparties.

138

Counterparties under specialised fi nancing and projects are

also subject to the Group-wide instrument, but the rating model

refl ects local specifi cs of the legislative and economic envi-

ronment and the specifi cs of project fi nancing and is primarily

based on projected cash fl ow.

Corporate customers are evaluated on the basis of their fi nancial

strength, business information, business plan and credit history

data. The primary source of information includes fi nancial

statements; less signifi cant weight is given to soft factors.

The rating of the small enterprises segment is based on similar

foundations as the rating of corporates, but the overall rating

substantially takes into account the solvency of the enterprise

owner or the entrepreneur himself.

Individuals/households are evaluated on the basis of socio-de-

mographic data, behavioural scoring and loan history, obtained

primarily from external registers of debtors (Credit Bureau)

and historical data of the Bank and the Group.

The Bank uses its own model based on analysis of budgets

in arriving at the internal ratings of its clients from among

budget-driven and subsidised organisations.

Ratings for corporate, small enterprises and individuals

segments are prepared using a unifi ed Erste Bank Group-wide

database designed to ensure a conceptual compliance with the

Erste Bank Group standard, but the setting of the models refl ects

local economic and legislative conditions. This database tool

uses outputs from individual rating tools and facilitates the com-

bination of multiple sources of information into one rating, for

example, for corporate clients, the outputs of fi nancial analysis

and soft factors or behavioural scoring and repayment ability.

The Bank reviews ratings in respect of all segments on a regular

basis. The rating of the banking, corporate and sovereign

segments is analysed at least annually on an individual basis.

The Bank has developed ‘behavioural rating’ for retail customers

where the Group updates the rating of a customer based on its

activities in the Bank and its delinquency on a monthly basis.

In addition to the internal ratings outlined above, the Group

allocates risk-profi le groups to individual assets arising from the

loan arrangement according to CNB Regulation 123/2007. In ac-

cordance with this Regulation, the Group maintains fi ve groups of

risk profi les, ranging from standard, watch, substandard, doubtful

to loss receivables. Individual groups are differentiated according

to the number of past due dates of any portion of a receivable,

bankruptcy status of a customer, forced restructuring of a recei-

vable and the internal anticipation of the Group with regard to the

timely and full repayment of the whole receivable balance.

The Group also uses independent external ratings provided by

reputable rating agencies. Based upon its historical experience,

the Group has determined a transfer bridge between its own

internal ratings and external ratings.

In compliance with the regulatory requirements arising from

BASEL II, rating instruments are subject to regular annual va-

lidation by the Risk Management Department and independent

specialists (Internal Audit). In addition, the rating instruments

are periodically adjusted to refl ect changing economic

conditions and the Bank’s plans, based on validations (results

consistency testing) and performance testing undertaken by the

Credit Risk Management Department.

The application of internal rating tools is limited for certain spe-

cialised products provided by the subsidiaries, hence the internal

rating tools are not used by all of the entities included in the

Group, specifi cally Leasing České spořitelny, a. s., s Autoúvěr,

a. s., s Autoleasing, a. s., brokerjet České spořitelny, a. s., Facto-

ring České spořitelny, a. s. and Pojišťovna České spořitelny, a. s.

The principal reason relates to the lack of appropriate input data

used in arriving at the internal rating and monitoring receivables

which the clients are obliged to provide to the Group. As such,

these products require an increased level of loan collateral.

Exposure Limits Exposure limits are defi ned as the maximum exposure that the Bank

may accept in respect of a client with a given rating and underlying

collateral. In setting the system of limits, the Bank strives to protect

its revenues and capital from risk concentration. Risk concentration

is measured as the capital required for the given portfolio.

Structure of Approval Authorities The structure of approval authorities is derived from the principle

of the materiality of the impact of a potential loss from a provided

139


loan on the Bank’s fi nancial performance and the risk profi le of

the relevant loan transaction. The highest approval authorities

rest with the Credit Committee of the Supervisory Board and

the Credit Committee of the Board of Directors. Lower approval

authorities are categorised taking account of the seniority of the

staff of the Credit Risk Management Department.

Risk Parameters The Group uses its own internal models in determining risk

parameters such as the probability of default (PD), loss given

default (LGD) and credit conversion factors (CCF). All of the

models are developed according to Basel II requirements and were

subject to review by the regulator. The monitoring of historical

risk parameters and their prediction serve as a basis for quantita-

tive management of the portfolio credit risk. The Group currently

uses risk parameters in monitoring portfolio risks, in-default loans

portfolio management, portfolio protection measurement and risk

valuation. The active use of the risk parameters in managing the

Group makes it possible to obtain detailed information about the

possible sensitivity of basic portfolio segments on both internal

and external changes. The PD risk parameter is monitored for

individual internal rating grades (see above) with the exception of

non-performing loans (in default) where it is equal to 1. The LGD

risk parameter is monitored in respect of fi ve homogenous corpo-

rate product portfolios and 15 product retail portfolios in regard

to non-performing loans (in default). The CCF risk parameter is

monitored for guarantees, overdraft loans and credit card loans.

All models are back-tested at least annually and validated by

independent specialists.

Provisions for Loan Losses The Group recognises provisions for incurred losses. In accor-

dance with the historical cost principle and the requirements

arising from IAS 39 Financial Instruments: Recognition and

Measurement, these losses are a result of past events. The Group

uses, to the maximum extent possible, the data that are monitored

within BASEL II but refers solely to the identifi ed historical

information.

Loan loss provisions are determined for individually impaired

loans and collectively impaired loans which include all

performing loans/loans that do not fall into the ‘individually

impaired loans’ category.

Individual Losses ComponentIndividually impaired receivables are receivables in default

(receivables with the ‘R’ internal rating) and the defi nition of

default complies with Basel II requirements (a receivable is

past due by more than 90 days or its full repayment is assessed

as being unlikely).

The individual losses component covers losses arising from

receivables impaired on an individual basis. Impairment of

a receivable is identifi ed based on loss making events that can

be ascertained individually. Impairment of corporate

receivables and retail receivables with a value exceeding

CZK 5 million (individually signifi cant exposures) is measured

on an individual basis. The impairment represents the diffe-

rence between the net present value of expected future cash

fl ows arising from the receivable using the original effective

interest rate and the carrying amount of the receivable.

The level of impairment of retail receivables (individually

insignifi cant) is determined using the provisioning coeffi cients

matrix. Provisioning coeffi cients are derived from the historical

values of probability of defaults (PD) and loss given default

(LGD) in respect of individual portfolios of individually

insignifi cant exposures. The coeffi cients additionally refl ect

durability of default.

All receivables are assessed by the Group on a monthly basis to

determine whether a loss making event or other changes occurred.

The estimated loss on the impairment of individually signifi -

cant exposures is reviewed at least on a quarterly basis for each

exposure.

Collective Losses ComponentThe collective losses component represents the loss on collective

impairment of individually unimpaired exposures. Collective

impairment covers losses arising from internal or external loss

making events that cannot be allocated to individual exposures.

Past loss making events are measurable and identifi able in

respect of the current portfolio. Collective impairment losses

represent the Group’s reasonable estimate made on the basis of

historical experience with the risk profi le of individual sub-port-

folios of individually unimpaired exposures.

140

The level of provisioning for these receivables is determined in

accordance with the Group methodology refl ecting the probabi-

lity of default (PD), loss given default (LGD) and loss identifi -

cation period (LIP). In determining the amount of incurred loss,

the Group adopts the same method of calculating historical PDs

and LGDs which are used as a basis for the calculation of risk

weighted assets under BASEL II. The LIP parameter is set de-

pending on the counterparty type – for corporate counterparties,

it is anticipated that the default is identifi ed within one year, the

default on retail receivables is anticipated to be identifi ed within

four months at the latest. Given that the Group has a customer

defi nition of the default in place, the LIP parameter is identical

for all retail products.

Restructured receivables are marked with the ‘R’ internal

rating. As part of the regular half-year reviews of restructured

receivables, the Group decides to improve the internal rating or

to extend the monitoring period by another six months.

Subsidiaries that do not use internal ratings apply portfolio

approaches derived from durability of default and historical

experience with portfolio losses.

Management of the Credit Risk in the Trading PortfolioThe credit risk inherent in the trading portfolio is managed

through the imposition of limits approved for individual

counterparties.

CollateralCollateralisation of the Group’s receivables arising from lending

transactions is governed by the following principles: collateral

represents the Group’s prevention and protection as a creditor and,

in addition to the collateralising function itself, it is exclusively

a secondary source of repayment. The selection of individual

collateral instruments and the composition of collateral depends

on the Group’s loan products, requirements and professional asse-

ssment by the Group’s responsible employee, always with respect

to the possibility of trouble-free realisation of the collateral.

The value of collateral is determined by reference to the market

price valuation (nominal value of collateral). The market price

is taken to mean the arm’s length price (selling) or the price

determined using a different valuation technique in terms of

Section 2 (1) and (3) of Property Valuation Act No. 151/1997

Coll.; however, always determined taking into account all the

circumstances which have a pricing impact, namely defects. If

more market prices of the collateral determined using various

valuation techniques are available in a particular business

transaction, the lower/lowest market price is used.

If the collateral instrument involves real estate, movable asset,

business or its branch, trade mark, an asset declared as a histo-

rical monument, antiquities, paintings, jewels, manuscripts, etc.

the price has to be determined on the basis of an appraisal made

by an expert appraiser contracted by the Group or an internal

appraiser for the purpose of evaluating the loan application. The

expert appraisal or price estimate must not be older than six

months at the date when the loan contract is entered into. For

real estate valuation purposes, a detailed special ‘Methodology

of Valuation of Real Estate for the Purpose of Advancing of

a Loan, Including Mortgage Loans, at Česká spořitelna’ is used.

The realisable value of collateral is determined using the

collateral coeffi cient according to the Collateral Catalogue. In

determining the collateral coeffi cient/the realisable (fair) value

of the collateral, it is necessary to assess individual instruments

by their specifi c features, e.g. real estate by the character of its

construction, etc. and always following a physical inspection.

The expert appraisal/price estimate always has to be reviewed.

Other conditions taken into account in determining the

realisable value of the collateral are, among others, as follows:

• Comprehensive assessment of all available and, for the

particular case, signifi cant circumstances and background

documentation;

• Insurance and pledge of a receivable arising from the

insurance proceeds in favour of the Group;

• Possibilities of the realisation of collateral at a particular

time and place and the amount of the costs of the realisation

which, in most cases, needs to be viewed as a sale in

distress; and

• Comparison to market trends.

In the event of doubt or any suspicion, the loan offi cer has to per-

sonally verify the actual physical and legal condition and nature of

collateral prior to determining the coeffi cient of recoverability.

The realisable value of collateral is determined using the

collateral coeffi cient according to the Collateral Catalogue.

141


The Collateral Catalogue also includes requirements for peri-

odical revaluation of collateral. Typically, the collateral value

is analysed and updated upon the regular monitoring/credit

review of clients. With respect to credit product portfolios with

a signifi cant amount of collateral, the Group uses portfolio

models of updating collateral realisable values.

In addition, the Group regularly monitors the loan to value ratio,

mainly in respect of mortgage loans and project fi nancing loans.

Credit Risk PricingThe Group uses historical experience and available data regarding

PD, LGD and CCF to arrive at an indicative standard risk mark-up

for individual types of counterparties, levels of internal rating and

products which are one of the pillars of the Bank’s pricing policy.

Stress Testing At least on an annual basis, the Group undertakes stress testing

of the sensitivity of its portfolio to changes in macroeconomic

factors (such as change in the economic growth rate, change in

interest rates and change in infl ation). The breakdown on credit

risk by industries is shown in Note 50.

(b) Market Risk The Group takes on exposure to market risks. Market risks

arise from open positions in interest rate, currency, equity and

commodity fi nancial instruments, the value of which changes

subject to general and specifi c fi nancial market movements.

The Group is primarily exposed to the market risk arising from

open positions in the trading book. A signifi cant component

of the market risk is also the interest rate risk associated with

assets and liabilities included in the banking book.

Trading book transactions in the capital, money, interbank and

derivative markets can be segmented as follows:

• Client quotations and client transactions, execution of client

orders;

• Interbank and derivative market quotations (market

making); and

• Proprietary trading in the interbank, derivative and capital

markets.

The Group enters into short-term transactions on its own

account in the trading book, that is, the Group opens

positions with a view to benefi ting from short-term fl uctua-

tions in fi nancial markets, purchases higher-interest bearing

assets funded by the sale of lower-interest bearing assets

with the objective of using the interest spread to generate

profi t, creates strategic positions, that is, positions opened to

benefi t from signifi cant movements in the prices of fi nancial

assets.

The Group trades with the following derivative fi nancial

instruments through the over-the-counter (OTC) market:

• Foreign currency forwards (including non-delivery for-

wards) and swaps;

• Foreign currency options;

• Interest rate swaps;

• Asset swaps;

• Forward rate agreements;

• Cross-currency swaps;

• Interest rate options such as swaptions, caps and fl oors;

• Commodity derivatives (for gold and oil); and

• Credit derivatives.

In the area of exchange-traded derivatives, the Group trades the

following instruments:

• Bond futures;

• Interest rate futures;

• Commodity derivatives (gold and oil futures); and

• Options in respect of bond futures.

The Group also trades, on behalf of its clients, with other less

common currency options, such as digital, barrier or windowed

options. Certain option contracts or options on various

underlying equity baskets or equity indices form part of other

fi nancial instruments as embedded derivatives.

Derivative fi nancial instruments are also entered into to hedge

against interest rate risk inherent in the banking book (interest

rate swaps, FRA, swaptions) and to refi nance the mismatch

between foreign currency assets and liabilities (FX swaps and

cross currency swaps).

In addition to the calculation of sensitivities to individual risk

factors, the Bank/Group uses the ‘value at risk’ methodology

(‘VaR’) to estimate and manage the market risk of open posi-

tions held and to determine the maximum losses expected on

142

these positions. The Board of Directors establishes a VaR limit

for the trading portfolio as the Bank’s maximum exposure of

the trading portfolio to market risk that may be accepted. VaR

sub-limits in respect of individual trading desks and limits for

sensitivity values of the trading portfolio to individual risk

factors such as foreign exchange rates, equity prices, interest

rates, volatility and other risk parameters of option contracts

facilitate the maintenance of the overall market risk profi le.

These limits are approved by the Financial Market and Risk

Management Committee and are monitored on a daily basis.

The market risk VaR indicator is also calculated for the banking

book using special models for current accounts and other liabilities

without specifi ed maturity. The VaR of the banking book is reported

to the Assets and Liabilities Committee on a monthly basis.

The VaR methodology includes all risk factors while

refl ecting their mutual diversifi cation effect. As of 31 De-

cember 2007, the value of VaR for the trading book and the

one-day period on the 99 percent confi dence level, i. e. the

maximum loss during one day, was CZK 25.4 million which

corresponds to a monthly VaR of CZK 116.5 million. The

average of daily VaR values for 2007 was CZK 20.3 million.

The monthly VaR for the banking book as of 31 December

2007, i. e. the maximum loss during one month, was CZK

835.9 million. The average of monthly VaR values for 2007

was CZK 768.8 million.

The VaR method is complemented with ‘back testing’ which

is designed to review the model for correctness. Back testing

involves comparing daily estimates of VaR to the hypothetical

results of the portfolio on the assumption that the positions

within the portfolio remain unchanged for one trading day.

Back testing results have, to date, confi rmed the correctness of

the setting of the VaR calculation model.

In addition, the Group uses stress testing or an analysis of

impacts of adverse developments in market risk factors on the

market value of the trading book. Scenarios are developed on

the basis of historical experience and expert opinions of the

Macroeconomic Analyses Department. The stress testing is

undertaken on a monthly basis and its results are reported to

the Assets and Liabilities Committee.

Foreign Currency Risk Foreign currency risk is the risk that the value of fi nancial

instruments in both the trading and banking book will fl uctuate

due to changes in foreign exchange rates. The Bank manages

this risk by establishing and monitoring limits on open posi-

tions, also including delta equivalents of currency options. In

addition, the Bank monitors special sensitivity limits for foreign

currency option contracts, such as limits for the delta equivalent

sensitivity to the exchange rate change in the form of the gamma

equivalent, and limits for option contract fair value sensitivity to

the exchange rate volatility in the form of the vega equivalent. In

addition, the Bank monitors the fair value sensitivity of options

to the period to maturity (theta) and interest rate sensitivity (rho,

phi) which is measured, together with other interest rate instru-

ments, in the form of the PVBP (Present Value of a Basis Point).

Foreign currency risk of all fi nancial instruments is transferred

in the Trading Department’s positions which manages these

currency positions in accordance with the set currency sensiti-

vity limits. In addition to the monitoring of limits, the Bank uses

the VaR (“Value at Risk”) concept for measuring the risk arising

from open positions from all currency instruments. The Bank’s

net open foreign exchange rate position as of 31 December 2007

and 2006 is shown in Note 48. The value of currency risk in the

form of VaR for one day and 99 percent confi dence level was

CZK 19.4 million as of 31 December 2007. The average of daily

VaR values for foreign currency risk for 2007 was CZK 12.6

million. The VaR value for the currency volatility of the trading

book was CZK 3.8 million. The average of daily VaR values for

the foreign currency volatility for 2007 was CZK 4.7 million.

Foreign currency exposures are primarily carried by the Bank

and real estate companies within the Group as they generate the

bulk of rental income in EUR. The foreign currency risk of other

Group entities is limited. With regard to real estate companies,

the Group uses ‘inherent’ hedging where the companies exposed

to foreign currency risk as a result of EUR-denominated rental

income are refi nanced by loans denominated in EUR.

Interest Rate Risk Interest rate risk is the risk that the value of fi nancial instru-

ments will fl uctuate due to changes in market interest rates.

The Group manages the interest rate risk of the banking book

through the monitoring of the repricing dates of the Group’s

assets and liabilities and using models which show the

143


potential impact that changes in interest rates may have on the

Group’s net interest income. Refer to Note 49.

In order to measure the interest rate risk exposure within the

trading portfolio instruments, the Group uses the ‘PVBP gap’

defi ned as a matrix of sensitivity factors to interest rates by

currency for individual portfolios of interest rate products.

These factors measure the portfolio market value sensitivity

with a parallel shift of the yield curve of the relevant currency

within the predefi ned period to maturity. The system of PVBP

limits is set in respect of each interest rate product portfolio by

currency. The limits are compared to the value that represents

the greater of the sum of positive PVBP values or the sum of

negative PVBP values in absolute terms for each period to ma-

turity. By adopting this approach, the Group manages not only

the risk attached to a parallel shift of the yield curve, but also

any possible ‘fl ip’ of the yield curve. With regard to foreign

currency options, the PVBP limits also include the Rho and

Phi equivalents. In addition, the Group monitors other special

limits for interest rate option contracts, such as the gamma and

vega limits for interest rates and their volatility.

The VaR methodology is also used for the calculation of the

interest rate risk of both the trading and banking books. The VaR

value for the interest rate risk of the trading book for one day

and 99 percent confi dence level as of 31 December 2007 was

CZK 20.4 million which corresponds to a VaR value for one

month of CZK 93.7 million. The average of daily VaR values for

the interest rate risk for 2007 was CZK 15.2 million. The monthly

VaR for the interest rate of the banking book as of 31 December

2007 was CZK 792 million. The average of monthly VaR values

for the interest rate risk for 2007 was CZK 727 million.

For monitoring and measuring the banking book interest rate

exposures, the Group uses a simulation model focused on moni-

toring potential impacts of market interest rate movements on the

Group’s net interest income. Simulations are performed over the

period of 36 months. A basic analysis focuses on the sensitivity of

the Group’s net interest income to a one-off change(s) of market

interest rates (rate shock). In addition, the Group undertakes

probability modelling of its net interest income (stochastic simu-

lation) and the traditional gap analysis. The analyses noted above

are undertaken on a monthly basis and the results are discussed by

the Assets and Liabilities Committee in the context of the overall

development of fi nancial markets, Czech banking sector, as well

as the structural changes in the Group’s balance sheet.

The following sensitivity analysis is based on the exposure of

the Group to interest rates for derivative and non-derivative

instruments as of the balance sheet date and the determined

changes which occurred at the beginning of the year and are

constant during the reported period for the instruments with

a variable interest rate, i. e., the model is based on the assump-

tion that the funds released as a result of the payment or sale of

interest rate assets and liabilities will be re-invested in assets

and liabilities with the same interest rate sensitivity. As such,

the model assumes the fi xed structure of the balance sheet

according to interest rate sensitivity.

If the CZK interest rates increased/decreased by 100 points

during the year and other variable interest rates remain

unchanged:

• The profi t for 2008 would increase by CZK 460 mil-

lion/decrease by CZK 460 million (2007: an increase of

CZK 470 million/decrease of CZK 550 million); and

• The gains/losses from revaluation would increase by

CZK –71/+73 million (2007: CZK –131/+137 million), na-

mely as a result of the changes in the fair value of securities

with a fi xed interest rate in the available-for-sale portfolio.

The Bank monitors the impact of stress scenarios of the shifts

of yield curves on the market value of the banking book. These

stress scenarios are determined in accordance with the regulatory

rules as 1 percent or 99 percent quantiles of the year-on-year

changes in interest rates based on the fi ve year history of time

series of individual maturities of yield curves in all currencies.

As of 31 December 2007, this stress scenario would trigger

a loss in the market value of the banking book of 1.5 percent of

the Bank’s capital (a total of the original and additional capital).

The Bank additionally monitors interest rate exposures

and simulates the impact of changes in interest rates on the

profi t/(loss) of selected subsidiaries, principally Stavební spo-

řitelna České spořitelny, a. s., Penzijní fond České spořitelny,

a. s. and Pojišťovna České spořitelny, a. s.

Other subsidiaries exposed to interest rate risk such as Leasing

České spořitelny, a. s., Factoring České spořitelny, a. s., s Autolea-

144

sing, a. s. and sAutoúvěr a. s. principally use ‘inherent’ hedging by

opting for the appropriate refi nancing of the active portfolios and

regularly adjusting this refi nancing (at least on an annual basis).

Equity RiskTo monitor and manage the equity risk inherent in the trading

and banking books, the Group uses the VaR method and

sensitivity analysis which is based on the exposure to the risk

of change in the rate of shares as of the balance sheet date.

With respect to the increased volatility of share prices, the

equity risk represents a signifi cant component of risks despite

smaller volumes of share positions. As of 31 December 2007,

the VaR value of the equity risk of the trading portfolio was

CZK 6.5 million for one day and 99 percent confi dence level

(CZK 30 million for a one-month period). The average of daily

VaR values for the equity risk for 2007 was CZK 3.8 million.

The VaR value for equity risk of the banking book for one

month as of 31 December 2007 and at the same confi dence

level was CZK 78.4 million. The average of monthly VaR

values for the equity risk for 2007 was CZK 74.1 million.

Capital Requirement in Respect of Market Risks Since December 2003, the Bank has used its internal model

approved by the Czech National Bank in November 2003 to

calculate its B capital requirements. The capital requirement in

respect of market risks (foreign currency risk, general interest

rate risk, general and specifi c equity risk and risk associated

with trading book option contracts) is determined using the

Value at Risk method. The model is based upon the calculation

of Value at Risk with a 99 percent confi dence level and a 10day

holding period using the historical simulation method.

(c) Liquidity Risk Liquidity risk is the risk that the Group will encounter

diffi culties in raising funds to satisfy its fi nancial liabilities

when they mature or in fi nancing its assets. The Bank’s short-

term liquidity position is monitored and managed based on

expected cash fl ows and adjusting the structure of interbank

deposits and placements accordingly and/or taking other

decisions aimed at adjusting the short-term liquidity position

of the Bank, for example, taking a decision to balance the

short-term liquidity position in individual currencies.

The mid-term and long-term liquidity is monitored on a mon-

thly basis through the Traffi c Light System (TLS) simulation

model which takes into account the anticipated possibility

of renewal, preliminary repayment or sale of the Bank’s

individual positions. The results are presented and discussed

in the Operating Liquidity Committee (OLC) and the Assets

and Liabilities Committee which decide on the need to take

measures with respect to liquidity risk exposure.

The analysis of the balance sheet as of 31 December 2007 and

2006 by maturities is provided in Note 52. This analysis shows

derivatives at fair values as of the balance sheet date.

(d) Operational Risk In accordance with CNB Regulation 123/2007, the Group

defi nes operational risk as the risk of loss arising from the

inappropriateness or failure of internal processes, human errors

or failures of systems or the risk of loss arising from external

events, including loss due to the breach of or failure to fulfi l

legal regulations.

With assistance from Erste Bank Vienna, the Group put in

place a standardised categorisation of operational risks. This

classifi cation became the basis of the ‘Book of Risks of Česká

spořitelna’, developed in cooperation with the Risk Management

and Internal Audit Departments. The Book of Risks is a tool

used to achieve unifi cation of risk identifi cation procedures on

a group-wide level and unifi cation of risk categorisation in order

to ensure consistency of risk monitoring and evaluation.

The Bank has cooperated with an external supplier in

developing a specialised software application to collect data

about operational risk which conforms to the data collection

requirements set out in BASEL II. The data is not only used

with a view to quantifying operational risks and monitoring

trends in the development of these risks but also for the pur-

pose of preventing recurrence of operational risks. In addition

to monitoring actual occurrence of operational risk, the Bank

also pays attention to how the operational risk is perceived by

the Bank’s management. This expert risk analysis is assessed

annually. A tool of importance in mitigating losses arising

from operational risks is the Group’s insurance programme

put in place in 2002. This insurance programme involves

insurance of property damage as well as risks arising from

145


banking activities and liability risks. Since 2004, the Bank and

its subsidiaries have joined the Erste Bank Group insurance

programme which expands the Bank’s insurance protection

specifi cally with regard to damage that may materially impact

its profi t or loss.

(e) Capital RiskThe Group has identifi ed the following risks which should be

covered entirely or partially by capital: market risks, interest

rate risk of the banking book, credit risk and concentration

risk, liquidity risk, operational risk, reputation risk, strategic

risk, business risk and residual risk of securitisation.

The principal objectives of the Group in managing capital risks

are as follows:

• Quantifi cation of risks in the form of economic capital

which is needed to cover potential losses arising from these

risks;

• Comparison of capital requirements with capital resources;

• Management of capital resources with respect to current

and future risks;

• Determination of the maximum acceptable degree of risks

with respect to available capital resources;

• Monitoring and management of the performance of

business activities with respect to the risk or the capital

requirements; and

• Strategic planning with respect to the risk, allocated capital

resources and capital effi ciency of individual business

activities of the Bank and the fi nancial group.

To calculate the economic capital for the market, credit, interest

rate, securitisation and operational risks, the Bank uses the

Value at Risk (VaR) methodology for a one-year period on the

confi dence level of 99.9 percent which corresponds approximately

to Česká spořitelna’s rating (A–) and the relevant probability of

default of the customer. To calculate other risks, the Bank uses an

estimate of the impact of risk scenarios modelled on an identical

confi dence level (liquidity risk) or an expert estimate of the

unexpected loss (business, reputation, strategic risks) based on the

experience of the Bank’s managers and historical data.

The aggregate value of the economic capital or capital

requirements is determined as the sum of economic capital

for individual risks (for the purpose of allocating capital to

individual business departments) or as aggregate economic

capital (for the purpose of comparison with available capital

resources to cover risks). The resulting aggregate risk capital is

compared to capital resources determined in accordance with

the regulatory rules as the sum of basic and additional capital

and the profi t for the current year taking into account the

anticipated payment of dividends. This comparison of the risk

and capital resources (risk capacity) is submitted to the Assets

and Liabilities Committee (ALCO) on a quarterly basis.

47. OFF BALANCE SHEET ITEMS AND DERIVATIVE FINANCIAL INSTRUMENTS

In the normal course of business, the Group becomes a party

to various fi nancial transactions that are not refl ected on the

balance sheet and are referred to as off balance sheet fi nancial

instruments. The following represent notional amounts of these

off balance sheet fi nancial instruments, unless stated otherwise.

(a) Contingent Liabilities

Legal Disputes At the balance sheet date the Group was involved in various

claims and legal proceedings of a nature considered normal

to its business. The Czech legal environment is still evolving,

legal disputes are costly and their outcome unpredictable.

Many parts of the legislation remain untested and there is

uncertainty about the interpretation that courts may apply in

a number of areas. The impact of these uncertainties cannot be

quantifi ed and will only be known as the specifi c legal disputes

in which the Group is named are resolved.

The Group is involved in various claims and legal proceedings

of a special nature. The Group also acts as a defendant in

a number of legal disputes fi led with the arbitration court. The

Group does not disclose the details underlying the disputes

as the disclosure may have an impact on the outcome of the

disputes and may seriously harm the Group’s interests.

Whilst no assurance can be given with respect to the ultimate

outcome of any such claim or litigation, the Group believes

that the various asserted claims and litigation in which it is

involved will not materially affect its fi nancial position, future

operating results or cash fl ows.

146

Pursuant to the ruling of the Antimonopoly Offi ce regarding

a potential violation of the Economic Competition Protection

Act 143/2001 Coll., whereby, inter alia, a penalty of CZK

94 million was imposed on Stavební spořitelna České spořitelny,

a. s. (‘SSČS’), SSČS recognised a provision for legal disputes

to the same value. The above ruling of the Antimonopoly Offi ce

was revoked in 2005 and the case was returned for reconside-

ration and for a new ruling to be issued. On 2 December 2005,

the Antimonopoly Offi ce issued a new ruling under which the

imposed penalty was reduced to CZK 38.5 million. SSČS appea-

led the ruling within the statutory deadline. On 19 December

2006, the Antimonopoly Offi ce issued a new ruling (a third

one) whereby it reduced the penalty to CZK 11.7 million. SSČS

appealed this ruling to the Chairman of the Antimonopoly Offi ce

who confi rmed the penalty on 18 April 2007. SSČS fi led an

administrative legal action against this ruling on 15 June 2007

and the penalty of CZK 11.7 million was paid on 4 July 2007.

As of 31 December 2007, brokerjet České spořitelny, a. s.

(‘brokerjet’) has been named as the defendant in a number of legal

disputes at the Arbitration Court in Prague. All the legal disputes

have the same substance. Brokerjet retained a reputable law fi rm,

which also acts as its legal counsel in these disputes, to prepare

an analysis of the likely outcome of these disputes. Pursuant to

this analysis and its own assessment, brokerjet believes that the

resolution of these disputes will be favourable. This belief is also

supported by the result of the arbitration proceedings that dealt

with the same matter which brokerjet won. For these reasons,

no provision to cover potential losses has been recognised even

though the aggregate claims raised by the plaintiffs are material.

Assets Pledged Assets are pledged as collateral under repurchase agreements

with other banks and customers in the amount of CZK 13,958

million (2006: CZK 10,977 million). Mandatory reserve

deposits are also held with the local central bank in accordance

with statutory requirements (refer to Note 6). These deposits

are not available to fi nance the Bank’s day to day operations.

The Group has received loans to fi nance investment property

for which it has pledged real estate of CZK 10,026 million

(2006: CZK 1,272 million) as collateral.

Commitments to Extend Credit and Commitments from Guarantees and Letters of CreditGuarantees and standby letters of credit, which represent irrevocable

assurances that the Group will make payments in the event that

a customer cannot meet its obligations to third parties, carry the

same credit risk as loans. Documentary and commercial letters of

credit, which are written undertakings by the Group on behalf of

a customer authorising a third party to draw drafts on the Group

up to a stipulated amount under specifi c terms and conditions, are

collateralised by the underlying shipments of goods to which they

relate and therefore carry less risk than a direct borrowing.

Commitments to extend credit represent unused portions of

clients’ authorisations to extend credit in the form of loans,

guarantees or letters of credit. The credit risk attached the

commitments to extend credit represents a potential loss for the

Group. The Group estimates the potential loss on the basis of

historical developments of credit conversion factors, probabi-

lity of default and loss given default. Credit conversion factors

indicate the likelihood of the Group paying out on a guarantee

or having to grant a loan on the basis of an issued commitment

to extend credit.

Guarantees, irrevocable letters of credit and undrawn loan

commitments are subject to similar credit risk monitoring and

credit policies as utilised in the extension of loans. Manage-

ment of the Group believes that the market risk associated with

guarantees, irrevocable letters of credit and undrawn loans

commitments is minimal.

In 2007, the Group recorded provisions for off balance sheet

risks to cover potential losses that may be incurred in connection

with these off balance sheet transactions. As of 31 Decem-

ber 2007, the aggregate balance of these provisions was

CZK 143 million (2006: CZK 101 million). Refer to Note 28.

CZK mil. 2007 2006

Guarantees and letters of credit 21,848 26,238

Undrawn loan commitments 95,339 91,013

147


(b) DerivativesThe Group maintains strict control limits on net open derivative positions, i. e., the difference between the fair values of purchase and

sale contracts. At any one time the amount subject to credit risk is limited to the positive fair value of derivative fi nancial instruments,

which is only a small fraction of the contract or notional values used to express the volume of instruments outstanding. This credit

risk exposure is managed as part of the overall lending limits with customers. Limits are established refl ecting the risk of fair value

fl uctuations arising from market movements. Collateral or other security is not usually obtained for credit risk exposures on the

derivative fi nancial instruments, except where the Group requires deposits from counterparties.

All derivatives are stated at fair value on the balance sheet as of 31 December 2007 and 2006 (refer to Notes 12 and 25).

(c) Foreign Currency Contracts Foreign currency contracts are agreements to exchange specifi c amounts of currencies at a specifi ed rate of exchange, at a spot date

(settlement occurs two days after the trade date) or at a forward date (settlement occurs more than two days after the trade date). The

notional amount of these contracts does not represent the actual market or credit risk associated with these contracts.

Foreign currency contracts are used by the Group for risk management and trading purposes.

CZK mil. 2007 2006

Notional amounts

Trading instruments

Commitments to purchase 136,359 69,997

Commitments to sell 136,845 70,518

(d) Interest rate swapsInterest rate swap contracts obligate two parties to exchange one or more payments calculated by reference to fi xed or periodically

reset rates of interest applied to a specifi c notional principal amount. Notional principal is the amount upon which interest rates

are applied to determine the payment streams under interest rate swaps. Such notional principal amounts are often used to express

the volume of these transactions but are not actually exchanged between the counterparties. The Group’s interest rate swaps were

principally transacted for propriety trading purposes, to hedge customer-oriented transactions or to hedge against interest rate risk.

The Group has applied hedge accounting in respect of the interest rate exposure arising from its own issue of mortgage bonds. The

mortgage bonds issued with a fi xed interest rate were linked to a fl oating market rate through interest rate swaps.

148

At 31 December 2007 CZK mil. Weighted average interest rate

Notional amounts Receive Pay

Hedging instruments

Remaining maturity:

– less than 1 year – – –

– 1 to 5 years 4,744 3.43% 3.46%

– over 5 years 11,257 3.47% 3.71%

Total 16,001 3.46% 3.64%

Trading instruments

Remaining maturity:

– less than 1 year 155,825 3.06% 3.55%

– 1 to 5 years 328,745 3.26% 3.53%

– over 5 years 151,763 2.68% 3.33%

Total 636,333 3.07% 3.49%

At 31 December 2006 CZK mil. Weighted average interest rate

Notional amounts Receive Pay

Hedging instruments

Remaining maturity:

– less than 1 year 90 2.55% 4.45%

– 1 to 5 years 9,360 3.30% 2.58%

– over 5 years 6,750 3.65% 2.71%

Total 16,200 3.44% 2.64%

Trading instruments

Remaining maturity:

– less than 1 year 138,987 3.06% 2.97%

– 1 to 5 years 279,624 3.20% 3.62%

– over 5 years 136,009 3.47% 3.43%

Total 554,620 3.23% 3.41%

(e) Option ContractsOption contracts represent the formal reservation of the right to buy or sell an asset at the specifi ed quantity, within a given time in the

future and at a certain price. The buyer of the option has the right, but not the obligation, to exercise the right to buy or sell an asset

and the seller has the obligation to sell or purchase the asset at the specifi ed quantity and at the price defi ned in the option contract.

149


CZK mil.

Notional amounts

2007 2006

Hedging instruments

Remaining maturity:

– less than 1 year – –

– 1 to 5 years 684 738

– more than fi ve years – –

Total 684 738

Trading instruments

Option contracts sold

Interest rate 21,273 24,624

Foreign currency 96,309 48,671

Equity 2,118 1,828

Commodity 128 –

Option contracts purchased

Interest rate 21,273 24,624

Foreign currency 94,359 48,756

Equity 2,118 1,828

Commodity 128 –

(f) Forward Rate Agreements A forward rate agreement is an agreement to settle amounts at a specifi ed future date based on the difference between an interest

rate index and an agreed upon fi xed rate. Market risk arises from changes in the market value of contractual positions caused by

movements in market interest rates. In principle, the Group limits its exposure to market risk by entering into generally matching

or offsetting positions and by establishing and monitoring limits on unmatched positions. Credit risk is managed through approval

procedures that establish specifi c limits for individual counterparties. All of the Group’s forward rate agreements were entered into for

trading purposes.

Notional amounts 2007 2006

CZK mil. Weighted average rate CZK mil. Weighted average rate

Trading instruments

Remaining maturity:

Purchase

– less than 1 year 197,180 3.58% 187,700 3.20%

– 1 to 5 years 17,000 4.49% 15,000 3.65%

Total 214,180 3.65% 202,700 3.23%

Sale

– less than 1 year 197,180 3.45% 187,700 3.11%

– 1 to 5 years 17,000 4.19% 15,000 3.73%

Total 214,180 3.51% 202,700 3.16%

150

(g) Swap and Forward Contracts with Securities Swap and forward contracts with securities are agreements to purchase or sell the securities for a specifi c amount at a future date. The

swap and forward contracts with securities are used by the Group for trading purposes.

CZK mil.

Notional amounts

2007 2006

Forward contracts with equities

Commitments to purchase 8 117

Commitments to sell 8 115

Swap contracts with equities



(h) Cross Currency Swaps and ForwardsCross currency swaps are combinations of interest rate swaps and foreign currency contracts. As with interest rate swaps, the Group

agrees to make fi xed versus fl oating interest payments at periodic dates over the life of the instrument. These payments are, however,

in different currencies, and are settled on a gross basis. Unlike interest rate swaps, the notional balances of the different currencies are

typically exchanged at the beginning and re-exchanged at the end of the contract period.

CZK mil.

Notional amounts

2007 2006

Swaps – trading instruments



Forwards – trading instruments



(i) Other Derivatives The Group entered into transactions resulting in the Group assuming risk on certain underlying debt securities denominated in

a foreign currency. As of 31 December 2007, the total notional amount of credit derivatives was CZK 311 million


(j) FuturesFutures contracts represent the obligation to sell or purchase a fi nancial instrument in the organised market at a certain price at a cer-

tain agreed date in the future. The Group entered into futures contracts in respect of debt securities and equities for trading purposes.

As of 31 December 2007, the total notional amount of the futures transactions was CZK 5,800 million (2006: CZK 15,564 million).

151


48. NET FOREIGN EXCHANGE POSITIONS

The net foreign exchange positions of the Group as of 31 December 2007 and 2006 were as follows:

At 31 December 2007

CZK mil.

CZK EUR USD GBP SKK HUF PLN Other Total

Assets

Cash and balances with the CNB 18,667 999 240 112 114 19 25 218 20,394

Loans and advances to fi nancial institutions 44,763 12,408 6,801 558 85 19 341 713 65,688

Loans and advances to customers, net of provisions 394,789 14,978 1,105 123 312 – 88 210 411,605

Securities at fair value through profi t or loss 28,033 16,693 3,110 – 873 3,102 1,912 118 53,841

Positive fair value of fi nancial derivative

transactions 16,687 610 230 – 69 54 17 7 17,674

Securities available for sale 27,728 6,088 1,044 122 – 125 319 60 35,486

Securities held to maturity 134,214 3,272 – – – – – – 137,486

Financial placements of insurance companies 14,659 497 477 41 – 39 84 11 15,808

Other assets 52,631 1,656 434 8 996 4 91 323 56,143

732,171 57,201 13,441 964 2,449 3,362 2,877 1,660 814,125

Liabilities

Amounts owed to fi nancial institutions 30,980 19,707 5,099 2 118 787 693 1,096 58,482

Amounts owed to customers 567,911 13,777 3,119 431 234 2,552 226 276 588,526

Liabilities at fair value 7,488 72 49 – – – – – 7,609

Negative fair value of fi nancial derivative

transactions 10,000 788 208 – 53 11 20 1 11,081

Bonds in issue 47,025 250 – – – – – – 47,275

Other liabilities 41,424 1,711 336 8 145 4 51 264 43,943

704,828 36,305 8,811 441 550 3,354 990 1,637 756,916

Net foreign exchange position –

on balance sheet 27,343 20,896 4,630 523 1,899 8 1,887 23 57,209

Net foreign exchange position –

off balance sheet 39,192 32 39,160 (28,515) (56) (28,459) (3,079) 23 18,298

The line ‘Other assets’ includes other assets, property and equipment, intangible fi xed assets, assets held for sale, investment property,

property under construction and equity investments. The line ‘Other liabilities’ includes other liabilities, technical insurance provisi-

ons, provisions and subordinated debt.

