CREDY BANKA 2008 English Final

Translation of the Independent Auditors Report and Financial Statements Issued in the Serbian language
CREDY BANKA A.D., KRAGUJEVAC

Financial Statements
For the Year Ended December 31, 2008
and Independent Auditors Report

Translation of the Independent Auditors Report and Financial Statements Issued in the Serbian language


CONTENTS

Page

Independent Auditors' Report 1 - 2

Financial Statements:

Income Statement 3

Balance Sheet 4

Statement of Changes in Equity 5

Cash Flow Statement 6

Notes to the Financial Statements 7 - 58

Translation of the Independent Auditors Report Issued in the Serbian language

INDEPENDENT AUDITORS REPORT

To the Management Board and Shareholders of
Credy banka A.D., Kragujevac

We have audited the accompanying financial statements (page 3 to 58) of Credy banka A.D., Kragujevac
(the Bank), which comprise the balance sheet as of December 31, 2008 and the related income
statement, statement of changes in equity and cash flow statement for the year then ended, and a summary
of significant accounting policies and other explanatory notes.

Managements Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in
accordance with the Law on Accounting and Auditing of the Republic of Serbia and regulations of the
National Bank of Serbia governing financial reporting of the banks. This responsibility includes:
designing, implementing and maintaining internal control relevant to the preparation and fair presentation
of financial 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.

Auditors Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted
our audit in accordance with International Standards on Auditing and the Law on Accounting and Auditing
of the Republic of Serbia. Those standards require that we comply with ethical requirements and plan and
perform the audit to obtain reasonable assurance whether the financial statements are free from material
misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditors judgment, including the assessment
of the risks of material misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys 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 financial statements.

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

(Continued)
Deloitte d.o.o.
Makenzijeva 24
11000 Belgrade
Serbia

Tel: +381 11 3812 100; +381 11 3812 200
Fax: +381 11 3812 101; +381 11 3812 201
www.deloittece.com

Business Registry Agency, registry number 4290
Raiffeisenbank a.d., Bulevar AVNOJ -a no. 64a
Business account no. 265-1040310000266-36
Tax identification number 100048772
Inscribed and paid capital 150.750,06 EUR

2

Translation of the Independent Auditors Report Issued in the Serbian language

INDEPENDENT AUDITORS REPORT

To the Management Board and Shareholders of
Credy banka A.D., Kragujevac (Continued)

Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of
Credy banka A.D., Kragujevac as of December 31, 2008, and its financial performance, changes in equity
and its cash flows for the year then ended in accordance with the Law on Accounting and Auditing of the
Republic of Serbia, regulations of the National Bank of Serbia governing financial reporting of banks and
basis for the preparation and presentation of the financial statements disclosed in the Note 2 to the financial
statements.

Emphasis of Matter

Without qualifying our opinion, we draw attention that the Bank is required to maintain certain ratios
pertaining to the volume of its activities within the prescribed ratios, i.e., to harmonize the volume and the
composition of its risk-weighted placements with the Law on Banks and Other Financial Institutions and
with the National Bank of Serbia requirements. As disclosed in Note 27 to the financial statements, as of
December 31, 2008, the ratio of the Banks investments in the non financial sector entities and fixed assets
amounted to 106.09% and did not comply with the prescribed maximum of 60% of the Banks core capital.

Belgrade, February 28, 2009

Nada Sui
Certified Auditor


Translation of the Financial Statements Issued in the Serbian language
4
BALANCE SHEET
As of December 31, 2008
(Thousands of RSD)

Notes 2008 2007
ASSETS
Cash and cash equivalents 3.9, 13 1,361,109 847,062
Revocable deposits and loans 14 1,306,400 2,498,591
Fee and commission receivables 15 45,143 26,946
Loans and deposits to customers 3.4, 16 3,078,646 2,062,032
Securities (excluding treasury shares) 3.6, 3.7, 17 228,385 326,568
Equity investments (interests) 3.8, 18 1,420 45,264
Other placements 19 768,333 953,451
Intangible assets 3.3, 20 8,368 13,027
Fixed assets and investment property 3.3, 20 957,461 858,008
Deferred tax assets 3.11, 12 17,654 13,188
Other assets 21 66,429 185,424

Total assets 7,839,348 7,829,561

LIABILITIES
Transaction deposits 22 1,547,392 1,914,111
Other deposits 23 4,773,840 4,024,348
Borrowings 24 122,493 8,432
Interest, fee and commission payables
and change in the value of derivatives 19,691 13,067
Provisions 26 55,334 41,915
Tax liabilities 3,716 2,983
Tax and dividend payables 369 -
Deferred tax liabilities 3.11, 12 48,201 35,962
Other liabilities 27 102,823 81,818

Total liabilities 6,673,859 6,122,636

EQUITY 27
Share and other capital 1,709,001 1,708,931
Reserves 404,263 329,932
Accumulated losses (947,775) (331,938)

Total Equity 1,165,489 1,706,925

Total Liabilities and Equity 7,839,348 7,829,561

OFF-BALANCE-SHEET ITEMS 28 8,102,839 7,665,437

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

5
STATEMENT OF CHANGES IN EQUITY
Year Ended December 31, 2008
(Thousands of RSD)
2008. 2007.
SHARE CAPITAL
Balance, beginning of year 1,426,550 1,300,090
Newly issued shares - 126,460

Balance, end of year 1,426,550 1,426,550

OTHER CAPITAL
Balance, beginning of year 6,260 6,260

Balance, end of year 6,260 6,260

SHARE PREMIUM
Share premium arising from new share issuance 276,191 276,191


TREASURY SHARES
Acquisition (70) (70)
Sale of treasury shares 70 -
Balance, end of year

- (70)

RESERVES FOR POTENTIAL LOSSES
Special reserve for potential losses 245,682 310,442
Additional provision for potential losses to be set aside as
appropriation of retained earnings (245,682) (310,442)


OTHER RESERVES
Balance, beginning of year 3 3
Balance, end of year

3 3

REVALUATION RESERVES
Property and equipment appraisal effect 120,246 311,276
Effects of deferred taxes arising from the appraisal of property
and equipment (12,024) (31,128)
Transfer to accumulated losses based on the sale of fixed assets (87) -
(Negative)/positive effects of remeasurement of available-for sale
securities to their fair value (33,804) 4,782


ACCUMULATED LOSS
Balance, beginning of year (331,938) (137,216)
Loss for the year (615,924) (194,722)
Transfer from revaluation reserves based on effects of sale of fixed assets 87 -

Balance, end of year (947,775) (331,938)

TOTAL EQUITY 1,165,489 1,706,925

6
CASH FLOW STATEMENT
Year Ended December 31, 2008
(Thousands of RSD)
2008. 2007.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash provided by/(used in) operating activities
Interest receipts 698,840 498,528
Fee and commission receipts 393,800 374,229
Receipts from other operating income 158,663 233,736
Interest payments (319,087) (201,608)
Fee and commission payments (60,615) (50,758)
Payments to, and on behalf of employees (607,154) (494,648)
Taxes, contributions and other duties paid (104,220) (99,878)
Payments for other operating expenses (279,136) (244,773)