On the grounds of materiality, the analysis of the foreign exchange position as of 31 December 2007 presented separately assets and

liabilities denominated in HUF and PLN. As of 31 December 2006, the assets and liabilities denominated in HUF and PLN were

reported as part of other currencies.

152

At 31 December 2006

CZK mil.

CZK EUR USD GBP SKK Other Total

Assets

Cash and balances with the CNB 21,413 1,014 202 131 138 253 23,151

Loans and advances to fi nancial institutions 56,566 8,357 5,458 30 1,503 1,265 73,179

Loans and advances to customers, net of provisions 304,941 15,103 2,012 181 147 382 322,766

Securities at fair value through profi t or loss 25,692 16,075 3,643 – 113 4,017 49,540

Positive fair value of fi nancial derivative transactions 17,478 668 162 – 79 46 18,433

Securities available for sale 30,689 6,934 1,011 35 – 716 39,385

Securities held to maturity 138,049 3,380 – – – – 141,429

Financial placements of insurance companies 12,768 490 490 29 – 101 13,878

Other assets 41,346 3,195 1,150 18 876 47 46,632

648,942 55,216 14,128 424 2,856 6,827 728,393

Liabilities

Amounts owed to fi nancial institutions 35,899 3,736 4,573 75 – 2,078 46,361

Amounts owed to customers 517,559 13,181 3,633 404 227 2,483 537,487

Negative fair value of fi nancial derivative transactions 11,934 573 124 – 10 43 12,684

Bonds in issue 34,261 147 – – – – 34,408

Other liabilities 44,427 1,745 1,212 31 159 17 47,591

644,080 19,382 9,542 510 396 4,621 678,531

Net foreign exchange position – on balance

sheet 4,862 35,834 4,586 (86) 2,460 2,206 49,862

Net foreign exchange position – off balance

sheet (112,308) 11,428 (809) (517) 115 (4,587) (106,678)



ons, provisions and liabilities at fair value.

153


49. INTEREST RATE RISK

(a) Interest rate repricing analysis The following tables present the distribution of assets and liabilities according to the interest rate repricing dates. They include sig-

nifi cant fi nancial assets and liabilities in CZK, EUR and USD as of 31 December 2007 and 2006. Variable yield assets and liabilities

have been reported according to their next rate repricing date. Fixed income assets and liabilities have been reported according to their

remaining maturity.

At 31 December 2007

CZK mil.

Demand and

less than

1 month

1 to

3 months

3 months

to 1 year

1 to 5 years Over 5 years Total

Selected assets

Cash and balances with the CNB 5,668 – – – – 5,668

Loans and advances to fi nancial institutions 42,577 2,708 15,136 4,645 218 65,284

Loans and advances to customers, net of provisions 82,026 76,695 81,508 141,677 34,649 416,555

Securities at fair value through profi t or loss 2,129 1,913 7,715 19,945 11,821 43,523

Securities available for sale 947 9,671 5,236 11,529 5,501 32,884

Securities held to maturity 9,267 18,753 15,640 58,331 35,496 137,487

Financial placements of insurance companies 2 1,356 742 5,704 5,509 13,313

142,616 111,096 125,977 241,831 93,194 714,714

Selected liabilities

Amounts owed to fi nancial institutions 24,584 3,742 4,219 11,020 14,853 58,418

Amounts owed to customers 87,660 151,661 132,458 210,065 2,241 584,085

Bonds in issue 7,447 2,751 3,983 10,769 22,325 47,275

Subordinated debt – – 5,605 – – 5,605

119,691 158,154 146,265 231,854 39,419 695,383

Current gap 22,925 (47,058) (20,288) 9,977 53,775 19,331

Cumulative gap 22,925 (24,133) (44,421) (34,444) 19,331

154

At 31 December 2006

CZK mil.

Demand and

less than

1 month

1 to

3 months

3 months

to 1 year


Selected assets


Loans and advances to fi nancial institutions 54,707 6,118 9,336 200 – 70,361


Securities at fair value through profi t or loss 27,251 1,008 535 8,236 2,396 39,426

Securities available for sale 1,884 9,092 4,317 17,738 4,187 37,218


Financial placements of insurance companies 121 642 491 5,528 4,854 11,636

187,991 79,610 95,376 209,608 58,616 631,201


Amounts owed to fi nancial institutions 27,063 5,086 4,321 7,593 123 44,186

Amounts owed to customers 82,124 122,769 115,420 206,052 1,837 528,202

Bonds in issue 3,890 901 4,063 14,027 11,527 34,408


113,077 128,756 129,690 227,672 13,487 612,682

Current gap 74,914 (49,146) (34,314) (18,064) 45,129 18,519

Cumulative gap 74,914 25,768 (8,546) (26,610) 18,519

In addition, the Group also enters into interest rate swaps to manage its interest rate risk exposure.

155


(b) Effective yield informationThe effective yields of signifi cant fi nancial assets and liabilities by major currencies of the banking segment as of 31 December 2007

and 2006 are as follows:

At 31 December 2007 Weighted average

interest rate

Weighted average

interest rate

Weighted average

interest rate

Weighted average

interest rate

CZK EUR USD TOTAL

Selected assets

Cash and balances with the CNB 3.17% 4.00% – 3.02%

Loans and advances to fi nancial institutions 3.63% 3.92% 5.61% 3.89%

Loans and advances to customers, net of provisions 6.16% 5.91% 5.62% 6.15%

Securities at fair value through profi t or loss 4.00% 4.59% 3.42% 4.15%

Securities available for sale 3.43% 4.87% 5.08% 3.69%

Securities held to maturity 4.09% 5.66% – 4.13%

Financial placements of insurance companies 4.59% 3.79% – 4.57%


Amounts owed to fi nancial institutions 3.35% 3.80% 5.02% 3.66%

Amounts owed to customers 1.21% 1.78% 2.59% 1.23%

Bonds in issue 3.59% 3.97% – 3.59%

Subordinated debt 4.19% – – 4.19%


interest rate

Weighted average

interest rate

Weighted average

interest rate

Weighted average

interest rate

CZK EUR USD TOTAL

Selected assets

Cash and balances with the CNB 2.50% 3.36% – 2.51%





Securities held to maturity 3.97% 4.51% – 3.98%

Financial placements of insurance companies 4.48% 3.98% 4.58% 4.51%




Bonds in issue 2.97% 3.16% – 2.97%


156

(c) Interest rate payments The following tables present expected cash fl ows from received/paid interest on selected assets and liabilities according to individual

time buckets:

At 31 December 2007

CZK mil.

Demand and

less than 1

month

1 to

3 months

3 months

to 1 year


Selected assets

Cash and balances with the CNB 7 – – – – 7

Loans and advances to fi nancial institutions 136 110 211 1 – 458


Securities at fair value through profi t or loss 108 121 440 1,169 491 2,329

Securities available for sale 100 164 515 1,556 928 3,263

Securities held to maturity 459 817 3,105 10,479 7,173 22,033


2,719 4,224 14,227 39,450 19,963 80,583


Amounts owed to fi nancial institutions 82 47 51 11 – 191

Amounts owed to customers 561 869 2,674 7,095 2,805 14,004

Bonds in issue 162 269 992 3,732 3,624 8,779

Subordinated debt 20 39 88 – – 147

825 1,224 3,805 10,838 6,429 23,121

Current gap 1,894 3,000 10,422 28,612 13,534 57,462

Cumulative gap 1,894 4,894 15,316 43,928 57,462

157


At 31 December 2006

CZK mil.

Demand and

less than

1 month

1 to

3 months

3 months

to 1 year


Selected assets





Securities available for sale 104 177 618 1,787 725 3,411



2,088 3,207 11,310 31,013 13,548 61,166



Amounts owed to customers 474 723 2,028 4,229 231 7,685

Bonds in issue 88 162 668 2,380 1,807 5,105


625 936 2,774 6,617 2,038 12,990

Current gap 1,463 2,271 8,536 24,396 11,510 48,176

Cumulative gap 1,463 3,734 12,270 36,666 48,176

158

50. CONCENTRATIONS OF CREDIT RISK

The Group is exposed to credit risk arising from the following items:

CZK mil. 2007 2006

Credit risk exposures relating to on-balance sheet items

Cash and with the Czech National Bank 5,695 9,075


Loans and advances to customers, net of provisions 411,605 322,766

a) Retail loans including loans to individuals-businessmen 219,404 165,800

– Overdraft loans 6,811 6,537

– Credit cards 2,951 2,370

– Other loans 60,983 49,061

– Mortgage loans 113,900 82,521

– Construction savings loans 33,181 23,940

– Finance leases 500 487

– Loans to fi nance the acquisition of securities 1,078 884

b) Corporate loans 192,201 156,966

– Large enterprises 51,639 39,046

– Small companies 24,683 19,395

– Small and medium sized enterprises (SMEs) 45,993 38,904

– Corporate mortgages 44,901 29,043

– Municipalities and public sector 15,026 20,801

– Factoring 2,251 2,442

– Finance leases 7,708 7,335

Positive fair value of fi nancial derivative transactions 17,674 18,433

Financial assets at fair value through profi t or loss

– Debt securities held for trading 26,121 25,639

– Debt securities designated upon initial recognition as at fair value through profi t or loss 17,735 14,868

Debt securities available for sale 32,884 37,525

Debt securities held to maturity 137,486 141,429

Financial placements of insurance companies (loans and advances to fi nancial institutions and debt securities) 13,313 11,710

Credit risk exposure relating to off-balance sheet items

Amounts owed from guarantees and letters of credit 21,848 26,238


Total 845,388 771,875

The resulting credit exposure as of 31 December 2007 and 2006 represents a worst case scenario, without taking into account any

collateral held or other credit enhancements attached. For on-balance sheet assets, the exposures set out above are based on net

carrying amounts as reported in the balance sheet.

159


As shown above, 56 percent of the total exposure is derived from loans and advances to fi nancial institutions and customers

(2006: 51 percent); 28 percent represents investments in debt securities (2006: 30 percent).

Set out below is a summary of loans and advances to customers and fi nancial institutions and debt securities by individual sectors in

the distribution of the credit exposure of the Group:

CZK mil. 2007 2006

Financial institutions 162,992 23% 168,460 27%

Individuals 213,362 30% 160,397 25%

Trading 31,983 5% 26,431 4%

Energy sector 7,536 1% 4,220 1%

State institutions 143,000 20% 148,778 23%

Public sector 18,382 3% 15,670 2%

Construction 7,722 1% 5,912 1%

Hotels, public catering 3,053 0% 2,459 0%

Real estate activities and other business activities 44,386 6% 30,799 5%

Processing industry 33,992 5% 33,333 5%

Other 41,234 6% 36,996 6%

Total 711,642 633,455

The geographical concentration of assets and liabilities is detailed in Note 54b.

51. ASSET QUALITY

The following tables show the assessment of asset quality using external ratings by a reputable rating agency:

31 December 2007

CZK mil.

AA AA– to

AA+

A– to A+ Lower

than A

Unrated

Total

Securities held for trading 149 – 25,309 1,184 1,794 28,436

Securities at fair value through profi t or loss 6,773 5,478 6,043 6,477 634 25,405

Securities available for sale 793 1,772 27,624 3,695 1,603 35,486

Securities held to maturity 4,161 11,962 113,349 8,014 – 137,486

Securities in fi nancial placements of insurance companies 518 50 12,399 1,014 1,753 15,733

Total 12,394 19,262 184,723 20,384 5,784 242,545

160

31 December 2006

CZK mil.

AAA AA– to

AA+

A– to A+ Lower

than A

Unrated Total

Securities held for trading 888 126 23,104 827 2,858 27,803

Securities at fair value through profi t or loss 3,903 5,101 5,395 6,827 511 21,737

Securities available for sale 2,589 1,467 31,453 1,493 2,383 39,385


Securities in fi nancial placements of insurance companies 821 – 10,782 – 2,201 13,804

Total 11,785 11,611 195,215 17,594 7,953 244,158

The following tables show the assessment of asset quality using internal ratings:

31 December 2007

CZK mil.

Investment

grade

(1–4c)

Standard

monitoring

(5–6)

Special

monitoring

(7–8)

Substandard

(R)

Total

Retail loans/loans to households

– Overdraft loans 4,522 950 362 257 6,091

– Credit cards 2,233 465 230 248 3,176

– Other loans 44,988 7,166 2,941 2,332 57,427

– Mortgage loans 97,435 9,441 3,141 1,543 111,560

– Construction savings loans 28,680 3,326 942 456 33,404

– Finance leases 361 81 19 39 500

– Loans to fi nance the acquisition of securities 1,078 – – – 1,078

MSE

– Overdraft loans 866 1,631 83 219 2,799

– Mortgage loans 5,021 11,668 524 417 17,630

– Other loans 4,249 9,129 548 603 14,529

– Construction savings loans 14 15 1 2 32

– Finance leases 384 2,052 408 291 3,135

Corporate loans

– Large enterprises 20,885 30,287 3,578 907 55,657

– Small and medium sized enterprises (SMEs) 11,269 34,613 4,194 2,750 52,826

– Factoring – 2,251 – – 2,251

– Other 25,016 29,358 1,132 814 56,320

Total loans and advances to customers 247,001 142,433 18,103 10,878 418,415

Total loans and advances to fi nancial institutions 59,434 6,254 – – 65,688

161


31 December 2006

CZK mil.

Investment

grade

(1–4c)

Standard

monitoring

(5–6)

Special

monitoring

(7–8)

Substandard

(R)

Total


– Overdraft loans 4,263 990 294 218 5,765

– Credit cards 1,823 344 184 158 2,509

– Other loans 36,724 5,209 2,312 2,281 46,526

– Mortgage loans 64,317 10,771 4,141 918 80,147

– Construction savings loans 21,752 1,522 450 391 24,114

– Finance leases 336 70 21 60 487

– Loans to fi nance the acquisition of securities 884 – – – 884

MSE

– Overdraft loans 550 1,917 112 167 2,746

– Mortgage loans 2,708 11,238 473 147 14,566

– Other loans 2,557 7,596 477 418 11,048

– Construction savings loans – 31 5 1 37

– Finance leases – 3,409 296 478 4,182

Corporate loans

– Large enterprises 15,870 25,507 2,918 1,448 45,743

– Small and medium sized enterprises (SMEs) 8,729 30,021 3,038 1,865 43,653

– Factoring – 2,442 – – 2,442

– Other 16,687 27,169 219 181 44,256



162

52. MATURITY ANALYSIS

The table below analyses assets and liabilities of the Group into relevant maturity groupings as of 31 December 2007, based on the

remaining period at the balance sheet date to the contractual maturity date (remaining maturity).

CZK mil. Demand

and less

than

1 month

1 to

3 months

3 months

to 1 year

1 to

5 years

Over

5 years

Not

specifi ed

Total

Assets

Cash and balances with the CNB 15,120 – 40 – – 5,234 20,394

Loans and advances to fi nancial institutions 42,958 2,694 15,171 4,647 218 – 65,688

Loans and advances to customers, net of provisions 32,121 13,369 84,358 136,195 152,372 (6,810) 411,605

Securities at fair value through profi t or loss 538 296 7,923 20,344 13,854 10,886 53,841

Positive fair value of fi nancial derivative transactions 904 1,264 1,869 5,572 8,065 – 17,674

Securities available for sale 249 5,418 4,300 14,754 8,163 2,602 35,486

Securities held to maturity 3,495 5,880 19,489 72,354 36,268 – 137,486

Financial placements of insurance companies 24 658 462 6,399 8,190 75 15,808

Other assets 5,005 4,877 6,127 689 2 39,443 56,143

Total 100,414 34,456 139,739 260,954 227,132 51,430 814,125

Liabilities

Amounts owed to fi nancial institutions 25,360 3,734 3,486 11,638 14,264 – 58,482

Amounts owed to customers 390,230 97,420 42,542 56,078 2,256 – 588,526

Liabilities at fair value 16 – 3,124 3,926 543 – 7,609

Negative fair value of fi nancial derivative transactions 661 1,001 1,900 5,143 2,376 – 11,081

Bonds in issue – 6,069 3,657 10,188 27,361 – 47,275

Subordinated debt – – – – 5,605 – 5,605

Other liabilities 5,077 1,379 1,656 153 19 30,054 38,338

Total 421,344 109,603 56,365 87,126 52,424 30,054 756,916

Current gap (320,930) (75,147) 83,374 173,828 174,708 21,376 57,209

Cumulative gap (320,930) (396,077) (312,703) (138,875) 35,833 57,209



ons and provisions.

163


The table below analyses assets and liabilities of the Group into relevant maturity groupings as of 31 December 2006, based on the

remaining period at the balance sheet date to the contractual maturity date.

CZK mil. Demand

and less

than

1 month

1 to

3 months

3 months

to 1 year

1 to

5 years

Over

5 years

Not

specifi ed

Total

Assets

Cash and balances with the CNB 14,521 – – – – 8,630 23,151


Loans and advances to customers, net of provisions 23,970 11,156 78,020 113,406 102,553 (6,339) 322,766

Securities at fair value through profi t or loss – 220 3,721 26,401 10,165 9,033 49,540

Positive fair value of fi nancial derivative transactions 976 350 657 2,406 4,690 9,354 18,433

Securities available for sale 1,000 6,137 3,520 20,029 6,839 1,860 39,385

Securities held to maturity 6,022 6,185 15,626 84,225 29,371 – 141,429

Financial placements of insurance companies 41 302 180 6,142 5,044 2,169 13,878

Other assets 5,219 3,095 6,672 208 – 31,438 46,181

Total 106,823 31,459 117,709 257,584 158,673 56,145 728,393

Liabilities

Amounts owed to fi nancial institutions 29,128 803 3,532 7,683 5,215 – 46,361

Amounts owed to customers 347,084 72,446 39,177 76,596 2,184 – 537,487

Negative fair value of fi nancial derivative transactions 268 312 1,049 1,669 185 9,201 12,684

Bonds in issue 1,280 2,540 2,437 14,448 13,703 – 34,408


Other liabilities 8,733 5,305 822 5,297 1,615 19,933 41,705

Total 386,493 81,406 47,017 105,693 28,788 29,134 678,531

Current gap (279,670) (49,947) 70,692 151,891 129,885 27,011 49,862

Cumulative gap (279,670) (329,617) (258,925) (107,034) 22,851 49,862




53. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value estimates are made based on relevant market data and information about the fi nancial instruments. Because no readily

available market prices exist for a signifi cant portion of the Group’s fi nancial instruments, fair value estimates for these instruments

are based on judgements regarding current economic conditions, currency and interest rate characteristics and other factors.

Many of these estimates involve uncertainties and matters of signifi cant judgement and cannot be determined with precision. There-

fore, the calculated fair value estimates cannot always be substantiated by comparison to market values and, in many cases, may not

be realised in the current sale of the fi nancial instrument. Changes in underlying assumptions could signifi cantly affect the estimates.

164

The following table summarises the carrying values and fair values of those fi nancial assets and liabilities not presented on the

balance sheet at their fair value.

CZK mil. Carrying value Estimated fair value Carrying value Estimated fair value

2007 2007 2006 2006

Financial assets

Loans and advances to fi nancial institutions 65,688 65,620 73,179 73,179

Loans and advances to customers, net of provisions 411,605 409,153 322,766 324,476

Securities held to maturity 137,860 136,835 141,880 145,406

Financial placements of insurance companies 15,808 15,692 13,878 14,221

Financial liabilities

Amounts owed to fi nancial institutions 58,482 57,872 46,361 46,353

Amounts owed to customers 588,526 588,138 537,487 536,819

Bonds in issue 47,275 47,334 34,408 34,446

Subordinated debt 5,605 5,611 5,886 5,889

Loans and Advances to Financial Institutions The fair value of loans and advances to fi nancial institutions is estimated as the present value of discounted future cash fl ows and the

applied discount factor is equal to the interest rates currently offered by the Group.

Loans and Advances to CustomersLoans and advances to customers are carried net of provisions. The fair value is estimated as the present value of discounted future

cash fl ows and the applied discount factor is equal to the interest rates currently offered by the Group.

Securities Held to MaturityThe fair value of securities held to maturity is based on market prices or price quotations obtained from brokers or dealers. If this

information is not available, the fair value is estimated using quoted market values for securities with similar credit risk characteris-

tics, maturity or yield rate or, as and when appropriate, according to the recoverability of the net asset value of these securities.

Amounts Owed to Financial Institutions and CustomersThe estimated fair value of amounts owed to fi nancial institutions and customers with no stated maturity which include no-interest

earning deposits, is equal to the amount payable on demand. The fair value of fi xed income deposits and other liabilities with no

stated market value is estimated as the present value of discounted future cash fl ows and the applied discount factor is equal to the

interest rates currently offered on the market for deposits with similar maturities. The fair value of products with no contractually

stated maturity (such as sight deposits, passbooks, overdraft facilities, construction savings deposits) is considered equal to their

carrying value.

Bonds in IssueThe aggregated fair value is based on quoted market prices. The fair value of securities where no market price is available is estimated

as the present value of discounted future cash fl ows and the applied discount factor is equal to the interest rates currently offered on

the market for deposits with similar remaining maturities.

165


Subordinated DebtIssued subordinated debt is traded on the free market of the Prague Stock Exchange. Its fair value is based on quoted market price.

54. SEGMENT REPORTING

(a) Industry segments For management purposes, the Group is organised into the following major operating divisions:

• Retail banking (accepting deposits from the public, providing loans to retail clients, services related to credit and debit cards);

• Corporate banking (providing loans to corporate clients and municipalities, issuance of guarantees, opening of letters of credit);

• Investment banking (securities investments, proprietary trading and trading on behalf of the client with securities, foreign exchange

assets, entering into futures and options including foreign currency and interest rate transactions, fi nancial brokerage, custodian

services, participation in issuance of stock, management, safe-keeping and administration of securities or other assets); and

• Other operations (leasing, insurance, management of investment and mutual funds, investment construction and advisory services).

These operations are aggregated in one segment “Other activities” as they are less material than the remaining activities.

2007

CZK mil.

Banking Other

activities

Elimi-

nations

Total

Retail Corporate Investment

REVENUE

External revenue 25,011 3,618 2,110 8,624 (1,522) 37,841

Inter-segment revenue 1,018 426 296 57 – 1,797

Total segment revenue 26,029 4,044 2,406 8,681 (1,522) 39,638

PROFIT

Segment profi t 12,164 1,763 1,566 4,372 (1,693) 18,172

Unallocated costs (2,583)

Profi t before tax 15,589

Income tax (3,213)

Minority interest (228)

Total profi t 12,148

OTHER INFORMATION

Asset acquisition 1,471 23 127 4,436 – 6,057

Write-offs and depreciation 1,047 – 90 2,115 19 3,271

BALANCE SHEET

Assets

Segment assets 338,579 148,052 251,258 102,643 (28,356) 812,176

Investments in associates 1

Unallocated assets 1,948

Total consolidated assets 814,125

Liabilities

Segment liabilities 476,089 58,038 159,016 79,489 (27,884) 744,748

Unallocated liabilities 12,168

Total consolidated liabilities 756,916

166

2006

mil. Kč

Banking Other

activities

Elimi-

nations

Total

Retail Corporate Investment

REVENUE

External revenue 22,219 3,403 2,620 6,666 (1,087) 33,821

Inter-segment revenue 687 289 189 44 1,209

Total segment revenue 22,906 3,692 2,809 6,710 (1,087) 35,030

PROFIT

Segment profi t 9,367 1,973 2,028 4,566 (1,132) 16,802



Income tax (3,498)

Minority interest (174)


OTHER INFORMATION

Asset acquisition 1,754 59 169 1,848 – 3,830

Write-offs and depreciation 1,229 – 59 2,066 – 3,354

BALANCE SHEET

Assets

Segment assets 273,841 116,782 265,469 82,258 (10,902) 727,448

Unallocated assets 945

Total consolidated assets 728,393

Liabilities

Segment liabilities 443,500 52,013 118,114 62,127 (10,289) 665,465


Total consolidated liabilities 678,531

Total income is composed of ‘Net interest income’, ‘Net fee and commission income’, ‘Net trading result’, ‘Net insurance income’,

‘Total other operating income’ and ‘Income from the revaluation/sale of securities, derivatives and equity investments’ (refer to Note 43).

167


(b) Geographical segments The Group operates predominantly within the Czech Republic and has no signifi cant cross border operations.

The geographical concentration of assets and liabilities as of 31 December 2007 was as follows:

mil. Kč Czech

Republic

EU

countries

Other

European

countries

Other Total

Assets

Cash and balances with the CNB 18,628 1,291 152 323 20,394


Loans and advances to customers, net of provisions 403,475 7,029 535 566 411,605

Securities at fair value through profi t or loss 29,957 21,366 236 2,282 53,841

Positive fair value of fi nancial derivative transactions 3,509 14,035 37 93 17,674

Securities available for sale 26,994 7,744 83 665 35,486

Securities held to maturity 95,595 33,345 3,799 4,747 137,486

Financial placements of insurance companies 11,177 4,022 12 597 15,808

Other assets 52,199 3,188 80 676 56,143

Total assets 677,581 118,671 6,479 11,394 814,125

Liabilities

Amounts owed to fi nancial institutions 33,333 24,910 190 49 58,482

Amounts owed to customers 582,843 3,699 1,111 873 588,526

Liabilities at fair value 7,395 214 – – 7,609

Negative fair value of fi nancial derivative transactions 4,076 6,824 22 159 11,081

Bonds in issue 46,985 284 6 – 47,275

Subordinated debt 4,751 829 25 – 5,605

Other liabilities 37,563 424 13 338 38,338

Total liabilities 716,946 37,184 1,367 1,419 756,916

Net position (39,365) 81,487 5,112 9,975 57,209



ons and provisions.

168


mil. Kč Czech

Republic

EU

countries

Other

European

countries

Other Total

Assets


Loans and advances to fi nancial institutions 47,582 21,777 2,829 991 73,179




Securities available for sale 30,110 8,902 138 235 39,385


Financial placements of insurance companies 10,404 2,340 – 1,134 13,878

Other assets 43,646 2,766 67 153 46,639

Total assets 600,361 108,904 8,468 10,660 728,393

Liabilities


Amounts owed to customers 529,049 7,290 588 560 537,487


Bonds in issue 34,222 182 4 – 34,408

Subordinated debt 4,002 1,834 50 – 5,886


Total liabilities 648,761 28,164 818 788 678,531

Net position (48,400) 80,740 7,650 9,872 49,862




169


55. ASSETS UNDER ADMINISTRATION

The Group provides custody, trustee, investment management and advisory services to third parties which involve the Group making

purchase and sale decisions in relation to a wide range of fi nancial instruments. Those assets that are held in a fi duciary capacity are

not included in these fi nancial statements.

The Group administered CZK 204,451 million (2006: CZK 173,949 million) of assets as of 31 December 2007 representing certifi -

cate securities and other assets received from customers into its custody for administration and safe-keeping split as follows:

CZK mil. 2007 2006

Customer securities in custody 14,814 8,760

Customer securities under administration 160,768 137,476

Customer securities for safe-keeping 74 4

Assets received for management 28,795 27,709

Total 204,451 173,949

In addition to customer assets arising from the provision of investment services (refer to Note 57), the total balance includes bills of

exchange and other securities collateralising loans and other assets that do not relate to the provision of investment services.

The Group also acts as a depositary for several mutual, investment and pension funds, whose assets amounted to CZK 106,854 mil-

lion as of 31 December 2007 (2006: CZK 96,519 million).

56. RELATED PARTY TRANSACTIONS

Related parties involve connected entities or parties that have a special relation to the Group.

Parties are considered to be related if one party has the ability to control the other party or exercise signifi cant infl uence over the other

party in making fi nancial or operational decisions. The Group is controlled by Erste Bank der österreichischen Sparkassen AG. Erste

Stiftung exercises signifi cant infl uence over the Erste Bank. The remaining investment in the Erste Bank is held by minority sharehol-

ders and institutional investors via freely traded shares on the Viennese and Prague Stock Exchanges.

The parties that have a special relation to the Group are considered to be members of the Group’s statutory and supervisory bodies

and management, legal entities exercising control over the Bank (including entities with a qualifi ed interest in these entities and

management of these entities), persons closely related to the members of the Group’s statutory and supervisory bodies, management,

and entities exercising control over the Bank, legal entities in which any of the parties listed above holds a qualifi ed interest, entities

with a qualifi ed interest in the Bank and any other legal entity under their control, members of the Czech National Bank’s Banking

Board, and legal entities which the Bank controls.

Pursuant to the defi nitions outlined above, the category of the Group’s related parties principally comprises its subsidiaries and asso-

ciated undertakings, members of its Boards of Directors and Supervisory Boards, and other entities, namely Erste Bank, its subsidiary

and associated undertakings, and subsidiary and associated undertakings owned by the Erste Bank’s subsidiaries.

170

The Group has the following amounts due from/to Erste Bank and other related parties as of 31 December 2007 and 2006:

2007 2006

Erste Bank Other Erste Bank Other

Assets

Loans and advances to fi nancial institutions 4,590 249 2,912 765

Loans and advances to customers – 1,753 – 2,422

Positive fair value of fi nancial derivative transactions 7,930 – 8,553 118

Securities at fair value through profi t or loss – 213

Securities held to maturity 310 – 310 –

Other assets 73 165 32 88

Total assets of the Bank 12,903 2,380 11,807 3,393

Liabilities

Amounts owed to fi nancial institutions 11,389 1,974 2,266 741

Amounts owed to customers – 797 – 984

Negative fair value of fi nancial derivative transactions 1,920 93 3,574 226

Bonds in issue 82 1,700 30 –

Subordinated debt 329 300 1,069 –

Other liabilities 53, 363 50 372

Total liabilities of the Bank 13,773 5,227 6,989 2,323

Off balance sheet

Undrawn loans 200 207 111 1,866

Issued guarantees 18 39 20 2

Received guarantees – 1 – 1

Notional value of the underlying assets of derivatives 192,518 3,836 207,782 6,252

Negative nominal value of fi nancial derivative transactions (187,029) (3,896) (202,716) (6,296)

Income

Interest income 126 157 111 132

Fee and commission income 9 250 9 206

Net trading result 1,571 4 1,099 29

Other operating income 57 25 13 1

Total income 1,763 436 1,232 368

Expenses

Interest expense 369 133 85 64

Fee and commission expense – 66 1 65

General administrative expenses 37 848 57 518

Other operating expenses – – 2 –

Total expenses 406 1,047 145 647

171


(a) Members of the Board of Directors and Supervisory Board Loans and advances granted to members of the Board of Directors and Supervisory Board amounted to CZK 20 million (in nominal

values) as of 31 December 2007 (2006: CZK 26 million).

Members of the Board of Directors and Supervisory Board held no shares of the Bank. Under the Employee Stock Option Plan (refer

to Note 41), members of the Board of Directors subscribed for 50,432 shares (2006: 14,000 shares) of the parent company, Erste

Bank. Under the Management Stock Option Plan (refer to Note 41), members of the Board of Directors hold 36,000 options (2006:

9,500 options) for subscription of shares of the parent company, Erste Bank.

(b) Related parties A number of banking transactions are entered into with related parties in the normal course of business. These principally include

loans, deposits and other transactions. These transactions were carried out on an arm’s length basis.

57. PAYABLES TO CLIENTS ARISING FROM THE PROVISION OF INVESTMENT SERVICES

Investment services involve receiving and providing instructions related to investment instruments, performing instructions relating

to investment instruments to a third party account, proprietary trading with investment instruments, management of customer assets

under a contractual arrangement with the client if these assets include an investment instrument, and investment instruments under-

writing or placement.

Additional investment services involve administration and custody of investment instruments, issuing loans to the client for the

purpose of trading with investment instruments if the issuer of the loan takes part in the transaction, advisory services relating to

capital structuring, industrial strategy, investments in investment instruments, provision of advice and services related to mergers and

acquisitions, implementation of foreign exchange transactions relating to the provision of investment services, services related to the

underwriting of investment instrument issues and rent of safe-deposit boxes.

In connection with the provision of these services, the Group received cash and investment instruments from clients or obtained cash

or investment instruments for its clients (‘customer assets’) in exchange for these values, which amounted to CZK 163,211 million as

of 31 December 2007 (2006: CZK 141,872 million).

58. DIVIDENDS

Management of the Bank has proposed that total dividends of CZK 4,560 million be declared in respect of the profi t for the year en-

ded 31 December 2007, which represents CZK 30 per both ordinary and priority share (2006: CZK 4,560 million, that is, CZK 30 per

both ordinary and priority share). The declaration of dividends is subject to the approval of the Annual General Meeting. Dividends

paid to shareholders are subject to a withholding tax of 15 percent or a percentage set out in the relevant double tax treaty. Dividends

paid to shareholders that are tax residents of an EU member country and whose interest in a subsidiary’s share capital is no less than

25 percent and that hold the entity’s shares for at least two years are not subject to a withholding tax.

172

59. POST BALANCE SHEET EVENTS

With effect from 4 February 2008, the Bank is implementing a new business model pursued by the Erste Bank Group in respect

of fi nancial markets trading. Market risks arising from the trading activities of the Financial Markets Divisions (i. e., transactions

with retail and corporate clients), the only exception being equity risk and the Bank’s liquidity management transactions (money

market), will be transferred to positions of the parent Erste Bank. By centralising trading activities and market risks into one portfolio,

the Erste Bank Group makes an effort to strengthen its fi nancial markets position, benefi t from synergistic effects in market risk

management and capitalise on local know-how and experience in developing competence centres in the relevant area of trading on

Erste Bank’s account. As a result, the Bank is becoming the competence centre for CZK fi nancial instruments traded on Erste Bank’s

account. The trading profi t, i. e., Erste Bank’s market positions, will be subsequently reallocated to the local banks from within the

Group on the basis of pre-determined rules.

173

Unconsolidated Financial StatementsPrepared in Accordance with International Financial Reporting Standards as Adopted by the European Union for the Years Ended 31 December 2007 and 2006

174 Auditors’ Report to the Shareholders of Česká spořitelna, a. s.

175 Balance Sheets as of 31 December 2007 and 2006

176 Profi t and Loss Accounts for the Year Ended 31 December 2007 and 2006

177 Statements of Changes in Shareholders’ Equity for the Year Ended 31 December 2007

and 2006

178 Statements of Cash Flows for the Year Ended 31 December 2007 and 2006

180 Notes to the Separate Financial Statements

174

Having its registered offi ce at: Olbrachtova 1929/62, 140 00 Prague 4

Identifi cation number: 45244782


We have audited the accompanying separate fi nancial statements of Česká spontelna, a.s., which comprise the balance sheet as of

31 December 2007, and the income statement, statement of changes in equity and cash fl ow statement for the year then ended, and


Statutory Body‘s Responsibility for the Financial StatementsThe Statutory Body is responsible for the preparation and fair presentation of these separate fi nancial statements in accordance with Interna-

tional Financial Reporting Standards as adopted by the EU. This responsibility includes: designing, implementing and maintaining internal

control relevant to the preparation and fair presentation of fi nancial statements that are free from material misstatement, whether due to fraud

or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor‘s ResponsibilityOur responsibility is to express an opinion on these separate fi nancial statements based on our audit. We conducted our audit in

accordance with the Act on Auditors and International Standards on Auditing and the related application guidelines issued by the

Chamber of Auditors of the Czech Republic. Those standards require that we comply with ethical requirements and plan and perform

the audit to obtain reasonable assurance whether the fi nancial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the fi nancial statements.

The procedures selected depend on the auditor‘s judgment, including the assessment of the risks of material misstatement of the

fi nancial 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 fi nancial 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 manage-

ment, as well as evaluating the overall presentation of the fi nancial statements.


OpinionIn our opinion, the separate fi nancial statements give a true and fair view of the fi nancial position of Česká spořitelna, a.s. as of

31 December 2007, and of its fi nancial performance and its cash fl ows for the year then ended in accordance with International

Financial Reporting Standards as adopted by the EU.

In Prague on 27 February 2008

Audit fi rm:

Deloitte Audit s. r. o., Certifi cate no. 79

Represented by: Statutory auditor:

Michal Petrman, statutory executive Michal Petrman, Certifi cate no. 1105

Independent Auditor’s Reportto the Shareholders of Česká spořitelna, a. s.






175

Independent Auditors’ Report to the Shareholders of Česká spořitelna, a. s.Unconsolidated Balance Sheets as of 31 December 2007 and 2006Unconsolidated Profi t and Loss Accounts for the Years Ended 31 December 2007 and 2006

Unconsolidated Balance Sheetsas of 31 December 2007 and 2006

CZK mil. Note 31 December 2007 31 December 2006

ASSETS1. Cash and balances with the CNB 5 19,683 22,515

2. Loans and advances to fi nancial institutions 6 55,520 61,085

3. Loans and advances to customers 7 376,500 296,498

4. Provisions for losses on loans and advances 8 (6,105) (5,175)

5. Securities at fair value through profi t or loss 52,844 48,896

(a) Securities held for trading 9 28,436 27,803

(b) Securities designated upon initial recognition as at fair value through

profi t or loss 10 24,408 21,093

6. Positive fair value of fi nancial derivative transactions 11 17,572 18,341

7. Securities available for sale 12 10,729 11,581

8. Assets held for sale 13 78 320

9. Securities held to maturity 14 101,582 100,260

10. Equity investments in subsidiary and associated undertakings 15 9,221 6,955

11. Intangible fi xed assets 16 4,314 4,460

12. Property and equipment 17 12,906 13,131

13. Other assets 18 10,202 6,295

Total assets 665,046 585,162

LIABILITIES AND SHAREHOLDERS’ EQUITY1. Amounts owed to fi nancial institutions 19 38,912 33,259

2. Amounts owed to customers 20 474,405 430,658

3. Liabilities at fair value 21 7,609 5,450

4. Negative fair value of fi nancial derivative transactions 22 11,066 12,683

5. Bonds in issue 23 58,858 36,463

6. Provisions for liabilities and other reserves 24 3,011 2,650

7. Other liabilities 25 13,731 12,086

8. Subordinated debt 27 5,605 5,886

9. Shareholders’ equity 28, 29 51,849 46,027

Total liabilities and shareholders’ equity 665,046 585,162

The accompanying notes are an integral part of these fi nancial statements.

These fi nancial statements were prepared by the Bank and approved by the Board of Directors on 26 February 2008.