Net cash (used in)/provided by operating activities
(118,909) 14,828 prior to changes in placements and deposits

Decrease/(increase) in placements and increase/(decrease) in deposits
Decrease in loans and placements to banks and customers 647,010 -
Increase in deposits from banks and customers - 1,929,655
Increase in loans and placements to banks and customers - (2,175,462)
Increase in securities at fair value through profit or loss, trading
placements and short-term securities held to maturity (87,995) (271,499)
Decrease in deposits from banks and customers (24,651) -

Net cash provided by/(used in) operating activities before income taxes 415,455 (502,478)
Income taxes paid (688) (6,936)

Net cash used in operating activities 414,767 (509,414)

CASH FLOWS FROM INVESTING ACTIVITY
Cash provided by/(used in) investing activity
Proceeds from long-term investments in securities - 4,325
Cash used for the purchase of intangible assets, fixed assets
and investment property, net (32,770) (24,357)

Net cash used in investing activities (32,770) (20,032)

CASH FLOWS FROM FINANCING ACTIVITIES
Cash provided by/(used in) financing activities
Proceeds from share issue - 402,651
Cash from borrowings 100,637 -
Proceeds from the sale of treasury shares 70 -
Cash used for subordinated liabilities (972) (971)

Net cash provided by financing activities 99,735 401,680

NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS 481,732 (127,766)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 847,062 1,003,066
NET FOREIGN EXCHANGE GAINS /(LOSSES) 32,315 (28,238)

CASH AND CASH EQUIVALENTS, END OF YEAR 1,361,109 847,062


NOTES TO THE FINANCIAL STATEMENTS
December 31, 2008
All amounts are expressed in thousands of RSD, unless otherwise stated.
7

1. BANKS ESTABLISHMENT AND OPERATING POLICY

Credy banka A.D. Kragujevac (hereinafter: the Bank) was established as a shareholding
company under the name of J ugobanka J ubanka D.D., Kragujevac, pursuant to the J une 27, 1991
Articles of Incorporation of the Bank and J uly 3, 1991 Decision issued by the National Bank of
Serbia. It was inscribed in the Register maintained by the Commercial Court in Kragujevac under
the registration number Fi. 1378-91 on J uly 9, 1991.

In order to comply with the Law on Banks and Other Financial Institutions, the Bank was entered
in the register maintained by the Commercial Court in Kragujevac on J une 20, 1995 pursuant to
the Decision numbered Fi. 1355/95.

At the March 30, 2000 Assembly meeting, the Bank enacted the Decision on merger with
umadija banka A.D., Kragujevac. The merger was consummated on J anuary 1, 2000 with the
balance of assets, equity and liabilities as of December 31, 1999. The Merger and Acquisition
Agreement entered by and between the Bank and umadija banka A.D., Kragujevac was signed
on March 30, 2000. Based on its Decision number IV/143 634/1 as of April 20, 2000, the National
Bank of Yugoslavia gave its consent to the Amendments and Addendums to Articles of
Incorporation of J ugobanka J ubanka A.D., Kragujevac which relate to the abovedescribed merger
of umadija banka A.D., Kragujevac. Pursuant to the Decision of the Commercial Court in
Kragujevac number Fi. 376/2000, the merger with umadija banka A.D., Kragujevac and
establishment of the Main Branch umadija banka Kragujevac were registered.

The change in the registered name into Credy banka A.D., Kragujevac was entered into the Court
Register maintained by the Commercial Court in Kragujevac on September 3, 2001, pursuant to
the Decision number Fi 1116/2001, and as provided in the NBY Decision as of J une 21, 2001,
number 1339 and J une 14, 2001 Decision enacted by the Banks Assembly.

At the December 10, 2004 Assembly meeting, the Bank enacted a Decision to accept the merger
of Credy banka A.D., Kragujevac with Srpska regionalna banka A.D., Beograd.

The merger was executed on November 1, 2004 with the assets, equity and liabilities as of
October 31, 2004.

By its December 24, 2004 Decision register number 5011, the Bank consented to the Decision
number 25744 regarding the Proposal of the Decision on Amendments and Addendums to the
Articles of Incorporation in order to account for the merger between Credy banka A.D.,
Kragujevac and Srpska regionalna banka A.D., Beograd.

Pursuant to the December 24, 2004 Decision enacted by the Commercial Court of Kragujevac
number Fi 1376/04, the merger between Credy banka A.D., Kragujevac and Srpska regionalna
banka A.D., Beograd was registered.

The Bank is registered to perform the deposit, credit and other banking operations in the country
and payment transactions abroad, based on the J une 18, 1999 Decision of the National Bank of
Yugoslavia registration number 465. Under the Decision of the National Bank of Yugoslavia
registration number 4162 as of November 23, 2001, the Bank became authorized to perform
payment transactions abroad (the so-called grand authorization).

At December 31, 2008, the Bank comprised of the Central Office located in Kragujevac, Kralja
Petra I Street number 13, 5 Main Branches, 12 Branches, 33 Branch Offices, 2 Business Units, 4
Agencies and 39 outlets.

As of December 31, 2008, the Bank had 707 employees (December 31, 2007: 788 employees).
The Banks tax identification number is 101458655.

December 31, 2008
8

2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL
STATEMENTS

2.1. Basis of Preparation and Presentation of the Financial Statements

Pursuant to the Law on Accounting and Auditing (Official Gazette of the Republic of Serbia no.
46 of J une 2, 2006), legal entities and enterprises incorporated in Serbia are required to maintain
their books of account, to recognize and value assets and liabilities, income and expenses, and to
present, submit and disclose financial statements in conformity with the prevailing legislation and
professional rules which include: the Framework for the Preparation and Presentation of Financial
Statements (the Framework), International Accounting Standards (IAS) and International
Financial Reporting Standards (IFRS), as well as the related interpretations representing an
integral part of these standards.

Pursuant to its Decision numbered 011-00-738-2003-01 of December 30, 2003, the Republic of
Serbia Ministry of Finance determined and issued the Framework and IAS that were applied as of
December 31, 2002, and upon which both the previous and the new Law on Accounting and
Auditing from 2006 were based.

The amendments to the IAS, as well as the newly-issued IFRS and the related interpretations
issued by the International Accounting Standards Board (IASB) and the International Financial
Reporting Interpretations Committee (IFRIC), upon the aforementioned date, were officially
adopted pursuant to a Decision enacted by the Ministry of Finance of the Republic of Serbia with
reference to the issuance of International Financial Reporting Standards (number 401-00-11/2008-
16) as published in the Official Gazette of the Republic of Serbia number 16 of February 12, 2008.

However, until the preparation date of the accompanying financial statements, not all amendments
to Standards and Interpretations had been translated (particularly after the aforesaid Decision of
the Ministry). The Interpretations in application for the accounting periods commencing J anuary
1, 2008, which were not officially translated and adopted by the Ministry are disclosed in Note
2.2.

The accounting regulations of the Republic of Serbia depart from IFRS and certain provisions of
IAS 39 Financial Instruments: Recognition and Measurement given that in the Interpretation of
the Ministry of Finance number 401-00-222/2009-16 dated February 24, 2009, the negative effects
and/or the decline in the value of securities available-for-sale (mostly shares), do not represent a
permanent impairment in the value but rather a fluctuation arising from extraordinary
circumstances that have lead to a drop in prices, and accordingly, the negative effects arising from
the decrease in fair value are not treated as impairment losses on securities available-for-sale, and
are not transferred to the income statement, but presented within the balance sheet as an equity
deductible.

In addition, the accompanying financial statements are presented in the format prescribed under
the Guidelines on the Prescribed Form and Content of the Financial Statements of Banks and
Other Financial Institutions (Official Gazette of the Republic of Serbia no. 74/2008 and 3/2009).
Such statements represent the complete set of financial statements as defined under the law, which
differ from those defined under the provisions of IAS 1, Presentation of Financial Statements
and IAS 7, Cash Flow Statement, and differ in some respects, from the presentation of certain
amounts as required under the aforementioned standards.

December 31, 2008
9

STATEMENTS (Continued)

2.2. Standards and Interpretations Issued, but not yet in Effect

As of the financial statements issuance date, the following standards, amendments and
interpretations were issued by the Board and Committee, but were neither in effect nor officially
adopted and translated in the Republic of Serbia for the accounting periods commencing on or
after J anuary 1, 2008:

IAS 1 Presentation of Financial Statements (effective for financial periods starting J anuary 1,
2009);
IAS 23 (Amended) Borrowing costs (effective for financial periods starting J anuary 1, 2009);
IFRS 8 Operating Segments (effective for financial periods starting J anuary 1, 2009);
IFRS 3 (Amended) Business Combinations and IAS 27 (Amended) Consolidated and Separate
Financial Statements (effective for financial periods starting J uly 1, 2009);
Amendments to IFRS 2 Share-Based Payment - Vesting Conditions and Cancellations
(effective for financial periods starting J anuary 1, 2009);
Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial
Statements (effective for financial periods starting J anuary 1, 2009);
Amendments to IAS 39 Financial Instruments: Recognition and Measurement Eligible
Hedged Items (effective for financial periods starting J uly 1, 2009);
Amendments to IFRS 1 First-time adoption of International Financial Reporting Standards and
IAS 27 Consolidated and Separate Financial Statements (effective for financial periods starting
J anuary 1, 2009);
Improvements to International Financial Reporting Standards 2008 (most changes are effective
for financial periods starting J anuary 1, 2009);
Improvements to IFRS 1 First-time Adoption of International Financial. Reporting Standards
(in effect from J uly 1, 2009);
IFRIC 17 Distributions of Non-cash Assets to Owners (in effect from J uly 1, 2009);

Also, as of the financial statements preparation date, the following interpretations were not
officially adopted by the Ministry.

IFRIC 13 Customer Loyalty programs (effective for financial periods starting J uly 1, 2008);
IFRIC 14 Interpretation on IAS 19 The Limit on a Defined Benefit Assets, Minimum
Funding Requirements and their Interaction (effective for the accounting periods starting
J anuary 1, 2008);
IFRIC 16 Hedges of a Net Investment in a Foreign Operation. (effective for financial periods
starting October 1, 2008).

In accordance with the aforementioned, the accompanying financial statements cannot be
described as having been prepared in accordance with IFRS and IAS.

In the preparation of the accompanying financial statements, the Bank adhered to the accounting
policies described in Note 3 which are in conformity with the accounting, banking and tax
regulations prevailing in the Republic of Serbia.

The Banks financial statements are stated in thousands of dinars (RSD). The dinar is the official
reporting currency in the Republic of Serbia.

December 31, 2008
10

STATEMENTS (Continued)

2.3. Comparative Information

In order to conform the presentation of figures to the current reporting period, certain
reclassifications have been made to the amounts reported in the financial statements for the year
ended December 31, 2007.

2.4. Use of Estimates

The presentation of the financial statements requires from the Banks management to make best
estimates and reasonable assumptions that effect: the assets and liabilities amounts, the disclosure
of contingent liabilities and receivables as of the date of preparation of the financial statements, as
well as the income and expenses arising during the accounting period. These estimations and
assumptions are based on information available to us, as of the date of preparation of the financial
statements. However, actual results may vary from these estimates.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3.1. Interest and Commission Income and Expenses

Interest income and interest expense, including penalty interest and other operating income and
expenses arising on the interest-bearing assets and/or interest-bearing liabilities, are recorded in
the income statement on an accrual basis (accounting basis). Interest income also includes positive
effects of hedging financial instruments, mostly based on linking the annuity to the RSD:EUR
exchange rate, and is accounted as of the annuitys maturity date, i.e., collection date.

With placements adequately provided for, the Bank suspends the interest accrued, but not
collected, until the allowance for impairment is formed.

Receivables and payables for suspended interest are stated within off-balance sheet items.

Fee and commission income and expenses are recognized when incurred as the accrued income is
collected simultaneously.

Fees and commissions are mostly earned by rendering services of payment transfers, loan
administration, issuance of guarantees and letters of credit, as well as other services. Loan
origination fees which cover the expenses incurred thereof, are recognized when collected, while
loan administration fees are deferred to the loan repayment period regardless of the time when
these are collected and are recorded within interest income.

3.2. Foreign Exchange Translation

Transactions denominated in foreign currencies are translated into dinars at official exchange rates
at the date of each transaction.

Assets and liabilities denominated in foreign currencies are translated into dinars by applying the
official exchange rates that are prevailing at the balance sheet date.

Net foreign exchange gains or losses arising upon the translation of transactions, and the assets
and liabilities denominated in foreign currencies are credited or charged to the income statement.

Commitments and contingent liabilities denominated in foreign currencies are translated into
dinars by applying the official exchange rates that are prevailing at the balance sheet date.

December 31, 2008
11

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.3. Property, Equipment and Intangible Assets

At December 31, 2008, equipment and intangible assets are stated at cost less accumulated
depreciation/amortization and impairment losses, if any.

Items of property are initially measured at cost. In the subsequent measurement of property (land
and buildings), the Bank applies the revaluation model in accordance with IAS 16 Property, Plant
and Equipment, whereas the cost model is applied to equipment.

The revalued amount is assessed by a certified appraiser. In the assessment the cost method has
been applied. The appraisal is performed on a regular basis, i.e., when the Banks management
assesses that the book value of property significantly differs from its market value. The positive
revaluation effects are credited to revaluation reserves. The decrease in the value of property is
charged to revaluation reserves created in the revaluation of the property at issue. However, the
decrease shall be charged to expenses of the period in which the difference is identified, if the
revaluation surplus relating to that asset does not suffice.

Upon disposal of property, revaluation reserves arising from the asset sold are transferred to
retained earnings from previous years.

Property and other assets, including tangibles acquired in lieu of debt settlement and leased, are
classified as investment property. Investment property is stated at cost.