Gernot Mittendorfer Dušan Baran

Chairman of the Board Vice Chairman of the Board

Chief Executive Offi cer 1st Deputy Chief Executive Offi cer

176

Unconsolidated Profi t and Loss Accountsfor the Years Ended 31 December 2007 and 2006

CZK mil. Note Year ended

31 December 2007

Year ended

31 December 2006

1. Interest income and similar income 30 29,769 24,567

2. Interest expense and similar expense 31 (7,305) (5,161)


3. Provisions for credit risks 32 (2,116) (1,567)


4. Fee and commission income 33 10,455 9,453

5. Fee and commission expense 34 (1,224) (852)


6. Net trading result 35 1,694 1,615

7. General administrative expenses 36 (16,991) (16,142)

8. Other operating income/(expenses), net 37 (590) (178)


9. Income tax expense 38 (3,076) (2,795)

Net profi t for the year attributable to the Bank’s shareholders 10,616 8,940


177

Unconsolidated Profi t and Loss Accounts for the Years Ended 31 December 2007 and 2006Unconsolidated Statements of Changes in Shareholders’ Equity for the Years Ended 31 December 2007 and 2006Unconsolidated Statements of Cash Flows for the Years Ended 31 December 2007 and 2006

Unconsolidated Statements of Changesin Shareholders’ Equity for the Years Ended 31 December 2007 and 2006

CZK mil. Net profi t

for the

year

Retained

earnings

Valuation

gains or

losses

Total

recognised

income and

expense for

the year

Statutory

reserve

fund

Share

premium

Share

capital

Total

At 1 January 2006 9,760 14,685 591 25,036 1,704 2 15,200 41,942

Dividends (4,560) – – – – – (4,560)

Transfer to reserve funds (488) – – 488 – – –

Revaluation gains or losses – – (295) – – – (295)

Transfer to retained earnings (4,712) 4,712 – – – – –

Net profi t for the year 8,940 – – – – – 8,940

At 31 December 2006 8,940 19,397 296 28,633 2,192 2 15,200 46,027

At 1 January 2007

Dividends (4,560) – – – – – (4,560)

Transfer to reserve funds (447) – – 447 – – –

Revaluation gains or losses – – (234) – – – (234)

Transfer to retained earnings (3,933) 3,933 – – – – – –

Net profi t for the year 10,616 – – – – 10,616

At 31 December 2007 10,616 23,330 62 34,008 2,639 2 15,200 51,849


178

Unconsolidated Statements of Cash Flows for the Years Ended 31 December 2007 and 2006



Adjustments for non-cash transactions

Creation/(release) of provisions for losses on loans, advances and other assets 2,192 1,456

Depreciation and amortisation of assets 3,137 3,233

Impairment of tangible and intangible fi xed assets 2 74

Unrealised loss/(profi t) on securities at fair value through profi t or loss (1,143) 106

Creation/(release) of provisions against equity investments (175) (2)

Net loss/(gain) on the sale of equity investments (39) (93)

Creation/(release) of other reserves 339 175

Change in fair values of fi nancial derivatives (850) (2,456)

Income from statute-barred savings books (1) (2)

Gain on the sale of tangible assets (153) (113)

Accrued interest, amortisation of discount and premium 839 (188)

Operating profi t before changes in operating assets and liabilities 17,840 13,925

Cash fl ows from operating activities

(Increase)/decrease in operating assets

Minimum reserve deposits with the CNB 3,579 (4,197)


Loans and advances to customers (81,236) (37,550)

Securities at fair value through profi t or loss (2,793) (12,890)

Securities available for sale 625 2,302

Other assets (3,884) (67)

Increase/(decrease) in operating liabilities

Amounts owed to fi nancial institutions 5,118 4,834


Liabilities at fair value 2,159 (1,912)

Other liabilities 1,268 2,236

Net cash fl ow from operating activities before income tax (7,975) 29,080

Income taxes paid (3,315) (3,410)

Net cash fl ow from operating activities (11,290) 25,670

Cash fl ows from investing activities

Net (increase)/decrease in securities held to maturity (1,221) (15,924)

Net costs related to equity investments (1,987) (109)

Purchase of tangible and intangible fi xed assets (3,011) (3,700)

Proceeds from the sale of tangible and intangible fi xed assets 639 950

Net cash fl ow from investing activities (5,580) (18,783)

179

Unconsolidated Statements of Changes in Shareholders’ Equity for the Years Ended 31 December 2007 and 2006Unconsolidated Statements of Cash Flows for the Years Ended 31 December 2007 and 2006Notes to the Unconsolidated Finanical Statements


Cash fl ows from fi nancing activites

Dividends paid (4,560) (4,560)

Bonds in issue 22,094 (4,497)

Receipt of subordinated debt (281) 2,888

Net cash fl ow from fi nancing activities 17,253 (6,169)

Net decrease in cash and cash equivalents 383 718

Cash and cash equivalents at beginning of year 14,752 14,034

Cash and cash equivalents at end of year 39 15,135 14,752


180

Notes to the Unconsolidated Financial StatementsPREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS AS ADOPTED BY THE EUROPEAN UNION FOR THE YEAR ENDED 31 DECEMBER 2007 AND 2006

1. INTRODUCTION

Česká spořitelna, a. s. (henceforth the “Bank”), having its

registered offi ce address at Olbrachtova 1929/62, Prague 4,

140 00, Corporate ID 45244782, is the legal successor of the

Czech State Savings Bank and was founded as a joint stock

company in the Czech Republic on 30 December 1991. The

Bank is a universal savings bank offering retail, corporate

and investment banking services on the territory of the Czech

Republic.

The principal activities of the Bank are as follows:

• Acceptance of deposits from the general public;

• Extension of credit;

• Investing in securities on its own account;

• Payments and clearing;

• Issuance of payment facilities, e.g. payment cards,

traveller’s cheques;

• Issuance of guarantees;

• Opening of letters of credit;

• Collection services;

• Proprietary or client-oriented trading with foreign currency as-

sets, forward and option contracts, including foreign currency

and interest rate transactions, and transferable securities;

• Management of clients’ securities on clients’ accounts and

provision of advisory services;

• Participation in the issuance of shares and provision of

related services;

• Safe-keeping and administration of securities or other

assets;

• Rental of safe-deposit boxes;

• Provision of business advisory services;

• Issuance of mortgage bonds under special legislation;

• Financial brokerage;

• Depositary activities;

• Foreign exchange services (foreign currency purchases);

• Provision of banking information; and

• Maintenance of a separate part of the Securities Centre’s

records.

The Bank is subject to the regulatory requirements of the

Czech National Bank (henceforth the “CNB”). These regula-

tions include those pertaining to minimum capital adequacy

requirements, categorisation of exposures and off balance sheet

commitments, credit risk connected with clients of the Bank,

liquidity, interest rate risk and foreign currency position.

2. BASIS OF PREPARATION

These statutory fi nancial statements have been prepared in


(IFRS) and interpretations approved by the International

Accounting Standards Board (IASB) as adopted by the

European Union.

All fi gures are in millions of Czech crowns (MCZK), unless

stated otherwise.

These fi nancial statements have been prepared under the

historical cost convention as modifi ed by the remeasurement

to fair value of available for sale securities, fi nancial assets

and liabilities at fair value through profi t or loss, all fi nancial

derivatives, issued debt securities which are hedged against

interest rate risk and assets held for sale. Assets held for sale

are measured at fair value if this value is greater than their

carrying amount (i.e. cost less accumulated depreciation and

cumulative impairment losses).

The presentation of fi nancial statements in conformity with

IFRS requires management to make estimates and assumptions

that affect the reported amounts of assets and liabilities and

disclosure of contingent assets and liabilities as of the date of

the fi nancial statements and their reported amounts of revenues

and expenses during the reporting period (refer to Note 4).

Actual results could differ from those estimates.

Comparative information has been restated, where necessary, on

a basis consistent with the current year presentation. These changes

relate to the adoption of IFRS 7 Financial Instruments: Disclosures

(refer to Note 3v) and the fi rst-time recognition of interest on

impaired loans – unwinding of discounts (refer to Note 3w).

These fi nancial statements and notes thereto are unconsoli-

dated and do not include the accounts and results of those

181

Unconsolidated Statements of Cash Flows for the Years Ended 31 December 2007 and 2006Notes to the Unconsolidated Financial StatementsReport on Relations between Related Parties

companies over which the Bank has control or signifi cant

infl uence. The policies of accounting for equity investments

are disclosed in Note 3b.

The Bank also prepares consolidated fi nancial statements in


(IFRS) and interpretations approved by the International Ac-

counting Standards Board (IASB) as adopted by the European

Union which present the results of the Bank’s fi nancial group.

3. SIGNIFICANT ACCOUNTING POLICIES

The signifi cant accounting policies adopted in the preparation

of the fi nancial statements are set out below:

(a) Loans and Advances, Other Off Balance Sheet Credit Exposures and Provisions for Losses on Loans and AdvancesLoans and advances are stated at the amount of outstanding

principal and overdue interest and fees. All loans and advances

are recognised when cash is advanced to borrowers.

The Bank classifi es its loan receivables according to several

criteria.

In terms of market segments, loan receivables are split into retail

receivables and corporate receivables. Retail receivables include

amounts due from individuals/households and sole traders and

amounts due from individuals–businessmen, small businesses

with the annual turnover of less than CZK 30 million and small

municipalities (the MSE category). Corporate loans include

amounts due from small and medium sized businesses with the

annual turnover between CZK 30 million and CZK 1,000 million

(the SME category), amounts due from large corporations (with

turnover over CZK 1,000 million) and the public sector.

In risk management terms, loan receivables are segmented

into non-default (performing) loans where the principal and

interest is not past due for more than 90 days and default (non-

performing) loans. Within these loans, two large sub-portfolios are

defi ned – individually signifi cant loans, which include corporate

loans or receivables where the Bank’s loan exposure exceeds

CZK 5 million, and individually insignifi cant loans. As part of

these two sub-portfolios, the Bank additionally monitors fi ve

client portfolios for individually signifi cant loans and 15 product

portfolios for individually insignifi cant loans. The Bank monitors

risk parameters (PD – probability of default, LGD – loss given

default, and CCF – credit conversion factors) in respect of these

portfolios. PD is additionally monitored in individual internal

rating grades. Additional details can be found in Note 40.

The Bank additionally splits its client and product portfolios

according to individual internal rating grades (refer to Note

40); there are 13 plus 1 (default) internal rating grades.

In accounting and provisioning terms, loans are segmented

into individually impaired, where objective evidence demon-

strates that a loss event occurred subsequent to their initial

recognition which impacts future anticipated cash fl ows arising

from these loans and these loans are therefore impaired on an

individual basis, and collectively impaired loans where such

circumstances were not demonstrated on an individual basis

and unimpaired loans with no indication of impairment.

Non-performing loans match individually impaired loans.

Performing loans with the 1–6 internal rating are unimpaired

loans; loans with 7–8 internal rating are collectively impaired.

Provisions for losses on loans and advances are recorded when

there are reasonable doubts over the recoverability of the loan

balance. Provisions for losses on loans and advances represent

management’s assessment of realised losses in relation to the

Bank’s on and off balance sheet activities. Amounts are set

aside to cover losses on loans and advances that have been

specifi cally identifi ed (individually impaired loans) and for

potential losses which may be present based on portfolio

performance (collectively impaired loans and unimpaired

loans). The level of provisions is established by comparing the

carrying amount of the loan and the present value of future

expected cash fl ows using the effective interest rate. The level

of provisions for individually insignifi cant loans is always

determined statistically at the product portfolio level. Individu-

ally signifi cant loans are assessed individually to determine if

they are individually impaired. The provisioning percentage in

respect of individually signifi cant loans which are collectively

impaired or unimpaired is established on a portfolio basis. The

amount of the realised loss, i.e., impairment loss adjusting the

provisions to their assessed levels, after write-offs, is charged

182

profi t or loss. Securities at fair value through profi t or loss are

recognised at cost at the acquisition date and subsequently re-

measured at fair value. Changes in the fair values of assets held

for trading are recognised in the profi t and loss account as “Net

trading result”. Changes in the fair values of securities not held

for trading are reported as “Other operating income/(expenses),

net” in the profi t and loss account.

Fair Value OptionIn addition to securities, the portfolio of instruments at fair

value through profi t or loss includes, upon origination or

acquisition, other fi nancial assets, liabilities and derivatives if

such classifi cation reduces the mismatch in reporting fi nancial

expenses or income or if it is a group of fi nancial assets and

liabilities which are typically managed and assessed according

to fair value changes and such a management and presentation

treatment complies with the investment strategy and/or the

assets and liabilities management strategy.

For debt and equity securities traded on the Prague Stock

Exchange (‘PSE’) and other stock exchanges, fair values are

derived from quoted prices. In respect of securities which are

publicly traded but the volumes or frequency are small, manage-

ment assesses the identifi ed market prices on an individual basis

to determine if they provide an actual indication of the fair value.

In exceptional cases, management uses its own estimates to

make adjustments or uses the Bank’s own valuation models. The

fair values of securities that are not publicly traded are estimated

by the management of the Bank as the best estimation of the

cash fl ow projection refl ecting the set of economic conditions

that will exist over the remaining maturity of the securities,

taking into account the issuer’s credit risk.

Securities Available for SaleSecurities available for sale are securities held by the Bank

for an indefi nite period of time that are available for sale as

liquidity requirements arise or market conditions change.

Securities available for sale are carried at acquisition cost and

subsequently remeasured at fair value. Changes in the fair

values of available for sale securities are recognised in equity

as “Revaluation gains or losses”, with the exception of their im-

pairment and interest income and foreign exchange differences

on debt securities. Impairment of securities available for sale is

to the profi t and loss account line “Provisions for credit risks.”

Additional details can be found in Note 40.

Write-offs are generally recorded after all reasonable restructu-

ring or collection activities have taken place and the possibility

of further recovery is considered to be remote. The loan is writ-

ten off against the related account “Provisions for credit risks”

in the profi t and loss account. If the reason for provisioning is no

longer deemed appropriate, the redundant provisioning charge

is released into income. The relevant amount and recoveries of

loans and advances previously written off are refl ected in the

profi t and loss account through “Provisions for credit risks.”

Restructured loans are those loans whose terms have been

renegotiated because of a debtor’s distress. Restructuring may

proceed solely on the basis of a new contract. Restructured loans

are initially assigned the internal rating of 8. This rating can be

upgraded no sooner than six months after the restructuring date.

(b) Debt and Equity SecuritiesSecurities held by the Bank are categorised into portfolios

in accordance with the Bank’s intent on the acquisition of

the securities and pursuant to the Bank’s security investment

strategy. In accordance with IAS 39 Financial Instruments:

Recognition and Measurement, the Bank categorises its

securities into the “Securities at fair value through profi t or

loss” portfolio, the “Securities available for sale” portfolio

and the “Securities held to maturity” portfolio. The principal

difference among the portfolios relates to the approach to the

measurement of securities and the recognition of their fair

values in the fi nancial statements.

All securities held by the Bank are recognised using trade

date accounting and initially recorded at their cost including

transaction costs (acquisition cost), the only exception

being securities at fair value through profi t or loss which are

recognised at cost net of transaction costs.

Securities at Fair Value through Profi t or LossThe portfolio includes debt and equity securities held for

trading, that is, securities held by the Bank with the intention

of reselling them, thereby generating profi ts on price fl uctuati-

ons in the short-term, and debt and equity securities that were

designated, upon initial recognition, as at fair value through

183

accounted for on the same basis as impairment of securities held

to maturity (see below). When realised, the relevant revaluation

gains or losses are taken to the profi t and loss account as “Other

operating income/(expenses), net”. Interest income on coupons,

amortisation of discounts or premiums, and dividends are inclu-

ded in “Interest income and similar income”. Foreign exchange

differences are reported within “Net trading result”.

Securities Held to MaturitySecurities held to maturity are fi nancial assets with fi xed

maturity and determinable payments that the Bank has the

positive intent and ability to hold to maturity.

Securities held to maturity are initially measured at acquisition

cost. Securities held to maturity are subsequently reported

at amortised cost using the effective interest rate, less any

provision for impairment. The amortisation of premiums and

discounts is included in “Interest income and similar income”.

A fi nancial asset including securities held to maturity (as defi ned

in IAS 39 Financial Instruments: Recognition and Measurement)

is impaired if its carrying amount is greater than its estimated re-

coverable amount. The amount of the impairment loss for assets

carried at amortised cost is calculated as the difference between

the asset’s carrying amount and the present value of the expected

future cash fl ows discounted at the fi nancial instrument’s

original effective interest rate. When an impairment of assets is

identifi ed, the Bank recognises provisions through the profi t and

loss account line “Other operating income/(expenses), net.”

At the reporting dates as a minimum, the Bank makes an

assessment to determine if events occurred indicating that

an investment has suffered impairment/other-than-temporary

impairment. The criteria indicating impairment of a security

include, but are not limited to:

• There are signifi cant changes with an adverse impact

on the investment in the market, economic or legislative

environments or such are expected to occur in the nearest

future (e.g., absence of an active market).

• Signifi cant fi nancial diffi culties of the issuer or the commit-

ted party; contract breach such as the non-payment of the

principal, interest or delayed payments.


Equity InvestmentsEquity investments in subsidiary and associated undertakings

are recorded at acquisition cost including transaction costs less

provisions for any temporary diminution in value or write-offs

for any permanent diminution in value.

An investment in a subsidiary is one in which the Bank holds,

directly or indirectly, more than 50 percent of its share capital

or in which the Bank can exercise more than 50 percent of the

voting rights based on an agreement with another shareholder/

owner, or where the Bank can appoint or dismiss a majority of

the Board of Directors or Supervisory Board members.

An investment in an associate is one in which the Bank holds,

directly or indirectly, 20 percent to 50 percent of its share capital

or over which the Bank exercises signifi cant infl uence through

representation on the entity’s statutory board, participation in

the development of the entity’s policy, signifi cant transactions

between the entity and the Bank, replacement of the entity’s

management by the Bank, and access to signifi cant technical

information of the entity.

At the fi nancial statement date or interim fi nancial statement

date, the Bank assesses equity investments in subsidiary or

associated undertakings for impairment. An equity investment

is impaired if its carrying amount is greater than its recoverable

amount. The recoverable amount is the higher of an asset’s fair

value less selling costs and its value in use determined as a sum

of discounted expected cash fl ows. The fair value less selling

costs valuation technique is adopted in respect of the Bank’s

investments in real estate funds and venture capital funds; the

discounted cash fl ows method is used in valuing other invest-

ments in the Bank’s subsidiaries and associates. Impairment of

equity investments in subsidiaries and associates is recognised

in “Other operating income/(expenses), net”. Impairment of

equity investments in subsidiary or associated undertakings is

accounted for through the recognition of provisions.

Dividends from equity investments are recognised in the profi t

and loss account within “Interest income and similar income”

in the period in which they are declared.

184

(c) Sale and Repurchase AgreementsWhere debt or equity securities are sold under a concurrent

commitment to repurchase them at a pre-determined price,

they remain at fair value or amortised cost (refer to Note

3b) within the relevant portfolio on the balance sheet and

the consideration received is recorded in “Amounts owed to

fi nancial institutions” or “Amounts owed to customers.” Con-

versely, debt or equity securities purchased under a concurrent

commitment to resell are not recognised in the balance sheet

and the consideration paid is recorded in “Loans and advances

to fi nancial institutions” or “Loans and advances to customers.”

Interest is accrued evenly over the life of the agreement.

(d) Liabilities at Fair ValueThe Bank classifi es as liabilities at fair value liabilities held

for trading and liabilities for which it uses the fair value option

as set out in IAS 39 Financial Instruments: Recognition and

Measurement.

Securities borrowed are not recognised in the fi nancial

statements, unless they are sold to third parties, in which

case the Bank records an obligation to return them which is

recognised at fair value as a trading liability and is presented

in the balance sheet line “Liabilities at fair value”. Upon the

repurchase of securities, the difference between the carrying

amount of the obligation and the contracted purchase price is

recognised in “Net trading result”.

The Bank additionally classifi es as liabilities at fair value

certain issued bonds and deposits with embedded derivatives

because management believes that this classifi cation materially

reduces the inconsistency in valuing these liabilities.

(e) Intangible Fixed AssetsIntangible fi xed assets include identifi able assets without

physical substance and with an estimated useful life excee-

ding one year. The Bank has determined that, in addition to

fulfi lling these criteria, intangible fi xed assets must include

assets with a cost greater than CZK 60,000. Intangible fi xed

assets are carried at cost less accumulated amortisation and

provisions and are amortised on a straight line basis through

“General administrative expenses – amortisation of intangible

assets” over an estimated useful life not exceeding four years.

Software acquisition, valuable rights and other intangible

assets are treated as intangible assets. Costs associated with

the maintenance of intangible assets (software) are expensed

through “General administrative expenses – other administra-

tive expenses” as incurred whilst costs of technical improve-

ments, if they exceed CZK 40,000 per one asset for the period

and are completed, are capitalised and increase the acquisition

cost of the intangible fi xed asset.

(f) Property and EquipmentProperty and equipment includes identifi able tangible assets

with physical substance and with an estimated useful life ex-

ceeding one year. The Bank has determined that, in addition

to fulfi lling these criteria, tangible fi xed assets must include

assets with a cost greater than CZK 13,000. Property and

equipment also includes selected low value tangible assets

with a cost between CZK 1,000 and CZK 12,999. Property

and equipment is stated at historical cost less accumulated

depreciation and impairment provisions and is depreciated

when ready for use through the profi t and loss account line

“General administrative expenses – depreciation of property

and equipment” on a straight line basis over their estimated

useful lives. Depreciation periods for individual categories of

assets are as follows:

Buildings and structures 20–50 years

Electronic machines and equipment 6–12 years

Tools and other equipment 4–12 years

Equipment, fi xtures and fi ttings 4–6 years

Selected low value machines and equipment 2 years

Leasehold improvements Period of the lease

Land and works of art (irrespective of their cost) and assets

under construction are not depreciated. The gain and loss

arising on the disposal of property and equipment is determi-

ned based on its carrying value and is recognised in the profi t

and loss account line “Other operating income/(expenses), net”

in the year of disposal.

Property and equipment costing less than CZK 13,000 that are

not the selected low value fi xed assets, technical improvements

costing less than CZK 40,000 and intangible fi xed assets

costing less than CZK 60,000 are charged to the profi t and loss

account line “General administrative expenses – other adminis-

trative expenses” in the period of acquisition.

185

Repairs and maintenance of property and equipment are char-

ged to the profi t and loss account line “General administrative

expenses – other administrative expenses” in the year in which

the expenditure is incurred.

(g) Assets Held for SaleThe category of ‘assets held for sale’ includes non-current

assets that are taken out of active use at the date on which

criteria for sale are met, that is, the sale is approved by an

authorised person, steps to locate a buyer have been initiated,

and a draft of a purchase contract and other documentation is

being prepared. At the same date, the assets held for sale are

measured at the lower of carrying amount and fair value less

selling costs. At the same time, depreciation on such assets

ceases. The fair value less selling costs is determined based

on an expert appraisal (refer to Note 4f). In circumstances

where the fair value less selling costs is lower than the

carrying amount, the difference is accounted for through the

recognition of an extraordinary write-off in the profi t and loss

account line “Other operating income/(expenses), net”. Any

subsequent revaluation of assets arising from the change in

the fair value less selling costs is presented in the same profi t

and loss account line.

(h) Impairment of AssetsWhere the carrying amount of an asset stated at net book value

is greater than its estimated recoverable amount, it is written

down immediately to its recoverable amount in accordance

with IAS 36 Impairment of Assets. The recoverable amount is

the greater of the following amounts: the market value which

can be recovered from the sale of an asset under normal con-

ditions, net of selling costs, and the estimated future economic

benefi ts arising from the use of the asset and its disposal at the

end of its service life.

The largest components of the Bank’s assets are periodically

tested for impairment and temporary impairments are

provisioned through the profi t and loss account line “Other

operating income/(expenses), net”. An increased carrying

amount arising from the reversal of a temporary impairment

loss must not exceed the carrying amount that would have

been determined (net of amortisation or accumulated

amortisation) had no impairment loss been recognised for the

asset in prior years.

Financial assets, including securities held to maturity (as


Measurement), are impaired when their carrying amount is

greater than the estimated recoverable value (refer to Note 3b).

Signifi cant accounting estimates and decisions in the applica-

tion of accounting policies are additionally disclosed in Note 4.

(i) ProvisionsProvisions are recognised when the Bank has a present legal

or constructive obligation as a result of past events and it is

probable that an outfl ow of resources embodying economic

benefi ts will be required to settle the obligation and a reliable

estimate of the amount of the obligation can be made.

(j) Provisions for Guarantees and Other Off Balance Sheet Credit Related CommitmentsIn the normal course of business, the Bank enters into credit

related commitments which are recorded in off balance sheet

accounts and primarily include guarantees, loan commitments,

undrawn loan facilities and letters of credit. Provisions are

made for estimated losses on these commitments on the same

basis as set out at Note 3a in respect of on balance sheet loan

exposures. In estimating the losses, the Bank refers to the

historical data regarding risk parameters (credit conversion

factors, probability of default and loss-given default). Additio-

nal details can be found in Note 41.

(k) Shareholders’ EquityThe statutory reserve fund comprises funds that the Bank is

required to retain according to current legislation. The use

of the statutory reserve fund is limited by legislation and the

articles of the Bank. The fund is not available for distribution

to the shareholders.

Where the Bank purchases its treasury shares or obtains rights

to purchase its treasury shares, the consideration paid including

any attributable transaction costs net of income taxes, is shown

as a deduction from total shareholders’ equity. In selling

treasury shares, the Bank recognises the difference between

their selling price and cost as share premium.

Dividends reduce retained earnings in the period in which they

are declared by the Annual General Meeting.


186

(l) Accrued InterestInterest receivable and payable accrued using the effective inte-

rest rate on outstanding loan balances, debt securities, deposit

products, bonds in issue and subordinated debt is reported

within “Other assets” and “Other liabilities,” respectively.

(m) Foreign CurrencyTransactions denominated in foreign currencies, which are mone-

tary items, are recorded in the local currency at offi cial exchange

rates as announced by the CNB on the date of transaction. Assets

and liabilities denominated in foreign currencies are translated

into the local currency at the CNB exchange rate prevailing at

the balance sheet date. Realised and unrealised gains and losses

on foreign exchange are recognised in the profi t and loss account

in “Net trading result”, with the exception of foreign exchange

rate differences on equity investments denominated in foreign

currencies which are reported at the historical exchange rate,

foreign exchange rate differences on equity securities included in

the available-for-sale portfolio which are reported as a component

of a change in the fair value and foreign exchange rate differences

on derivatives entered into with a view to hedging currency risk

associated with assets or liabilities whose foreign exchange rate

differences are not reported in the profi t and loss account.

(n) Interest Income and Interest ExpenseInterest income and expense are recognised, on an accruals

basis, in the profi t and loss account lines “Interest income and

similar income” and “Interest expense and similar expense”

when earned or incurred, the only exception being securities

held for trading which are recognised in “Net trading result”.

The Bank accounts for the accruals of interest using the

effective interest rate method. Outstanding penalties, con-

tractual sanctions and interest on non-performing loans, which

are those loans that have overdue interest and/or principal,

or for which management of the Bank otherwise believes the

contractual interest or principal due may not be received, are

only recognised on their collection.

The Bank also recognises interest income on non-performing

loans in accordance with IAS 39 Financial Instruments:

Recognition and Measurement, Paragraph 93 of the IAS 39

Implementation Guidance. This interest income represents

interest income using the effective interest rate in respect of the

assets less a provision.

(o) Fees and CommissionsFees and commissions are recognised in the profi t and loss

account lines “Fee and commission income” and “Fee and

commission expense” on an accruals basis, with the exception

of fees that are included in the effective interest rate.

The effective interest rate includes the fees directly associated

with the provision of the loan, such as loan origination fees,

loan application processing fees, etc. The Bank’s direct

external transaction costs involved in issuing loans are offset

against these capitalized fees.

(p) TaxationTax on the profi t or loss for the year comprises the current year

tax charge, adjusted for deferred taxation. Current tax comprises

the tax payable calculated on the basis of the taxable income for

the year, using the tax rate enacted by the balance sheet date, and

any adjustment of the tax payable for previous years.

Deferred tax is provided using the balance sheet liability

method on all temporary differences between the carrying

amounts for fi nancial reporting purposes and the amounts used

for taxation purposes. The principal temporary differences

arise from certain non-tax deductible reserves and provisions,

tax and accounting depreciation on tangible and intangible

fi xed assets and revaluation of other assets.

The estimated value of tax losses expected to be available for

utilisation against future taxable income and tax deductible

temporary differences are offset against the deferred tax

liability within the same legal tax unit to the extent that the

Bank has a legally enforceable right to set off the recognised

amounts and intends either to settle on a net basis, or to realise

the asset and settle the liability simultaneously.

Deferred tax assets are recognised only to the extent that it is

probable that suffi cient taxable profi t will be available to allow

the asset to be recovered.

Deferred tax is calculated on the basis of the tax rates that are

expected to apply to the period when the asset is realised or the

liability is settled. The effect on deferred tax of any changes

in tax rates is charged to the profi t and loss account, except to

187

the extent that it relates to items previously charged or credited

directly to equity.

(q) Financial Derivative InstrumentsFinancial derivatives include foreign currency and interest rate

swaps, currency forwards, forward rate agreements, foreign

currency and interest rate options (both purchased and sold),

futures and other derivative fi nancial instruments. The Bank

uses various types of derivative instruments in both its trading

and hedging activities.

Financial derivative instruments entered into for trading or

hedging purposes are recognised at fair value as “Positive

fair value of fi nancial derivative transactions” and “Negative

fair value of fi nancial derivative transactions.” Realised and

unrealised gains and losses are recognised in the profi t and

loss account line “Net trading result”, the only exception

being unrealised gains and losses on cash fl ow hedges which

are recognised in equity. Fair values of derivatives are based

upon quoted market prices or pricing models which take into

account current market and contractual prices of the underlying

instruments, as well as the time value and yield curve or

volatility factors underlying the positions.

Certain derivatives embedded in other fi nancial instruments are

treated as separate derivatives when their risks and characteris-

tics are not closely related to those of the host contract and the

host contract is not carried at fair value with gains and losses

reported in the profi t and loss account.

Hedging derivatives are defi ned as derivatives that comply with

the Bank’s risk management strategy, the hedging relationship

is formally documented and the hedge is effective, that is, at

inception and throughout the period, changes in the fair value or

cash fl ows of the hedged and hedging items are almost fully offset

and the results are within a range of 80 percent to 125 percent.

If the Bank uses a fair value hedge, the hedged item is

remeasured at fair value and the gain or loss from the remea-

surement (in respect of an interest rate risk exposure hedge) is

recognised as an expense or income in “Interest income and

similar income” or “Interest expense and similar expense” as

appropriate. The same accounts of expense and income that

refl ect the gain or loss from remeasuring the hedged item at

fair value are also used in accounting for changes in fair values

of hedging derivatives that are attributable to the hedged risk.

If the Bank uses a cash fl ow hedge, the gains or losses

from changes in fair values of hedging derivatives that are

attributable to the hedged risk are retained in equity on the

balance sheet and are recognised as an expense or income in

the periods in which the expense or income associated with the

hedged items are recognised.

Certain derivative transactions, while providing effective

economic hedges under the Bank’s risk management positions,

do not qualify for hedge accounting under the specifi c rules in

IAS 39 Financial Instruments: Recognition and Measurement

and are therefore treated as derivatives held for trading with

fair value remeasurement gains and losses reported in “Net

trading result”.

(r) Transactions with Securities Undertaken on behalf of ClientsSecurities received by the Bank into custody, administration,

management or safe-keeping are typically recorded at market

or nominal values if the market value is not available and

maintained off balance sheet. “Other liabilities” include

the Bank’s payables to clients arising from cash received to

purchase securities or cash to be refunded to the client.

(s) Segment ReportingSegment information is based on two segment formats. The

primary format represents business segments – retail banking,

corporate banking, investment banking and other operations.

The secondary format represents the Bank’s geographical

markets – the Czech Republic, EU countries, other European

countries and other regions.

Segment results include revenue and expenses directly

attributable to a segment and the relevant portion of revenue

and expenses that can be allocated to a segment, whether

from external transactions or from transactions with other

segments of the Bank. Inter-segment transfer pricing is

based on cost plus an appropriate margin, as specifi ed by

the Bank’s policy. Unallocated items mainly comprise

administrative expenses.


188

Segment assets and liabilities comprise those operating assets

and liabilities that are directly attributable to the segment or

can be allocated to the segment on a reasonable basis. Segment

assets are determined after deducting related adjustments

that are reported as direct offsets in the Bank’s balance sheet.

Segment assets and liabilities do not include income tax items.

(t) Cash and Cash EquivalentsThe Bank considers cash and deposits with the CNB, treasury

bills with a residual maturity of three months or less, nostro

accounts with fi nancial institutions and loro accounts with

fi nancial institutions to be cash equivalents. For the purposes of

determining cash and cash equivalents, the minimum reserve

deposit with the CNB is not included as a cash equivalent due

to restrictions on its availability.

(u) Changes in Accounting Policies arising from the Adoption of New IFRSs and Amendments to IASs effective 1 January 2007

The Bank has adopted IFRSs in the wording in effect as of

31 December 2007, namely the following standards:

• IFRS 7 ‘Financial Instruments: Disclosures’ (effective

1 January 2007); and

• Amendments to IAS 1 ‘Presentation of Financial Statements’

on capital disclosures (effective 1 January 2007). Additional

disclosure requirements are presented in Note 40e.

At the date of authorisation of these fi nancial statements, the

following standards were in issue and endorsed by the EU but

not yet effective:

• IFRS 8 Operating Segments (effective 1 January 2009); and

• IFRIC 11: IFRS 2 on Group and treasury shares transactions

(effective for the period commencing after 31 March 2007).

The impact of adopting this interpretation would be CZK

99 million, representing an increase in the Bank’s costs

and equity (an additional capital investment of the parent

company) arising from the fair value of the options under the

Employee Erste Bank Stock Ownership Programme and the

Management Erste Bank Stock Option Programme.

The adoption of these standards in the future periods is not

expected to have a material impact on the unconsolidated profi t

or equity.

The following standards or interpretations have been issued by

IASB but not yet endorsed by the EU:

• IAS 1 (Revised) Presentation of Financial Statements

including the requirement to disclose comprehensive

income (effective 1 January 2009);

• Amendments to IAS 23 Borrowing Costs relating to

qualifying assets (effective 1 January 2009);

• IFRIC 12 Service Concession Arrangements (effective

1 January 2008);

• IFRIC 13 Customer Loyalty Programmes (effective for

accounting periods beginning on or after 1 July 2008). The

Bank did not adopt this interpretation for the year ended

31 December 2007. The adoption would have resulted

in a presentation change in the profi t and loss account

involving a decrease in “Other operating income/(expen-

ses), net” of CZK 331 million and an increase in “Fee and

commission income” in the same amount; and

• IFRIC 14 IAS 19 – The Limit on a Defi ned Benefi t Asset,

Minimum Funding Requirements and their Interaction

(effective 1 January 2008).

These standards are not yet effective as of the reporting date.

Endorsement by the EU is expected by the time the standards

and interpretations become effective. The Bank believes that

the adoption of these standards will not have a material impact

on the unconsolidated profi t or equity.

(v) Presentation Changes resulting from the Adoption of IFRS 7The adoption of IFRS 7 Financial Instruments: Disclosures

resulted in the following presentation changes in the annual

fi nancial statements. Comparative information for 2006 has

been restated accordingly.

• The Bank segments its fi nancial instruments into the

following categories in accordance with IAS 39 Financial

Instruments: Recognition and Measurement:

• Loans and receivables not held for trading;

• Held-to-maturity investments;

• Financial assets/liabilities at fair value through profi t or

loss;

• Available-for-sale fi nancial assets;

• Financial liabilities measured at amortised cost; and

• Financial liabilities measured at fair value.

189

• The Bank discloses the following classes of fi nancial

instruments:

• Cash and balances with the CNB;

• Loans and advances to fi nancial institutions;

• Loans and advances to customers, of which retail loans

and corporate loans;

• Securities held for trading;

• Securities designated upon initial recognition as at fair

value through profi t or loss;



• Securities available for sale;

• Securities held to maturity;

• Other assets;

• Amounts owed to fi nancial institutions;

• Amounts owed to customers;

• Liabilities at fair value;


• Bonds in issue;

• Other liabilities; and

• Subordinated debt.

Set out below are the values of fi nancial instruments in individual classes. The table presents a comparison between the classes of

recognised fi nancial assets and liabilities under IFRS 7 Financial Instruments: Disclosures, and the categories of fi nancial assets and

liabilities under IAS 39 Financial Instruments: Recognition and Measurement:

At 31 December 2007 Loans and

receivables

not held for

trading

Held-to-

maturity

investments

Financial

assets at fair

value through

profi t or loss

Available-for-

sale fi nancial

assets

Financial

liabilities

measured at

amortised cost

Financial

liabilities

measured at

fair value

FINANCIAL ASSETSCash and balances with the CNB 19,683


institutions 55,520









Other assets 10,202

FINANCIAL LIABILITIESAmounts owed to fi nancial institutions 38,912







190

At 31 December 2006 Loans and

receivables

not held for

trading

Held-to-

maturity

investments

Financial

assets at fair

value through

profi t or loss

Available-for-

sale fi nancial

assets

Financial

liabilities

measured at

amortised cost

Financial

liabilities

measured at

fair value

FINANCIAL ASSETSCash and balances with the CNB 22,515


institutions 61,085









Other assets 6,295

FINANCIAL LIABILITIESAmounts owed to fi nancial institutions 33,259







• Qualitative disclosures about risks (refer to Note 40).

• Quantitative disclosures about each type of risk – maximum

exposure to credit risk (refer to Note 44), loan collaterali-

sation (refer to Note 7), quality of assets (refer to Note 45),

loan restructuring, past due loans (refer to Note 7), analysis

of sensitivity to market risks (interest rate risk refer to Note

43, foreign currency risk refer to Note 40).

• Disclosure of interest income and expenses by class (refer

to Notes 30 and 31).

• Disclosure of impairment losses for individual classes of

fi nancial assets (refer to Note 32).

• Disclosure of fees from trust and other fi duciary activities

(refer to Note 33).

(w) Changes of Accounting Policies and Accounting EstimatesIn 2007, the Bank revised its methodological treatment of

recognising provisions for loan receivables. For the fi rst time

in 2007, the Bank recognised provisions for unimpaired

loans, i.e., performing loans with the 1–6 internal rating, both

individually signifi cant and individually insignifi cant. These

provisions are recognised on a portfolio basis as the product

of probability of default (PD), loss given default (LGD) and

loss identifi cation period (LIP) which represents the period

for the which the Bank anticipates being able to identify the

loss event on an individual basis. All of the risk parameters are

derived from the Bank’s historical experience. Management of

the Bank believes that this approach results in a more faithful

presentation of the risk the Bank is exposed to and the related

191

costs. Pursuant to historical experience and current business

practices in lending, the Bank does not expect that a certain

portion of loans will be fully recoverable, including accrued

interest. Refl ecting this expectation, the Bank calculates a risk

margin charged to clients which is part of the Bank’s interest

income and also recognises a provision which takes into

account the losses realised by the Bank by providing loans

which cannot be allocated to individual loan receivables. These

provisions are classifi ed as collective impairment provisions.

For the fi rst time, the Bank reports the unwinding of discount

within provisions. The unwinding of discount represents

interest income on impaired loans on the basis of the effective

interest rate in respect of the discounted value of individually

impaired loans.

Set out below is the impact of the change in the accounting

policy on the Bank’s fi nancial statements:

2007 2006 Net change

Provisions for performing loans with the 1–6 internal rating 972 208 764

Provisions for performing loans with the 7–8 internal rating 304 720 (416)

Total provisions for performing loans (collective impairment) 1,276 928 348

Provisions for non-performing loans (individually impaired) 4,578 4,051 527


Total provisions 6,105 5,175 930

4. SIGNIFICANT ACCOUNTING ESTIMATES AND DECISIONS IN THE APPLICATION OF ACCOUNTING POLICIES

(a) Impairment of Loans and AdvancesThe Bank regularly assesses its loan portfolio for possible

impairment. As part of this analysis, the Bank splits all loans

into two categories: non-performing loans, i.e., a larger than

insignifi cant part of the principal and interest is past due for

more than 90 days, and performing loans. In respect of the

fi rst category of loans, the Bank believes that there is objective

evidence demonstrating that a loss event occurred subsequent

to the initial recognition of these loans which impacts future

anticipated cash fl ows arising from these loans and these loans

are therefore impaired on an individual basis. The Bank makes

an estimates of realised losses on an individual basis for indivi-

dually signifi cant loans, and on a portfolio basis for individually

insignifi cant loans by reference to historical indicators.

The Bank additionally splits performing loans into collectively

impaired (the 7–8 internal rating) where an indication of

impairment on a portfolio basis exists, and unimpaired (the 1–6

internal rating). With regard to all performing (i.e., including

unimpaired) loans, the Bank assesses whether there are ob-

servable data indicating that there is a measurable decrease in

the estimated future cash fl ows from the portfolio although the

decrease cannot yet be identifi ed with individual loans. Manage-

ment of the Bank uses estimates based on historical experience

of losses on loans that have similar risk characteristics. The

methods and assumptions adopted in estimating amounts and

the timing of future cash fl ows are regularly reviewed to reduce

differences between the estimated and actual data. Details about

provisioning can be found in Note 40.

(b) Debt Securities Held to MaturityBased upon the model of the development of future cash fl ows

and its balance sheet structure, the Bank invests in securities

and categorises a portion of purchased securities in the held-

to-maturity portfolio. The key criterion driving this decision

is the Bank’s ability to hold the security to maturity assuming

suffi cient fi nancial coverage throughout the whole term of

the investment. Should the sale of a signifi cant volume of the

held-to-maturity debt securities before their maturity take

place, pursuant to IAS 39 Financial Instruments: Recognition

and Measurement, the Bank would be required to reallocate the

held-to-maturity securities into one of the remaining portfolios.

In terms of the Bank’s asset management policy, the purchase

of a debt security into the portfolio of the held-to-maturity


192

debt securities is primarily considered as a tool of the banking

book interest rate risk management, the ability to hold such

a debt security to maturity is a pre-condition for using the debt

security as a banking book interest rate risk management tool.