Depreciation and amortization are calculated on a straight-line basis by applying the following,
annual rates in order to write off the assets over their estimated useful lives:

Intangible assets 20%
Computers 20.0% - 50.0%
Buildings 1.1% - 4.0%
Motor vehicles 14.3% - 33.3%
Investment property 1.3%
Furniture and other equipment 7.0% - 50.0%
Other 7.0% - 16.5%

The depreciation of property and equipment commences when these assets are placed into use.

3.4. Loans

Loans are stated in the balance sheet at amortized value which comprises the initial amount of
approved placement, increased by the accrued interest less repayment of the loan principal and
allowance for impairment, based on the assessment of specifically-identified exposures and losses
that are inherent in the Banks loan portfolio. The Banks management applies the internally
adopted methodology in its evaluation which is disclosed in Note 3.5.

Loans that are disbursed in dinars and index-linked to the RSD:EUR exchange rate or to the
officially published coefficients derived from the changes in the retail price growth index, are
revalued in accordance with the specific individual loan agreements in question. The effects of
such revaluation are included under gains and losses on the valuation of assets and liabilities.

December 31, 2008
12


3.5. Allowances for Impairment and Provisions for Contingent Liabilities

In the assessment of credit risk, the management applies its internal model for risk assessment to
the accompaniment of the methodology for the calculation of allowance for impairment of balance
sheet assets and provisions for losses on off-balance sheet items. The credit risk assessment takes
the following into account: financial positions of debtors from the aspect of profit stability,
liquidity gap between items of assets and liabilities, cash flow adequacy as a difference between
the net cash flow from debtors operating activities and short-term financial liabilities of debtors
and indebtedness expressed as debt to equity ratio, customer regularity in setting its contractual
liabilities towards the Bank, i.e. default in settling contractual liabilities and quality of collaterals
provided against the Banks receivables (first class, adequate or otherwise rated with respect to its
quality).

Pursuant to internal criteria for the credit risk assessment, the Bank rates customers, receivables
from customers and legal entities as belonging to performing assets, risk-weighted assets and non-
performing assets.

Receivables from entrepreneurs and registered farmers are rates pursuant to their regularity in
settling materially significant liabilities towards the Bank within the last 12 months, based on their
liquidity and due settlement of their tax dues.

The calculation of the allowance for impairment of receivables from retail customers is performed
on individual basis for receivables from debtors owing more than RSD 1,500,000.00 (in case of
frequent defaults and deterioration in creditworthiness) and collectively, for all other receivables
due from retail customers designated into groups per type of product: loans, credit cards, current
accounts and receivables for which legal suits have been filed.

The methodology for the calculation of allowance for impairment of balance sheet assets and
provisions for losses on off-balance sheet items closer determines the procedure and criteria for
the calculation of allowance for impairment.

For the assessment of credit risk, the internal model is applied with the methodology for the
calculation of allowance for impairment of the balance sheet assets and provisions for losses on
off-balance sheet items, according to which all the Banks receivables classified pursuant to the
provisions of the Decision of the National Bank of Serbia delineating the classification of balance
sheet assets and off-balance sheet items, subject to the credit risk assessment.

Loans in dinars, for which hedging is achieved by linking the dinar to EUR exchange rate, are
revalued in accordance with the agreement pertinent to each loan. The effect of reconciling with
the exchange rate as of the balance sheet date is recorded through income statement.

Special reserve for potential losses is determined in accordance with the relevant NBS
Regulations. Loans, other placements, guarantees and off-balance-sheet exposures are classified
into categories A, B, V, G and D, in accordance with the evaluation of their collectability and
associated risk exposures, which depend upon the number of days the payments are in arrears,
financial standing of the counterparty, and the quality of the collateral obtained on the exposures.
The estimated amount of special reserve for potential losses is calculated by applying the
percentages ranging between: 1% and 2% for placements classified into the A category, between
5% and 10% for the placements classified into the B category, between 20% and 35% for the V
category placements, percentage of 40% to 75% for the G category placements and 100% for
placements in D category.

December 31, 2008
13


3.5. Allowances for Impairment and Provisions for Contingent Liabilities (Continued)

The difference between the amount of special reserve for potential losses calculated in accordance
with the National Bank of Serbia Decision on the Classification of Balance Sheet and Off-Balance
Sheet Exposures, and the amount of allowances for impairment and provision for contingent
liabilities estimated in accordance with the internally adopted methodology, is presented as special
reserve for potential losses within the equity.

Special reserve for potential losses is set aside as appropriation of retained earnings. If current
year profit and retained earnings from prior years are not sufficient to cover the estimated amount
of special reserve, the difference is recognized as additional required provision and represents the
item to be deducted from equity.

3.6. Trading Securities

Trading securities comprise of securities which are held for the purpose of making a profit by
trading it in the near term. Trading securities are recorded at cost and, as of the balance sheet date,
these securities are remeasured to their fair values. All realized and unrealized gains arising on
sale, and any changes in their fair values are charged to expenses/credited to income within Gains
/(Losses) on sale of securities.

3.7. Securities Held-to-Maturity

Securities held-to-maturity represent securities for which there is a positive intention and ability to
hold to maturity. Securities held-to-maturity consist of bills of exchange held-to-maturity. All
securities are initially recorded at cost. As at the balance sheet date, securities held-to-maturity are
recorded at amortized cost, using the original effective interest rate, less provisions for
impairment, if any.

3.8. Securities Available-for-Sale

Securities for which there is intention to hold them for an indefinite time period that can be sold to
meet liquidity needs or due to changes in interest rates, foreign exchange rates or prices of equity,
are classified as securities available-for-sale. These securities are comprised of equity
instruments issued by banks and other legal entities, as well as other securities available-for-sale.

Following the initial recognition, securities available-for-sale are presented at fair value. The fair
value of securities not listed on the stock exchange is based on the currently offered prices on the
market. Unrealized gains and losses arising from securities available-for-sale are recorded within
revaluation reserves, until such security is sold, collected or in some other way realized, or until
the security is permanently impaired. When securities available-for-sale are sold or become
impaired, cumulative fair value adjustments recognized within equity are recorded in the income
statement.

Equity investments in other legal entities that are not quoted on an active market are excluded
from being measures at fair value and are stated at cost, net of allowance for impairment. Gains
and losses on the sale of these securities are credited or charged to income statement with
Gains/(losses) on sale of securities available-for-sale.

3.9. Cash and Cash Equivalents

For the purposes of the cash flow statement, Cash and cash equivalents include cash, balances
on the current accounts held with other banks, gold and assets held on the gyro account.

December 31, 2008
14


3.10. Managed Funds

The Bank manages funds on behalf of, and for the account of third parties, charging fees for these
services. These items are not included in the Banks balance sheet.

3.11. Income Taxes

Current Income Taxes

Income tax is payable at the rate of 10% on the tax base reported in the annual corporate income
tax return as reduced by any applicable tax credits. The taxable base stated in the income tax
return includes the profit shown in the statutory statement of income, as adjusted for differences
that are specifically defined under statutory tax rules.

The tax regulations in the Republic of Serbia do not envisage that any tax losses of the current
period be used to recover taxes paid within a specific carry back period. However, any current
year losses may be used to reduce or eliminate taxes to be paid in future periods, but only for
duration of no longer than ten years in succession.

Deferred Income Taxes

Deferred income taxes are provided using the balance sheet liability method, for temporary
differences arising between the tax bases of assets and liabilities and their carrying values in the
financial statements. The currently-enacted tax rates or the substantively-enacted rates at the
balance sheet date are used to determine the deferred income tax amount. Deferred tax liabilities
are recognized on all taxable temporary differences. Deferred tax assets are recognized for all
deductible temporary differences, and the tax effects of income tax losses and credits are available
for carry forward, to the extent that it is probable that taxable profit will be available, against
which the deductible temporary differences and the tax loss/credits of the carry forwards can be
utilized.

Indirect Taxes and Contributions

Indirect taxes and contributions include property taxes and various other taxes and contributions
paid, pursuant to effective republic and municipal regulations.

3.12. Employee Benefits

The Bank does not have defined benefit plans or share-based remuneration options and there are
no identified liabilities thereof as of December 31, 2008. At the aforementioned date, the Bank
made provisions based on the estimated present value of retirement benefits to which employees
are entitled upon regular retirement.

Long-term liabilities of the Bank arising from retirement benefits payable to an employee once the
conditions prescribed by the Labor Law have been met, stated at December 31, 2008 represent the
present value of future payments to employees determined under the following assumptions:

Discount rate: 17.75%
Fluctuation rate: 40.00%

December 31, 2008
15


3.13. Fair Value

The accompanying financial statements are prepared on a historical cost basis, including
adjustments and provisions made to reduce assets to their estimated recoverable amounts.

It is the policy of the Bank to disclose the fair value information on those financial assets and
financial liabilities for which published market information is readily and reliably available, and
whose fair value is materially different from their recorded amounts. Sufficient market experience,
stability and liquidity do not exist for the purchase and sale of loans and other financial assets or
liabilities, given that published market information is not readily available. Hence, fair value
cannot be reliably determined. In the opinion of the Banks management, amounts expressed in the
financial statements reflect the fair value which is most reliable and useful for the needs of the
financial reporting in accordance with the Law on Accounting and Auditing of the Republic of
Serbia.

3.14. Segment Information

The largest portion of its business operations is performed on the territory of the Republic of
Serbia. The concentration of financial assets per separate industries is presented in Notes to the
financial statements. The revenues which the Bank realizes through its broker-dealer department
are presented within fee and commission income.

4. RISK MANAGEMENT

Managing risks comprises effective supervision, control and active management of credit and non-
credit risks comprising liquidity risks, interest rate risk, foreign currency risk and other risks.

The Banks Management Board is responsible for the establishment of a unique system for the
risk management and supervision over the system and is under obligation to ensure that the
Executive Board closer identifies the risks to which the Bank is exposed as well as to exercise
control over the risks in accordance with the adopted policies and procedures.

The Banks Executive Board identifies and measures risks to which the Bank is exposed in its
operations and applies the principles of risk management as approved by the Management Board
of the Bank. The Board for monitoring the Banks business operations analyzes and adopts the
proposals of the Banks policies and procedures in respect of risk management and internal
controls submitted to the Management Board for further consideration and adoption. The Board
for monitoring and managing risks considers the reports on risks in the Bank and delivers them
to the Asset and Liability Management Board. The Investment Board monitors and analyzes the
compliance of the Banks business operations, expressed through the positions in the Trading
Book, with the prescribed limits determined pursuant to the Decision enacted by the Bank and
another Decision issued by the NBS.

The Bank has adopted procedures securing the control and consistent application of all internal
Banks procedures with reference to risk management, as well as the procedures for regular
reporting to the Banks bodies and to the National Bank of Serbia regarding risk management.

December 31, 2008
16

4. RISK MANAGEMENT (Continued)

4.1. Credit Risk

Credit risk relates to the risks that customers will not be able to settle its liabilities towards the
Bank in full and when due. The Bank is secured against credit risk as follows:

- by calculating and allocating reserves for potential losses and losses contingent on balance sheet
assets and off-balance sheet items of the Bank, pursuant to the NBS regulations and enactments
of the Bank,
- by monitoring the changes in operating ratios and reconciling these ratios with percentages
prescribed by the NBS,
- by monitoring the Banks exposure to credit risk arising from the impact of dinar exchange
fluctuations on the financial position of debtors pursuant to the Banks methodology,
- by monitoring the participation of non-performing assets (G, D category) in the total classified
assets so that it has a tendency towards the average in the banking sector,
- by daily customer monitoring from the aspect of default in collection noticing first signs that a
customer may be experiencing certain issues on operations,
- by strict adherence to the rules for the activation of collaterals accepted, as prescribed in the
operating policies,
- by collecting placements so that the percentage of collectability of matured liabilities is not
below 90%,
- by dispersion of placements per separate industries and customers, while taking care that the
Banks exposures to individual clients or groups of related parties is within the limits prescribed
by the NBS.

The credit risk management principles are the following:

a) Clearly defined competencies and responsibilities, procedures in the decision-making process
in the area of credit and other types of engagements with legal entities and entrepreneurs, and
targets and objectives set under the Operating Plan and monitoring the implementation, as in
accordance with the credit policy adopted by the Bank,

b) The application of defined criteria for the loan origination with the prescribed rating of
customer creditworthiness, monitoring the compliance with the conditions that are to be
fulfilled upon loan origination or upon any other engagement, as in accordance with the
Banks Operating Policy.

c) Adequate maintenance of credit files in accordance with the NBS Decision on the Procedure
and Content of a Credit File.

d) Defined criteria for measuring the risk inherent in placements, pursuant to the Procedure for
identifying assessment, diminishing and monitoring credit risk and Methodology for
defining criteria for the calculation of special reserve for potential losses, and then a
developed system of communication and instructions exchanged between credit departments
exposed to risk in direct contact with the customer and Portfolio and Credit Risk Department
managing that risk, as well as periodic control and assessment performed by the internal
auditor regarding the effectiveness of risk control.

e) Education of employees within the Risk Management Sector and Portfolio and Credit Risk
Department, through regular reading of reference books, participations in seminars in the
field of risk management, technological innovations of the work process and constant
education of employees in the Branch Offices with the object of a more effective application
of procedures and guidenaces.

December 31, 2008
17


4.1. Credit Risk (Continued)

The process of credit risk management is executed in the Portfolio and Credit Risk Department
within the Risk Management Sector. In the aim of easier identification and assessment of credit
risk upon the origination of loans and other sorts of engagement, uniformity is to be applied to all
organizational parts in respect of compiling documentation and delivering standardized
information upon placement approval, which is defined in the credit file content procedure, know-
your client procedure and guidance on the unique data processing at the request of legal entities,
entrepreneurs and unit of the local self-government for the Banks body in charge.

The compilation of all necessary documentation, writing of standardized information for
placement approval and delivering it to the Portfolio and Credit Risk Department is the
responsibility of the credit officers that are, jointly with the manager of the organizational part at
issue, also responsible for the accuracy of input data and complexity of documentation included in
the debtors credit file.