(c) Impairment of SecuritiesSecurities held by the Bank, the only exception being debt

securities in the held-to-maturity portfolio, are regularly

marked to market and the marked-to-market revaluation is

recognised in the profi t and loss account (the at-fair-value-

through-profi t-or-loss portfolio) or in equity (the available-

for-sale portfolio) which refl ects impairment, if any, of the

securities (for instance, as a result of the bankruptcy of their

issuer). If the Bank concludes that some of its securities

held to maturity suffered impairment (for instance, a full

redemption of the nominal value of a debt security cannot

be anticipated with a suffi cient degree of certainty), the

carrying amount of the security is written down and the

incurred loss is taken to the profi t and loss account. The

same treatment applies to securities available for sale,

impairment is refl ected in the profi t and loss account instead

of equity where current fl uctuations in the market value of

the security are recognised.

(d) Valuation of Instruments without Direct QuotationsFinancial instruments without direct quotations in an active

market are valued using the mark-to-model technique. The models

are regularly reviewed by a skilled employee of the Risk Manage-

ment Department that is different from the preparer of the model.

Each model is calibrated for the most recent available market

data. While the models are built only on available data, their use is

subject to certain assumptions and estimates (e.g., for correlations,

volatilities, etc). Changes in the model assumptions may affect the

reported market value of the relevant fi nancial instruments.

The valuation of structured bonds, the yields of which are

linked to the underlying assets (asset backed securities) is

performed monthly on the basis of quotations requested from

listing agents. With assistance from the parent company, the

Bank analyses the quoted prices by reference to the results

of internal valuation models and other facts. Based on this

analysis, the Bank can value its bonds at other than the

quoted price. Where multiple quotations are available, the

Bank uses the lowest quotation.

(e) ProvisionsThe Bank is involved in a number of ongoing legal disputes,

the resolution of which may have an adverse fi nancial impact

on the Bank. Based upon historical experience and expert

reports, the Bank assesses the developments in these cases,

and the likelihood and the amount of potential fi nancial losses

which are appropriately provided for.

(f) Fair Value of Immovable Assets Held for SaleImmovable assets held for sale are valued based on expert

appraisals prepared by independent real estate appraisers and

the valuation refl ects anticipated prices on the real estate market.

The Bank carries only immovable assets as assets held for sale.

(g) Impairment of AssetsThe Bank tests its assets for impairment at least on an annual

basis to determine whether there is any indication that those

assets have suffered impairment. If any such indication exists,

the Bank compares the carrying amount of the assets with their

recoverable amount defi ned as the higher of fair value less

costs to sell and value in use.

With regard to equity investments in subsidiaries and

associates that are within the scope of IAS 27 Consolidated

and Separate Financial Statements and IFRS 3 Business

Combinations, the Bank determines value in use, the only

exception being investments in the real estate funds CEE

Property Development Portfolio B. V. and Czech and Slovak

Property Fund B. V. In respect of real estate funds, the Bank

determines the fair values of individual equity investments held

via these funds less costs to sell. The fair value of the entire

fund represents the sum of the fair values of all individual

investments. In determining the fair value of equity invest-

ments held via the real estate funds, the Bank uses estimates

prepared by recognised real estate appraisers. The value in use

is established as equal to the discounted value of the projected

cash fl ows from individual investments. The discount rate used

by the Bank matches the zero-risk rate increased by a credit

mark-up refl ecting the Group’s external rating.

With regard to tangible assets within the scope of IAS 16

Property, Plant and Equipment, the Bank determines the fair

value less costs to sell. The fair value is arrived at on the basis

of expert appraisals prepared by certifi ed appraisers.

193

Depreciation periods applicable to individual categories

of property, plant and equipment and intangible assets are

disclosed in Notes 3e and 3f, respectively.

The Bank determines the value in use of intangible assets by esti-

mating discounted future cash infl ows and outfl ows to be derived

from continuing use of the asset and from its ultimate disposal.

The fair value of securities held to maturity and securities

availa ble for sale that fall within the scope of IAS 39

Financial instruments: Recognition and Measurement is

determined on the basis of standard market parameters or

valuation models as appropriate.

(h) Fair Value of CollateralIn the course of its lending business, the Bank accepts mova-

ble and immovable assets and securities pledged as collateral.

The Bank also uses various forms of guarantee statements

to collateralise its loan receivables. Movable and immovable

assets pledged as collateral are carried off balance sheet

and are initially valued on the basis of an expert appraisal

(nominal value of collateral) which is reduced, based on the

Bank’s experience, to the realisable (fair) value using the

collateral discount coeffi cient which is derived from the type

of collateral. Guarantees are valued at the nominal value

reduced by the collateral coeffi cient which is derived from

the guarantor’s solvency. Subsequently, the Bank regularly

assesses the realisable value of collateral for impairment.

This assessment is mostly conducted as part of the regular

(at least annual) monitoring of loan receivables. With respect

to a large amount of collateral of the same type, the Bank

uses portfolio models to determine if the realisable value of

the collateral decreased. The Bank takes into account the

realisable value of collateral in calculating provisions for loan

receivables. Details about the determination of the realisable

(fair) value of collateral are provided in Note 40.

5. CASH AND BALANCES WITH THE CNB

CZK mil. 2007 2006

Cash 14,719 13,988

Nostro accounts with the CNB 461 445

Minimum reserve deposits with the CNB 4,503 8,082

Total 19,683 22,515

Minimum reserve deposits represent mandatory deposits calculated in accordance with regulations promulgated by the CNB, and

whose withdrawal is restricted. Minimum reserve deposits accrue interest at the Czech National Bank’s two week repo rate. The

Bank is authorised to make withdrawals of minimum reserve deposits in an amount that exceeds the actual average level of minimum

reserve deposits for the relevant holding period calculated pursuant to the CNB’s regulation. The nostro balances represent balances

with the CNB relating to settlement activities and were available for withdrawal at the year-end.


194

6. LOANS AND ADVANCES TO FINANCIAL INSTITUTIONS

CZK mil. 2007 2006

Nostro accounts 592 556


Placements with fi nancial institutions 42,635 29,322

Total 55,520 61,085

As of 31 December 2007, the Bank provided certain fi nancial institutions with loans of CZK 6,123 million (2006: CZK 25,814 mil lion)

under reverse repurchase transactions which were collateralised by securities amounting to CZK 6,842 million (2006: CZK 25,341 million).

7. LOANS AND ADVANCES TO CUSTOMERS

(a) Analysis of Loans and Advances to Customers by Type of Loan

CZK mil. 2007 2006

Corporate loans 128,966 102,446

Mortgage loans (both retail and corporate customers) 159,904 115,411

Retail loans 72,590 60,098

Public sector loans 15,040 18,543

Total 376,500 296,498

As of 31 December 2007, the Czech Consolidation Agency ceased to exist under law. All of the Bank’s receivables were collected in

the context of the transfer of the Czech Consolidation Agency’s assets to the Finance Ministry of the Czech Republic. At the end of

2006, the Bank reported receivables from the Czech Consolidation Agency of CZK 5,000 million which are included in the ‘Public

sector’ loans (a year-on-year change of presentation).

(b) Industry Sector AnalysisThe table below details the breakdown of loans and advances to customers by industry sector:

CZK mil. 2007 2006

Non-fi nancial institutions 143,981 109,921

Financial institutions 20,985 18,578

Government sector 17,447 20,754

Not-for-profi t organisations 5,311 2,423

Households (self employed) 11,756 10,259

Resident individuals 177,020 134,563

Total 376,500 296,498

As of 31 December 2007, the Bank provided certain customers with loans of CZK 4,203 million (2006: CZK nil) under reverse

repurchase transactions which were collateralised by securities amounting to CZK 4,249 million (2006: CZK nil).

195

The Bank recognised interest on impaired loans in the amount of CZK 251 million (2006: CZK 196 million) in the profi t and loss account.

(c) Analysis of Loans and Advances to Customers according to Credit Risk Assessment Policies

31 December 2007

CZK mil.

Individually

signifi cant loans

Individually


Total


Collectively impaired 8,649 6,998 15,647

Unimpaired 169,273 182,058 351,331

Total 182,587 193,913 376,500

31 December 2006

CZK mil.

Individually

signifi cant loans

Individually


Total


Collectively impaired – 28,442 28,442

Unimpaired 137,666 115,076 252,742

Total 147,160 149,338 296,498

Individually signifi cant loans represent corporate loans or loans where the Bank’s exposure exceeds CZK 5 million. Individually

impaired loans are those loans where objective evidence demonstrates that the associated cash fl ow is at risk (loss event). The Bank

defi nes the loss event in accordance with BASEL II. This classifi cation corresponds to the ‘R’ internal rating (default). Collectively

impaired loans are loans that show an indication of impairment on a collective basis, which corresponds to the 7–8 internal rating, but

are not non-performing. Unimpaired loans are loans with the 1–6 internal rating.

The Bank uses various types of collateral in order to mitigate credit risk exposure. The list of collateral instruments is set out in an

internal regulation which also outlines the guidance to be followed in determining the values of individual types of collateral. The

Bank establishes the nominal value of collateral based upon a market valuation which is subsequently used as a basis for arriving at

the realisable value by applying a discount factor set for each type of collateral. Collateral that is valued at the realisable value is taken

into account in provisioning (refer to Note 4a). Collateral valuation rules also set out when and how often the valuations of individual

collateral instruments are updated.


196

(d) Analysis of individually impaired receivables

(da) Retail Receivables

Retail receivables from individuals/households MSE x) Other Total retail

eceivables

Overdraft

loans

Credit

cards

Other

loans

Mortgage

loans

Total Overdraft

loans

Other

loans

Mortgage

loans

31 December 2007

Individually impaired 257 248 2,205 1,543 4,253 219 564 417 13 5,466

Fair value of collateral – – 219 1,034 1,253 29 291 258 0 1,831

31 December 2006

Individually impaired 218 158 2,242 918 3,536 167 147 406 4 4,260

Fair value of collateral – – 202 653 855 12 106 242 – 1,215x) MSE – individuals – businessmen and small enterprises with the annual turnover of less than CZK 30 million.

(db) Corporate Receivables

Corporate receivables

Corporate customers SME x) Corporate mortgages Total

31 December 2007

Individually impaired 907 2,349 800 4,056

Fair value of collateral 70 1,325 523 1,918

31 December 2006

Individually impaired 1,451 1,823 177 3,451

Fair value of collateral 136 1,055 2 1,193x) SME – small and medium size enterprises with the annual turnover of CZK 30 – 1,000 million.

(e) Restructuring of LoansThe Bank restructured the loans of CZK 900 million (2006: CZK 1,075 million) that would otherwise be past due or impaired. None

of these loans triggered a recognition of new assets on the Bank’s balance sheet.

2007 2006

Other loans 412 650

Mortgage loans 488 428

Total 900 1,078

(f) Past Due LoansAs of 31 December 2007 and 2006, the Bank records the following retail loans that are past their due dates but not impaired:

197

Retail loans to individuals/households MSE x) Other Total retail

receiv-

ablesOverdraft

loans

Credit

cards

Other

loans

Mortgage

loans

Loans Overdraft

loans

Other

loans

Mortgage

loans

31 December 2007

Past due

less than 30 days 244 337 2,404 415 3,400 28 410 95 10 3,943

Past due

between 30–60 days 51 38 563 687 1,339 20 87 146 – 1,592

Past due

between 60–90 days 26 16 209 289 540 10 52 114 – 716

Total 321 391 3,176 1,391 5,279 58 549 355 10 6,251

Fair value of collateral 1 – 10,345 88,282 98,628 497 7,517 11,000 2,596 120,239

31 December 2006

Past due

less than 30 days 2 207 1,874 244 2,327 25 250 78 10 2,690

Past due

between 30–60 days 1 31 398 389 819 23 107 186 5 1,140

Past due

between 60–90 days – 13 146 139 298 12 22 42 3 377

Total 3 251 2,418 772 3,444 60 379 306 18 4,207

Fair value of collateral 1 – 10,273 66,224 76,498 520 6,550 10,938 2,837 102,589

As of 31 December 2007 and 2006, the Bank records the following corporate loans past their due dates which are not impaired:


Corporate customers SME Corporate mortgages Municipalities Total

Past due less than 30 days 1,468 1,698 350 – 3,516

Past due between 30–60 days 60 296 203 – 559

Past due between 60–90 days – 92 – 167 259

Total 1,528 2,086 553 167 4,334



Corporate customers SME Corporate mortgages Municipalities Total

Past due less than 30 days 154 830 371 3 1,358

Past due between 30–60 days 101 104 – – 205

Past due between 60–90 days – 62 26 – 88

Total 255 996 397 3 1,651



198

8. PROVISIONS FOR LOSSES ON LOANS AND ADVANCES

(a) Creation and use of provisions for losses on loans and advances

CZK mil. 2007 2006

At 1 January 5,175 5,046


Release of provisions (2 200) (1 438)

Net charge/(release) of provisions 2,153 1,654

Unwinding of discount (251) (196)

Use of provisions for loans written off and assigned (957) (1 309)

FX differences from provisions in foreign currency (15) (20)

At 31 December 6,105 5,175

Net change in amount of provisions 930 129

The use of provisions for loans written off and assigned of CZK 957 million (2006: CZK 1,309 million) has a zero impact on the

Bank’s profi t.

(b) Provisions for losses on loans and advances by category

31 December 2007

CZK mil.

Individually

signifi cant loans

Individually


Total


Collectively impaired 756 520 1,276


Total 2,603 3,502 6,105

31 December 2006

CZK mil.

Individually

signifi cant loans

Individually


Total


Collectively impaired – 208 208


Total 2,076 3,099 5,175

In 2007, the Bank began to recognise provisions for unimpaired loans, i.e., performing loans with the 1–6 internal rating. These

provisions are recorded on a portfolio basis using the estimated PDs for individual grades of the 1–6 internal rating, LGDs for

individual product and client portfolios, and the loss identifi cation period for individual product and client portfolios. These provi-

sions are refl ected in collectively impaired provisions together with the provisions for performing loans with the 7–8 internal rating

(collectively impaired loan receivables).

199

In 2007, the Bank sold part of the non-performing loans portfolio of CZK 920 million to third parties. The Bank made a profi t of

CZK 301 million on this transaction.

The unwinding of discount represents interest income on impaired loans on the basis of the effective interest rate in respect of the

discounted value of loans.

Losses from impairment by types of fi nancial assets:

2007

CZK mil.

Retail loans to individuals/households

Overdraft loans

Creditcards

Other Loans Mortgage

loans

Total

Balance at 1 January 183 145 1,833 492 2,653

Provisioning 171 237 1,271 468 2,147

Write-off of receivables (58) (1) (570) (1) (630)

Amounts recovered during the year (75) (138) (641) (226) (1,080)

Interest income from impaired loans (unwinding of discount) (5) (18) (82) (12) (117)

Balance at 31 December 216 225 1,811 721 2,973

Net change in amount of provisions 33 80 (22) 229 320

2007

CZK mil.

Other retail loans Other retail

loans total

MSE Other

Overdraft

loans

Other

loans

Mortgage

loans

Balance at 1 January 219 281 67 9 576

Provisioning 137 248 134 – 519


Amounts recovered during the year (93) (57) (37) (9) (196)

Interest income from impaired loans (unwinding of discount) – (12) (11) – (23)

Balance at 31 December 227 433 153 – 813

Net change in amount of provisions 8 152 86 (9) 237


200

2007

CZK mil.

Corporate loans

Corporate

customers

SME Corporate

mortgages

Municipal

customers

Total

Balance at 1 January 549 1,237 160 – 1,946

Provisioning 246 1,010 108 9 1,373

Write-off of receivables (140) (124) – – (264)


Interest income from impaired loans (unwinding of discount) (46) (53) (12) – (111)



Net change in amount of provisions (115) 409 70 9 373

2006

CZK mil.

Retail loans to individuals/households

Overdraft

loans

Credit

cards

Other

loans

Mortgage

loans

Total

Balance at 1 January 132 89 2,089 169 2,479

Provisioning 187 98 1,137 407 1,829



Interest income from impaired loans (unwinding of discount) (6) (12) (80) (19) (117)

Balance at 31 December 183 145 1,833 492 2,653

Net change in amount of provisions 51 56 (256) 323 174

2006

CZK mil.

Other retail loans Other retail

loans total

MSE Other

Overdraft

loans

Other retail

loans total

Mortgage

loans

Balance at 1 January 68 188 26 14 296

Provisioning 170 167 65 2 404



Interest income from impaired loans (unwinding of discount) (1) (12) (4) – (17)

Balance at 31 December 219 281 67 9 576

Net change in amount of provisions 151 93 41 (5) 280

201


2006

CZK mil.

Corporate loans

Corporate

customers

SME Corporate

mortgages Total

Balance at 1 January 855 1,235 181 2,271

Provisioning 212 780 20 1,012

Write-off of receivables (265) (129) (1) (395)

Amounts recovered during the year (197) (625) (38) (860)

Interest income from impaired loans (unwinding of discount) (36) (24) (2) (62)

FX differences (20) – – (20)

Balance at 31 December 549 1,237 160 1,946

Net change in amount of provisions (306) 2 (21) (325)

9. SECURITIES HELD FOR TRADING

CZK mil. 2007 2006


Listed equity securities and other variable yield securities 2,315 2,164

Total 28,436 27,803

Listed debt securities include Government treasury bills and treasury bills of the CNB in the aggregate amount of CZK 100 million

(2006: CZK 297 million) and Government bonds in the aggregate amount of CZK 23,103 million (2006: CZK 20,782 million) which




CZK mil. 2007 2006



Issued in other currencies – –

Total 290 210




Total 25,831 25,429


202


CZK mil. 2007 2006




Total 2,315 2,164

Debt securities were issued by:

CZK mil. 2007 2006



Foreign state institutions 1,062 363

Financial institutions in the Czech Republic 832 1,052

Foreign fi nancial institutions 149 1,820



Total 26,121 25,639

Equity securities and other variable yield securities held for trading were issued by the following issuers:

CZK mil. 2007 2006






Total 2,315 2,164

203


10. SECURITIES DESIGNATED UPON INITIAL RECOGNITION AS AT FAIR VALUE THROUGH PROFIT OR LOSS

CZK mil. 2007 2006

Debt securities

Listed 17,287 14,632


Listed 6,221 5,601

Unlisted 900 860

Total 24,408 21,093

Debt securities and other fi xed income securities do not include any Government treasury bills, treasury bills of the CNB. These

securities also do not include Government bonds which may be used for refi nancing with the CNB.

This portfolio includes asset-backed securities (‘ABS’) of CZK 3,316 million (2006: CZK 1,565 million). The response of the

market to the subprime mortgage crisis in the USA gave rise to an impairment of these securities and the Bank incurred a loss on the

revaluation of the ABSs in the amount of CZK 284 million which is reported in the profi t and loss account line “Other net operating

income/(expenses), net” (refer to Note 37). The Bank believes that this loss refl ects the current market conditions rather than any

actual deterioration of the rating of the underlying assets of these securities.

Unlisted equity securities and other variable yield securities include equity investments and holdings that are not participating inte-

rests with controlling or signifi cant infl uence in the aggregate amount of CZK 900 million (2006: CZK 860 million). The fair value of

these equity investments is not derived from the market price as these securities are not traded on an active market. The fair value was

determined based on an expert opinion based on the estimate of cash fl ows.


CZK mil. 2007 2006


Issued in CZK – –


Total 3,684 3,658


Issued in CZK 269 –


Total 13,603 10,974


204


CZK mil. 2007 2006


Issued in CZK 1,253 860


Total 7,121 6,461


CZK mil. 2007 2006


State institutions in the Czech Republic 187 –






Total 17,287 14,632


CZK mil. 2007 2006




Total 7,121 6,461

11. POSITIVE FAIR VALUE OF FINANCIAL DERIVATIVE TRANSACTIONS

CZK mil. 2007 2006

Financial derivatives


– Interest rate hedging 245 383

– Interest rate non-hedging 6,667 9,698

– Other 138 97

Total 17,572 18,341

205


12. SECURITIES AVAILABLE FOR SALE

CZK mil. 2007 2006

Debt securities

Listed 10,686 11,538


Unlisted 43 43

Total 10,729 11,581

Debt securities include Government treasury bills in the aggregate amount of CZK 2,665 million (2006: CZK 3,893 million) which



Unlisted equity securities and other variable yield securities include equity investments and holdings that are not participating

interests with controlling or signifi cant infl uence in the aggregate amount of CZK 43 million (2006: CZK 43 million).


CZK mil. 2007 2006




Total 6,526 4,938




Total 4,160 6,600



CZK mil. 2007 2006


Issued in CZK 38 38


Total 43 43

206


CZK mil. 2007 2006







Total 10,686 11,538


CZK mil. 2007 2006




Total 43 43

13. ASSETS HELD FOR SALE

CZK mil. 2007 2006

Cost

At 1 January 617 578

Additions 9 199

Disposals (465) (160)

At 31 December 161 617

Accumulated depreciation including impairment

At 1 January (297) (252)

Additions (5) (115)

Disposals 219 70

At 31 December (83) (297)

Net book value at 31 December 78 320

Assets are reported as held for sale due to their redundancy.

A portion of the assets held for sale as of 1 January 2007 at an aggregate carrying amount of CZK 136 million was not sold in 2007

for reasons that were beyond the Bank’s control. As such, these assets were reclassifi ed as assets in use in the same amount at the

balance sheet date.

207


During the year ended 31 December 2007, the Bank sold assets at a net book value of CZK 106 million (2006: CZK 6 million) which

were carried as assets held for sale as of 31 December 2006.

All assets held for sale are presented in the ‘Other activities’ segment.

14. SECURITIES HELD TO MATURITY

CZK mil. 2007 2006

Debt securities

Listed 101,272 99,950

Unlisted 310 310

Total 101,582 100,260

Listed debt securities include Government treasury bills and treasury bills of the CNB of CZK nil (2006: CZK 1,489 million) and Go-

vernment bonds of CZK 47,922 million (2006: CZK 39,851 million) which may be used for refi nancing with the CNB (the amounts

shown above do not refl ect securities that were transferred to collateralise loans received under repurchase transactions).

The portfolio additionally comprises credit linked notes issued by the parent company, Erste Bank, at a cost of CZK 310 million



CZK mil. 2007 2006




Total 21,805 21,896




Total 79,777 78,364


208


CZK mil. 2007 2006





Other entities in the Czech Republic 2,071 1,113


Total 101,582 100,260

15. EQUITY INVESTMENTS IN SUBSIDIARY AND ASSOCIATED UNDERTAKINGS

Name of the company Registered offi ce Principal activities

Associated undertakings

CBCB-Czech Banking Credit Bureau, a. s. Prague 1, Na Příkopě 1096/21

Provision of information from the client information

banking register

První certifi kační autorita, a. s. Prague 9, Podvinný mlýn 2178/6 Digital signature certifi cation services

s IT Services CZ, s. r. o. Prague 4, Antala Staška 32/1292

Provision of software and advisory involving

hardware and software

s IT Solutions SK, spol. s r. o. Bratislava, Prievozská 14, Slovakia Provision of software

Subsidiary undertakings

brokerjet České spořitelny, a. s. Prague 1, Na Příkopě 29/584 Investment services

CEE Property Development Portfolio B. V. Naritaweg 165 Amsterdam, Netherlands Real estate investment

Consulting České spořitelny, a. s. Prague 3, Vinohradská 1632/180 Consultancy

CS Investment Limited Ogier House, St Julian’s Avenue, St Peter Port, Guernsey Investments and equity holdings

CS Property Investment Limited Themistokli Dervi, 48, Nicosia, Cyprus Investments in securities, issuance of loans

Czech and Slovak Property Fund B. V. Fred Roeskerstraat 123, 1076EE, Amsterdam, Netherlands Real estate investment

Czech TOP Venture Fund B. V. Postweg 11 6561 Groesbeek, Netherlands Management and fi nancing services

Erste Corporate Finance, a. s. Prague 1, Na Perštýně 1/342 Consultancy

Factoring České spořitelny, a. s. Prague 8, Pobřežní 46 Factoring

Informatika České spořitelny, a. s. Prague 4, Antala Staška 32/1292 Provision of IT services

Investiční společnost České spořitelny, a. s. Prague 1, Na Perštýně 1/342 Investment management

Leasing České spořitelny, a. s. Prague 8, Střelničná 8/1680 Leasing

Penzijní fond České spořitelny, a. s. Prague 4, Poláčkova 1976/2 Pension insurance

Pojišťovna České spořitelny, a. s. Pardubice, nám. Republiky 115 Insurance

RAVEN EU Advisory, a. s. Brno, Jakubské nám. 101/2 Business advisory

Realitní společnost České spořitelny, a. s. Prague 3, Vinohradská 1632/180 Real estate activities

REICO investiční společnost České spořitelny, a. s. Prague 1, Antala Staška 2027/79 Real estate investment

s Autoleasing, a. s. Prague 8, Střelničná 8/1680 Leasing

Stavební spořitelna České spořitelny, a. s. Prague 3, Vinohradská 180/1632 Construction savings bank

209


At 31 December 2007

Name of the company

Share capital in

CZK mil./ T

EUR, SKK

Currency Ownership

percentage

Voting power

in %

Carrying amount

in CZK mil.


CBCB-Czech Banking Credit Bureau, a. s. 1 CZK 20.00% 20.00% 0.2

První certifi kační autorita, a. s. 20 CZK 23.25% 23.25% 8

s IT Services CZ, s. r. o. 0,2 CZK 20.00% 20.00% 0.04

s IT Solutions SK, spol. s r.o. 200 SKK 23.50% 23.50% 69

Total associated undertakings 77


brokerjet České spořitelny, a. s. 160 CZK 51.00% 51.00% 82

CEE Property Development Portfolio B. V. 20 EUR 20.00% 20.00% 2,081

Consulting České spořitelny, a. s. 1 CZK 100.00% 100.00% 5

CS Investment Limited 8 EUR 99.99% 100.00% 254

CS Property Investment Limited 87 EUR 100.00% 100.00% 2,370

Czech and Slovak Property Fund B. V. 30 EUR 10.00% 10.00% 683

Czech TOP Venture Fund B. V. 19 EUR 84.25% 84.25% 159

Erste Corporate Finance, a. s. 6 CZK 50.17% 50.17% 3

Factoring České spořitelny, a. s. 84 CZK 100.00% 100.00% 57

Informatika České spořitelny, a. s. 10 CZK 100.00% 100.00% 10

Investiční společnost České spořitelny, a. s. 70 CZK 100.00% 100.00% 77

Leasing České spořitelny, a. s. 300 CZK 100.00% 100.00% 250

Penzijní fond České spořitelny, a. s. 100 CZK 100.00% 100.00% 241

Pojišťovna České spořitelny, a. s. 1,117 CZK 55.25% 55.25% 1,363

RAVEN EU Advisory, a. s. 7 CZK 65.71% 65.71% 46

Realitní společnost České spořitelny, a. s. 20 CZK 100.00% 100.00% 20

REICO investiční společnost České spořitelny, a. s. 80 CZK 100.00% 100.00% 80

s Autoleasing, a. s. 100 CZK 100.00% 100.00% 100

Stavební spořitelna České spořitelny, a. s. 750 CZK 95.00% 95.00% 1,198

Total subsidiary undertakings 9,079

Hedging instruments to equity investments

denominated in EUR 65

Total equity investments 9,221

The Bank presents its investments in the real estate funds CEE Property Development Portfolio B. V. and Czech and Slovak Property

Fund B. V. as equity investments in subsidiary undertakings. While the Bank holds 20 percent and 10 percent, respectively, of the

issued share capital of the funds and does not have a majority of voting rights or Board representation, it has provided signifi cant

additional funding to the funds for investment purposes which results in the Bank receiving substantially all of the returns and bearing

substantially all of the risks of the investments. The second shareholder of CEE Property Development Portfolio B. V. bears minimal

risks and receives minimal returns from its investment in the funds. Following the completion of shareholding changes, the Bank also

remains the majority shareholder of Czech and Slovak Property Fund B. V. owning 67 percent of the invested funding.

210

During the year ended 31 December 2007, the portfolio of equity investments underwent the following changes:

• In February 2007, s IT Services CZ, s. r. o. was formed, the equity investment of the Bank is 20 percent;

• In June 2007, the Bank sold its equity investment in České nemovitosti, a. s.; the gain from the transaction amounted to

CZK 39 million;

• In June 2007, the Bank purchased an 65.71 percent equity investment in RAVEN Consulting, a. s., the entity was then renamed to

RAVEN EU Advisory, a. s.;

• In July 2007, a portion of the originally paid purchase price for První certifi kační autorita, a. s. was refunded, the carrying amount

decreased by CZK 2 million to CZK 8 million;

• In October 2007, the share capital of REICO investiční společnost České spořitelny, a. s. was increased by CZK 50 million, the

share capital of the entity thus increased to CZK 80 million;

• In December 2007, the Bank increased the share capital of Realitní společnost České spořitelny, a. s. from CZK 4 million to

CZK 20 million;

• By way of issuing shares with share premium, the Bank increased its equity investment in CS Investment Limited in relation to the

expansion of its business activities;

• By way of issuing shares with share premium, the Bank increased its equity investment in CS Property Investment Limited in

relation to the expansion of its activities;

• By way of the payment of a portion of the share premium, the equity investment in Czech TOP Venture Fund B. V. was increased

in relation to the expansion of its business activities;

• By way of the payment of a portion of the share premium, the equity investment in CEE Property Development Portfolio B. V. was

increased in relation to the expansion of its business activities;

• By way of the payment of a portion of the share premium, the equity investment in Czech and Slovak Property Fund B. V. was

increased in relation to the expansion of its business activities;

• Given the good fi nancial results and increase in the share capital of Leasing České spořitelny, a. s., the Bank released the previ-

ously recognised provisions against this equity investment in the amount of CZK 175 million; and

• With a view to managing foreign currency risk exposures associated with the Bank’s investments in foreign subsidiaries and

associates CS Investment Limited, CS Property Investment Limited, Czech TOP Venture Fund B. V., CEE Property Development

Portfolio B. V., and Czech and Slovak Property Fund B. V. denominated in EUR, the Bank has defi ned these investments as

a hedged item within the fair value hedge of these shareholdings. Hedging instruments include short-term received deposits in the

same nominal value which are periodically rolled over. The Bank began to remeasure these investments at fair value as a result of

the foreign currency risk hedge.

CEE Property Development Portfolio B. V., Czech and Slovak Property Fund B. V., Leasing České spořitelny, a. s., sAutoleasing, a. s.

and RAVEN EU Advisory, a. s. hold investments in other entities with which they form sub-groups (detailed information is provided

in the consolidated fi nancial statements).

211


At 31 December 2006

Name of the company

Share capital in

CZK mil./T

EUR, SKK

Currency Ownership

percentage

Voting power

in %

Carrying amount

in CZK mil.


CBCB-Czech Banking Credit Bureau, a. s. 1 CZK 20.00% 20.00% 0.2

První certifi kační autorita, a. s. 20 CZK 23.25% 23.25% 10

České nemovitosti, a. s. 45 CZK 24.00% 24.00% 17

s IT Solutions SK, spol. s r. o. 200 SKK 23.50% 23.50% 69

Total associated undertakings 96


brokerjet České spořitelny, a. s. 160 CZK 51.00% 51.00% 82

CEE Property Development Portfolio B. V. 20 EUR 20.00% 20.00% 1,741

Consulting České spořitelny, a. s. 1 CZK 100.00% 100.00% 5

CS Investment Limited 8 EUR 99.99% 100.00% 230

CS Property Investment Limited 47 EUR 100.00% 100.00% 1,245

Czech and Slovak Property Fund B. V. 30 EUR 10.00% 10.00% 253

Czech TOP Venture Fund B. V. 19 EUR 84.25% 84.25% 145

Erste Corporate Finance, a. s. 6 CZK 50.17% 50.17% 3

Factoring České spořitelny, a. s. 84 CZK 100.00% 100.00% 57

Informatika České spořitelny, a. s. 10 CZK 100.00% 100.00% 10

Investiční společnost České spořitelny, a. s. 70 CZK 100.00% 100.00% 77

Leasing České spořitelny, a. s. 300 CZK 100.00% 100.00% 75

Penzijní fond České spořitelny, a. s. 100 CZK 100.00% 100.00% 241

Pojišťovna České spořitelny, a. s. 1,117 CZK 55.25% 55.25% 1,363

Realitní společnost České spořitelny, a. s. 4 CZK 100.00% 100.00% 4

REICO investiční společnost České spořitelny, a. s. 30 CZK 100.00% 100.00% 30

s Autoleasing, a. s. 100 CZK 100.00% 100.00% 100

Stavební spořitelna České spořitelny, a. s. 750 CZK 95.00% 95.00% 1,198

Total subsidiary undertakings 6,859

Total equity investments 6,955

212

16. INTANGIBLE FIXED ASSETS

CZK mil. Software Other Total

Cost

1 January 2006 2,317 7,003 9,320

Additions 995 733 1,728

Disposals (37) (152) (189)

31 December 2006 3,275 7,584 10,859

1 January 2007 3,275 7,584 10,859

Additions 1,926 133 2,059

Disposals (711) (541) (1,252)

31 December 2007 4,490 7,176 11,666

Accumulated amortisation including impairment and provisions

1 January 2006 (1,514) (3,474) (4,988)

Additions (482) (1,094) (1,576)

Disposals 27 138 165

31 December 2006 (1,969) (4,430) (6,399)

1 January 2007 (1,969) (4,430) (6,399)

Additions (769) (902) (1,671)

Disposals 474 244 718

31 December 2007 (2,264) (5,088) (7,352)

Net book value

31 December 2006 1,306 3,154 4,460

31 December 2007 2,226 2,088 4,314

The balances as of 31 December 2007 shown above include CZK 1,515 million (2006: CZK 1,954 million) in assets under construction.

In 2007, the Bank recorded asset impairment of CZK nil (2006: CZK 11 million).

213


17. PROPERTY AND EQUIPMENT

CZK mil. Land and buildings Equipment, fi xtures

and fi ttings

Total

Cost

1 January 2006 15,520 11,396 26,916

Additions 522 1,447 1,969

Disposals (472) (1,689) (2,161)

31 December 2006 15,570 11,154 26,724

1 January 2007 15,570 11,154 26,724

Additions 508 1,180 1,688

Disposals (8) (1,503) (1,511)

31 December 2007 16,070 10,831 26,901

Accumulated depreciation including impairment and provisions

1 January 2006 (4,872) (8,347) (13,219)

Additions (446) (1,252) (1,698)

Disposals 260 1,064 1,324

31 December 2006 (5,058) (8,535) (13,593)

1 January 2007 (5,058) (8,535) (13,593)

Additions (455) (982) (1,437)

Disposals 54 981 1,035

31 December 2007 (5,459) (8,536) (13,995)

Net book value

31 December 2006 10,512 2,619 13,131

31 December 2007 10,611 2,295 12,906

The balances as of 31 December 2007 shown above include CZK 626 million (2006: CZK 772 million) in assets under construction.

In 2007, the Bank recognised asset impairment of CZK nil (2006: CZK 35 million). This impairment largely relates to real estate that

is insuffi ciently used by the Bank for its activities.

214

18. OTHER ASSETS

CZK mil. 2007 2006

Accrued income 3,736 3,966

Of which:

– Interest on loans and advances to fi nancial institutions 314 254

– Interest and fees on loans and advances to customers 425 727

– Coupons on bonds 2,996 2,984

– Other 1 1

Deferred tax asset (refer to Note 26) 249 –

Other tax receivables 68 45

Deferred expenses 1,047 706

Receivables from securities trading 3,433 488

Various receivables 1,669 1,090

Total 10,202 6,295

19. AMOUNTS OWED TO FINANCIAL INSTITUTIONS

CZK mil. 2007 2006

Loro accounts 737 267

Term deposits 22,668 19,766

Loans received 15,507 13,226

Total 38,912 33,259

As of 31 December 2007, the Bank received from other fi nancial institutions loans of CZK 11,964 million (2006: CZK 9,206 million)

under repurchase transactions which were collateralised by securities amounting to CZK 11,787 million (2006: CZK 8,959 million).

20. AMOUNTS OWED TO CUSTOMERS

CZK mil. 2007 2006

Repayable on demand 367,797 326,032

Other deposits 106,608 104,626

Total 474,405 430,658

As of 31 December 2007, the Bank received from customers loans of CZK nil (2006: CZK 516 million) under repurchase transactions

which were collateralised by securities amounting to CZK nil (2006: CZK 515 million).

The fair value option has been applied in respect of part of amounts owed to customers (refer to Note 21).

215


Analysis of amounts owed to customers:

CZK mil. 2007 2006

Savings deposits 94,319 99,547

Other amounts owed to customers

– Public sector 51,049 45,357

– Corporate clients 93,662 78,085

– Retail clients 235,375 207,669

Total 474,405 430,658

21. LIABILITIES AT FAIR VALUE

CZK mil. 2007 2006

Payables to customers – deposits with the fair value option 3,080 –

Liabilities arising from issued securities at fair value 1,189 –

Payables arising from short sales – debt securities 3,167 5,435

Payables arising from short sales – shares 173 15

Total 7,609 5,450

“Liabilities arising from issued securities at fair value” include bond issues ISIN CZ0003701237, CZ0003701278 and CZ0003701351

(refer to Note 23).

CZK mil. 2007 2006

Change in the fair value unrelated to changes in market conditions



Total 6 0

Difference between the carrying amount and the contractual agreed nominal value due at maturity



Total 139 0

Short sales are short-term trading liabilities which mature between one and three months. Changes in the fair value of these trading

liabilities are not analysed since the liabilities are different at each balance sheet date.

Given that the Bank did not use the fair value option in respect of liabilities in 2006, the change in the fair value arising from the

changes in the credit profi le of the issuer (the Bank) is determined as equal to the difference between the fair value of the liabilities at

the issue date and the balance sheet date.

216

22. NEGATIVE FAIR VALUE OF FINANCIAL DERIVATIVE TRANSACTIONS

CZK mil. 2007 2006

Financial derivatives


– Interest rate hedging 727 254

– Interest rate non-hedging 5,994 9,262

– Other 488 381

Total 11,066 12,683

217


23. BONDS IN ISSUE

ISIN Date of issue

Maturity Interest rate 2007

CZK mil.

2006

CZK mil.

Mortgage bonds CZ0002000201 November 2002 November 2007 5.80% – 2,947

Mortgage bonds CZ0002000235 March 2003 March 2008 5.20% 1,071 3,028

Mortgage bonds CZ0002000276 August 2003 August 2008 4.50% 1,503 2,958

Mortgage bonds CZ0002000342 April 2004 April 2009 3.50% 303 298

Mortgage bonds CZ0002000409 August 2004 August 2009 3.60% 698 695

Mortgage bonds CZ0002000524 May 2005 May 2010 4.50% 2,073 2,096

Mortgage bonds CZ0002000573 June 2005 June 2010 4.05% 2,056 2,078


Mortgage bonds CZ0002000755 February 2006 February 2016 4.80% 4,863 4,863

Mortgage bonds CZ0002000771 December 2005 December 2008 4.45% 2,496 2,532

Mortgage bonds CZ0002000896 October 2006 October 2011 Floating 1,163 1,116


Mortgage bonds CZ0002000920 October 2006 October 2011 3.00% 788 201

Mortgage bonds CZ0002000995 May 2007 May 2012 5.90% 1,082 –

Mortgage bonds CZ0002001068 June 2007 October 2015 4.50% 762 –

Mortgage bonds CZ0002001084 July 2007 July 2014 Floating 1,640 –

Mortgage bonds CZ0002001126 August 2007 August 2012 3.70% 884 –

Mortgage bonds CZ0002001134 August 2007 August 2017 Floating 2,998 –

Mortgage bonds CZ0002001191 October 2007 October 2022 Floating 1,998 –

Mortgage bonds CZ0002001274 November 2007 November 2014 Floating 600 –

Mortgage bonds CZ0002001282 November 2007 November 2017 5.90% 2,130 –


Mortgage bonds CZ0002001407 December 2007 December 2022 Floating 3,997 –


Mortgage bonds CZ0002001423 December 2007 December 2017 5.85% 5,438 –

Mortgage bonds CZ0002001613 December 2007 December 2022 Floating 3,000 –



Mortgage bonds CZ0002001654 December 2007 December 2022 Floating 157 –

Bonds CZ0003700759 February 2004 February 2008 1.00% x) 316 312

Bonds CZ0003700767 February 2004 February 2014 3.51% x) 1,460 1,499

Bonds CZ0003701013 May 2005 June 2008 – x) 230 243

Bonds CZ0003701047 July 2005 July 2012 2.72% xx) 736 745

Bonds CZ0003701054 September 2005 September 2017 4.75% x) 211 204

Bonds CZ0003701062 October 2005 October 2013 5.00% x) 252 244

Bonds CZ0003701286 March 2007 March 2012 3.49% 948 –

Depository bills of exchange 4,994 3,899

Total 58,858 36,463x) Bonds were issued with a combined yield.xx) If the early repayments option is not exercised, the interest rate is increased by 3.55 percent.

218

Of the aggregate carrying value of the mortgage bonds, CZK 14,180 million (2006: CZK 16,952 million) was hedged against interest

rate risk through interest rate swaps linked to a market fl oating rate. In accordance with applicable accounting policies, these mort-

gage bonds are remeasured at fair value.

Bonds issues were placed with an embedded derivative. The ISIN CZ0003700767 and CZ0003701047 issues of bonds are remeasured

at fair value because they are hedged against interest rate risk and early repayment options are attached to the bonds. Of the aggregate

carrying value of the mortgage bonds, CZK 2,042 million (2006: CZK 2,245 million) was hedged against interest rate risk through

interest rate swaps linked to a market fl oating rate.

The ISIN CZ0003701013, CZ0003701054 and CZ0003701062 issues were placed with a share index option which is recorded

separately and is remeasured at fair value.

All mortgage bonds issues placed in 2007 were issued as part of the Česká spořitelna bond placement programme.

The ISIN CZ0002000342, CZ0002000409, CZ0002001027, CZ0002001126, CZ0002001613, CZ0002001639, CZ0002001647

and CZ0002001654 mortgage bonds issues and the ISIN CZ0003701013 bond are not traded on any regulated market. Other issues

of mortgage bonds and bonds are traded on the offi cial free market of the Prague Stock Exchange.

The Bank has also placed the following bonds which are reported as “Liabilities arising from issued securities at fair value”

(refer to Note 21):

ISIN Date of issue

Maturity Interest rate 2007

CZK mil.

2006

CZK mil.

Bonds CZ0003701237 February 2007 April 2011 x) 273 –

Bonds CZ0003701278 March 2007 March 2010 xx) 746 –

Bonds CZ0003701351 September 2007 September 2011 x) 170 –

Total 1,189 –x) Bonds bear no interest, the yield of bonds increases on a one-off basis as of the fi nal maturity date.xx) The yield depends on the development of the EUR/PLN spot exchange rate.

The ISIN CZ0003701237 and CZ0003701351 issues were placed as structured bonds, the yield of which is determined as equal to the

difference between the issue rate and ‘another value’ in accordance with the issue terms and conditions. The amount of the ‘another

value’ will be based on a set of indexes and an equity bucket and will be payable as of the fi nal maturity of the bonds. Similarly, the

ISIN CZ0003701278 issue was placed as a structured bond, the yield of which is derived from the development of the EUR/PLN spot

exchange rate. The ISIN CZ0003701237 and CZ0003701351 issues are not traded on any regulated market. The ISIN CZ0003701278

issue is traded on the offi cial free market of the Prague Stock Exchange.

219


24. PROVISIONS FOR LIABILITIES AND OTHER RESERVES

(a) Structure of provisions

CZK mil. 2007 2006

Provision for legal disputes relating to credit transactions 1,986 1,997

Provision for off balance sheet credit risks 143 100

Other provisions 882 553

Total 3,011 2,650

Other provisions include the provisions for the Bonus programme, legal disputes, onerous contracts and other risks. The most

signifi cant provision for the Bonus programme is maintained to cover the cost of providing clients with awards for the use of payment

cards in making cash-free payments. The level of the provision is determined by reference to the current developments in the drawing

of the awards where the average value of the point is CZK 0.81 and clients utilise 73 percent of the allocated points, on average.

(b) Charge for and use of provisions

CZK mil. 2007 2006






(c) Provisions for other credit risks and off balance sheet credit exposuresProvisions for other credit risks and off balance sheet credit exposures are recorded to cover specifi c risks arising from pending legal

disputes relating to loan transactions and to cover losses that result from off balance sheet and other exposures.

CZK mil. 2007 2006






220

25. OTHER LIABILITIES

CZK mil. 2007 2006

Accrued expenses 1,127 888

Of which:

– Interest on amounts owed to fi nancial institutions 88 48

– Interest on amounts owed customers 196 123

– Interest on bonds in issue 791 679

– Other 52 38

Deferred income 1,201 884

Various creditors 1,729 1,385

Payables from securities trading 3,152 711

Payables from payment transactions 2,816 2,805

Estimated payables 3,203 3,418

Other liabilities 125 1,803

Income tax liability 378 112

Deferred income tax liability (Note 26) – 80

Total 13,731 12,086

Estimated payables largely comprise estimated payables for staff and management bonuses, unbilled supplies and contributions to the

Deposit Insurance Fund.

Deferred income principally includes deferred commissions and fees related to amounts due from customers in respect of the effective

interest rate.

26. DEFERRED INCOME TAXES

Deferred income tax is calculated from all temporary differences under the liability method using a principal tax rate of 20 percent

(2006: 24 percent).

Net deferred income tax assets (liabilities) are as follows:

CZK mil. 2007 2006

Balance at the beginning of the year (80) (192)

Movement for the year – equity 76 90

Movement for the year – income/(expense) 253 22

Net balance at the year-end – asset/(liability) 249 (80)

The impact of deferred tax liabilities on equity arises from changes in the fair value of securities available for sale and hedging

derivatives. The deferred tax (charge)/credit in the profi t and loss account comprises the following temporary differences:

221


CZK mil. 2007 2006

Provisions and reserves 196 7

Accelerated depreciation 61 75


Total (Note 38) 253 22

Of which: impact of the change of rate (50) –

Deferred income tax assets and liabilities are attributable to the following items:

CZK mil. 2007 2006

Deferred tax assets

Non-tax deductible reserves and provisions 340 144

Other temporary differences 102 107

Total deferred tax asset 442 251

Deferred tax liabilities

Accelerated depreciation for tax purposes (178) (239)

Changes in the fair value of securities available for sale and hedging derivatives (15) (92)

Total deferred tax liability (193) (331)

Net deferred tax asset (liability) 249 (80)

27. SUBORDINATED DEBT

Date of issue Maturity of the

issue

Interest rate Nominal value

CZK mil.

Carrying amount

at 31 December

2007 CZK mil.

Carrying amount

at 31 December

2006 CZK mil.

16 May 2005 16 May 2015 6M PRIBOR+0.46% 3,000 2,950 2,948

2 October 2006 2 October 2016 6M PRIBOR+0.45% 3,000 2,655 2,938

Total 5,605 5,886

Both issues of subordinated debt were made in certifi cate form and placed on the free market of the Prague Stock Exchange. If the

Bank does not exercise its option for premature repayment of the debt after the lapse of fi ve years, the interest rates attached to each

issue shall increase to 6M PRIBOR plus 1.4 percent p.a. Interest is payable semi-annually in arrears. The debt is unsecured and

unconditional. On 5 May 2005 and 13 September 2006, the Czech National Bank issued certifi cates confi rming that these issues of

subordinated debt are compliant with all regulatory requirements and may be included in the additional capital of the Bank for the

purposes of calculating the capital adequacy ratio.

222

28. SHARE CAPITAL

Authorised, called-up and fully paid share capital was as follows:

Number of

shares

2007

CZK mil.

Number of

shares

2006

CZK mil.

Ordinary shares of CZK 100 each 140,788,787 14,079 140,788,787 14,079

Priority shares of CZK 100 each 11,211,213 1,121 11,211,213 1,121

Total 152,000,000 15,200 152,000,000 15,200

Priority shareholders are not entitled to vote at the annual shareholders’ meeting. They have a right to receive dividends each year if

the Bank is profi table. The amount of the dividend is proposed by the Board of Directors and subject to approval at the annual share-

holders’ meeting. In the case of liquidation, priority shareholders have a right to the assets of the Bank before ordinary shareholders

but after other creditors. Priority shareholders have a right to purchase shares offered by the Bank when it increases its share capital

in the same proportion as the current holding. Priority registered shares can be issued only to municipalities and local governments in

the Czech Republic. The priority registered shares can be transferred to entities other than municipalities and local governments of the

Czech Republic only subject to the approval of the Board of Directors.

29. REVALUATION GAINS OR LOSSES

CZK mil. Securities available for sale Hedging derivatives Total

2007 2006 2007 2006 2007 2006

At 1 January

Gain on fair value changes 386 782 – – 386 782

Deferred tax liability (91) (184) 3 (91) (181)

Cash fl ow hedge – – 1 (10) 1 (10)

Total at 1 January 295 598 1 (7) 296 591

Changes during the year

Loss on fair value changes (309) (396) – – (309) (396)

Deferred tax (liability)/asset 76 93 – (3) 76 90

Cash fl ow hedge – – (1) 11 (1) 11

At 31 December

Gain on fair value changes 77 386 – – 77 386

Deferred tax liability (15) (91) – – (15) (91)

Cash fl ow hedge – – – 1 – 1

Total at 31 December 62 295 – 1 62 296

223


30. INTEREST INCOME AND SIMILAR INCOME

CZK mil. 2007 2006


Loans and advances to customers 20,129 15,996

Of which: unwinding of discount 251 196

Debt securities and other fi xed income securities 5,393 4,965



Securities held to maturity 4,072 3,893

Proceeds from shares and other variable yield securities 1,170 934



Equity investments 779 594

Other 99 104

Total 29,769 24,567

31. INTEREST EXPENSE AND SIMILAR EXPENSE

CZK mil. 2007 2006

Amounts owed to fi nancial institutions 1,347 691


Bonds in issue 1,299 1,103

Subordinated debt 197 108

Fair value of interest rate hedging derivatives 103 (198)

Total 7,305 5,161

The loss/(profi t) from the revaluation of hedging derivatives in the amount of CZK 103 million (2006: CZK (198) million) increases/

decreases the loss from the revaluation of the hedged part of issued bonds in the amount of CZK 16,222 million

(2006: CZK 19,197 million), whose fair value is hedged by these derivatives (Refer to Note 23).

224

32. PROVISIONS FOR CREDIT RISKS

CZK mil. 2007 2006

Charge for reserves for the year (refer to Note 24) (152) (282)

Release of reserves for the year (refer to Note 24) 109 271

Net (charge)/release of reserves for the year (43) (11)

Charge for provisions for the year (refer to Note 8) (4,353) (3,092)

Release of provisions for the year (refer to Note 8) 2,200 1,438

Net (charge)/release of provisions for the year (2,153) (1,654)

Reversal of the charge for provisions for outstanding interest – 8

Write-offs of loans not covered by provisions (9) (13)

Recoveries 89 103

Total (2,116) (1,567)

33. FEE AND COMMISSION INCOME

CZK mil. 2007 2006

Lending activities 1,976 1,677

Payment transactions 6,144 5,901

Custody, trustee and administration of assets 250 233


Mediation of insurance activities 177 122

Mediation of construction savings activities 602 476



Total 10,455 9,453

34. FEE AND COMMISSION EXPENSE

CZK mil. 2007 2006

Lending activities 286 75

Payment transactions 586 480


Mediation of insurance activities 26 19

Mediation of construction savings activities 157 141



Total 1,224 852

225


35. NET TRADING RESULT

CZK mil. 2007 2006

Realised and unrealised losses on securities held for trading (852) (372)

Derivative instruments 372 510

Foreign exchange trading 1,862 1,263

Other 312 214

Total 1,694 1,615

36. GENERAL ADMINISTRATIVE EXPENSES

(a) Composition of general administrative expenses

CZK mil. 2007 2006

Staff costs

Wages and salaries 5,569 5,171

Social security costs 1,885 1,748

Other staff costs 390 338

Total staff costs 7,844 7,257

Other administrative expenses

Data processing expenses 2,057 1,763

Building maintenance and rent 1,409 1,296

Costs of business transactions 1,055 980

Advertising and marketing 697 697

Advisory and legal services 247 374

Other administrative expenses 545 542

Total other administrative expenses 6,010 5,652

Depreciation

Amortisation of intangible assets (Note 17) 1,671 1,565

Depreciation of property and equipment (Notes 14 and 18) 1,466 1,668

Total depreciation, amortisation and impairment 3,137 3,233

Total 16,991 16,142

(b) Board of Directors and Supervisory Board emoluments

CZK mil. 2007 2006

Salaries 124 119

Total 124 119

All emoluments to the members of the Board of Directors and Supervisory Board are treated as short-term employee benefi ts.

226

(c) Average number of employees and Board members

2007 2006

Board of Directors 7 7

Supervisory Board 11 12

Staff 10,098 10,097

With a view to fostering loyalty of the Bank’s key employees and attracting new key managers, the Supervisory Board of Erste Bank,

resolved, based upon authorisation given by the General Meeting of Shareholders dated 8 May 2001, to implement an Employee Erste

Bank Stock Ownership Programme (‘ESOP’) and a Management Erste Bank Stock Option Programme (‘MSOP’) within the Bank.

All employees of the Bank were entitled to subscribe for shares under the Employee Stock Ownership Programme. Each employee was

entitled to subscribe for a maximum of 200 shares (2006: 200 shares). The price of one share was established on the basis of the average

rate in April 2007 decreased by a 20 percent discount. The 20 percent discount is conditional upon the shares being held for a period of

one year. A total of 809 employees (2006: 541) participated in the programme and subscribed for 98,868 shares (2006: 71,879).

Management of the Bank and selected key employees were granted the second tranche of options for subscription of shares under the

Management Erste Bank Stock Option Plan 2005. In the year ended 31 December 2007, approximately 83,000 options (2006: 78,000)

were granted to these employees. The third tranche of the programme in 2007 is the last tranche of the MSOP 2005. These options

entitle the holders to acquire Erste Bank’s shares for the price of EUR 43 which was determined as the average price of shares ruling

in April 2005 plus a 10 percent mark-up, rounded to EUR 0.5. For the options subscribed until 2004 under the Management Erste

Bank Stock Option Plan 2002, the price of the share was EUR 16.50, within fi ve years from the issuance of each tranche of options.

In 2007, 13,200 options granted under the Management Erste Bank Stock Option Plan 2002 were exercised, for which 52,800 shares

were purchased (2006: 69,360). 10,750 options granted under the Management Erste Bank Stock Option Plan 2005 were exercised

during the fi rst exercise period in 2007 (2006: 11,200), 1,300 options in the second exercise period (2006: 0) and 130 options during

the third exercise period (2006: 2,900).

The aggregate amount of the discount in respect of both programmes was CZK 33 million (2006: CZK 12 million) and was reported

within “General administrative expenses – other staff costs”.

227


37. OTHER OPERATING INCOME/(EXPENSES), NET

CZK mil. 2007 2006

Release of other reserves 33 1

Gain on the sale of real estate 153 112

Income from other services 84 79

Received compensation for defi cits and damage 39 255

Release of provisions against non-credit receivables 11 10

Income from statute-barred deposits 1 2

Other operating income 201 152

Total other operating income 522 611

Charges for other reserves (372) (176)

Contribution to the Deposit Insurance Fund (442) (397)

Write-off of assets under construction – (3)

Loss on the sale and impairment of real estate (5) (60)

Defi cits and damage, fi nes and penalties (56) (333)

Charge for provisions against non-credit receivables (7) (10)

Sponsorship contributions (40) (30)

Other operating charges (81) (76)

Other taxes (40) (30)

Total other operating expense (1,043) (1,115)

Gains/(losses) on the sale of securities held to maturity 12 (23)

Income from the revaluation/sale of securities at fair value through profi t or loss that are not designed for trading (458) (62)

Income from the sale of securities available for sale 112 308

Income from revaluation hedging derivatives 0 8

Release of provisions for equity investments 175 2

Gains on the sale of equity investments 90 93

Total other operating income/(expenses), net (590) (178)

The line “Income from the revaluation/sale of securities at fair value through profi t or loss that are not designed for trading” for the

year ended 31 December 2007 includes the loss from the revaluation of asset-backed securities of CZK 284 million (refer to Note 10).

The line “Gains on the sale of equity investments“ for the year ended 31 December 2007 includes gains from the sale of an equity

investment in MasterCard Incorporated of CZK 51 million and from the sale of an equity investment in České nemovitosti, a. s. of

CZK 39 million. In the year ended 31 December 2006, it included gains from the sale of Czech and Slovak Property Fund B. V. of

CZK 91 million and Servis 1 – ČS, a. s. of CZK 2 million.

228

38. INCOME TAX EXPENSE

CZK mil. 2007 2006

Current tax expense (3,329) (2,817)

Deferred tax income/(expense) (Note 26) 253 22

Total (3,076) (2,795)

The tax on the Bank’s profi t before tax differs from the theoretical amount that would arise using the basic tax rate of the Czech

Republic as follows:

CZK mil. 2007 2006

Profi t before tax 13,692 11,734

Tax calculated at a tax rate of 24 percent (2006: 24 percent) 3,286 2,816

Income not subject to tax (728) (559)

Expenses not deductible for tax purposes 720 514

Tax allowances and credits, including the utilisation of tax losses, tax recoveries

and additional taxes for prior periods 65 62

Other items (14) (16)


Movement in deferred taxation (Note 26) (253) (22)

Income tax expense 3,076 2,795

Effective tax rate 22.47% 23.82%

Further information about deferred income tax is presented in Note 26.

39. CASH AND CASH EQUIVALENTS

Cash and cash equivalents at the end of the year as shown in the statements of cash fl ows are composed of the following balances:

CZK mil. 2007 2006

Cash (Note 5) 14,719 13,988

Nostro accounts with the CNB (Note 5) 461 445

Treasury bills with maturity of less than three months 100 30

Nostro accounts with fi nancial institutions (Note 6) 592 556

Loro accounts with fi nancial institutions (Note 19) (737) (267)

Total cash and cash equivalents 15,135 14,752

229


40. FINANCIAL INSTRUMENTS

A fi nancial instrument is any contract that gives rise to the right to receive cash or another fi nancial asset from another party (fi nancial

asset) or the obligation to deliver cash or another fi nancial asset to another party (fi nancial liability).

The Bank classifi es fi nancial instruments into the trading and banking (investment) portfolios in accordance with BASEL II rules

as per CNB Regulation No. 123/2007, on the rules of prudent business of banks, savings and lending associates an securities trades

(henceforth ‘Regulation 123/2007). The Bank uses various risk management techniques for the banking and trading books.

Financial instruments may result in certain risks to the Bank. In addition to the credit risk, i.e. the counterparty risk, the key risks

attached to the trading portfolio include market risks, specifi cally foreign exchange, interest rate and equity risks; the key risks

inherent in the banking/investment portfolio include interest rate and liquidity risks. All transactions with fi nancial instruments also

carry operational risk. The Bank gives signifi cant attention to risk management.

In 2007, a division managed by the Chief Risk Offi cer was formed as part of the reorganisation of the Bank’s structure. This division,

which is completely independent of the business divisions of the Bank, centralises all departments tasked with risk management such as

Legal and Compliance, Central Risk Management and Credit Risk Management, Credit Risk Controlling and Credit Portfolio Manage-

ment. Central Risk Management is further divided into Financial Markets Risk Management, Operational Risks and Economic Capital.

(a) Credit RiskThe Bank takes on exposure to credit risk which is the risk that a counterparty will be unable to pay amounts in full when due.

Credit Risk Management MethodologyIn managing credit risk, the Bank applies a unifi ed methodology which sets out applicable procedures, roles and authorities.

The lending policy includes:

• Prudent credit process guidelines, including procedures for the prevention of money laundering and fraudulent activities;

• General guidelines regulating the acceptability of client segments on the basis of their principal activities, geographical areas,

maximum maturity period, product and purpose of the loan;

• Principal methods for arriving at an internal rating of a borrower and its periodic review;

• Basic principles underlying the determination of the system of limits and the structure of approval authorities;

• Risk parameters calculation methodology;

• Rules of loan collateral management;

• Structure of basic product categories;

• Provision calculation methodology;

• Stress testing methodology; and

• Credit risk pricing methodology.

Breakdown of the Portfolio for Credit Risk Management PurposesFor credit risk management purposes, the Bank’s loan portfolio is broken down as follows:

• Retail receivables are receivables from individuals and small enterprises with the annual turnover of up to CZK 30 million. The

portfolio of retail receivables is further divided by type of counterparty and product for the purpose of regular analyses, and it is

230

further divided into smaller sub-portfolios as part of ad hoc analyses. The methods of managing the credit risk of retail receivables

are based on statistical models calibrated using historical data.

• Receivables from corporate counterparties include receivables from legal entities which do not comply with the ‘small enterprise’

defi nition. The portfolio of corporate receivables is further divided by counterparty type (large enterprises, mid-size enterprises,

project fi nancing and municipalities) for the purposes of regular analyses. The methods of managing the credit risk of corporate

receivables are based on statistical models (namely for the portfolio of receivables from mid-size enterprises), great emphasis is

also put on regular individual analysis of individual customers.

With exception of sporadic border-line cases, the implemented breakdown of the portfolio corresponds to the asset classes defi ned in

CNB Regulation 123/2007 which implements the Basel II rules.

For the purpose of provisioning, monitoring and predicting losses, the Bank differentiates between individually signifi cant and

individually insignifi cant exposures when managing credit risk. The credit risk attached to individually signifi cant exposures is

managed on an individual basis with the minor use of portfolio models. The Bank aggregates individually insignifi cant exposures

into portfolios and manages the risk on a portfolio basis. The Bank’s category of individually signifi cant exposures includes corporate

loans, including small and medium sized enterprises (SME), and private sector loans. Individually insignifi cant exposures include

retails loans to households, individuals, individuals – entrepreneurs and small municipalities (MSE).

Individually signifi cant loans include the Bank’s exposures exceeding CZK 5 million and they encompass the Bank’s corporate

portfolio. Corporate (individually signifi cant) loans are additionally split into 5 portfolios: large corporate customers (turnover

over CZK 1,000 million), small and medium sized enterprises (turnover from CZK 30 to 1,000 million), corporate mortgages,

municipality loans and loans from the Workout department. Corporate loans additionally match the corporate class (segment) of

assets under BASEL II.

Individually insignifi cant loans, including MSE loans, encompass the Bank’s retail loans and are additionally split into 15 product

portfolios. The key portfolios include mortgage retail loans, credit card loans, overdraft loans and consumer loans. The Bank’s retail

loans additionally match the ‘individuals/households’ assets class (segment) under BASEL II.

All loans are additionally segmented into default loans (non-performing) and non-default loans (performing). Default is defi ned using

the BASEL II criteria.

Collection of Key Risk Management InformationIn managing credit risk, the Bank refers not only to its own portfolio information but also the portfolio information of other members

of the Česká spořitelna Financial Group. The Bank additionally uses information obtained from external sources such as the Credit

Bureau or ratings provided by reputable rating agencies. As part of the preparation for the application of Regulations 2006/48/EU and

2006/49/EU (Basel II), the collected data were expanded and their quality markedly improved in the past. These data provide a basis

for modelling credit risk and as a support during debt recovery, valuation of receivables and calculation of losses.

Internal Rating ToolsThe internal rating of the Bank refl ects the ability of counterparties to meet with their fi nancial liabilities. The degree of the risk is

refl ected in the internal rating as a probability of default of the debtor in the following twelve months. This degree of risk complies

with the defi nition of new capital requirements set out in CNB Regulation 123/2007 (BASEL II).

231


The Bank allocates internal ratings to all loan receivables from customers. In addition to the rating of individuals and households, the

Bank uses the 13 degree rating scale of non-default categories and one group for “R” default customers. The scale for individuals and

households is 8 + R.

The defi nition of default of a debtor complies with the CNB Regulation referred to above and thus refl ects the debt status of any

portion of the receivable with the limit of 90 days and more past the due date, bankruptcy proceedings, insolvency or forced restructu-

ring of a receivable.

Individual customer segments (classes) are, under BASEL II, subject to various rating instruments and all of them are currently the

Erste Bank Group-wide standard.

Counterparties from the sovereign and banking segments are evaluated using a model which is unifi ed for the whole Erste Bank

Group. The model places great emphasis on independent external ratings of reputable counterparties.

Counterparties under specialised fi nancing and projects are also subject to the Group-wide instrument, but the rating model refl ects

local specifi cs of the legislative and economic environment and the specifi cs of project fi nancing and is primarily based on projected

cash fl ow.

Corporate customers are evaluated on the basis of their fi nancial strength, business information, business plan and credit history data.

The primary source of information includes fi nancial statements; less signifi cant weight is given to soft factors.

The rating of the small enterprises segment is based on similar foundations as the rating of corporates, but the overall rating substanti-

ally takes into account the solvency of the enterprise owner or the entrepreneur himself.

Individuals/households are evaluated on the basis of socio-demographic data, behavioural scoring and loan history, obtained primarily

from external registers of debtors (Credit Bureau) and historical data of the Bank and the Group.

The Bank uses its own model based on analysis of budgets in arriving at the internal ratings of its clients from among budget-driven

and subsidised organisations.

Ratings for corporate, small enterprises and individuals segments are prepared using a unifi ed Group-wide database designed to ensure

a conceptual compliance with the Group standard, but the setting of the models refl ects local economic and legislative conditions. This

database tool uses outputs from individual rating tools and facilitates the combination of multiple sources of information into one rating,

for example, for corporate clients, the outputs of fi nancial analysis and soft factors or behavioural scoring and repayment ability.

The Bank reviews ratings in respect of all segments on a regular basis. The rating of the banking, corporate and sovereign segments

is analysed at least annually on an individual basis. The Bank has developed ‘behavioural rating’ for retail customers where the Bank

updates the rating of a customer based on its activities in the Bank and its delinquency on a monthly basis.

In addition to the internal ratings outlined above, the Bank allocates risk-profi le groups to individual assets arising from the loan

arrangement according to CNB Regulation 123/2007. In accordance with this Regulation, the Bank maintains fi ve groups of risk

profi les, ranging from standard, watch, substandard, doubtful to loss receivables. Individual groups are differentiated according to the

number of past due dates of any portion of a receivable, bankruptcy status of a customer, forced restructuring of a receivable and the

internal anticipation of the Bank with regard to the timely and full repayment of the whole receivable balance.

232

The Bank also uses independent external ratings provided by reputable rating agencies. Based upon its historical experience, the Bank

has determined a transfer bridge between its own internal ratings and external ratings.

In compliance with the regulatory requirements arising from BASEL II, rating instruments are subject to regular annual validation by

the Risk Management Department and independent specialists (Internal Audit). In addition, the rating instruments are periodically

adjusted to refl ect changing economic conditions and the Bank’s plans, based on validations (results consistency testing) and perfor-

mance testing undertaken by the Credit Risk Management Department.

Exposure LimitsExposure limits are defi ned as the maximum exposure that the Bank may accept in respect of a client with a given rating and un-

derlying collateral. In setting the system of limits, the Bank strives to protect its revenues and capital from risk concentration. Risk

concentration is measured as the capital required for the given portfolio.

Structure of Approval AuthoritiesThe structure of approval authorities is derived from the principle of the materiality of the impact of a potential loss from a provided

loan on the Bank’s fi nancial performance and the risk profi le of the relevant loan transaction. The highest approval authorities rest

with the Credit Committee of the Supervisory Board and the Credit Committee of the Board of Directors. Lower approval authorities

are categorised taking account of the seniority of the staff of the Credit Risk Management Department.

Risk ParametersThe Bank uses its own internal models in determining risk parameters such as the probability of default (PD), loss given default

(LGD) and credit conversion factors (CCF). All of the models are developed according to Basel II requirements and were subject

to review by the regulator. The monitoring of historical risk parameters and their prediction serve as a basis for quantitative mana-

gement of the portfolio credit risk. The Bank currently uses risk parameters in monitoring portfolio risks, in-default loans portfolio

management, portfolio protection measurement and risk valuation. The active use of the risk parameters in managing the Bank makes

it possible to obtain detailed information about the possible sensitivity of basic portfolio segments on both internal and external chan-

ges. The PD risk parameter is monitored for individual internal rating grades (see above) with the exception of non-performing loans

(in default) where it is equal to 1. The LDG risk parameter is monitored in respect of homogenous 5 corporate product portfolios

and 15 product retail portfolios in regard to non-performing loans (in default). The CCF risk parameter is monitored for guarantees,

overdraft loans and credit card loans.

All models are back-tested at least annually and validated by independent specialists.

Provisions for Loan LossesThe Bank recognises provisions for incurred losses. In accordance with the historical cost principle and the requirements arising from

IAS 39 Financial Instruments: Recognition and Measurement, these losses are a result of past events. The Bank uses, to the maximum

extent possible, the data that are monitored within BASEL II but refers solely to the identifi ed historical information.

Loan loss provisions are determined for individually impaired loans and collectively impaired loans which include all performing

loans/loans that do fall into the ‘individually impaired loans’ category.

Individual Losses ComponentIndividually impaired receivables are receivables in default (receivables with the ‘R’ internal rating) and the defi nition of default com-

plies with Basel II requirements (a receivable is past due by more than 90 days or its full repayment is assessed as being unlikely).

233


The individual losses component covers losses arising from receivables impaired on an individual basis. Impairment of a receivable is

identifi ed based on loss making events that can be ascertained individually. Impairment of corporate receivables and retail receivables

with a value exceeding CZK 5 million (individually signifi cant exposures) is measured on an individual basis. The impairment

represents the difference between the net present value of expected future cash fl ows arising from the receivable using the original

effective interest rate and the carrying amount of the receivable.

The level of impairment of retail receivables (individually insignifi cant) is determined using the provisioning coeffi cients matrix.

Provisioning coeffi cients are derived from the historical values of probability of defaults (PD) and loss given default (LGD) in respect

of individual portfolios of individually insignifi cant exposures. The coeffi cients additionally refl ect durability of default.

All receivables are assessed by the Bank on a monthly basis to determine whether a loss making event or other changes occurred.

The estimated loss on the impairment of individually signifi cant exposures is reviewed at least on a quarterly basis for each exposure.

Collective Losses ComponentThe collective losses component represents the loss on collective impairment of individually unimpaired exposures. Collective

impairment covers losses arising from internal or external loss making events that cannot be allocated to individual exposures. Past

loss making events are measurable and identifi able in respect of the current portfolio. Collective impairment losses represent the

Bank’s reasonable estimate made on the basis of historical experience with the risk profi le of individual sub-portfolios of individually

unimpaired exposures.

The level of provisioning for these receivables is determined in accordance with the Group methodology refl ecting the probability

of default (PD), loss given default (LGD) and loss identifi cation period (LIP). In determining the amount of incurred loss, the Bank

adopts the same method of calculating historical PDs and LGDs which are used as a basis for the calculation of risk weighted assets

under BASEL II. The LIP parameter is set depending on the counterparty type – for corporate counterparties, it is anticipated that the

default is identifi ed within one year, the default on retail receivables is anticipated to be identifi ed within four months at the latest.

Given that the Bank has a customer defi nition of the default in place, the LIP parameter is identical for all retail products.

Restructured receivables are marked with the ‘R’ internal rating. As part of the half-year reviews of restructured receivables, the Bank

decides to improve the internal rating or to extend the monitoring period by another six months.

Management of the Credit Risk in the Trading PortfolioThe credit risk inherent in the trading portfolio is managed through the imposition of limits approved for individual counterparties.

CollateralCollateralisation of the Bank’s receivables arising from lending transactions is governed by the following principles: collateral

represents the Bank’s prevention and protection as a creditor and, in addition to the collateralising function itself, it is exclusively

a secondary source of repayment. The selection of individual collateral instruments and the composition of collateral depends on

the Bank’s loan products, requirements and professional assessment by the Bank’s responsible employee, always with respect to the

possibility of trouble-free realisation of the collateral.

The value of collateral is determined by reference to the market price valuation (nominal value of collateral). The market price is

taken to mean the arm’s length price (selling) or the price determined using a different valuation technique in terms of Section 2 (1)

and (3) of Property Valuation Act No. 151/1997 Coll.; however, always determined taking into account all the circumstances which

234

have a pricing impact, namely defects. If more market prices of the collateral determined using various valuation techniques are

available in a particular business transaction, the lower/lowest market price is used.

If the collateral instrument involves real estate, movable asset, business or its branch, trade mark, an asset declared as a historical mo-

nument, antiquities, paintings, jewels, manuscripts, etc. the price has to be determined on the basis of an appraisal made by an expert

appraiser contracted by the Bank or an internal appraiser for the purpose of evaluating the loan application. The expert appraisal or

price estimate must not be older than six months at the date when the loan contract is entered into. For real estate valuation purposes,

a detailed special ‘Methodology of Valuation of Real Estate for the Purpose of Advancing of a Loan, Including Mortgage Loans, at

Česká spořitelna’ is used.

The realisable value of collateral is determined using the collateral coeffi cient according to the Collateral Catalogue. In determining

the collateral coeffi cient/the realisable (fair) value of the collateral, it is necessary to assess individual instruments by their specifi c

features, e.g. real estate by the character of its construction, etc. and always following a physical inspection. The expert appraiser/

price estimate always has to be reviewed. Other conditions taken into account in determining the realisable value of the collateral are,

among others, as follows:

• Comprehensive assessment of all available and, for the particular case, signifi cant circumstances and background documentation;

• Insurance and pledge of a receivable arising from the insurance proceeds in favour of the Bank;

• Possibilities of the realisation of collateral at a particular time and place and the amount of the costs of the realisation which, in

most cases, needs to be viewed as a sale in distress; and

• Comparison to market trends.

In the event of doubt or any suspicion, the loan offi cer has to personally verify the actual physical and legal condition and nature of

collateral prior to determining the coeffi cient of recoverability.

The realisable value of collateral is determined using the collateral coeffi cient according to the Collateral Catalogue. The Collateral

Catalogue also includes requirements for periodical revaluation of collateral. Typically, the collateral value is analysed and updated

upon the regular monitoring/credit review of clients. With respect to credit product portfolios with a signifi cant amount of collateral,

the Bank uses portfolio models of updating collateral realisable values.

In addition, the Bank regularly monitors the loan to value ratio, mainly in respect of mortgage loans and project fi nancing loans.

Credit Risk PricingThe Bank uses historical experience and available data regarding PD, LGD and CCF to arrive at an indicate standard risk mark-up for

individual types of counterparties, levels of internal rating and products which are one of the pillars of the Bank’s pricing policy.

Stress TestingAt least on an annual basis, the Bank undertakes stress testing of the sensitivity of its portfolio to changes in macroeconomic factors

(such as change in the economic growth rate, change in interest rates and change in infl ation).

The breakdown on credit risk by industries is shown in Note 44.

(b) Market RiskThe Bank takes on exposure to market risks. Market risks arise from open positions in interest rate, currency, equity and commodity

fi nancial instruments, the value of which changes subject to general and specifi c fi nancial market movements. The Bank is primarily

235


exposed to the market risk arising from open positions in the trading book. A signifi cant component of the market risk is also the

interest rate risk associated with assets and liabilities included in the banking book.

Trading book transactions in the capital, money, interbank and derivative markets can be segmented as follows:

• Client quotations and client transactions, execution of client orders;

• Interbank and derivative market quotations (market making); and

• Proprietary trading in the interbank, derivative and capital markets.

The Bank enters into short-term transactions on its own account in the trading book, that is, the Bank opens positions with a view to

benefi ting from short-term fl uctuations in fi nancial markets, purchases higher-interest bearing assets funded by the sale of lower-inte-

rest bearing assets with the objective of using the interest spread to generate profi t, creates strategic positions, that is, positions opened

to benefi t from signifi cant movements in the prices of fi nancial assets.

The Bank trades with the following derivative fi nancial instruments through the over-the-counter (OTC) market:

• Foreign currency forwards (including non-delivery forwards) and swaps;

• Foreign currency options;

• Interest rate swaps;

• Asset swaps;

• Forward rate agreements;

• Cross-currency swaps;

• Interest rate options such as swaptions, caps and fl oors;

• Commodity derivatives (for gold and oil); and

• Credit derivatives.

In the area of exchange-traded derivatives, the Bank trades the following instruments:

• Bond futures;

• Interest rate futures;

• Commodity derivatives (gold and oil futures); and

• Options in respect of bond futures.

The Bank also trades, on behalf of its clients, with other less common currency options, such as digital, barrier or windowed options.

Certain option contracts or options on various underlying equity baskets or equity indices form part of other fi nancial instruments as

embedded derivatives.

Derivative fi nancial instruments are also entered into to hedge against interest rate risk inherent in the banking book (interest rate swaps,

FRA, swaptions) and to refi nance the mismatch between foreign currency assets and liabilities (FX swaps and cross currency swaps).

In addition to the calculation of sensitivities to individual risk factors, the Bank uses the ‘value at risk’ methodology (‘VaR’) to

estimate and manage the market risk of open positions held and to determine the maximum losses expected on these positions. The

Board of Directors establishes a VaR limit for the trading portfolio as the Bank’s maximum exposure of the trading portfolio to

market risk that may be accepted. VaR sub-limits in respect of individual trading desks and limits for sensitivity values of the trading

portfolio to individual risk factors such as foreign exchange rates, equity prices, interest rates, volatility and other risk parameters of

option contracts facilitate the maintenance of the overall market risk profi le. These limits are approved by the Financial Market and

Risk Management Committee and are monitored on a daily basis.

236

The market risk VaR indicator is also calculated for the banking book using special models for current accounts and other liabilities

without specifi ed maturity. The VaR of the banking book is reported to the Assets and Liabilities Committee on a monthly basis.

The VaR methodology includes all risk factors while refl ecting their mutual diversifi cation effect. As of 31 December 2007, the

value of VaR for the trading book and the one-day period on the 99 percent confi dence level, i.e. the maximum loss during one day,

was CZK 25.4 million which corresponds to a monthly VaR of CZK 116.5 million. The average of daily VaR values for 2007 was

CZK 20.3 million. The monthly VaR for the banking book as of 31 December 2007, i.e. the maximum loss during one month, was

CZK 835.9 million. The average of monthly VaR values for 2007 was CZK 768.8 million.

The VaR method is complemented with ‘back testing’ which is designed to review the model for correctness. Back testing involves

comparing daily estimates of VaR to the hypothetical results of the portfolio on the assumption that the positions within the portfolio

remain unchanged for one trading day. Back testing results have, to date, confi rmed the correctness of the setting of the VaR calcula-

tion model.

In addition, the Bank uses stress testing or an analysis of impacts of adverse developments in market risk factors on the market value

of the trading book. Scenarios are developed on the basis of historical experience and expert opinions of the Macroeconomic Analyses

Department. The stress testing is undertaken on a monthly basis and its results are reported to the Assets and Liabilities Committee.

Foreign Currency RiskForeign currency risk is the risk that the value of fi nancial instruments in both the trading and bank book will fl uctuate due to changes

in foreign exchange rates. The Bank manages this risk by establishing and monitoring limits on open positions, also including delta

equivalents of currency options. In addition, the Bank monitors special sensitivity limits for foreign currency option contracts, such

as limits for the delta equivalent sensitivity to the exchange rate change in the form of the gamma equivalent, and limits for option

contract fair value sensitivity to the exchange rate volatility in the form of the vega equivalent.

In addition, the Bank monitors the fair value sensitivity of options to the period to maturity (theta) and interest rate sensitivity (rho,

phi) which is measured, together with other interest rate instruments, in the form of the PVBP (Present Value of a Basis Point).

Foreign currency risk of all fi nancial instruments is transferred in the Trading Department’s positions which manages these currency

positions in accordance with the set currency sensitivity limits. In addition to the monitoring of limits, the Bank uses the VaR (“value

at risk”) concept for measuring the risk arising from open positions from all currency instruments. The Bank’s net open foreign

exchange rate position as of 31 December 2007 and 2006 is shown in Note 42. The value of currency risk in the form of VaR for one

day and 99 percent confi dence level was CZK 19.4 million as of 31 December 2007. The average of daily VaR values for foreign

currency risk was CZK 12.6 million. The VaR value for the currency volatility of the trading book was CZK 3.8 million. The average

of daily VaR values for the foreign currency volatility for 2007 was CZK 4.7 million.

Interest Rate RiskInterest rate risk is the risk that the value of fi nancial instruments will fl uctuate due to changes in market interest rates. The Bank mana-

ges the interest rate risk of the banking book through the monitoring of the repricing dates of the Bank’s assets and liabilities and using

models which show the potential impact that changes in interest rates may have on the Bank’s net interest income. Refer to Note 43.

In order to measure the interest rate risk exposure within the trading portfolio instruments, the Bank uses the ‘PVBP gap’ defi ned as

a matrix of sensitivity factors to interest rates by currency for individual portfolios of interest rate products. These factors measure

the portfolio market value sensitivity with a parallel shift of the yield curve of the relevant currency within the predefi ned period to

maturity. The system of PVBP limits is set in respect of each interest rate product portfolio by currency. The limits are compared to

237


the value that represents the greater of the sum of positive PVBP values or the sum of negative PVBP values in absolute terms for

each period to maturity. By adopting this approach, the Bank manages not only the risk attached to a parallel shift of the yield curve,

but also any possible ‘fl ip’ of the yield curve. With regard to foreign currency options, the PVBP limits also include the Rho and Phi

equivalents. In addition, the Bank monitors other special limits for interest rate option contracts, such as the gamma and vega limits

for interest rates and their volatility.