Based on the data obtained from the analysis of debtor creditworthiness and its regularity in
liability settlement, the officers working in the Portfolio and Credit Risk Department rates debtors
into risk groups:

a) Low risk (pass) with the following characteristics: the customer maintains significant and/or
long-lasting connection with the Bank through its business operations or if the customer has
been operating for 5 years at least and has a high quality management; if its account has not
been frozen within the last year; the customer has adequate experience in the activity it
performs; it has a clear and stabile source of debt repayment; has been operating with profit in
the last two years; realizes cash flows sufficient to meet its dues; the maturities of its liabilities
match or significantly match the maturities of its assets; there are no debts that exceed
capital; it offers first-class or adequate collaterals. Debtors with the majority of these
characteristics are classified into the A or B category and are treated as low credit risk
exposures.

b) Medium exposure (risk-weighted assets) imply the following characteristics: the account of
such customer was frozen from time to time for more than 10 days in the last year; the source
for debt repayment is not clear or is unreliable; the customer invests an insignificant amount
of its own resources into the project; its cash flows are insufficient to cover liabilities; the
maturities of its liabilities do not match or significantly mismatch the maturities of its assets;
the customer did not operate with profit in any of the last two years; the management
fluctuates. Debtors with the majority of such characteristics are classified into V category.
Exceptionally, if the engagement is secured by adequate collateral, the receivable can be
classified into B category.

c) High risk (non-performing assets) show the following characteristics: there is no visible
source of debt repayment; the customer incurs losses that exceed its equity; it has liabilities
that are more than 30 days past due, while operating with loss; its account is frozen for more
than 90 days in succession, it was founded in the last two years, and there is no cash flow
projection; the Bank has doubtful receivables from the customer. Debtors showing these
characteristics are classified into the categories G and D. The decision on undertaking new
engagements with these debtors may be enacted by the Executive Board if the engagement
does not exceed three months, and if the engagement is within the decision-making
limitations defined by the Management Board; whereas, the Management Board enacts
decisions on engagements longer in duration. Exceptionally, if the engagement is secured by
adequate collateral, the decision on the exposure is enacted by the Banks Credit Board.

December 31, 2008
18


4.1. Credit Risk (Continued)

A credit officer involved in the origination process must obtain collaterals pursuant to the Banks
Business Policy, and in the form of standard information forward it to the Portfolio and Credit
Risk Department, whereas the assessment of the collaterals provided by the officer working in
Portfolio and Credit Risk Department.

The credit officer is bound to keep track of the customer operations, the customer liability
settlement towards the Bank and monitor the updatedness of credit files taking care of its
completeness, accuracy and any fluctuations in the value of collaterals (adequate collaterals).

A special procedure regulates the manner of managing credit risk occurring and emerging in the
Banks receivables based on loans approved and placements with retail customers.

Credit risk in the Bank is identified based on: customer creditworthiness, customer delinquency in
settling its liabilities towards the Bank and quality of collaterals that stand surety for the Banks
receivables.

Creditworthiness is the basic condition for obtaining loans and advances from the Bank. Total
monthly credit liabilities of a private individual are comprised of a sum of liabilities arising from
loans, credit cards (monthly liability from the aggregately approved credit card loan), 5% of entire
overdraft facilities per current account, activated sureties provided against loans or agreed-upon
finance leases, as well as 50% of amounts of sureties against loans.

The assessment of credit risk with receivables from retail customers is conducted according to the
Methodology applied in defining criteria for calculating special reserves for potential losses
arising from receivables from retail customers, based on which a degree of risk is determined, as is
the amount at risk, i.e. rate category of receivables.

The service engaged in coordinating, monitors the report on the classification of receivables on
quarterly basis and cooperates with the Portfolio and Credit Risk Department within the Sector in
charge of placements and risk management, with the object of prescribed timely reporting to the
National Bank of Serbia.

The coordination service reports to the Asset and Liability Management Board in respect of the
total funds engaged in loans and advances to retail sector on daily basis, and based on the Decision
made by the Banks Commission for approving loans to retail customers.

Once a month or when necessary, the organizational parts involved in retail operations report to
the Board for monitoring and managing risks, as well as to the Asset and Liability Management
Board, on the regularity of collections in retail.

4.2. Liquidity Risk

Liquidity risk relates to the adverse effects on the financial results of the Bank contingent on the
Banks inability to settle its matured liabilities when due.

For the Bank to insure itself against such risks and avoid the sanctions of the regulatory body, the
procedures defining the activities for the implementation of liquidity risk management policy have
been adopted and they prescribe the manner of identifying, measuring, mitigating monitoring
liquidity risk pursuant to legal requirements.

December 31, 2008
19


4.2. Liquidity Risk (Continued)

The Bank is under obligation to reconcile its liquidity ratio with the requirements of the NBS
Decision, where the critically low liquidity risk internally set at no less than 1.5 when it is
calculated as the average of liquidity ratio for all working days in the month (NBS Decision
prescribes the ratio of 1.0). However, it does not have to be below 1.3 for more than three working
days in succession (Decision prescribes 0.9), i.e. it amounts to 1.2 at least when calculated for a
single day (Decision prescribes 0.8).

For the purpose of identifying and measuring liquidity risk, the Sector in charge of assets provides
information for the timely and continued liquidity risk management, as well as for:

- planning the scope of inflows and outflows of dinar and foreign currency assets (daily,
monthly), as well as matching between the maturities of the Banks receivables and payables,
including the assessment of potential commitments to invest the Banks cash funds,

- daily determining and monitoring of the average balance of dinar and foreign exchange reserve
held with the NBS,

- measuring and monitoring the liquidity for each and every currency significant for the Banks
entire liquidity through monitoring liquidity and currency matching between receivables and
payables denominated in the currency at issue,

- monitoring the compliance of business operations with the limits set in the Bank with respect to
liquidity risk management delineated in the said Procedure,

- the analysis and assessment of stability in all dinar and foreign currency transaction deposits and
other demand deposits of the Bank, as well as planning and assessment of contingent liabilities
arising from dinar and foreign currency time deposits of the Bank,

- keeping track of dinar conversion into foreign currency and vice versa, as well as conversion
from one currency into another at customers requests and as the Banks needs,

- monitoring the balance of cash in foreign currency, assessment of the needs for and timely
acquisition of cash,

- determining and monitoring the liquidity ratios on daily basis and calculation of the average
liquidity ratios for each day in a month.

For the purpose of daily measuring and monitoring the net cash flows on the part of the Banks
Management Board, a Board has been established as an operating body in charge, inter alia, of
managing net cash flows, measures necessary for establishing and maintaining the adequate level
of dinar and foreign currency liquidity. For the needs of measuring daily cash flows, the Sector in
charge of assets provides data both from its own scope of work and from services concerned,
which are valid for timely management of cash flows, as well as for the needs of the Asset and
Liability Management Board.

The Sector in charge of assets undertakes measures for regulating cash flows and reports of results
thereof to the Executive Board, Risk Management Board and Placement and Risk Management
Department further reporting to the Asset and Liability Management Board of the Bank.