The VaR methodology is also used for the calculation of the interest rate risk of both the trading and banking books. The VaR value for

the interest rate risk of the trading book for one day and 99 percent confi dence level as of 31 December 2007 was CZK 20.4 million

which corresponds to a VaR value for one month of CZK 93.7 million. The average of daily VaR values for the interest rate risk for 2007

was CZK 15.2 million. The monthly VaR for the interest rate of the banking book as of 31 December 2007 was CZK 792 million. The

average of monthly VaR values for the interest rate risk for 2007 was CZK 727 million.

For monitoring and measuring the banking book interest rate exposures, the Bank uses a simulation model focused on monitoring

potential impacts of market interest rate movements on the Bank’s net interest income. Simulations are performed over the period

of 36 months. A basic analysis focuses on the sensitivity of the Bank’s net interest income to a one-off change(s) of market interest

rates (rate shock). In addition, the Bank undertakes probability modelling of its net interest income (stochastic simulation) and the

traditional gap analysis. The analyses noted above are undertaken on a monthly basis and the results are discussed by the Assets and

Liabilities Committee in the context of the overall development of fi nancial markets, Czech banking sector, as well as the structural

changes in the Bank’s balance sheet.

The following sensitivity analysis is based on the exposure of the Bank to interest rates for derivative and non-derivative instruments

as of the balance sheet date and the determined changes which occurred at the beginning of the year and are constant during the

reported period for the instruments with a variable interest rate. i.e., the model is based on the assumption that the funds released as

a result of the payment or sale of interest rate assets and liabilities will be re-invested in assets and liabilities with the same interest

rate sensitivity. As such, the model assumes the fi xed structure of the balance sheet according to interest rate sensitivity.

If the CZK interest rates increased/decreased by 100 points during the year and other variable interest rates remain unchanged:

• The profi t for 2008 would increase by CZK 460 million/decrease by CZK 460 million (2007: an increase of CZK 470 million/de-

crease of CZK 550 million); and

• The gains/losses from revaluation would increase by CZK –71/+73 million (2007: CZK –131/+137 million), namely as a result of

the changes in the fair value of securities with a fi xed interest rate in the available-for-sale portfolio.

The Bank monitors the impact of stress scenarios of the shifts of yield curves on the market value of the banking book. These stress

scenarios are determined in accordance with the regulatory rules as 1 percent or 99 percent quantiles of the year-on-year changes in

interest rates based on the fi ve year history of time series of individual maturities of yield curves in all currencies. As of 31 December

2007, this stress scenario would trigger a loss in the market value of the banking book of 1.5 percent of the Bank’s capital (a total of

the original and additional capital).

Equity RiskTo monitor and manage the equity risk inherent in the trading and banking books, the Bank uses the VaR method and sensitivity analysis

which is based on the exposure to the risk of change in the rate of shares as of the balance sheet date. With respect to the increased

volatility of share prices, the equity risk represents a signifi cant component of risks despite smaller volumes of share positions. As of 31

December 2007, the VaR value of the equity risk of the trading portfolio was CZK 6.5 million for one day and 99 percent confi dence

level (CZK 30 million for a one-month period). The average of daily VaR values for the equity risk for 2007 was

238

CZK 3.8 million. The VaR value for equity risk of the banking book for one month as of 31 December 2007 and at the same confi -

dence level was CZK 78.4 million. The average of monthly VaR values for the equity risk for 2007 was CZK 74.1 million.

Capital Requirement in Respect of Market RisksSince December 2003, the Bank has used its internal model approved by the Czech National Bank in November 2003 to calculate its

B capital requirements. The capital requirement in respect of market risks (foreign currency risk, general interest rate risk, general and

specifi c equity risk and risk associated with trading book option contracts) is determined using the Value at Risk method. The model

is based upon the calculation of Value at Risk with a 99 percent confi dence level and a 10 day holding period using the historical

simulation method.

(c) Liquidity RiskLiquidity risk is the risk that the Bank will encounter diffi culties in raising funds to satisfy its fi nancial liabilities when they mature or

in fi nancing its assets. The Bank’s short-term liquidity position is monitored and managed based on expected cash fl ows and adjusting

the structure of interbank deposits and placements accordingly and/or taking other decisions aimed at adjusting the short-term

liquidity position of the Bank, for example, taking a decision to balance the short-term liquidity position in individual currencies.

The mid-term and long-term liquidity is monitored on a monthly basis through the Traffi c Light System (TLS) simulation model

which takes into account the anticipated possibility of renewal, preliminary repayment or sale of the Bank’s individual positions. The

results are presented and discussed in the Operating Liquidity Committee (OLC) and the Assets and Liabilities Committee which

decide on the need to take measures with respect to liquidity risk exposure.

The analysis of the balance sheet as of 31 December 2007 and 2006 by maturities is provided in Note 46. This analysis shows

derivatives at fair values as of the balance sheet date.

(d) Operational RiskIn accordance with CNB Regulation 123/2007, the Bank defi nes operational risk as the risk of loss arising from the inappropriateness

or failure of internal processes, human errors or failures of systems or the risk of loss arising from external events, including loss due

to the breach of or failure to fulfi l legal regulations.

With assistance from Erste Bank Vienna, the Bank put in place a standardised categorisation of operational risks. This classifi cation

became the basis of the ‘Book of Risks of Česká spořitelna’, developed in cooperation with the Risk Management and Internal Audit

Departments. The Book of Risks is a tool used to achieve unifi cation of risk identifi cation procedures on a group-wide level and

unifi cation of risk categorisation in order to ensure consistency of risk monitoring and evaluation.

The Bank has cooperated with an external supplier in developing a specialised software application to collect data about operational

risk which conforms to the data collection requirements set out in BASEL II. The data is not only used with a view to quantifying

operational risks and monitoring trends in the development of these risks but also for the purpose of preventing recurrence of operati-

onal risks. In addition to monitoring actual occurrence of operational risk, the Bank also pays attention to how the operational risk is

perceived by the Bank’s management. This expert risk analysis is assessed annually.

A tool of importance in mitigating losses arising from operational risks is the Bank’s insurance programme put in place in 2002. This

insurance programme involves insurance of property damage as well as risks arising from banking activities and liability risks. Since

2004, the Bank and its subsidiaries have joined the Erste Bank Group insurance programme which expands the Bank’s insurance

protection specifi cally with regard to damage that may materially impact its profi t or loss.

239


(e) Capital RiskThe Bank has identifi ed the following risks which should be covered entirely or partially by capital: market risks, interest rate risk of

the banking book, credit risk and concentration risk, liquidity risk, operational risk, reputation risk, strategic risk, business risk and

residual risk of securitisation.

The principal objectives of the Bank in managing capital risks are as follows:

• Quantifi cation of risks in the form of economic capital which is needed to cover potential losses arising from these risks;

• Comparison of capital requirements with capital resources;

• Management of capital resources with respect to current and future risks;

• Determination of the maximum acceptable degree of risks with respect to available capital resources;

• Monitoring and management of the performance of business activities with respect to the risk or the capital requirements; and

• Strategic planning with respect to the risk, allocated capital resources and capital effi ciency of individual business activities of the

Bank and the fi nancial group.

To calculate the economic capital for the market, credit, interest rate, securitisation and operational risks, the Bank uses the Value

at Risk (VaR) methodology for a one-year period on the confi dence level of 99 percent which corresponds approximately to Česká

spořitelna’s rating (A–) and the relevant probability of default of the customer. To calculate other risks, the Bank uses an estimate

of the impact of risk scenarios modelled on an identical confi dence level (liquidity risk) or an expert estimate of the unexpected loss

(business, reputation, strategic risks) based on the experience of the Bank’s managers and historical data.

The aggregate value of the economic capital or capital requirements is determined as the sum of economic capital for individual

risks (for the purpose of allocating capital to individual business departments) or as aggregate economic capital (for the purpose

of comparison with available capital resources to cover risks). The resulting aggregate risk capital is compared to capital resources

determined in accordance with the regulatory rules as the sum of basic and additional capital and the profi t for the current year taking

into account the anticipated payment of dividends. This comparison of the risk and capital resources (risk capacity) is submitted to the

Assets and Liabilities Committee (ALCO) on a quarterly basis.

41. OFF BALANCE SHEET ITEMS AND DERIVATIVE FINANCIAL INSTRUMENTS

In the normal course of business, the Bank becomes a party to various fi nancial transactions that are not refl ected on the balance sheet

and are referred to as off balance sheet fi nancial instruments. The following represent notional amounts of these off balance sheet

fi nancial instruments, unless stated otherwise.

(a) Contingent Liabilities

Legal DisputesAt the balance sheet date the Bank was involved in various claims and legal proceedings of a nature considered normal to its business.

The Czech legal environment is still evolving, legal disputes are costly and their outcome unpredictable. Many parts of the legislation

remain untested and there is uncertainty about the interpretation that courts may apply in a number of areas. The impact of these

uncertainties cannot be quantifi ed and will only be known as the specifi c legal disputes in which the Bank is named are resolved.

The Bank is involved in various claims and legal proceedings of a special nature. The Bank also acts as a defendant in a number of

legal disputes fi led with the arbitration court. The Bank does not disclose the details underlying the disputes as the disclosure may

have an impact on the outcome of the disputes and may seriously harm the Bank’s interests.

240

Whilst no assurance can be given with respect to the ultimate outcome of any such claim or litigation, the Bank believes that the

various asserted claims and litigation in which it is involved will not materially affect its fi nancial position, future operating results or

cash fl ows.

Assets PledgedAssets are pledged as collateral under repurchase agreements with other banks and customers in the amount of CZK 13,958 million

(2006: CZK 10,977 million). Mandatory reserve deposits are also held with the local central bank in accordance with statutory

requirements (refer to Note 5). These deposits are not available to fi nance the Bank’s day to day operations.

Commitments to Extend Credit and Commitments from Guarantees and Letters of CreditGuarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that

a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of

credit, which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to

a stipulated amount under specifi c terms and conditions, are collateralised by the underlying shipments of goods to which they relate

and therefore carry less risk than a direct borrowing.

Commitments to extend credit represent unused portions of clients’ authorisations to extend credit in the form of loans, guarantees or

letters of credit. The credit risk attached the commitments to extend credit represents a potential loss for the Bank. The Bank estima-

tes the potential loss on the basis of historical developments of credit conversion factors, probability of default and loss given default.

Credit conversion factors indicate the likelihood of the Bank paying out on a guarantee or having to grant a loan on the basis of an

issued commitment to extend credit.

Guarantees, irrevocable letters of credit and undrawn loan commitments are subject to similar credit risk monitoring and credit

policies as utilised in the extension of loans. Management of the Bank believes that the market risk associated with guarantees,

irrevocable letters of credit and undrawn loans commitments is minimal.

In 2007, the Bank recorded provisions for off balance sheet risks to cover potential losses that may be incurred in connection with

these off balance sheet transactions. As of 31 December 2007, the aggregate balance of these provisions was CZK 143 million

(2006: CZK 100 million). Refer to Note 24.

CZK mil. 2007 2006

Guarantees and letters of credit 44,577 23,899


(b) DerivativesThe Bank maintains strict control limits on net open derivative positions, ie, the difference between the fair values of purchase and

sale contracts. At any one time the amount subject to credit risk is limited to the positive fair value of derivative fi nancial instruments,

which is only a small fraction of the contract or notional values used to express the volume of instruments outstanding. This credit

risk exposure is managed as part of the overall lending limits with customers. Limits are established refl ecting the risk of fair value

fl uctuations arising from market movements. Collateral or other security is not usually obtained for credit risk exposures on the

derivative fi nancial instruments, except where the Bank requires deposits from counterparties.

All derivatives are stated at fair value on the balance sheet as of 31 December 2007 and 2006 (refer to Notes 11 and 22).

241


(c) Foreign Currency ContractsForeign currency contracts are agreements to exchange specifi c amounts of currencies at a specifi ed rate of exchange, at a spot date

(settlement occurs two days after the trade date) or at a forward date (settlement occurs more than two days after the trade date). The

notional amount of these contracts does not represent the actual market or credit risk associated with these contracts.

Foreign currency contracts are used by the Bank for risk management and trading purposes.

Notional amounts CZK mil. 2007 2006

Trading instruments



(d) Interest rate swapsInterest rate swap contracts obligate two parties to exchange one or more payments calculated by reference to fi xed or periodically

reset rates of interest applied to a specifi c notional principal amount. Notional principal is the amount upon which interest rates are

applied to determine the payment streams under interest rate swaps. Such notional principal amounts are often used to express the

volume of these transactions but are not actually exchanged between the counterparties. The Bank’s interest rate swaps were princi-

pally transacted for propriety trading purposes, to hedge customer-oriented transactions or to hedge against interest rate risk.

The Bank has applied hedge accounting in respect of the interest rate exposure arising from its own issue of mortgage bonds. The

mortgage bonds issued with a fi xed interest rate were linked to a fl oating market rate through interest rate swaps.

At 31 December 2007

Notional amounts

CZK mil. Weighted average interest rate

Receive Pay

Hedging instruments

Remaining maturity:

– less than 1 year – – –

– 1 to 5 years 4,744 3.43% 3.46%

– over 5 years 11,257 3.47% 3.71%

Total 16,001 3.46% 3.64%

Trading instruments

Remaining maturity:

– less than 1 year 155,825 3.06% 3.55%

– 1 to 5 years 328,745 3.26% 3.53%

– over 5 years 151,763 2.68% 3.33%

Total 636,333 3.07% 3.49%

242

At 31 December 2006

Notional amounts

CZK mil. Weighted average interest rate

Receive Pay

Hedging instruments

Remaining maturity:

– less than 1 year 90 2.55% 4.45%

– 1 to 5 years 9,360 3.30% 2.58%

– over 5 years 6,750 3.65% 2.71%

Total 16,200 3.44% 2.64%

Trading instruments

Remaining maturity:

– less than 1 year 138,987 3.06% 2.97%

– 1 to 5 years 279,624 3.20% 3.62%

– over 5 years 136,009 3.47% 3.43%

Total 554,620 3.23% 3.41%

(e) Option ContractsOption contracts represent the formal reservation of the right to buy or sell an asset at the specifi ed quantity, within a given time in the

future and at a certain price. The buyer of the option has the right, but not the obligation, to exercise the right to buy or sell an asset

and the seller has the obligation to sell or purchase the asset at the specifi ed quantity and at the price defi ned in the option contract.

CZK mil.

Notional amounts

2007 2006

Hedging instruments

Remaining maturity:

– less than 1 year – –

– 1 to 5 years 684 738

– more than fi ve years – –

Total 684 738

Trading instruments

Option contracts sold

interest rate 21,273 24,624

foreign currency 96,309 48,671

equity 2,118 1,828

commodity 128 –

Option contracts purchased

interest rate 21,273 24,624

foreign currency 94,359 48,756

equity 2,118 1,828

commodity 128 –

243


(f) Forward Rate AgreementsA forward rate agreement is an agreement to settle amounts at a specifi ed future date based on the difference between an interest rate in-

dex and an agreed upon fi xed rate. Market risk arises from changes in the market value of contractual positions caused by movements in

market interest rates. In principle, the Bank limits its exposure to market risk by entering into generally matching or offsetting positions

and by establishing and monitoring limits on unmatched positions. Credit risk is managed through approval procedures that establish

specifi c limits for individual counterparties. All of the Bank’s forward rate agreements were entered into for trading purposes.

Notional amounts 2007 2006

CZK mil. Weighted

average rate

CZK mil. Weighted

average rate

Trading instruments

Remaining maturity:

Purchase

– less than 1 year 197,180 3.58% 187,700 3.20%

– 1 to 5 years 17,000 4.49% 15,000 3.65%

Total 214,180 3.65% 202,700 3.23%

Sale

– less than 1 year 197,180 3.45% 187,700 3.11%

– 1 to 5 years 17,000 4.19% 15,000 3.73%

Total 214,180 3.51% 202,700 3.16%

(g) Swap and Forward Contracts with SecuritiesSwap and forward contracts with securities are agreements to purchase or sell the securities for a specifi c amount at a future date. The

swap and forward contracts with securities are used by the Bank for trading purposes.

CZK mil.

Notional amounts

2007 2006

Forward contracts with equities

Commitments to purchase 8 117

Commitments to sell 8 115

Swap contracts with equities



244

(h) Cross Currency Swaps and ForwardsCross currency swaps are combinations of interest rate swaps and foreign currency contracts. As with interest rate swaps, the Bank

agrees to make fi xed versus fl oating interest payments at periodic dates over the life of the instrument. These payments are, however,

in different currencies, and are settled on a gross basis. Unlike interest rate swaps, the notional balances of the different currencies are

typically exchanged at the beginning and re-exchanged at the end of the contract period.

CZK mil.

Notional amounts

2007 2006

Swaps – trading instruments



Forwards – trading instruments



(i) Other DerivativesThe Bank entered into transactions resulting in the Bank assuming risk on certain underlying debt securities denominated in a foreign

currency. As of 31 December 2007, the total notional amount of credit derivatives was CZK 311 million (2006: CZK 310 million).

(j) FuturesFutures contracts represent the obligation to sell or purchase a fi nancial instrument in the organised market at a certain price at a cer-

tain agreed date in the future. The Bank entered into futures contracts in respect of debt securities and equities for trading purposes.

As of 31 December 2007, the total notional amount of the futures transactions was CZK 5,800 million (2006: CZK 15,564 million).

245


42. NET FOREIGN EXCHANGE POSITIONS

The net foreign exchange positions of the Bank as of 31 December 2007 and 2006 were as follows:

At 31 December 2007

CZK mil.

CZK EUR USD GBP SKK HUF PLN Other Total

Assets

Cash and balances with the CNB 17,956 999 241 112 113 19 25 218 19,683

Loans and advances to fi nancial institutions 35,971 11,324 6,700 555 54 11 212 693 55,520

Loans and advances to customers, net of provisions 353,440 15,125 1,072 123 268 1 115 251 370,395

Securities at fair value through profi t or loss 27,595 16,157 3,110 – 851 3,102 1,912 117 52,844

Positive fair value

of fi nancial derivative transactions 16,657 610 157 – 69 54 18 7 17,572

Securities available for sale 5,033 5,592 104 – – – – – 10,729

Securities held to maturity 98,310 3,272 – – – – – – 101,582

Equity investments in subsidiary

and associated undertakings 3,540 5,612 – – 69 – – – 9,221

Other assets 26,304 675 177 5 1 – 61 277 27,500

584,806 59,366 11,561 795 1,425 3,187 2,343 1,563 665,046

Liabilities

Amounts owed to fi nancial institutions 16,567 14,930 4,840 1 0 786 693 1,095 38,912

Amounts owed to customers 453,854 13,794 3,020 431 213 2,552 265 276 474,405

Liabilities at fair value 7,487 72 50 – – – – – 7,609

Negative fair value

of fi nancial derivative transactions 9,984 789 208 – 53 11 20 1 11,066

Bonds in issue 58,608 250 – – – – – – 58,858

Other liabilities 20,225 1,479 312 6 12 4 50 259 22,347

566,725 31,314 8,430 438 278 3,353 1,028 1,631 613,197

Net foreign exchange position

– on balance sheet 18,081 28,052 3,131 357 1,147 (166) 1,315 (68) 51,849


– off balance sheet 39,189 (28,513) (3,078) (254) 221 (528) (678) 179 6,538

The line ‘Other assets’ includes other assets, property and equipment, intangible fi xed assets and assets held for sale. The line ‘Other

liabilities’ includes other liabilities, provisions, and subordinated debt.

On the grounds of materiality, the analysis of the foreign exchange position as of 31 December 2007 presented separately assets and

liabilities denominated in HUF. As of 31 December 2006, the assets and liabilities denominated in HUF were reported as part of other

currencies.

246

At 31 December 2006

CZK mil.

CZK EUR USD GBP SKK Other Total

Assets

Cash and balances with the CNB 20,798 993 202 131 138 253 22,515

Loans and advances to fi nancial institutions 45,546 7,556 5,381 29 1,488 1,085 61,085

Loans and advances to customers, net of provisions 274,782 14,581 1,299 178 101 382 291,323

Securities at fair value through profi t or loss 25,252 15,871 3,643 – 113 4,017 48,896

Positive fair value of fi nancial derivative transactions 17,432 668 116 – 79 46 18,341

Securities available for sale 6,285 5,175 121 – – – 11,581

Securities held to maturity 96,880 3,380 – – – – 100,260


and associated undertakings 3,272 3,614 – – – 69 6,955

Other assets 23,347 633 187 16 6 17 24,206

513,594 52,471 10,949 354 1,925 5,869 585,162

Liabilities

Amounts owed to fi nancial institutions 25,703 1,581 3,822 75 – 2,078 33,259

Amounts owed to customers 411,054 12,997 3,560 404 147 2,496 430,658

Negative fair value of fi nancial derivative transactions 11,933 573 124 – 10 43 12,683

Bonds in issue 36,316 147 – – – 0 36,463

Other liabilities 24,256 1,473 287 28 11 17 26,072

509,262 16,771 7,793 507 168 4,634 539,135


– on balance sheet 4,332 35,700 3,156 (153) 1,757 1,235 46,027


– off balance sheet (113,949) 12,827 (592) (517) 115 (4,587) (106,703)


liabilities’ includes other liabilities, provisions, and subordinated debt.

43. INTEREST RATE RISK

(a) Interest rate repricing analysisThe following tables present the distribution of assets and liabilities according to the interest rate repricing dates. They include sig-

nifi cant fi nancial assets and liabilities in CZK, EUR and USD as of 31 December 2007 and 2006. Variable yield assets and liabilities

have been reported according to their next rate repricing date. Fixed income assets and liabilities have been reported according to their

remaining maturity.

247


At 31 December 2007

CZK mil.

Demand and

less than

1 month

1 to

3 months

3 months

to 1 year


Selected assets


Loans and advances to fi nancial institutions 35,913 1,508 13,236 4,645 218 55,520


Securities at fair value through profi t or loss 2,129 1,913 7,705 19,913 11,748 43,408

Securities available for sale 698 5,597 1,576 2,815 – 10,686


126,761 99,453 102,550 191,487 66,092 586,343


Amounts owed to fi nancial institutions 20,925 2,805 3,437 152 11,528 38,847

Amounts owed to customers 87,480 75,835 105,322 201,362 – 469,999

Bonds in issue 9,445 5,949 10,370 10,769 22,325 58,858


117,850 84,589 124,734 212,283 33,853 573,309

Current gap 8,911 14,864 (22,184) (20,796) 32,239 13,034

Cumulative gap 8,911 23,775 1,591 (19,205) 13,034

At 31 December 2006

CZK mil.

Demand and

less than

1 month

1 to

3 months

3 months to

1 year


Selected assets


Loans and advances to fi nancial institutions 49,280 4,818 4,385 – – 58,483


Securities at fair value through profi t or loss 27,251 1,008 493 8,164 2,274 39,190

Securities available for sale 885 2,955 2,201 5,498 – 11,539


177,974 65,668 69,560 153,691 41,768 508,661


Amounts owed to fi nancial institutions 26,220 4,440 293 153 – 31,106

Amounts owed to customers 80,520 68,573 93,111 179,728 – 421,932

Bonds in issue 3,890 1,406 4,063 15,284 11,821 36,464


110,630 74,419 103,353 195,165 11,821 495,388

Current gap 67,344 (8,751) (33,793) (41,474) 29,947 13,273

Cumulative gap 67,344 58,593 24,800 (16,674) 13,273

In addition, the Bank enters into interest rate swaps to manage its interest rate risk exposure.

248

(b) Effective yield informationThe effective yields of signifi cant fi nancial assets and liabilities by major currencies of the banking segment as of 31 December 2007

and 2006 are as follows:


interest rate

Weighted average

interest rate

Weighted average

interest rate

Weighted average

interest rate

CZK EUR USD TOTAL

Selected assets

Cash and balances with the CNB 3.09% 4.00% 0.00% 3.11%





Securities held to maturity 4.23% 5.66% 0.00% 4.28%




Bonds in issue 3.59% 3.97% 0.00% 3.59%



interest rate

Weighted average

interest rate

Weighted average

interest rate

Weighted average

interest rate

CZK EUR USD TOTAL

Selected assets

Cash and balances with the CNB 2.50% 3.50% 0.00% 2.51%





Securities held to maturity 4.17% 4.86% 0.00% 4.20%




Bonds in issue 3.06% 3.16% 0.00% 3.06%


249


(c) Interest rate paymentsThe following tables present expected cash fl ows from received/paid interest on selected assets and liabilities according to individual

time buckets:

At 31 December 2007

CZK mil.

Demand and

less than

1 month

1 to

3 months

3 months

to 1 year


Selected assets





Securities available for sale 38 52 108 222 – 420


2,338 3,545 11,635 31,019 14,058 62,595



Amounts owed to customers 323 519 1,726 3,648 – 6,216

Bonds in issue 162 269 992 3,732 3,624 8,779


587 874 2,857 7,391 3,624 15,333

Current gap 1,751 2,671 8,778 23,628 10,434 47,262

Cumulative gap 1,751 4,422 13,200 36,828 47,262

At 31 December 2006

CZK mil.

Demand and

less than

1 month

1 to

3 months

3 months

to 1 year


Selected assets

Cash and balances with the CNB 9 0 0 0 0 9

Loans and advances to fi nancial institutions 83 35 49 0 0 167

Loans and advances to customers, net of provisions 1,187 1790 6,106 14,955 4,537 28,575


Securities available for sale 32 52 164 360 0 608


1,728 2,549 8,852 23,900 9,988 47,017


Amounts owed to fi nancial institutions 47 19 6 8 0 80

Amounts owed to customers 244 390 1,291 2,732 0 4,657

Bonds in issue 88 162 668 2,380 1,807 5,105

Subordinated debt 16 32 72 0 0 120

395 603 2,037 5,120 1,807 9,962

Current gap 1,333 1,946 6,815 18,780 8,181 37,055

Cumulative gap 1,333 3,279 10,094 28,874 37,055

250

44. CONCENTRATIONS OF CREDIT RISK

The Bank is exposed to credit risk arising from the following items:

CZK mil. 2007 2006

Credit risk exposures relating to on-balance sheet items

Cash and with the Czech National Bank 4,964 8,527


Loans and advances to customers, net of provisions 370,395 291,323

a) Retail loans including loans to individuals – businessmen 183,579 140,143

– Overdraft loans 6,811 6,537

– Credit cards 2,951 2,370

– Other loans 59,917 48,715

– Mortgage loans 113,900 82,521

b) Corporate loans 186,816 151,180

– Large enterprises 56,813 43,037

– Small companies 24,083 19,395

– Small and medium sized enterprises (SMEs) 45,993 38,904

– Corporate mortgages 44,901 29,043

– Municipalities and public sector 15,026 20,801

Positive fair value of fi nancial derivative transactions 17,572 18,341

Financial assets at fair value through profi t or loss

– Debt securities held for trading 26,121 25,639

– Debt securities designated upon initial recognition as at fair value through profi t or loss 17,287 14,632

Debt securities available for sale 10,687 11,538

Debt securities held to maturity 101,582 100,260

Credit risk exposure relating to off-balance sheet items

Amounts owed from guarantees and letters of credit 44,577 23,899


Total 742,765 645,511

The resulting credit exposure as of 31 December 2007 and 2006 represents a worst case scenario, without taking into account any

collateral held or other credit enhancements attached. For on-balance sheet assets, the exposures set out above are based on net

carrying amounts as reported in the balance sheet.

As shown above, 57 percent of the total exposure is derived from loans and advances to fi nancial institutions and customers

(2006: 55%); 21 percent represents investments in debt securities (2006: 24%).

251

Unconsolidated Statements of Cash Flows for the Years Ended 31 December 2007 and 2006Notes to the Unconsolidated Financial StatemepntsReport on Relations between Related Parties

Set out below is a summary of loans and advances to customers and fi nancial institutions and debt securities by individual sectors in

the distribution of the credit exposure of the Bank:

CZK mil. 2007 2006

Financial institutions 148,473 26% 145,984 29%

Resident individuals 177,194 30% 134,451 26%

Trade 29,444 5% 24,251 5%

Energy sector 6,934 1% 4,070 1%

State institutions 77,706 13% 82,911 16%

Public sector 18,002 3% 15,299 3%

Construction industry 7,170 1% 5,540 1%

Hotels, public catering services 2,955 1% 2,354 –

Manufacturing industry 35,510 6% 30,518 6%

Other 84,308 14% 64,274 13%

Total 587,696 509,652

The geographical concentration of assets and liabilities is detailed in Note 48b.

45. ASSET QUALITY

The following tables show the assessment of asset quality using external ratings by a reputable rating agency:

31 December 2007

CZK mil.

AAA AA– to

AA+

A–

to A+

Lower

than A

Unrated Total

Securities held for trading 149 – 25,309 1,184 1,794 28,436

Securities at fair value through profi t or loss 6,773 5,251 5,919 6,465 – 24,408

Securities available for sale 510 1,772 5,798 2,607 42 10,729


Total 10,693 18,985 115,646 17,995 1,836 165,155

31 December 2006

CZK mil.

AAA AA– to

AA+

A–

to A+

Lower

than A

Unrated Total

Securities held for trading 888 126 23,104 827 2,858 27,803

Securities at fair value through profi t or loss 3,903 5,101 5,278 6,811 – 21,093

Securities available for sale 872 1,428 7,746 1,493 42 11,581


Total 7,948 11,572 121,019 17,298 2,900 160,737

252

The following tables show the assessment of asset quality using internal ratings:

31 December 2007

CZK mil.

Investment

grade

(1–4c)

Standard

monitoring

(5–6)

Special

monitoring

(7–8)

Sub–standard

(R)

Total


– Overdraft loans 4,522 950 362 257 6,091

– Credit cards 2,233 465 230 248 3,176

–Other loans 44,281 6,979 2,811 2,205 56,276

–Mortgage loans 97,435 9,441 3,141 1,543 111,560

MSE

– Overdraft loans 866 1,631 83 219 2,799

–Mortgage loans 5,021 11,668 524 417 17,630

–Other loans 4,199 8,648 508 564 13,919

Corporate loans

–Large enterprises 22,699 33,908 3,578 907 61,092

–Small and medium sized enterprises (SMEs) 10,834 31,176 3,280 2,349 47,639

– Other 25,016 29,358 1,131 813 56,318



31 December 2006

CZK mil.

Investment

grade

(1–4c)

Standard

monitoring

(5–6)

Special

monitoring

(7–8)

Sub–standard

(R)

Total


– Overdraft loans 4,263 990 294 218 5,765

– Credit cards 1,823 344 184 158 2,509

–Other loans 36,507 5,152 2,272 2,242 46,173

–Mortgage loans 64,317 10,771 4,141 918 80,147

MSE

–Overdraft loans 550 1,917 112 167 2,746

–Mortgage loans 2,708 11,238 473 147 14,566

–Other loans 2,542 7,448 465 406 10,860

Corporate loans

–Large enterprises 15,853 29,115 2,918 1,448 49,334

–Small and medium sized enterprises (SMEs) 8,722 27,130 2,466 1,823 40,141

–Other 16,687 27,169 219 181 44,256



253


46. MATURITY ANALYSIS

The table below analyses assets and liabilities of the Bank into relevant maturity groupings as of 31 December 2007, based on the

remaining period at the balance sheet date to the contractual maturity date (remaining maturity).

CZK mil. Demand

and less

than

1 month

1 to

3 months

3 months

to 1 year

1 to

5 years

Over

5 years

Not

specifi ed

Total

Assets

Cash and balances with the CNB 17,141 – 40 – – 2,502 19,683


Loans and advances to customers, net of provisions 15,909 10,313 74,764 113,286 141,918 14,205 370,395


Positive fair value of fi nancial derivative transactions 904 1,264 1,840 5,572 7,992 – 17,572

Securities available for sale – 1,345 640 6,039 2,662 43 10,729

Securities held to maturity – 3,103 11,794 55,182 31,503 – 101,582


and associated undertakings – – – – – 9,221 9,221

Other assets 3,708 832 2,312 – – 20,648 27,500

Total 73,951 18,661 112,456 205,024 198,899 56,055 665,046

Liabilities

Amounts owed to fi nancial institutions 20,990 2,805 3,437 152 11,528 – 38,912

Amounts owed to customers 390,134 21,504 15,382 47,385 – – 474,405

Liabilities at fair value 16 – 3,124 3,926 543 – 7,609

Negative fair value

of fi nancial derivative transactions 652 1,001 1,894 5,143 2,376 – 11,066

Bonds in issue 4,804 1,464 4,244 11,741 36,605 – 58,858


Other liabilities 4,155 781 434 83 19 11,270 16,742

Total 420,751 27,555 28,515 68,430 56,676 11,270 613,197

Current gap (346,800) (8,894) 83,941 136,594 142,223 44,785 51,849

Cumulative gap (346,800) (355,694) (271,753) (135,159) 7,064 51,849


liabilities’ includes other liabilities and provisions.

254

The table below analyses assets and liabilities of the Bank into relevant maturity groupings as of 31 December 2006, based on the

remaining period at the balance sheet date to the contractual maturity date.

Demand

and less

than

1 month

1 to

3 months

3 months

to 1 year

1 to

5 years

Over

5 years

Not

specifi ed

Total

Assets

Cash and balances with the CNB 14,433 – – – – 8,082 22,515

Loans and advances to fi nancial institutions 49,517 2,667 4,329 4,572 – – 61,085

Loans and advances to customers, net of provisions 13,662 8,450 67,770 89,878 101,481 10,082 291,323


Positive fair value of fi nancial derivative transactions 976 350 657 2,406 4,690 9,262 18,341

Securities available for sale – – 1,404 7,482 2,652 43 11,581

Securities held to maturity – 7,116 4,314 63,246 25,584 – 100,260


and associated undertakings – – – – – 6955 6,955

Other assets 2,142 1,140 1,783 4 – 19,137 24,206

Total 80,816 19,857 83,937 193,889 144,478 62,185 585,162

Liabilities

Amounts owed to fi nancial institutions 28,282 512 384 153 3,928 – 33,259

Amounts owed to customers 345,548 17,747 16,854 50,509 – – 430,658

Negative fair value

of fi nancial derivative transactions 268 312 1,049 1,669 185 9,200 12,683

Bonds in issue 3,799 – 2,947 15,655 14,062 – 36,463


Other liabilities 3,657 3,972 347 2,432 815 8,963 20,186

Total 381,554 22,543 21,581 70,418 24,876 18,163 539,135

Current gap (300,738) (2,686) 62,356 123,471 119,602 44,022 46,027

Cumulative gap (300,738) (303,424) (241,068) (117,597) 2,005 46,027

The line ‘Other assets’ includes other assets, property and equipment, intangible fi xed assets. The line ‘Other liabilities’ includes other

liabilities, provisions and liabilities at fair value.

47. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value estimates are made based on relevant market data and information about the fi nancial instruments. Because no readily

available market prices exist for a signifi cant portion of the Bank’s fi nancial instruments, fair value estimates for these instruments are

based on judgements regarding current economic conditions, currency and interest rate characteristics and other factors.

255


Many of these estimates involve uncertainties and matters of signifi cant judgement and cannot be determined with precision. There-

fore, the calculated fair value estimates cannot always be substantiated by comparison to market values and, in many cases, may not

be realised in the current sale of the fi nancial instrument. Changes in underlying assumptions could signifi cantly affect the estimates.

The following table summarises the carrying values and fair values of those fi nancial assets and liabilities not presented on the

balance sheet at their fair value.

CZK mil. Carrying value

2007

Estimated fair value

2007

Carrying value

2006

Estimated fair value

2006

Financial assets

Loans and advances to fi nancial institutions 55,520 55,474 61,085 61,085

Loans and advances to customers, net of provisions 370,395 367,502 291,323 292,565

Securities held to maturity 101,582 101,096 100,260 103,136

Financial liabilities

Amounts owed to fi nancial institutions 38,912 38,367 33,259 33,251

Amounts owed to customers 474,405 473,935 430,658 430,443

Bonds in issue 58,858 57,970 36,463 36,515

Subordinated debt 5,605 5,611 5,886 5,889

Loans and Advances to Financial InstitutionsThe fair value of loans and advances to fi nancial institutions is estimated as the present value of discounted future cash fl ows and the

applied discount factor is equal to the interest rates currently offered by the Bank.

Loans and Advances to CustomersLoans and advances to customers are carried net of provisions. The fair value is estimated as the present value of discounted future

cash fl ows and the applied discount factor is equal to the interest rates currently offered by the Bank.

Securities Held to MaturityThe fair value of securities held to maturity is based on market prices or price quotations obtained from brokers or dealers. If this

information is not available, the fair value is estimated using quoted market values for securities with similar credit risk characteris-

tics, maturity or yield rate or, as and when appropriate, according to the recoverability of the net asset value of these securities.

Amounts Owed to Financial Institutions and CustomersThe estimated fair value of amounts owed to fi nancial institutions and customers with no stated maturity which include no-interest

earning deposits, is equal to the amount payable on demand. The fair value of fi xed income deposits and other liabilities with no stated

market value is estimated as the present value of discounted future cash fl ows and the applied discount factor is equal to the interest rates

currently offered on the market for deposits with similar maturities. The fair value of products with no contractually stated maturity (such

as sight deposits, passbooks, overdraft facilities, construction savings deposits) is considered equal to their carrying value.

Bonds in IssueThe aggregated fair value is based on quoted market prices. The fair value of securities where no market price is available is estimated

as the present value of discounted future cash fl ows and the applied discount factor is equal to the interest rates currently offered on

the market for deposits with similar remaining maturities.

256

Subordinated DebtIssued subordinated debt is traded on the free market of the Prague Stock Exchange. Its fair value is based on quoted market price.

48. SEGMENT REPORTING

(a) Industry segmentsFor management purposes, the Bank is organised into the following major operating divisions:

• Retail banking (accepting deposits from the public, providing loans to retail clients, services related to credit and debit cards);

• Commercial banking (providing loans to corporate clients and municipalities, issuance of guarantees, opening of letters of credit);

• Investment banking (securities investments, proprietary trading and trading on behalf of the client with securities, foreign exchange

assets, entering into futures and options including foreign currency and interest rate transactions, fi nancial brokerage, custodian

services, participation in issuance of stock, management, safe-keeping and administration of securities or other assets); and

• Other operations.

2007

CZK mil.

Banking Other activities Total

Retail Commercial Investment

REVENUE

Total segment revenue 24,028 4,044 2,406 3,822 34,300

PROFIT

Segment profi t 10,735 1,763 1,566 2,212 16,276



Income tax 3,076


OTHER INFORMATION

Asset acquisition 1,358 23 127 1,503 3,011

Write-offs and depreciation 973 – 90 2,074 3,137

Impairment losses – – – 2 2

BALANCE SHEET

Assets

Segment assets 242,515 148,053 251,258 21,272 663,098

Unallocated assets 1,948

Total assets 665,046

Liabilities

Segment liabilities 383,801 58,038 159,016 175 601,030


Total liabilities 613,197

257


2006

CZK mil.

Banking Other activities Total

Retail Commercial Investment

REVENUE

Total segment revenue 21,107 3,692 2,809 2,754 30,362

PROFIT

Segment profi t 8,154 1,973 2,028 2,324 14,479

Unallocated costs (2 745)


Income tax (2 795)

Total profi t 8,939

OTHER INFORMATION

Asset acquisition 1,700 59 169 1,771 3,699

Write-offs and depreciation 1,151 – 59 2,023 3,233

Impairment losses 4 – – 70 74

BALANCE SHEET

Assets

Segment assets 183,079 116,782 265,469 18,886 584,216

Unallocated assets 946

Total assets 585,162

Liabilities

Segment liabilities 355,942 52,013 118,114 526,069


Total liabilities 539,135

Total income is composed of ‘Net interest income’, ‘Net fee and commission income’, ‘Net trading result’, ‘Total other operating

income’ and ‘Income from the revaluation/sale of securities, derivatives and equity investments’ (refer to Note 37).

258

(b) Geographical segmentsThe Bank operates predominantly within the Czech Republic and has no signifi cant cross border operations.


CZK mil. Czech

Republic

EU countries Other

European

countries

Other Total

Assets






Securities available for sale 5,034 5,695 – – 10,729


Equity investments in subsidiary and associated undertakings 3,605 5,616 – – 9,221

Other assets 26,165 865 48 422 27,500

Total assets 536,485 112,352 6,368 9,841 665,046

Liabilities


Amounts owed to customers 468,518 3,906 1,109 872 474,405

Liabilities at fair value 7,379 230 – – 7,609


Bonds in issue 58,568 284 6 – 58,858

Subordinated debt 4,751 829 25 – 5,605


Total liabilities 578,209 32,214 1,356 1,418 613,197

Net position (41,724) 80,138 5,012 8,423 51,849


liabilities’ includes other liabilities and provisions.

259



CZK mil. Czech

Republic

EU countries Other

European

countries

Other Total

Assets


Loans and advances to fi nancial institutions 36,731 20,534 2,829 991 61,085




Securities available for sale 6,285 5,296 – – 11,581


Equity investments in subsidiary and associated undertakings 3,272 3,683 – – 6,955

Other assets 22,927 1,074 56 149 24,206

Total assets 465,708 101,848 8,319 9,287 585,162

Liabilities


Amounts owed to customers 422,737 6,776 586 559 430,658


Bonds in issue 36,277 182 4 – 36,463

Subordinated debt 4,002 1,834 50 – 5,886



Net position (46,736) 76,760 7,503 8,500 46,027


liabilities’ includes other liabilities, provisions and liabilities at fair value.

260

49. ASSETS UNDER ADMINISTRATION

The Bank provides custody, trustee, investment management and advisory services to third parties which involve the Bank making

purchase and sale decisions in relation to a wide range of fi nancial instruments. Those assets that are held in a fi duciary capacity are

not included in these fi nancial statements.

The Bank administered CZK 204,451 million (2006: CZK 173,949 million) of assets as of 31 December 2007 representing certifi cate

securities and other assets received from customers into its custody for administration and safe-keeping split as follows:

CZK mil. 2007 2006

Customer securities in custody 14,814 8,760

Customer securities under administration 160,768 137,476

Customer securities for safe-keeping 74 4

Assets received for management 28,795 27,709

Total 204,451 173,949

In addition to customer assets arising from the provision of investment services (refer to Note 51), the total balance includes bills of

exchange and other securities collateralising loans and other assets that do not relate to the provision of investment services.

The Bank also acts as a depositary for several mutual, investment and pension funds, whose assets amounted to CZK 106,854 million

as of 31 December 2007 (2006: CZK 96,519 million).

50. RELATED PARTY TRANSACTIONS

Related parties involve connected entities or parties that have a special relation to the Bank.

Parties are considered to be related if one party has the ability to control the other party or exercise signifi cant infl uence over the other

party in making fi nancial or operational decisions. The Bank is controlled by Erste Bank der österreichischen Sparkassen AG. Erste

Stiftung exercises signifi cant infl uence over the Bank. The remaining investment in the Bank is held by minority shareholders and

institutional investors via freely traded shares on the Viennese and Prague Stock Exchanges.

The parties that have a special relation to the Bank are considered to be members of the Bank’s statutory and supervisory bodies and

management, legal entities exercising control over the Bank (including entities with a qualifi ed interest in these entities and mana-

gement of these entities), persons closely related to the members of the Bank’s statutory and supervisory bodies, management, and

entities exercising control over the Bank, legal entities in which any of the parties listed above holds a qualifi ed interest, entities with

a qualifi ed interest in the Bank and any other legal entity under their control, members of the Czech National Bank’s Banking Board,

and legal entities which the Bank controls.

Pursuant to the defi nitions outlined above, the category of the Bank’s related parties principally comprises its subsidiary and associa-

ted undertakings, members of its Board of Directors and Supervisory Board, and other entities, namely Erste Bank, its subsidiary and

associated undertakings, and subsidiary and associated undertakings owned by the Bank’s subsidiaries.

The Bank has the following amounts due from/to related parties as of 31 December 2007 and 2006:

261


2007

CZK mil.

Parent bank Subsidiaries Associates Members of

the Board of

Directors and

Supervisory

Board

Other related

parties

Assets

Loans and advances to fi nancial institutions 4,590 2,000 – – 232

Loans and advances to customers – 460 20 6,739

Securities held to maturity 310 – – – –

Positive fair value of fi nancial derivative transactions 7,930 – – – 10

Other assets 73 260 4 – 50

Total assets 12,903 2,720 4 20 7,031

Liabilities

Amounts owed to fi nancial institutions 11,216 418 – – 1,070

Amounts owed to customers 0 1,747 117 5 1,453

Bonds in issue 82 11,583 – – 1,700

Negative fair value of fi nancial derivative transactions 1,920 – 1 – 61

Other liabilities 53 112 100 – 136

Subordinated debt 329 – – – 300


Off balance sheet

Undrawn loans 200 528 – – 2,279

Issued guarantees 18 15,991 – – 6,777

Received guarantees – (687) – –

Positive fair value of fi nancial derivative transactions 192,518 26 56 – 5,251

Negative fair value of fi nancial derivative transactions (187,029) (26) (56) – (5,311)

Income

Interest income 125 44 – 1 364

Dividends received – 752 27 – 19

Fee and commission income 9 1,644 – – 126

Net trading result (263) – – – 53

Other operating income 57 67 – – 26

Total income (72) 2,507 27 1 588

Expenses

Interest expense 369 202 – – 46

Fee and commission expense – 67 – – 10

General administrative expenses 37 186 279 – 557

Total expenses 406 455 279 – 613

262

2006

CZK mil.

Parent bank Subsidiaries Associates Members of

the Board of

Directors and

Supervisory

Board

Other related

partie

Assets

Loans and advances to fi nancial institutions 2,912 – – – 758

Loans and advances to customers 0 441 90 26 5,630

Securities held to maturity 310 – – – –

Positive fair value of fi nancial derivative transactions 8,386 – – – 16

Other assets 195 199 – – 58

Total assets 11,803 640 90 26 6,462

Liabilities

Amounts owed to fi nancial institutions 2,168 19 – – 116

Amounts owed to customers 0 1,334 5 1 867

Bonds in issue 29 2,075 – – –

Negative fair value of fi nancial derivative transactions 3,560 – – – 290

Other liabilities 65 46 24 – 285

Subordinated debt 1,069 – – – –


Off balance sheet

Undrawn loans 111 1,634 10 – 2,282

Issued guarantees 20 7,296 1 – 837

Positive fair value of fi nancial derivative transactions 207,782 576 – – 7,550

Negative fair value of fi nancial derivative transactions (202,716) (573) – – (7,594)

Income

Interest income 74 93 1 – 284

Dividends received – 582 12 – –

Fee and commission income 9 1,252 – – 17

Net trading result 116 – – – (15)

Other operating income 13 55 – – 91

Total income 212 1,982 13 – 377

Expenses

Interest expense 85 106 – – 32

Fee and commission expense 1 1 – – 10

General administrative expenses 56 174 74 – 416

Total expenses 142 281 74 – 458

Subsidiaries include both direct and indirect investments with controlling infl uence, associates include both direct and indirect

investments with signifi cant infl uence.

263


(a) Members of the Board of Directors and Supervisory BoardLoans and advances granted to members of the Board of Directors and Supervisory Board amounted to CZK 20 million (in nominal

values) as of 31 December 2007 (2006: CZK 26 million).

Members of the Board of Directors and Supervisory Board held no shares of the Bank. Under the Employee Stock Option Plan (refer

to Note 36), members of the Board of Directors subscribed for 50,432 shares (2006: 14,000 shares) of the parent company, Erste

Bank. Under the Management Stock Option Plan (refer to Note 36), members of the Board of Directors hold 36,000 options (2006:

9,500 options) for subscription of shares of the parent company, Erste Bank.

(b) Related partiesA number of banking transactions are entered into with related parties in the normal course of business. These principally include

loans, deposits and other transactions. These transactions were carried out on an arm’s length basis.

51. PAYABLES TO CLIENTS ARISING FROM THE PROVISION OF INVESTMENT SERVICES

Investment services involve receiving and providing instructions related to investment instruments, performing instructions relating

to investment instruments to a third party account, proprietary trading with investment instruments, management of customer assets

under a contractual arrangement with the client if these assets include an investment instrument, and investment instruments under-

writing or placement.

Additional investment services involve administration and custody of investment instruments, issuing loans to the client for the

purpose of trading with investment instruments if the issuer of the loan takes part in the transaction, advisory services relating to

capital structuring, industrial strategy, investments in investment instruments, provision of advice and services related to mergers and

acquisitions, implementation of foreign exchange transactions relating to the provision of investment services, services related to the

underwriting of investment instrument issues and rent of safe-deposit boxes.

In connection with the provision of these services, the Bank received cash and investment instruments from clients or obtained cash or

investment instruments for its clients (‘customer assets’) in exchange for these values, which amounted to CZK 163,211 million as of

31 December 2007 (2006: CZK 141,872 million).

52. DIVIDENDS

Management of the Bank has proposed that total dividends of CZK 4,560 million be declared in respect of the profi t for the year en-

ded 31 December 2007, which represents CZK 30 per both ordinary and priority share (2006: CZK 4,560 million, that is, CZK 30 per

both ordinary and priority share). The declaration of dividends is subject to the approval of the Annual General Meeting. Dividends

paid to shareholders are subject to a withholding tax of 15 percent or a percentage set out in the relevant double tax treaty. Dividends

paid to shareholders that are tax residents of an EU member country and whose interest in a subsidiary’s share capital is no less than

25 percent and that hold the entity’s shares for at least two years are not subject to a withholding tax.

264

53. POST BALANCE SHEET EVENTS

With effect from 4 February 2008, the Bank is implementing a new business model pursued by the Erste Bank Group in respect

of fi nancial markets trading. Market risks arising from the trading activities of the Financial Markets Divisions (i.e., transactions

with retail and corporate clients), the only exception being equity risk and the Bank’s liquidity management transactions (money

market), will be transferred to positions of the parent Erste Bank. By centralising trading activities and market risks into one portfolio,

the Erste Bank Group makes an effort to strengthen its fi nancial markets position, benefi t from synergistic effects in market risk

management and capitalise on local know-how and experience in developing competence centres in the relevant area of trading on

Erste Bank’s account. As a result, the Bank is becoming the competence centre for CZK fi nancial instruments traded on Erste Bank’s

account. The trading profi t, i.e., Erste Bank’s market positions, will be subsequently reallocated to the local banks from within the

Group on the basis of pre-determined rules.

265

Financial Section 2Report on Relations Between Related PartiesČeská spořitelna’s Financial Group

Report on Relationsbetween Related PartiesUNDER SECTION 66A (9) OF COMMERCIAL CODE 513/1991 COLL. FOR THE YEAR ENDED 31 DECEMBER 2007

Česká spořitelna, a. s., with its registered offi ce address at Ol-

brachtova 1929/62, 140 00 Prague 4, Corporate ID: 45244782,

incorporated in the Register of Companies, Section B, File

1171, maintained at the Municipal Court in Prague (hereinafter

“Česká spořitelna” or the “Company”), is part of a business

group (holding company) in which the following relations

between Česká spořitelna and controlling entities and further

between Česká spořitelna and entities controlled by the same

controlling entities (hereinafter the “related entities”) exist.

This report on relations between the entities stated below was

prepared in accordance with Section 66a (9) of Commercial

Code 513/1991 Coll., as amended, for the year ended 31 De-

cember 2007 (hereinafter the “accounting period”). In the

accounting period, Česká spořitelna and the below mentioned

entities entered into the contracts stated below and adopted or

effected the following legal acts and other factual measures.

The Report on Relations for the year ended 31 December 2007

reports on material transactions and arrangements between the

related entities.

266

Česká spořitelna

Erste Bank

Alpha Immorent

Bank Waldviertel Mitte

CT Iota

CTFinance

ecetra CE Finance

EB Befektetesi

Erste Sec Polska

Erste & Steiermärkische

Grand Hotel Marienbad

Immorent Avenir

Immorent ČR

Immorent Chomutov

Immorent Investment XX.

Immorent Kladno

Immorent Plzeň

IT Services SK

Lambda Immorent

Malá Štěpánská

OCI

Omega Immorent

Procurement CZ

Proxima Immorent

Retail Příbram

S IT Solutions AT Spardat

Allgemeine Sparkasse

BCR

S Morava leasing

A. CHART OF ENTITIES WHOSE RELATIONS ARE DESCRIBED

Theta Immorent

Weinviertel Sparkasse

CT Rho

CTP

Epsilon Immorent

Erste Bank Hungary

Erste-Sparinvest

Factoring SISp

Immokor

Immorent BR

Immorent Cheb

Immorent Investment XVII.

Immorent Investment XXV.

Immorent Ostrava

Inprox F-M

Jablonecká

Logcap ČR

Milou

Objektmanagement

Pankrácká obchodní

Procurement AT

Retail Kopřivnice

s IT Serv CZ

S IT Solutions SK

Slovenská sporiteľňa

Waldviertel Sparkasse

Zeta Immorent

The Erste Bank Group

CT Brno

CTPark Dezentrale IT

267


Becon

brokerjet ČS

CSPF Residential

Czech and Slovak Property

Erste Corporate

Gallery Myšák

Investiční společnost ČS

Česká spořitelna

Consulting ČS

CP Praha

CP DP IT Cen

NHS

The Česká spořitelna Financial Group

Erste Bank

Pojišťovna ČS

Realitní společnost ČS

s Autoleasing

Satpo Jeseniova

Satpo Na Malzavinkách

Satpo Sacre Coeur II

Smíchov RE

Tavaresa

B. CHART OF ENTITIES WHOSE RELATIONS ARE DESCRIBED

BGA Czech

CEE Property Development

CS Property Investment

ČS Tech centrum

Factoring ČS

Informatika ČS

Leasing ČS

Corfi na Trade

CPDP 2003

CPDP Jungamannova

Penzijní fond ČS

RAVEN EU Advisory

REICO ČS

s Autoúvěr

Satpo Král. vyhlídka

Satpo Sacre Coeur

Satpo Švédská

Stavební spořitelna ČS

Zahradní čtvrť

268

C. CONTROLLING ENTITIES

• Erste Bank der oesterreichischen Sparkassen AG, Am Graben 21, Vienna, Austria (“Erste Bank”)

Relation to the Company: directly controlling entity

D. OTHER RELATED ENTITIES, whose relations are described

OTHER RELATED ENTITIES, The Erste Bank Group

• Allgemeine Sparkasse Oberösterreich Bankaktienges-ellschaft, Promenade 11, Linz, Austria (“Allgemaine

Sparkasse”)

Relation to the Company: related entity

• Alpha Immorent s. r. o., Národní 973/41, Prague 1,

Czech Republic (“Alpha Immorent”)


• Banca Comerciala Romana, Regina Elisabeta Blvd 5,

Bucharest, Romania (“BCR”)


• Bank und Sparkassen Aktiengesellschaft Waldviertel Mitte, Hauptplatz 3, Zwettl, Austria (“B. und S. Waldviertel

Mitte”)


• CT Brno Heršpická, spol. s r. o., Národní 973/41,

Prague 1, Czech Republic (“CT Brno”)


• CT Iota, spol. s r. o., Národní 973/41, Prague 1,

Czech Republic (“CT Iota”)


• CT Rho, spol. s r. o., Národní 973/41, Prague 1,

Czech Republic (“CT Rho”)


• CTFinance s. r. o., Národní 973/41, Prague 1,

Czech Republic (“CTFinance”)


• CTP Heršpická, spol. s r. o., Národní 973/41, Prague 1,

Czech Republic (“CTP”)


• CTPark Bor, spol. s r. o., Národní 973/41, Prague 1,

Czech Republic (“CTPark”)


• Dezentrale IT-Infrastruktur Services GmbH, Geiselbergstrasse 21, Vienna, Austria (“Dezentrale IT”)


• ecetra Central European e–Finance AG, Neutorgasse 2,

Vienna, Austria (“ecetra CE Finance”)


• Epsilon Immorent s. r. o., Národní 973/41, Prague 1,

Czech Republic (“Epsilon Immorent”)


• Erste Bank Befektetesi Alapkezelö Rt, Madách Imre

ut. 13, Budapest, Hungary (“EB Befektetesi”)


• Erste Bank Hungary Nyrt, Hold utca 16, Budapest,

Hungary (“Erste Bank Hungary”)


• Erste Securities Polska S. A., ul. Królewska 16, Warsaw,

Poland (“Erste Sec Polska”)


• Erste-Sparinvest Kapitalanlagegesellschaft m. b. H., Habsburgergasse 1, Vienna, Austria (“Erste-Sparinvest”)


• Erste & Steiermärkische banka d. d., Rijeka,

Jadranski trg 3, Rijeka, Croatia (“Erste & Steiermarkische”)


• Factoring Slovenskej sporiteľni a. s., Priemyselná 1,

Bratislava, Slovakia (“Factoring SlSp”)


269


• Grand Hotel Marienbad s. r. o., Národní 973/41, Prague 1,

Czech Republic (“Grand Hotel Marienbad”)


• Immokor d. o. o., Zelinska 3, Zagreb, Croatia (“Immokor”)


• Immorent Avenir 3 s. r. o., Národní 973/41, Prague 1,

Czech Republic (“Immorent Avenir”)


• Immorent Brno Retail, s. r. o., Národní 973/41, Prague 1,

Czech Republic (“Immorent BR”)


• Immorent ČR, s. r. o., Národní 973/41, Prague 1,

Czech Republic (“Immorent ČR”)


• Immorent Cheb s. r. o., Národní 973/41, Prague 1,

Czech Republic (“Immorent Cheb”)


• Immorent Chomutov, s. r. o., Národní 973/41, Prague 1,

Czech Republic (“Immorent Chomutov”)


• Immorent Investment XVII, s. r. o., Národní 973/41,

Prague 1, Czech Republic (“Immorent Invest XVII”)


• Immorent Investment XX, s. r. o., Národní 973/41,

Prague 1, Czech Republic (“Immorent Invest XX”)


• Immorent Investment XXV, s. r. o., Národní 973/41,

Prague 1, Czech Republic (“Immorent Invest XXV”)


• Immorent Kladno, s. r. o., Národní 973/41, Prague 1,

Czech Republic (“Immorent Kladno”)


• Immorent Ostrava I s. r. o., Národní 973/41, Prague 1,

Czech Republic (“Immorent Ostrava”)


• Immorent Plzeň s. r. o., Národní 973/41, Prague 1,

Czech Republic (“Immorent Plzeň”)


• Inprox Frýdek-Místek s. r. o., Národní 973/41, Prague 1,

Czech Republic (“Inprox F-M”)


• IT Services SK, spol. s r. o., Prievozská 10, Bratislava,

Slovakia (“IT Services SK”)


• Jablonecká realitní a. s., Národní 973/41, Prague 1,

Czech Republic (“Jablonecká”)


• Lambda Immorent s. r. o., Národní 973/41, Prague 1,

Czech Republic (“Lambda Immorent”)


• Logcap ČR s. r. o., Národní 973/41, Prague 1,

Czech Republic (“Logcap ČR”)


• Malá Štěpánská 17 s. r. o., Národní 973/41, Prague 1,

Czech Republic (“Malá Štěpánská”)


• Milou s. r. o., Národní 973/41, Prague 1, Czech Republic

(“Milou”)


• ÖCI – Unternehmensbeteiligungs-gesellschaft. m. b. H., Am Graben 21, Vienna, Austria (“OCI”)


• OM Objektmanagement GmbH, Schwarzenbergplatz 2,

Vienna, Austria (“Objektmanagement”)


270

• Omega Immorent s. r. o., Národní 973/41, Prague 1,

Czech Republic (“Omega Immorent”)


• Pankrácká obchodní, a. s., Na Pankráci 14, Prague 4,

Czech Republic (“Pankrácká obchodní”)


• Procurement Services CZ, s. r. o., Želetavská 1449/9,

Prague 4, Czech Republic (“Procurement CZ”)


• Procurement Services GmbH, Brehmstrasse 12, Vienna,

Austria (“Procurement”)


• Proxima Immorent, s. r. o., Národní 973/41, Prague 1,

Czech Republic (“Proxima Immorent”)


• Retail Kopřivnice, spol. s r. o., Národní 973/41, Prague 1,

Czech Republic (“Retail Kopřivnice”)


• Retail Příbram, spol. s r. o., Národní 973/41, Prague 1,

Czech Republic (“Retail Příbram”)


• s IT Services CZ, s. r. o., Antala Staška 32/1292, Prague 4,

Czech Republic (“s IT Serv CZ”)


• s IT Solutions AT Spardat GmbH, Geiselbergstrasse 21,

Vienna, Austria (“S IT AT Spardat”)


• s IT Solutions SK, spol. s r. o., Prievozská 14, Bratislava,

Slovakia (“S IT SK”)


• S – Morava leasing, a. s., Horní náměstí 264/18, Znojmo,

Czech Republic (“S – Morava leasing”)


• Slovenská sporiteľňa, a. s., Suché myto 4, Bratislava,

Slovakia (“Slovenská sporiteľňa”)


• Theta Immorent s. r. o., Národní 973/41, Prague 1,

Czech Republic (“Theta Immorent”)


• Waldviertler Sparkasse von 1842 AG, Hauptplatz 22, 3830

Waidhofen a.d. Thaya, Austria (“Waldviertler Sparkasse”)


• Weinviertler Sparkasse AG, Hauptplatz 10, Hollabrunn,

Austria (“Weinviertler Sparkasse”)


• Zeta Immorent s. r. o., Národní 973/41, Prague 1, Czech

Republic (“Zeta Immorent”)


OTHER RELATED ENTITIES, The Česká spořitelna Financial Group

• Becon s. r. o., Rozkošného 1058/3, Prague 5,

Czech Republic (“Becon”)

Relation to the Company: indirectly controlled entity

• BGA Czech s. r. o., Rozkošného 1058/3, Prague 5,

Czech Republic (“BGA Czech“)


• brokerjet České spořitelny, a. s., Na Příkopě 29/584,

Prague 1, Czech Republic (“brokerjet ČS”)

Relation to the Company: directly controlled entity

• CEE Property Development Portfolio B.V., Naritawes

165 Telestone 8, 1043 BW Amsterdam, Netherlands

(“CEE Property Development”)


• Consulting České spořitelny, a. s., Vinohradská 180/1632,

Prague 3, Czech Republic (“Consulting ČS”)


271


• Corfi na Trade, s. r. o., Střelničná 8/1680, Prague 8,

Czech Republic (“Corfi na Trade”)


• CP Praha s. r. o., Koněvova 929/19, Prague 3,

Czech Republic (“CP Praha”)


• CPDP 2003 s. r. o., Vodičkova 710/31, Prague 1,

Czech Republic (“CPDP 2003”)


• CPDP IT Centrum s. r. o., Vodičkova 710/31, Prague 1,

Czech Republic (“CPDP IT Cen”)


• CPDP Jungmannova s. r. o., Vodičkova 710/31, Prague 1,

Czech Republic (“CPDP Jungmannova”)


• CSPF Residential B.V., Fred Roeskestraat 123,

Amsterdam, The Netherlands (“CSPF Residential”)


• CS Property Investment Limited, Arch. Makariou III,

2-4, Capital Center, 9th fl oor, P.C. 1505, Nicosia, Cyprus

(“CS Property Investment”)


• Czech and Slovak Property Fund B.V., Fred Roeskerstraat 123, Amsterdam, Netherlands

(“Czech and Slovak Property“)


• ČS Technické centrum s. r. o., Ke Štvanici 656/3, Prague 8,

Czech Republic (“ČS Tech centrum”)


• Erste Corporate Finance, a. s., Na Perštýně 1/342,

Prague 1, Czech Republic (“Erste Corporate”)


• Factoring České spořitelny, a. s., Pobřežní 46, Prague 8,

Czech Republic (“Factoring ČS”)


• Gallery Myšák s. r. o., Vodičkova 710/31, Prague 1,

Czech Republic (“Gallery Myšák”)


• Informatika České spořitelny, a. s., Bubenská 1447/1 ,

Prague 7, Czech Republic (“Informatika ČS”)


• Investiční společnost České spořitelny, a. s., Na Perštýně 342/1, Prague 1, Czech Republic

(“Investiční společnost ČS”)


• Leasing České spořitelny, a. s., Střelničná 8, Prague 8,

Czech Republic (“Leasing ČS”)


• NHS Czech, s. r. o., Rozkošného 1058/3, Prague 5,

Czech Republic (“NHS”)


• Penzijní fond České spořitelny, a. s., Poláčkova 1976/2,

Prague 4, Czech Republic (“Penzijní fond ČS”)


• Pojišťovna České spořitelny, a. s., nám. Republiky 115,

Pardubice, Czech Republic (“Pojišťovna ČS”)


• RAVEN EU Advisory, a. s., Jakubské nám. 101/2, Brno,

Czech Republic (“RAVEN”)


• Realitní společnost České spořitelny, a. s., Vinohradská 180/1632 , Prague 3, Czech Republic

(“Realitní společnost ČS”)


272

• REICO investiční společnost České spořitelny, a. s., Antala Staška 2027/79, Prague 4, Czech Republic

(“REICO ČS”)


• s Autoleasing, a. s., Střelničná 8, Prague 8, Czech Republic

(“s Autoleasing”)


• s Autoúvěr, a. s., Střelničná 8, Prague 8, Czech Republic

(“s Autoúvěr”)


• Satpo Jeseniova, s. r. o., Plzeňská 3217/16, Prague 5,

Czech Republic (“Satpo Jeseniova”)


• Satpo Královská vyhlídka, s. r. o., Plzeňská 3217/16,

Prague 5, Czech Republic (“Satpo Král. vyhlídka”)


• Satpo Na Malvazinkách, a. s., Plzeňská 3217/16, Prague 5,

Czech Republic (“Satpo Na Malvazinkách”)


• Satpo Sacre Coer, s. r. o., Plzeňská 3217/16, Prague 5,

Czech Republic (“Satpo Sacre Coer”)


• Satpo Sacre Coer II, s. r. o., Plzeňská 3217/16, Prague 5,

Czech Republic (“Satpo Sacre Coer II“)


• Satpo Švédská, s. r. o., Plzeňská 3217/16, Prague 5, Czech

Republic (“Satpo Švédská”)


• Smíchov Real Estate, a. s., Karlovo nám. 10, Prague 2,

Czech Republic (“SRE”)


• Stavební spořitelna České spořitelny, a. s., Vinohradská

180/1632, Prague 3, Czech Republic (“Stavební spořitelna ČS”)


• Tavaresa a. s., Vodičkova 710/31, Prague 1, Czech

Republic (“Tavaresa”)


• Zahradní čtvrť, a. s., Neumannova 1, Prague 5,

Czech Republic (“Zahradní čtvrť”)


E. TRANSACTIONS WITH THE RELATED ENTITIES

Česká spořitel”na identifi ed relations with the related entities

listed in Section C and Section D and aggregated them into the

following categories.

Related Party Transactions on the Assets Side of Česká spořitelna’s Balance Sheet

Loans and Advances to Financial Institutions Česká spořitelna provided the related entities – fi nancial institu-

tions, with funding under contracts for the provision of loans, term

placements, maintenance of current accounts and overdraft loans

under standard business terms and conditions in the aggregate

amount of CZK 6,823 million. Česká spořitelna incurred no detri-

ment as a result of these transactions in the accounting period.

Loans and Advances to Customers Česká spořitelna provided the related entities – non-fi nancial

institutions, with funding under contracts for the provision of

loans, overdraft loans, etc. under standard business terms and

conditions in the aggregate amount of CZK 7,198 million.

Česká spořitelna incurred no detriment as a result of these

transactions in the accounting period.

Securities Held to MaturityČeská spořitelna holds own bonds and similar securities of

related entities which were purchased under standard market

conditions in the aggregate amount of CZK 310 million. Česká

spořitelna incurred no detriment as a result of these transac-

tions in the accounting period.

Positive Fair Value of Financial Derivative Transactions Česká spořitelna entered into hedging and trading fi nancial

derivatives under standard market conditions, the positive

fair value of which was CZK 7,941 million at the end of the

273


accounting period. Česká spořitelna incurred no detriment as

a result of these transactions in the accounting period.

Other AssetsOther assets include other receivables from business transac-

tions of Česká spořitelna to related entities on the asset side of

the balance sheet in the aggregate amount of CZK 387 million.



Related Party Transactions on the Liabilities Side of Česká spořitelna’s Balance Sheet

Amounts Owed to Financial Institutions In the accounting period, Česká spořitelna provided related

entities – fi nancial institutions, with monetary services relating to

the maintenance of current accounts, term bank accounts, received

loans, loro accounts, etc. based on the contracts for the opening

and maintenance of accounts under standard business terms and

conditions, in the aggregate amount of CZK 12,705 million at

the end of the accounting period. Česká spořitelna incurred no

detriment as a result of these transactions in the accounting period.

Amounts Owed to Customers In the accounting period, Česká spořitelna provided related par-

ties – non-fi nancial institutions, with monetary services relating

to the maintenance of current accounts, term bank accounts, re-

ceived loans, credit balances on overdraft facilities, etc. based on

the contracts for the opening and maintenance of accounts under

standard business terms and conditions, in the aggregate amount

of CZK 3,317 million. Česká spořitelna incurred no detriment as


Česká spořitelna’s Bonds in Issue Related entities hold bonds and similar securities issued by

Česká spořitelna that were purchased under standard market

conditions in the aggregate amount of CZK 13,365 million.



Negative Fair Value of Financial Derivative Transactions Česká spořitelna entered into trading or hedging fi nancial deriva-

tives under standard market conditions with related entities, the

negative value of which was CZK 1,982 million at the end of

the accounting period. Česká spořitelna incurred no detriment as


Subordinate DebtRelated parties hold subordinate bonds issued by Česká

spořitelna that were purchased under standard terms and




Other LiabilitiesOther liabilities include other liabilities from transactions

between Česká spořitelna and related entities on the li-

abilities side of the balance sheet in the aggregate amount of

CZK 400 million. Česká spořitelna incurred no detriment as


Transactions with Related Parties Having an Impact on Česká spořitelna’s Profi t and Loss Account

Interest Income In the accounting period, Česká spořitelna generated total interest

income of CZK 1,331 million, including dividends, from banking

transactions with related entities under standard market or busi-

ness terms and conditions. Česká spořitelna incurred no detriment

as a result of these transactions in the accounting period.

Interest ExpensesČeská spořitelna incurred total interest expenses of

CZK 616 million in respect of banking transactions with

related entities under standard market or business terms and

conditions. Česká spořitelna incurred no detriment as a result

of these transactions in the accounting period.

Fee and Commission Income In the accounting period, Česká spořitenla received, as part of

the transactions with related entities, under standard market

or business terms and conditions, fee and commission income

that predominantly includes fees and commissions for asset

management, depository services, sale of the products of sub-

sidiaries, etc. in the aggregate amount of CZK 1,780 million.



274

Fee and Commission ExpenseIn the accounting period, Česká spořitelna incurred, as part of

the transactions with related parties, under standard market or

business terms and conditions, fee and commission expense

that predominantly includes transaction fees, in the aggregate

amount of CZK 77 million. Česká spořitelna incurred no detri-


Net Trading Result Česká spořitelna, as part of securities transactions, foreign cur-

rency transactions and similar transactions with related entities,

including income and expenses from changes in fair values of

non-hedging derivatives, incurred a net loss of CZK 210 million

in the accounting period under standard market or business

terms and conditions. Česká spořitelna incurred no detriment as


General Administrative Expenses In the accounting period, Česká spořitelna incurred

CZK 1,060 million in general administrative expenses in

respect of related entities, namely for the purchase of goods,

material, insurance, advisory, professional, consulting and

maintenance services, under standard market or business terms

and conditions. Česká spořitelna incurred no detriment as


Other Operating Income/(Expenses) In the accounting period, Česká spořitelna had, as part of other

transactions with related entities, specifi cally in providing

outsourcing services and client centre services, under standard

market or business terms and conditions, a positive balance of

other operating income and expenses in the aggregate amount

of CZK 150 million. Česká spořitelna incurred no detriment as


Other Bank-business Transactions with Related Entities

General LimitsČeská spořitelna has approved general limits in place for trans-

actions with the related entities in respect of current and term

deposits, loans, repurchase transactions, own securities, letters

of credit, and issued and received guarantees in the aggregate

amount of CZK 88 248 million. Under these limits, the aggre-

gate exposure to the related entities was CZK 47 452 million.



Provided and Received GuaranteesČeská spořitelna provided guarantees based on the contracts

for the provision of guarantees to related parties under standard

terms and conditions. The aggregate amount of the provided

guarantees was CZK 22,786 million. Česká spořitelna received

guarantees from related parties based on the contracts for the

receipt of bank guarantees under standard business terms and




Fixed Term ContractsIn the accounting period, Česká spořitelna entered into fi xed

term contracts with the related entities under standard market

conditions. At the accounting period-end, the nominal values

of receivables and payables arising from fi xed term contracts

were CZK 197,850 million and CZK 192,422 million,

respectively. Česká spořitelna incurred no detriment as a result

of these transactions in the accounting period.

Equity Transactions with Related EntitiesIn the accounting period, Česká spořitelna, as a market maker,

purchased and sold shares of related entities, under standard

market conditions, with an aggregate turnover of CZK 17,631

million. Česká spořitelna incurred no detriment as a result of

these transactions in the accounting period.

Loans Provided to Employees of the Česká spořitelna Financial GroupBased on the concluded contracts, Česká spořitelna provides

the employees of companies – members of the Česká

spořitelna Financial Group, with standard loans to individuals

for prime rate interest rates. Česká spořitelna incurred no detri-


Paid DividendsFollowing the decision of the General Meeting of

26 April 2007, Česká spořitelna paid dividends of

CZK 4,468 million to related parties in the accounting period.



275


F. NON-BANKING TRANSACTIONS WITH THE RELATED ENTITIES

In the previous accounting periods, Česká spořitelna entered

into contracts with related parties listed in sections C and

D, concerning non-banking relations, the fi nancial details of

which are included in section E. In the accounting period,

Česká spořitelna entered into new contracts with related

entities listed in C and D concerning non-banking relations, the

fi nancial details of which are included in section E. The below

list includes signifi cant non-banking contracts entered into

with related entities in the accounting period. The immate-

rial contractual arrangements under which Česká spořitelna

received or provided performance as part of contractual ar-

rangements with related entities, the fi nancial details of which

are also included in section E, and no detriment was incurred

in relation to these contractual arrangements are not included

in this report.

Name Party to the Contract Description of the performance Detriment

incurred,

if any

Contract for the provision of services

Procurement Services GmbH and

Procurement Services CZ, s. r. o.

Strategic purchase of goods and services, outsourcing of

orders None

Framework cooperation contract Procurement Services CZ, s. r. o.

Performance according to implementation contracts for the

purchase of goods and services None

Contract for the transfer of rights and obligations Procurement Services CZ, s. r. o.

Contract for the transfer of rights and obligations arising

from labour relations None

Contracts for the provision of services, contracts

for work s IT Solutions AT Spardat GmbH Services within various projects None

Servicing contracts s IT Solutions SK, spol. s r. o. Servicing and support of SW None

Contract for the transfer of rights and obligations s IT Solutions SK, spol. s r. o.


from labour relations, in effect from 1 January 2008 None

Articles of Association s IT Solutions SK, spol. s r. o.

Contract for the foundation of a limited liability company

with s IT Services CZ None

Mandate contract s IT Services CZ, s. r. o.

Servicing and support of SW, performance according to

implementation contracts None

Contract for the transfer of rights and obligations s IT Services CZ, s. r. o.


from labour relations None

Lease agreements s IT Services CZ, s. r. o. Contracts for the lease of offi ce premises None

Contract for participation in the risk Slovenská sporiteľňa, a. s.

Participation in the risk arising from the non-payment of

covered receivables None

Contracts for the provision of advisory services Consulting České spořitelny, a. s. Advisory services and valuation of assets None

Contracts for the provision of advisory services Informatika České spořitelny, a. s. Provision of servicing for IT None

Mandate contract

REICO investiční společnost České

spořitelny, a. s.

Provision of selected activities relating to the administration

of assets in mutual funds None

Contract for the subscription of shares

REICO investiční společnost České

spořitelny, a. s.

Subscription of 50 shares of CZK 1,000,000 per share upon

the increase in the share capital None

Contract for the subscription of shares

Realitní společnost České spořitelny,

a. s.

Subscription of 16 shares of CZK 1,000,000 per share upon

the increase in the share capital None

General lease agreement ČS Technické centrum s. r. o. Lease of non-residential premises None

276

Name Party to the Contract Description of the performance Detriment

incurred,

if any

Contract for cooperation and mediation Immorent ČR, s. r. o. Mediation of lease of real estate None

Framework contract

Dezentrale IT-Infrastruktur Services

GmbH

Management, services, development, technical infrastructure

in IT None

Framework insurance contracts Pojišťovna České spořitelny, a. s. Insurance and technical relations to selected products None

Contract for the mediation of payments Pojišťovna České spořitelny, a. s.

Payment of insurance benefi ts through the Česká spořitelna

branches None

Legal title Party to the Contract Description of the performance Detriment

incurred,

if anyThe Employee Erste Bank Stock Ownership

Programme (‘ESOP’) and the Management Erste

Bank Stock Option Programme (‘MSOP’)

Erste Bank der oesterreichischen

Sparkassen AG

Payment of a 20% discount on the subscription for shares

by employees who made use of the option None

G. OTHER LEGAL ACTS

In the accounting period, Česká spořitelna adopted or made no other legal acts in the interest, or at the initiative, of the related entities.

H. OTHER FACTUAL MEASURES

Česká spořitelna participates in the New Group Architecture (NGA) programme within the Erste Bank Group. The programme is

designed to fully utilise the business potential of Central European markets in all segments, to benefi t from economies of scale and

cost synergies, to concentrate support activities in the group, and to ensure transparency and comparability in performance measure-

ment. The NGA programme includes business projects (Card Strategy, Retail 2008 – Approach to Micros and Sales Management

Techniques, Financial Market Web Portal, Group Capital Markets), IT projects (sIT Solutions, Group IT Operations, Decentralised

Computing, Core SAP, Data Centre Movement, Core Banking Initiative, Enterprise Service Bus), performance and risk manage-

ment projects (Group Performance Model, Basel II) and service activities projects (Group Procurement, Group Payment Initiative,

Group Risk Management, PariS (P2P)). In the IT area, the projects are expected to bring about savings as a result of the sharing of

operational and development activities, merging of IT procurement, and standardisation of hardware. Česká spořitelna incurred no

detriment as a result of its participation in the Group-wide projects referred to above.

I. CONCLUSION

Our review of the legal relations put in place between Česká spořitelna and the related entities indicates that Česká spořitelna incurred

no detriment as a result of contractual arrangements, other legal acts or other measures implemented, made or adopted by Česká

spořitelna during the year ended 31 December 2007 in the interest, or at the initiative, of individual related entities.

Dušan Baran Jiří Škorvaga

Vice Chairman of the Board of Directors Member of the Board of Directors

and First Deputy CEO and Deputy CEO

277

Report on Relations Between Related PartiesČeská spořitelna’s Financial GroupAuditor’s Report

Česká spořitelna’s Financial Group

FIGURES ARE STATED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS), UNLESS INDICATED OTHERWISE.

STAVEBNÍ SPOŘITELNA ČESKÉ SPOŘITELNY, A. S.

Stavební spořitelna České spořitelny, a. s., with its registered of-

fi ce address at Vinohradská 180, Prague 3, was incorporated on

22 June 1994. Its principal business is the provision of fi nancial

services under Act No. 96/1993 Coll. The shareholder structure

consists of Česká spořitelna, a. s., which owns a 95 percent

sharaeholding and the remaining fi ve percent is held by Bauspar-

kasse der österreichischen Sparkassen AG. Stavební spořitelna

offers its clients construction savings with state support and

statutory rights to loans from construction savings.

In fulfi lling its mission of “Funding Better Housing for Every-

one”, Stavební spořitelna ČS principally focuses on providing loans while emphasising simplicity, speed and a reasonable price. Stavební spořitelna introduced a new loan on the market,

the HYPO TREND, a bridging loan with a fi xed interest rate.

Record-breaking fi nancial and business results for 2007 showed

that Stavební spořitelna is headed in the right direction.

In 2007, Stavební spořitelna provided more than 40,000 new loans in the aggregate amount of CZK 15.0 billion. This

represents a year-on-year growth of almost 70 percent, which is the highest percentage increase on the construction savings market. As of 31 December 2007, the Company maintained more

than 188,000 loan accounts and lent its clients CZK 33.4 billion

for housing improvements. The development of construction sav-

ings contracts’ sale in 2007 confi rmed the assumed growth trend.

Compared to 2006, the number of newly concluded contracts

grew by almost 18 percent. As of 31 December 2007, Stavební

spořitelna administered 1,126 million construction savings

accounts. In 2007, clients entered into deposit contracts with the

aggregate target amount of CZK 42.4 billion, which represents an

increase of 13 percent as compared to 2006.