December 31, 2008
20


4.2. Liquidity Risk (Continued)

At the Boards meeting, daily reports are discussed, movements in dinar and foreign currency
liquidity are analyzed, as well as liquidity gaps dating from the day before or from previous
periods, while the inflows and outflows of resources are forecasted for that particular day or for
the following days, and based on the data available, for the purpose of timey undertaking the
necessary measures and activities for achieving an optimal level of net cash flows, that ensure
timely dinar and foreign currency payment transactions, timely discharge of all matured liabilities
of the Bank and meeting all the customer demands (corporate and retail customers) for additional
sources of finances and other forms of the Banks engagement.

Measuring and monitoring liquidity per currencies is performed by the Sector in charge of assets
with its the Service for dinar and foreign currency deposits and liquidity, which measures and
monitors liquidity per separate currencies EUR, USD and CHF, and collectively for all currencies,
based on the daily report on the foreign currency ratio supplied through the DEV form. Such
monitoring also makes it possible to keep track of proportion between long and short positions, on
one side, and the Banks equity, on the other. If measuring and monitoring shows that there are
significant departures in certain currencies or aggregately, which leads to a higher liquidity risk,
the Sector in charge of assets - Service for dinar and foreign currency deposits and liquidity,
reports to the Executive Board, Asset and Liability Management Board, Risk Management
Department enacting measures aiming to reconcile foreign currency positions in certain
currencies:

- purchase or sale of certain currency,
- conversion from one currency into another,
- purchase and sale of securities denominated in a certain currency,
- decreasing or increasing dinar liabilities indexed to a currency clause.

At the proposal of the Asset and Liability Management Board, the Banks Executive Board
determines exact measures for the reconciliation of liquidity risk ratios, i.e. elimination of a
critical level of liquidity determined in accordance with the Procedure used to identify, measure
and assess liquidity risk.

With the object of maintaining the prescribed liquidity level and diminishing risk of critical level
of liquidity, the Bank undertakes the following measures:

- engagement to increase deposits, capital and to obtain other sources of finances,
- effective collection of matured receivables, sale of certain type of securities (in dinars or in
foreign currency),
- the sale of foreign currency surpluses for dinars up to the desired level, which does not
jeopardize the Banks foreign currency liquidity,
- limitation or complete discontinuance in approving and disbursing loans,
- limitation or complete discontinuance in discounting securities,
- limitation or complete discontinuance in issuing guarantees and other forms of sureties,
- limitation or complete discontinuance in issuing letters of credit and other instruments used in
payment transfers,
- limitation or complete discontinuance of payments from its gyro account,
- use of interbanking loan for liquidity purposes, obtained under most favorable terms,
- undertaking other measures aiming to reconcile the inflows and outflows of resources.

December 31, 2008
21


4.3. Currency Risk

Currency risk implies risk from negative effects on the Banks financial result and capital due to
changes in exchange rates. The Bank is exposed to this risk through the items carried in the
banking and trading book.

By means of adopted Procedures, the activities in respect of currency risk management policy
implementation are defined and the manner of identifying, measuring, relieving and monitoring
risk is prescribed in accordance with the legal requirements, in the aim of eliminating risk from
incurring negative effects on the financial results and the Banks capital due to the movements in
the foreign exchange, protecting the Bank from these risks and avoiding sanctions that may
otherwise be imposed by the regulatory body.

The currency risk ratio is the proportion between the total net open foreign currency position of
the Bank and the Banks capital, calculated in accordance with the Decision delineating the capital
adequacy in banks. The total open foreign currency position of the Bank represents the absolute
value of the total long or total short foreign currency position, whichever is the greater one.

The Bank is under obligation to maintain the balance between its foreign currency assets and its
foreign currency liabilities (including the dinar items of assets and liabilities indexed to a currency
clause), so that its total net open foreign currency position (including the absolute value of net
open position in gold), at the end of each working day, does not exceed 20% of its capital, and in
its procedures, the Bank defined a critical level of currency risk as amounting to 18% of the
Banks capital.

The hedge against currency risk in the Bank is provided by managing:

- total foreign currency assets and liabilities of the Bank, taking care of their maturity, currency,
balance and liquidity matching,
- the risk of changes in intercurrency relations, taking care of its maturity, currency, balance and
liquidity matching between the Banks assets and liabilities denominated in a certain currency,
- risk from the change in the value of local currency, so that the risk from changes is transferred
to the ultimate beneficiary in the manner defined by the Banks Operating Policy, and the
amount of assets for which there is no hedge against currency risk, needs to be reconciled with
the amount of risk-weighted liabilities of the Bank indexed to a currency clause,
- the optimum level of foreign currency liquidity ensures long-term solvency in the Bank and
timely, effective and high quality payment transactions in foreign currency performed abroad. It
makes it possible for the Bank to extend loans and advances to its customers in the form of
loans and other forms of foreign currency engagements or make deposits with some other
domestic or foreign bank, its foreign currency surplus that remains once all prescribed and other
liabilities and reserve requirements have been settled,
- the optimal proportion between the repurchase and sale of currency from retail and corporate
customers, as well as entrepreneurs, and/or by purchasing or sale of foreign currency or cash on
Interbank Market,
- when necessary, by converting one into other currency in the aim of unimpeded operations and
realizing the best possible financial results, such as reconciliation of foreign currency ratios, i.e.
eliminating the critical level of long or short position of the Bank expressed in a certain
currency.

December 31, 2008
22


4.3. Currency Risk (Continued)

At the proposal of the Asset and Liability Management Board, the Executive Board determines
concrete steps to be taken as a hedge against currency risk, i.e. measures to be taken to reconcile
the foreign currency risk ratios, by eliminating the critical level of long and short foreign currency
positions in certain currency or by increasing the Banks capital by means of increasing
profitability or by increasing capital.

The measures for eliminating short foreign currency position of the Bank in a certain currency are
as follows:

- the purchase of foreign currency or cash from customer or on Interbank Market in certain
currency the conversion of foreign currency assets from one currency into another or from
currency into cash and vice versa,
- the purchase of securities stated in a foreign currency for dinars decrease in liabilities
denominated in dinars indexed to a currency cause.

Measures to eliminate a long position of the Bank in a certain currency are the following:

- the sale of foreign currency or cash to customers or on Interbank Market in a certain currency
conversion of foreign currency assets from one currency into another or by converting foreign
currency assets in the local currency, and vice versa,
- the sale of securities denominated in a foreign currency for dinar amounts decreasing the dinar
credit engagement of the Bank with a currency clause where the Bank did not agree on the
hedge against the fluctuations in foreign exchange increase in dinar liabilities with a currency
clause and the like.

4.4. Interest Rate Risk

Interest rate risk relates to the negative effects on the financial results and capital of the Bank
contingent on the movements in interest rates, and the Bank is exposed to such risk based on the
items carried in the banking book.

The Bank separately analyzes the exposure to interest rate risk based on the following:

1) Risk inherent in the maturity mismatch (for items with fixed interest rate) and repricing (for
items with variable interest rate) for separate items of assets and liabilities, as well as off-
balance sheet items of the Bank (repricing risk),
2) basis risk (the risk of the so-called imperfect correlation in the movement in rates of collection
and payment arising from different characteristics in respect of maturities, i.e. repricing and
3) the risk of options imbedded in the interest sensitive items of assets and liabilities, as well as
in the off-balance sheet items of the Bank (optionality risk). The emergence of this risk is
associated with situations such as withdrawal of deposits without defined maturities or early
loan repayment.