In 2007, Stavební spořitelna ČS, for the fi rst time, exceeded CZK 1 billion in the volume of generated net profi t (CZK 1,105 million). The year-on-year increase of net profi t amounts

to 18 percent. The record profi t was predominantly driven by

the increase in net interest income arising from client loans. The

cost/income ratio continued to fall from 30 percent to 23 percent

year-on-year. The increase in the proportion of loans to deposits

from 29 percent in 2006 to 39 percent in 2007 confi rmed once

again that housing needs have increasingly been funded from

the loans provided by Stavební spořitelna ČS. The outstanding

fi nancial and business results of Stavební spořitelna in 2007 cor-

respond to the leading position of the Česká spořitelna Financial

Group in the Czech market of funding housing needs.

2007 2006 2005 2004 2003

Share capital (CZK million) 750 750 750 750 750

Total assets (CZK billion) 96.2 90.8 84.3 73.7 61.6

Loans and advances to clients (CZK billion) 33.4 24.2 19.5 15.5 10.4

Client deposits (CZK billion) 89.8 83.8 77.6 67.4 56.0

Net profi t (CZK million) 1,105 938, 649 351 209

Number of clients (million) 1.1 1.2 1.2 1.3 1.4

Average headcount 209 215 234 281 304

Contact address: Vinohradská 180, 130 11 Prague 3

Free info-line: 800 207 207

Telephone: 224 309 111

Internet: www.burinka.cz

Email: [email protected]

278

POJIŠŤOVNA ČESKÉ SPOŘITELNY, A. S.

Pojišťovna České spořitelny, a. s. was formed on 1 October

1992 and has had its registered offi ce at náměstí Republiky 115,

Pardubice. The Company’s issued share capital is CZK 1,117

million and Česká spořitelna’s share of the Company’s share

capital is 55.25 percent and the remaining 44.75 percent equity

interest is held by Sparkasse Versicherung AG, a subsidiary of

Erste Bank. Measured by the share capital balance, the Company

is one of the best capitalised insurance companies on the Czech

market. The Company has been licensed to undertake insurance

activities, reinsurance activities and relating activities.

In 2004, the Company’s universal profi le changed and the

Company became a specialised life-insurer offering primarily

the following types of insurance: capital life insurance,

insurance with an investment fund, credit life insurance and

accident insurance. By its character and insurance portfolio

structure, Pojišťovna ČS has continuously developed its life-

insurance services and promoted their linking to bank services

in the ‘bankassurance’ form.

The life insurance market saw a signifi cant year-on-year in-

crease in 2007. Pojišťovna ČS anticipates that the overall pace

of the growth of the written life premium market for 2007

will amount to 11–12 percent. The development of fi nancial

markets, especially the development of interest rates, the

long-expected reform of the pension system, and the ongo-

ing growth of competition in fi nancial services did not have

a negative impact on the business performance of Pojišťovna

ČS. The production of premiums written saw an increase

of over 45 percent, to CZK 6,454 million. Pojišťovna ČS principally achieved success selling lump-sum insurance, being the fi rst on the Czech market and having a market share of almost 31 percent. This refl ects the client’s growing

trust in the Company’s products and shows that the ‘bankas-

surance’ project has been successful. While achieving the given premiums written, the net profi t amounts to CZK 367 million, which represents a year-on-year increase of 18 percent. Technical reserves amounted to CZK 15.4 billion

and increased by CZK 2.0 billion year-on-year.

2007 2006 2005 2004 2003

Share capital (CZK million) 1,117 1,117 1,117 1,117 1,117


Premiums written (CZK billion) 6.4 4.4 2,5 3.9 6.9

Net profi t (CZK million) 367 312 175 2,275 229

Number of insurance policies (thousand) 541 509 464 399 914


Contact address: Nám. Republiky 115, 530 02 Pardubice


Internet: www.pojistovnacs.cz

Email: pojistovnacs@ pojistovnacs.cz

PENZIJNÍ FOND ČESKÉ SPOŘITELNY, A. S.

Penzijní fond České spořitelny, a. s. was formed on 24 August

1994. The Company’s registered offi ce is located at Poláčkova

1976/2, Prague 4. Česká spořitelna has been the Company’s

sole shareholder since March 2001. The Company is primarily

engaged in the provision of retirement benefi t schemes under

Act 42/1994 Coll.

Penzijní fond České spořitelny became the second larg-est pension fund in the Czech Republic according to the number of clients in 2007. The number of clients increased

by CZK 84,000 compared to 2006 and amounted to over

CZK 634,000 at the end of 2006. The Company saw dynamic

growth in the volume of funding on clients’ personal accounts,

which amounted to over CZK 24.4 billion, a 27 percent

increase year-on-year.

279


As of 31 December 2007, the net profi t amounted to CZK 776 million, which represents an increase of 46 per-cent compared to the previous year. The profi t, which is the

highest in the pension fund’s history, was generated through

a well-selected investment strategy, increased business dynam-

ics and growing volume of fi nancial assets under management.

The Company’s business performance was notably driven

by the development of cooperation with employers. As part of its corporate programme, the Company entered into business arrangements with 7,310 employers. The growth

of business dynamics was supported by a further extension of

the sales network covering all branches of Česká spořitelna

and its external sales network, which also includes the

insurance company Kooperativa. In fi nancial assets manage-

ment, the Company followed the stated strategic objective

to achieve the greatest possible return on clients’ assets

while maintaining a low rate of fi nancial risk. The Company

invested funds principally in Czech, largely government, debt

securities that carry a low risk of non-payment, debt securi-

ties of OECD countries, government treasury bills and to

a lesser extent also equities.

2007 2006 2005 2004 2003



Capital funds (CZK billion)* 24.4 19.2 15.1 12.0 9.2

Net profi t (CZK million) under CAS** 776 531 630 408 243

Net profi t (CZK million) under IFRS 776 531 630 644 220

Number of participants (thousand) 634 550 480 410 383


*This fi gure indicates the balance of funds in clients’ personal accounts.

** Under the Retirement Benefi t Schemes Act the pension fund allocates no less than 85 percent of the profi t made under CAS to its clients.

Contact address: Poláčkova 1976/2, 140 21 Prague 4


Internet: www.pfcs.cz


INVESTIČNÍ SPOLEČNOST ČESKÉ SPOŘITELNY, A. S.

Investiční společnost České spořitelny, a. s. was incorporated

on 27 December 1991 as a wholly-owned subsidiary of Česká

spořitelna. The Company’s registered offi ce is at Na Perštýně

342, Prague 1.

Investiční společnost ČS has been maintaining the leading

position on the local market of mutual funds in the long-term.

At the end of 2007, the Company, together with its fellow

subsidiary Erste Sparinvest, managed nearly one third of the

total assets in the Czech mutual funds market regardless of a fast

growing competition, predominantly from cross-border funds. In 2007, the Company reported a high return in trading with

participation certifi cates of managed funds. Gross sales of the Company’s funds amounted to CZK 29.4 billion with aggregate repurchases of CZK 23.8 billion. The net sales of

CZK 5.6 billion correspond with the trading development on the

local market of mutual funds. The aggregate volume of managed

assets amounted to CZK 81.8 billion.

The assets held in mixed funds increased by 56 percent and

exceeded CZK 10 billion at the end of 2007. The strategy applied

to four profi le funds (Konzervativní, Opatrný, Vyvážený and

Dynamický) generated very good results in 2007. Akciový Mix

FF, which holds a high percentage of shares in its portfolio,

was newly added to the profi le funds group. The funds invest in

participation certifi cates of other mutual funds according to their

280

investment focus, observing the key rule of successful investment

– diversifi cation. All profi le funds are currency hedged so that

investors do not suffer from the strengthening of the crown.

Assets within the equity fund segment increasingly demanded by

clients saw a high increase of almost 27 percent. The aggregate

volume of assets amounted to almost CZK 10 billion at the end

of 2007. Low interest rates impacting bank deposits and money

market funds are one of the reasons why clients tend to invest

increasing amounts in equity funds. This trend was supported also

by the development on equity markets – most of them reported

fi ve subsequent successful years. Numerous equity indexes came

close to their historic maxima by the year end. The performance

of bond funds was unbalanced in 2007. The bond fund profi t has

decreased as a result of the gradual growth of global, especially

US, interest rates. The Czech bond market was not an exception

this year as well and the performance of the local bond indexes

was negative for the fi rst time in many years.

The Company has offered four brand new funds with unique

construction since September 2007 – Fond životního cyklu 2020, 2025, 2030 and 2040, with the year indicating the

anticipated retirement of the investor. The objective is to

provide investors with a tool for regular and long-term invest-

ments that may also be deposited in smaller amounts. At the

beginning, the funds construction takes into account higher

representation of the categories of assets with a higher yield

potential (shares, commodities etc.) and a gradual decrease of

their exposure so that these will, de facto, be monetary cycle

funds towards the end of the investments horizon. This is the

Company’s response to the unresolved reform of the pension

system. The Company offers life cycle funds as an addition to

the supplementary pension insurance.

Investiční společnost ČS also prepared the open-ended mutual

fund ČS Balancovaný, which is primarily designed for external

distribution, i.e. outside the traditional branch network of Česká

spořitelna. This is a balanced fund with a signifi cant neutral posi-

tion of shares in the portfolio. The Company also developed three

brand new funds using the absolute revenues strategy – funds

AR25, AR50 and AR75, with the numbers indicating the percent-

age of shares in the fund's benchmark. These funds are intended

for the distribution network of Česká spořitelna’s private banking.

The Company generated a net profi t of CZK 126 million for

the year ended 31 December 2007, a year-on-year increase of

6 percent.

2007 2006 2005 2004 2003


Equity (CZK million) 296 289 261 597 510

Total assets (CZK million) 381 358 325 654 591

Net profi t (CZK million) 126 119 91 85 104

Assets under management (CZK billion) 81.8 74.1 71.6 58.9 48.3


Contact address: Na Perštýně 342/1, 110 00 Prague 1


Internet: www.iscs.cz


S AUTOLEASING, A. S.

s Autoleasing, a. s. was formed on 6 October 2003. Since May

2004, the Company has been wholly-owned by Česká spořitelna.

Its registered offi ce is located at Střelničná 8, Prague 8. The

Company had no employees until 31 December 2006. All

services relating to business and administrative activities were

purchased from the Company’s fellow subsidiary, Leasing České

spořitelny, a. s. As of 1 January 2007, employees of Leasing ČS

were transferred to s Autoleasing. In 2007, s Autoleasing ranked

at the forefront of the Czech lease market in terms of newly

leased assets. The Company’s business focuses primarily on

281


fi nance leases of transport equipment covering a wide range of

commodities, primarily composed of passenger and utility cars.

For the year ended 31 December 2007, s Autoleasing incurred

a loss of CZK 90 million primarily due to increased operating

expenses, which are typically incurred in rolling out new

business activities. During 2007, the Company executed new transactions worth CZK 5.5 billion, with the proportion of transport equipment being 73 percent. s Autoleasing creates

provisions to cover all known risks arising from the portfolio

of concluded lease contracts. All new transactions of the fellow

subsidiary, Leasing ČS, have been concluded on the account

of s Autoleasing since 1 October 2004. The substantial facts

that will have a positive impact on s Autoleasing’s meeting its

business targets in the future include more intensive coopera-

tion with the parent bank.

s Autoleasing is the sole shareholder of s Autoúvěr, whose

principal activities include the provision of consumer loans

for vehicles to individuals and legal persons. During 2007,

s Autoúvěr fi nanced new transactions worth CZK 1.5 billion, but reported a loss of CZK 60 million as of the year-end.

2007 2006 2005 2004

Share capital (CZK million) 100 100 2 2

Total assets (CZK billion) 8.6 6.4 2.9 0.2

Number of new transactions (CZK billion) 5.5 5.2 3.1 0.2

Net profi t or loss (CZK million) -90 -13 -22 -13

Number of new contracts 6,488 6,017 4,380 237

Number of own points of sale 1 1 1 1

Average headcount 98 --- --- ---

Contact address: Střelničná 8/1680, 180 00 Prague 8


Internet: www.sautoleasing.cz

FACTORING ČESKÉ SPOŘITELNY, A. S.

Factoring České spořitelny, a. s. was formed in November

1995. In 1997, the Company was transformed into a joint stock

company and Česká spořitelna acquired a 10 percent equity

holding. In 2001, Česká spořitelna became the sole owner

of the Company. The Company’s registered offi ce address is

Pobřežní 46, Prague 8. The Company’s focus is on domestic,

export and import factoring, and debt management related

to a broad range of commodities that principally comprise

corporate clients operating in the consumer and food industry,

suppliers for retail chains, chemistry, metallurgy, etc.

The year ended 31 December 2007 saw a slight market revival

for factoring companies, and hence also for Factoring České

spořitelny. The Company managed to retain its market share of almost 24 percent and once again placed fi rst in the market of factoring companies in the Czech Republic.

During 2007, Factoring ČS developed a system of operational

risk prevention to eliminate losses and improve information

technologies, thus increasing the user comfort for clients. For the year ended 31 December 2007, Factoring generated a net profi t of CZK 30 million according to CAS, which constitutes a year-on-year increase of 43 percent. The

volume of contracts increased by 7 percent and amounted to

CZK 29.3 billion.

282

2007 2006 2005 2004 2003


Equity (CZK million) 138 136 112 109 93


Net profi t (CZK million) 30 21 9 16 15

Contracted amounts (CZK billion) 29.3 27.3 21.6 21.4 15.8


Contact address: Pobřežní 46, 186 00 Prague 8


Internet: www.factoringcs.cz

BROKERJET ČESKÉ SPOŘITELNY, A. S.

Brokerjet České spořitelny, a. s. was established on 17 Septem-

ber 2003 by Česká spořitelna as a subsidiary (51 percent share)

and by ecetra Internet Services AG (49 percent share). Ecetra

Internet Services AG is a wholly-owned subsidiary of Erste

Bank operating as one of the most important internet securities

traders in Austria. Brokerjet České spořitelny has its registered

offi ce at Na Příkopě 29/584, Prague 1. The shareholder

structure provides brokerjet České spořitelny with a unique

combination of a strong background, an extensive sales

network as a member of the Česká spořitelna Financial Group,

and top technologies and ecetra Internet Services’ several years

of experience. This combination provides maximum support to

the Company in achieving its strategic target of becoming one

of the largest internet securities traders in the Czech Republic

within a short period of time.

In 2007, brokerjet České spořitelny reported rapid growth in its

client base and the number of transactions, and strengthened its position on the market as one of the three most important on-line brokers in the Czech Republic. As in previous years,

the Company provided educational services in the area of

fi nancial markets and thus contributed to the increased fi nancial

“literacy” of the broader public. The Company’s net profi t increased year-on-year by 27 percent to CZK 52 million.

2007 2006 2005 2004 2003


Subordinated debt (CZK million) 60 60 0

Total assets (CZK million) 3,023 2,420 1,434 256 165

Volume of managed assets (CZK million) 8,828 6,998 4,106 438 7

Net profi t (CZK million) 52 41 4 -28 -13


Contact address: Na Příkopě 29, 110 00 Prague 1


Internet: www.brokerjet.cz


283


REICO INVESTIČNÍ SPOLEČNOST ČESKÉ SPOŘITELNY, A. S.

REICO investiční společnost České spořitelny, a. s. was

formed on 13 June 2006. Česká spořitelna, a. s. has been its

sole shareholder since its formation. The Company’s registered

offi ce is located at Antala Staška 2027/79, 14000 Prague 4.

REICO investiční společnost ČS is the fi rst investment company in the Czech Republic to manage a special real estate fund. The ČS real estate fund was formed on the basis

of an approval of the Czech National Bank, which took legal

effect on 9 February 2007. The sale of the fund’s participa-

tion certifi cates to the public started on 1 March 2007. The net sales of the fund’s participation certifi cates in 2007 amounted to CZK 1.2 billion.

Commercial real estate worth almost EUR 1.9 billion was

invested in the Czech Republic by different investors despite

the impact of the American mortgage crisis on the real estate

market in 2007. The Czech market is specifi c in that the

demand has signifi cantly surpassed the supply in the long

term. For this reason, real estate experts do not anticipate the

situation on the commercial real estate market in the Czech

Republic to materially worsen. The ČS real estate fund suc-

cessfully completed the fi rst acquisition of a real estate asset

on 31 August 2007, when it acquired a 100 percent share of the

real estate company JRA, s. r. o. The second acquisition was

made on 7 December 2007, i.e. a 100 percent share of the real

estate company REICO Investment ALFA, s. r. o. was acquired.

These real estate companies include fi ve estates, each having

different purposes, located in different parts of the Czech

Republic. The performance of the fund in 2007 amounted to 1.78 percent, which corresponds with the anticipated initial development of the rate.

Economic indicators of the investment company refl ect the

initial phase of the business. REICO incurred a loss of CZK

28 million in 2007, which was principally due to an expensive

marketing campaign for the opening of the fund and an

increase in the number of the Company’s employees. The share

capital of the Company increased by CZK 50 million in 2007.

2007 2006

Share capital (CZK million) 80 30

Equity capital (CZK million) 51 29

Total assets (CZK million) 62 29

Net profi t (CZK million) –28 –2

Volume of managed assets (CZK billion) 1.2 0.0

Average headcount 7 3

Contact address: Antala Staška 2027/79, 140 00, Prague 4


Internet: www.reicofunds.cz


RAVEN EU ADVISORY, A. S.

RAVEN EU Advisory, a. s. was formed on 18 April 2000 and

has been included in the Česká spořitelna Financial Group

since 2007. The registered offi ce of the Company is located at

Jakubské náměstí 2, 602 00 Brno, and has branches in Prague,

Zlín, Pardubice, Plzeň, Hradec Králové and Liberec; the Company

operates throughout the Czech Republic. The Company has offered

its services in Slovakia since 2007 through the subsidiary Euro-

Dotácie, s. r. o. The Company implemented and certifi ed a quality

assurance system according to the ISO 9001:2001 norm in 2005.

The Company offers complex services in the area of subsidy policies of the European Union and Czech Republic for

clients of all legal forms, with an emphasis on the municipal

sector and business entities, and it is a leader on the market

284

in this area. The portfolio of the Company’s services comprises

the preparation of applications for subsidies in terms of operat-

ing programmes and other subsidy programmes, advisory for

the realisation and management of projects, including tender

procedures and ensuring the subsequent monitoring and techni-

cal support – advisory for public administration institutions.

Despite a signifi cant delay of the approval of the operating

programmes, the Company realised a total of 566 orders for

384 clients, principally in the area of applications for subsidies, in

2007. The year 2007 was notable for services innovations and new

solutions, branch network development and its linking to Česká

spořitelna, as well as inclusion in the Česká spořitelna Financial

Group. The Company incurred a loss of CZK 15 million in 2007,

which was infl uenced by a signifi cant delay of announcing calls

and the development of the branch network, post-acquisition

processes and product support, as well as the reputation of the

Company on the market.

2007 2006 2005 2004 2003

Share capital (CZK million) 7 7 7 7 0,1

Net profi t (CZK million) –15 8 5 0 5

Income from principal activities (CZK million) 25 37 28 14 9

Added value (CZK million) 9 25 18 9 7


Contact address: Jakubské náměstí 2, 602 00 Brno


Internet: www.raven.cz


REALITNÍ SPOLEČNOST ČESKÉ SPOŘITELNY, A. S.

Realitní společnost České spořitelny, a. s. with its registered

offi ce at Vinohradská 180/1632, Prague 3 was incorporated on

4 December 2002. The sole shareholder of the Company is Česká

spořitelna. The share capital was increased to CZK 20 million

on 17 December 2007. The Company is primarily engaged in

undertaking real estate activities – mediation of sales and lease

of residential and commercial real estate and provision of related

advisory services, specifi cally in order to expand and complement

the comprehensive services of the Česká spořitelna Financial

Group in real estate and advisory services in respect of the sale

and lease of real estate owned by the parent bank.

Realitní společnost ČS principally focuses on the new

housing market in Prague and Central Bohemia, but it also

dealt with classic mediation of real estate sales and leases in

2007 and had business network branches in 50 cities in the

Czech Republic at the end of 2007. The Company gener-ated income from 2,040 real estate transactions totalling CZK 5.5 billion in 2007, which supported its dominant

position in the area of real estate agencies and development

companies that sell their real estate. The Company generated

revenues from real estate activities in the aggregate amount

of CZK 75 million and net profi ts of almost CZK 0.3 million

for the year ended 31 December 2007.

2007 2006 2005 2004 2003



Income from real estate activities (CZK million) 75 48 56 35 18

Net profi t (CZK million) 0 5 5 1 -1


285


Contact address: Vinohradská 180; P.O. Box 114; 130 11

Prague 3

Telephone: 224 309 701; 800 227 227

Internet: www.rscs.cz


CONSULTING ČESKÉ SPOŘITELNY, A. S.

Consulting České spořitelny, a. s. was formed on 8 June 1995;

its current registered offi ce address is at Vinohradská 180,

Prague 3. The Company is wholly-owned by Česká spořitelna

and is a medium-sized advisory business that is gradually

building its position on the Czech and Slovak markets by

offering specialised services to both businesses and other

entities from the private and public sectors in the areas of

management consulting services, information system and information technology, fi nancial and economic advisory services and appraisals of movable and immovable assets.

For the year ended 31 December 2007, the Company incurred

a loss of CZK 2 million. Added value amounted, on average

per employee, to CZK 1.1 million and CZK 1.8 million in the

years ended 31 December 2007 and 2006, respectively. The total

revenues from services amounted to CZK 60 million in 2007.

2007 2006 2005 2004 2003



Net profi t (CZK million) –2 11 4 3 1


Contact address: Vinohradská 180, 130 00 Prague 3

Telephone: 224 309 740, 271 746 972

Internet: www.consultingcs.cz

ERSTE CORPORATE FINANCE, A. S.

Erste Corporate Finance, a. s. was formed on 19 July 1995

and has its registered offi ce at Na Perštýně 1/342, Prague 1.

The Company is a joint venture of three members of the

Erste Bank Group: Česká spořitelna, Slovenská sporiteľna

and Erste Corporate Finance Gmbh. Česká spořitelna holds

50.17 percent of the Company’s issued share capital. Erste

CF provides its clients in the Czech Republic and Slovakia

with professional investment banking and fi nancial advisory

services, primarily in mergers and acquisitions, privatisa-

tion, MBO, valuation of companies or their parts, economic

advisory, due diligence, investment opportunity analysis,

restructuring and projects of public private partnerships

(PPP). In the Czech Republic, Erste CF is a renowned

advisory company and has one of the leading positions on the market.

In the year ended 31 December 2007 the Company was suc-

cessful in winning a number of advisory mandates in invest-

ment banking and fi nancial consulting and created a basis for

the development of the Company in the following years. The

most signifi cant projects in 2007 comprised: consulting for

ČEZ, Telefónica O2 Czech Republic, Slovak Telekom and

Erste Bank Group companies. Erste Corporate Finance also

provided advisory services in the area of public private partner-

ship projects in 2007. Erste Corporate Finance generated a net

profi t after tax of CZK 40 thousand under Czech Accounting

Standards (CAS) for the year ended 31 December 2007.

Income from advisory services amounted to CZK 70 million.

286

2007 2006 2005 2004 2003


Equity under CAS (CZK million) 50 50 67 37 61

Net profi t under CAS (CZK million) 0 13 30 8 47


Contact address: Na Perštýně 1/342, 110 00 Prague 1


Internet: www.erste-cf.com


INFORMATIKA ČESKÉ SPOŘITELNY, A. S.

Informatika České spořitelny, a. s. was formed on

11 December 1997 by Česká spořitelna as a wholly-owned

subsidiary with the objective of providing Česká spořitelna

and/or its subsidiaries with auxiliary banking services. The

Company is involved in providing technical servicing and

administration of information technologies and purchasing

of goods for sale in the IT area for Česká spořitelna and

other members of the Group.

In the year ended 31 December 2007, Informatika České

spořitelny focused on providing warranty and post-warranty serv-

ices of IT equipment owned by Group members, installation and

servicing of ATMs for Česká spořitelna, technical support in IT

servicing for the Česká spořitelna Financial Group, and support to

traders equipped with POS and FlexiPad terminals. The Company

was also involved in HW business activities for the ČS Financial

Group and provided technical support through its HW specialists

in the implementation of Česká spořitelna’s development projects.

Informatika ČS holds the status of an authorised business and

service HP partner and an ISO 9001 – 2000 certifi cate.

2007 2006 2005 2004 2003



Net profi t (CZK million) 9 16 8 10 –3

Sales (CZK million) 253 279 281 247 390


287

Independent Auditor’s Report to the Shareholders of Česká spořitelna, a. s.





Having its registered offi ce at: Prague 4, Olbrachtova 1929/62, 140 00

Identifi cation number: 452 44 782


SEPARATE FINANCIAL STATEMENTS

Based upon our audit, we issued the following audit report dated 27 February 2008 on the unconsolidated fi nancial statements which

are included in this annual report on pages 173 to 264:

“We have audited the accompanying separate fi nancial statements of Česká spořitelna, a. s., which comprise the balance sheet as of

31 December 2007, and the income statement, statement of changes in equity and cash fl ow statement for the year then ended, and


Statutory Body‘s Responsibility for the Financial StatementsThe Statutory Body is responsible for the preparation and fair presentation of these separate fi nancial statements in accordance





Auditor‘s ResponsibilityOur responsibility is to express an opinion on these separate fi nancial statements based on our audit. We conducted our audit in

accordance with the Act on Auditors and International Standards on Auditing and the related application guidelines issued by the




The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the


to the entity’s preparation and fair presentation of the fi nancial 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




OpinionIn our opinion, the separate fi nancial statements give a true and fair view of the fi nancial position of Česká spořitelna, a. s. as of

31 December 2007, and of its fi nancial performance and its cash fl ows for the year then ended in accordance with International

Financial Reporting Standards as adopted by the EU.“

288

CONSOLIDATED FINANCIAL STATEMENTS

Based upon our audit, we issued the following audit report dated 12 March 2008 on the consolidated fi nancial statements which are

included in this annual report on pages 69 to 172:

“We have audited the accompanying consolidated fi nancial statements of Česká spořitelna, a. s., which comprise the balance sheet as

of 31 December 2007, and the income statement, statement of changes in equity and cash fl ow statement for the year then ended, and


Statutory Body‘s Responsibility for the Financial StatementsThe Statutory Body is responsible for the preparation and fair presentation of these consolidated fi nancial statements in accordance





Auditor‘s ResponsibilityOur responsibility is to express an opinion on these consolidated fi nancial statements based on our audit. We conducted our audit

in accordance with the Act on Auditors and International Standards on Auditing and the related application guidelines issued by the




The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the


to the entity’s preparation and fair presentation of the fi nancial 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




OpinionIn our opinion, the consolidated fi nancial statements give a true and fair view of the fi nancial position of Česká spořitelna, a. s. as

of 31 December 2007, and of its fi nancial performance and its cash fl ows for the year then ended in accordance with International

Financial Reporting Standards as adopted by the EU.“

RELATED PARTY TRANSACTIONS REPORT

We have also reviewed the factual accuracy of the information included in the related party transactions report of Česká spořitelna, a. s.

for the year ended 31 December 2007 which is included in this annual report on pages 265 to 276. This related party transactions report

is the responsibility of the Bank’s Board of Directors. Our responsibility is to express our view on the related party transactions report

based on our review.

289

Česká spořitelna’s Financial GroupAuditor’s ReportČeská spořitelna Selected Consolidated Financial Performance


We conducted our review in accordance with the International Standard on Review Engagements (ISRE) 2400 and the related

application guidelines issued by the Chamber of Auditors of the Czech Republic. Those standards require that we plan and perform

the review to obtain moderate assurance as to whether the related party transactions report is free of material factual misstatements.

A review is limited primarily to inquiries of Company personnel and analytical procedures and examination, on a test basis, of the

factual accuracy of information, and thus provides less assurance than an audit. We have not performed an audit of the related party

transactions report and, accordingly, we do not express an audit opinion.

Nothing has come to our attention based on our review that indicates that the information contained in the related party transactions

report of Česká spořitelna, a. s. for the year ended 31 December 2007 contains material factual misstatements.

ANNUAL REPORT

We have also audited the annual report for consistency with the fi nancial statements referred to above. This annual report is the

responsibility of the Bank’s Board of Directors. Our responsibility is to express an opinion on the consistency of the annual report and

the fi nancial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing and the related application guidelines issued by the

Chamber of Auditors of the Czech Republic. Those standards require that the auditor plan and perform the audit to obtain reasonable

assurance about whether the information included in the annual report describing matters that are also presented in the fi nancial

statements is, in all material respects, consistent with the relevant fi nancial statements. We believe that our audit provides a reasonable

basis for our opinion.

In our opinion, the information included in the annual report is consistent, in all material respects, with the fi nancial statements

referred to above.

In Prague on 25 April 2008

Audit fi rm:

Deloitte Audit s. r. o.

Certifi cate no. 79

Represented by:

Michal Petrman, statutory executive Michal Petrman, Certifi cate no.1105

290

Česká spořitelna Selected Consolidated Financial Performancefi gures in 1. Quarter 2008 according to International Financial Reporting Standards (unaudited)

CZK mil. 31. 3. 2008 31. 3. 2007

Interest income and similar income 10,750 8,132

Interest expense and similar expense –3,625 –2,438


Provisions for credit risks –655 –401


Fee and commission income 2,993 2,599

Fee and commission expense –361 –254


Net profi t on fi nancial operations 673 461

General administrative expenses –4,749 –4,402

Net insurance income 57 100

Other operating expenses, net –140 –148

Results from fi nancial assets –892 71


Income tax expense –866 –912

Profi t after taxes 3,185 2,808

Minority interest 40 –87

Net profi t for the year 3,225 2,721

Total Assets 844,571 793,985

Loans and advances to clients 421,964 346,554

Amounts owed to clients 624,663 606,709

Shareholders' equity 58,347 51,235

291

Česká spořitelna Selected Consolidated Financial PerformanceConclusions of the Annual General Meeting of ShareholdersIndex

Conclusions of the Annual General Meeting of ShareholdersHeld on 23 April 2008

At the Annual General Meeting of Česká spořitelna held

in Prague on 23 April 2008, the shareholders, inter alia,

approved the Board of Directors’ Report on the Bank’s Per-

formance and Financial Position as of and for the year ended

31 December 2007. The shareholders present at the General

Meeting were presented with the Supervisory Board’s Report

for the year ended 31 December 2007 and approved the

annual unconsolidated fi nancial statements, consolidated

fi nancial statements and proposal for profi t allocation.

The distributable funds amounted to CZK 33,946 million,

of which CZK 401 million was allocated to the statutory

reserve fund which amounted to the statutory required

amount of 20 percent of the share capital. CZK 4,560 million

was allocated to the payment of dividends, which amount

to CZK 30 per share. The balance of retained earnings is

CZK 28,985 million. The Annual General Meeting approved

the proposed changes to the Articles of Association refl ect-

ing amended legal regulations. The shareholders re-elected

Maxmilian Hardegg and Herbert Juranek as members of the

Supervisory Board of Česká spořitelna.

292

Index

AAmounts due from banks 23, 170

Amounts due from customers 23, 78,

125, 170, 181, 220, 260

ATM 3, 5, 19, 27, 31, 32, 39, 40, 64,

286

Auditor 60, 63, 68, 70, 71, 174, 287,

288, 289

BBasel II 22, 44, 48, 49, 52, 53, 101,

136–140, 144, 195, 229–233, 238, 276

Board of Directors 4, 6–11, 48–51,

55–57, 59–66, 68, 71, 77, 127, 128, 132,

139, 142, 171, 175, 183, 222, 226, 232,

235, 260–263, 276, 288, 289, 291

Bonds issued 24, 147, 241, 273

Bonus programme 31, 46, 124, 219

brokerjet České spořitelny 11, 95,

138, 146, 208, 209, 211, 270, 282

BUSINESS 24 3, 36, 39, 43

CCapital adequacy 22, 52–54, 76, 127,

180, 221

Client deposits (amounts owed to custo-mers) 19, 21, 22, 47, 52, 71, 74, 81, 86,

89, 90, 120, 129, 151–157, 162–164, 167,

168, 170, 175, 178, 184, 189, 190, 214,

215, 233, 245–249, 253–255, 258, 259,

261, 262, 273, 277

Commission and fee income 18–20,

47, 72, 84, 88, 130, 166, 170, 176, 186,

188, 224, 257, 261, 262, 273, 274, 290

Construction savings 5, 22, 23, 26, 29,

30, 78, 87, 92, 99, 101–103, 106, 107,

130, 137, 158, 160, 161, 164, 208, 224,

255, 277

Consulting České spořitelny 208, 209,

211, 270, 275, 285

Corporate clientele 32

Corporate clients 2, 3, 19, 21, 23, 35,

36, 46, 120, 138, 165, 172, 215, 231, 256,

264, 281

Corporate Governance Code 59,

62, 63

Cost/income ratio 18, 47, 277

Czech Finance Ministry 100, 119, 194

Czech National Bank (CNB)

DDeposit insurance fund 10, 11, 17, 18,

44, 51–53, 60, 62, 76, 99, 127, 144, 158,

169, 180, 193, 221, 238, 250, 260, 283

Dividends 4, 17, 22, 61, 73, 75, 80, 84,

127, 145, 171, 177, 179, 183, 185, 222,

239, 261–263, 273, 274, 291

EEquity 18, 19, 22, 28, 29, 32, 33,

35, 37, 42, 47, 50, 51, 53 ,54, 60, 61,

71, 73, 74, 77–84, 86–88, 92, 93, 97,

98, 108–114, 123, 125, 129, 134, 136,

141, 142, 144, 149, 151, 152, 162, 163,

166, 167, 168, 172, 175, 177–188, 192,

201–206, 208–211, 218, 220, 223, 227,

229, 234, 235, 237, 238, 242, 245, 246,

253, 254, 257–259, 264, 274, 278,

280–282, 286, 290

Equity investments 60, 74, 78, 84, 93,

110, 112, 129, 134, 151, 152, 162, 163,

166, 167, 168, 175, 178, 181, 183, 186,

192, 203, 205, 208–211, 223, 227, 245,

246, 253, 254, 257–259

Erste Bank 2, 4, 5, 9–16, 20, 29, 35,

37, 41, 43, 47, 50, 53, 55, 56, 59, 60, 62,

63, 88, 115, 132, 137, 138, 144, 145,

169–172, 188, 207, 226, 231, 238, 260,

263, 264, 266–268, 276, 278, 282, 285

Erste Corporate Finance 10, 15, 44,

98, 208, 209, 211, 271, 285

Erste Private Banking 5, 37, 38

Exclusive Account 28

FFactoring České spořitelny 10, 95,

138, 143, 208, 209, 211, 271, 281

Financial markets 9, 10, 37, 47, 48,

50, 51, 63, 64, 66, 136, 172, 229, 264

First Choice Bank 4, 6, 25, 40, 41,

46, 47

GGiro accounts 5, 21, 26–28, 30, 44

Guarantee funds 23, 32, 33, 37

HHomebanking 39

IIndependent professions 30

Informatika České spořitelny 10, 95,

208, 209, 211, 271, 275, 286

Information technologies (IT) 44,

281, 286

International Financial Reporting Standards (IFRS) 18, 47, 49, 68, 70,

76, 77, 88, 89, 93, 180, 181, 188, 189,

192, 277, 279, 287, 288, 290

Investiční společnost České spoři-telny 11, 28, 38, 95, 208–211, 271, 279

Invoice 24 5, 35

LLeasing České spořitelny 10, 95, 138,

143, 208–211, 271, 280

Life cycle funds 5, 6, 29, 280

Liquidity ratio 52

MMortgage bonds 19, 22, 29, 38, 52, 76,

122, 123, 147, 180, 217, 218, 241

Mortgage loans 19, 22, 23, 25, 33, 36,

40, 46, 52, 99, 101, 102, 103, 106, 107,

108, 140, 141, 158, 160, 161, 194, 196,

197, 199, 200, 234, 250, 252

Mutual funds 2, 19, 21, 28, 30, 32, 37,

38, 43, 165, 275, 279

NNet interest income 18, 19, 20, 47, 51,

52, 72, 80, 143, 166, 176, 183, 236, 237,

257, 277, 290

Net interest margin 19

Net profi t 2, 18–20, 47, 72, 73, 176,

177, 277–286, 290

Non-interest income 18

OOmbudsman 25, 42

Operating expenses 18, 20, 44, 116,

133, 170, 281, 290

Operating income 18–20, 22, 72,

78–83, 88, 110, 134, 166, 170, 176,

182–185, 188, 203, 227, 257, 262, 274

Operating profi t 18, 74, 178

PPenzijní fond České spořitelny 5, 30,

95, 97, 125, 134, 143, 208, 209, 211,

271, 278

Pojišťovna České spořitelny 30, 85, 95,

138, 143, 208, 209, 211, 271, 276, 278

Prague Stock Exchange 37, 55, 80,

123, 127, 165, 169, 182, 218, 221, 256,

260

Private Account 5, 25, 27, 28, 32,

40, 44

Private clientele 25, 33, 39

Public sector 21, 23, 36, 59, 78, 99,

100, 120, 158, 159, 181, 194, 215, 250,

281, 285

RRating 4, 5, 24, 40, 48, 49, 79, 90–93,

101, 105, 106, 110, 136–141, 145, 159,

181, 182, 190–192, 195, 198, 203,

229–234, 239, 251

RAVEN EU Advisory 4, 10, 34, 36, 42,

95, 97, 98, 208–210, 267, 271, 283

Realitní společnost České spoři-telny 26, 33, 208–211, 271, 275, 284

REICO 4, 10, 21, 29, 30, 33, 95,

208–211, 267

Reserves and provisions 86, 126,

186, 221

Retail loans 23, 40, 52, 88, 99, 103,

106–108, 137, 158, 160, 161, 189, 194,

196, 197, 199, 200, 230, 250, 252

Retirement benefi t scheme 278, 279

Risks 2, 20, 28, 44, 45, 47–53, 63, 64,

72, 79, 87, 90, 98, 124, 130, 136, 139,

141, 144–146, 172, 176, 182, 187, 190,

209, 219, 224, 229, 232, 234, 237–240,

264, 281, 287, 288, 290

ROA 18

ROE 18, 47

Ss Autoleasing 10, 43, 44, 95, 97, 138,

143, 208, 209, 211, 267, 272, 280, 281

Savings books 21, 29, 30, 74, 178

Securities 13, 15, 19, 21–24, 37, 38,

47, 54, 61–63, 71, 74–81, 83, 84, 87–90,

92–94, 99, 100, 108–116, 119–121,

125, 126, 128–131, 134, 136, 137, 143,

150–170, 175, 178, 182–187, 189, 194,

201–208, 214, 215, 218, 220–225, 227,

229, 237, 243–251, 253–262, 268,

272–274, 279, 282

Service quality 25, 32, 40, 42, 66

SERVIS 24 3, 4, 27, 32, 39, 43–45

Share capital 22, 53–55, 73, 77, 78,

97, 98, 127, 128, 171, 177, 183, 209–211,

222, 263, 275, 277–286, 291

SME 34, 78, 102, 104, 107, 108, 137,

181, 196, 197, 200, 201, 230

Stavební spořitelna České spoři-telny 11, 26, 95, 119, 143, 146, 208,

209, 211, 272, 277

Strategy 4, 6, 9, 37, 44, 46–48, 51, 56,

63–65, 79, 80, 87, 171, 182, 187, 263,

276, 279, 280

Student+ 28

Supervisory Board 4, 10–16, 45, 49,

55–57, 59–64, 66, 68, 77, 132, 139, 171,

183, 225, 226, 232, 260–263, 291

TTax 17, 21, 22, 30, 54, 56, 72, 74, 81,

85–87, 116, 119, 125, 126, 128, 135, 165,

166, 171, 176, 178, 186, 214, 220–222,

228, 256, 257, 263, 285, 290

TOP Energy 4, 34

Total assets 21, 24, 47, 71, 151, 167,

168, 170, 175, 256–259, 261, 262,

277–285, 290

XX-Account 28

Česká spořitelna, a. s.Olbrachtova 1929/62, 140 00 Prague 4

IČ: 45244782

Telephon: +420 261 071 111

Telex: 121010 SPDB C,

121624 SPDB C,

121605 SPDB C

Swift: GIBA CZ PX

Information line: 800 207 207

E-mail: [email protected]

Internet: www.csas.cz

Annual Report 2007

Production: Omega Design, s. r. o.

Material for the Public

www.csas.cz

cs vz en prezentacni i 09 - Česká spořitelna

Documents