The Procedure used to identify interest rate risk enables timely and comprehensive identification
of interest rates to which the Bank is exposed, as well as the analysis of causes leading to its
appearance.

The Bank is exposed to the interest rate risk in case of a maturity gap between its interest bearing
assets and liabilities with fixed interest rates, as in the case of mismatch between the dates of
recalculation of interest rates applied to assets and liabilities with variable interest rates.

December 31, 2008
23


4.4. Interest Rate Risk (Continued)

Interest risk is identified based on the following elements:

- movements in interest rates on the financial market, changes in the interest reference rate of the
NBS, as well as the retail price growth interest,
-liquidity gap between the balance sheet positions,
- proportion between the interest bearing and non-interest bearing assets and liabilities,
- participation of positions with variable and fixed interest rates in the interest bearing assets and
liabilities,
- data included in the balance sheet and income statement and
- average weighted interest rate accrued on the assets and liabilities on a certain date.

Information for determining the aforementioned elements is provided by the Sector in charge of
assets, Retail Sector, Finance and Accounts Department on the basis of updated book balances
including all bookkeeping changes while using adequate databases comprised in the information
system.

For measuring interest rates, quantitative methods and ratios for expressing the scope of interest
rate risk are used.

Measuring interest rate risk is performed by determining the gap ratio, being the proportion
between interest sensitive assets and interest sensitive liabilities.

In order to determine the ratio of interest sensitivity it is necessary to identify interest-bearing
positions within assets and liabilities.

Within the interest-bearing assets and liabilities, it is necessary to establish items with fixed, i.e.
variable interest rates.

For the items with fixed interest rates, maturities are determined, whereas for the items with
variable interest rates, it is the dynamics of movements in interest rates that is being determined.

Disaggregation of interest-bearing assets and liabilities based on the previously determined
maturities, makes it possible to determine periodic gaps for individual maturities, as well as to
determine cumulative gap.

The interest sensitivity quotient may have the value of 1 when the gap position equals zero and the
sensitivity of assets and liabilities is matched. If the quotient has the value above 1, then the gap
position is positive, implying faster growth of interest income, as well as the exposure of the Bank
to the risk in case of a decrease in interest rates.

If the quotients value is below 1, it is a negative gap position which assumes faster growth of
income arising from the movements in interest rates, as well as the exposure of the Bank to the
risk in case interest rate marks a growth.

December 31, 2008
24


4.4. Interest Rate Risk (Continued)

Based on the outstanding maturities, i.e. recalculation of interest rates, the scenarios for analyzing
the impact of projected changes in interest rates relating to interest bearing assets and liabilities,
by calculating the net change in the financial results under the assumption of:

- changes in interest rates applied to placements made and deposits received with the same
intensity for all time intervals on annual basis,
- changes in interest rates applied to placements made and deposits received with different
intensity for all time intervals and
- changes in interest rates applied to placements made and deposits received with the same
intensity for different time intervals.

Interest risk is assessed as acceptable:

- if the average weighted interest rate applied to interest bearing assets is above the average
weighted interest rate applied to interest bearing liabilities by 8 percentage points,
- if the analysis performed based on the scenario indicates a positive effects on the financial
result in case of projected changes in interest rates.

Mitigating risk involves determining measures and rules for the application of those measures
relating to the assumption, reduction, diversification, transfer and aversion of risks identified or
assessed, which means continued analysis and proposing measures for removing the reasons for
the unacceptable level of interest rate risk.

4.5. Investment Risk

The Bank is bound by the legal requirements and secondary legislation acts to provide
assumptions indicating successful business operations of the Bank under terms of acceptable risk
parameters, so as to achieve its business objectives, including positive financial result and
preservation of the Banks equity.

The risk inherent in the Banks investments in other legal entities relates to the following:

a) investments of the Bank in a single entity outside the financial sector
b) total investment of the Bank in the entities outside the financial sector and capital expenditures.

The Banks investments in a single person outside the financial sector pursuant to the NBS
Decision must not exceed 10% of the total Banks capital. The total Banks investments in entities
outside the financial sector and into the Banks fixed assets (capital expenditures) must not exceed
60% of the Banks capital.

The Banks investments in the entities outside the financial sector do not include purchase of
shares for the purpose of their resale within 6 months from the share acquisition date.

The Procedure for identifying risks inherent in the Banks investments enable timely and
comprehensive identification of risks to which the Bank is exposed, as well as the analysis of
reasons leading to its appearance. The Bank is exposed to investing risk and risk from potential
fluctuations in the value of investment in other legal entities that are outside the financial sector
and capital expenditures.

December 31, 2008
25


4.5. Investment Risk (Continued)

Measuring and/or assessment of investment ratios of the Bank is performed on monthly, quarterly
and annual basis and when so requested by the Banks Executive Board, by preparing reports
based on the Banks bookkeeping data and defined parameters applied in the calculation stipulated
in the NBS Decision on risk management, where the critically high level of investments in other
legal entities and capital expenditures is considered to be the following:

- 8% for the Banks investments in a single entity outside the financial sector and
- 58% for the Banks total investments in the entities outside the financial sector and capital
expenditures.
The report on the ratio is prepared by the Banks Finance and Accounts Departments and it is
delivered to the regulatory body in the manner and following the timeline stipulated in the relevant
NBS Decision.

The assessment of fluctuations in the ratio entails the projections of the amount of ratio for a
certain time interval, and it is determined by assessing the expected changes:

- amount of capital expenditures,
- amount invested in shares and equity investments and
- amount of the Banks capital in accordance with the Decision on Capital Adequacy in Banks.

For the purpose of mitigating investment risk, the causes of unacceptable risk are continually
examined and the steps for their removal may be the following:

- efforts invested to increase the profitability of the Banks operations based on actually proposed
activities,
- increase in the Banks capital via recapitalization, distribution of profit into capital, conversion
of liabilities into equity and the like.
- discontinuance of capital expenditures except for those necessary to maintain the Banks
business activities,
- sale of shares and equity investments,
- sale and disposal of fixed assets and
- monitoring the dates for disposal and sale of shares acquired for the purpose of their resale.

4.6. Counterparty Risk

The Banks exposure to a single entity or a group of related entities and risk towards a Banks
related party is inherent in the Banks involvement with an entity or a group of related entities and
risk towards a Banks related party above the limits prescribed in the NBS Decision.

The Counterparty Risk Management Policy providing for exposures towards a single entity or a
group of related entities and risk towards a Banks related party, comprises a set of all activities
used to identify, measure, control and monitor this risk, and define clear guidelines for
determining the responsibilities of persons in charge of collecting documents relevant for noticing
the form of relatedness and in the aim of reconciliation with the defined limits and legal
provisions.

Managing counterparty risk in the Bank is performed by the Portfolio and Credit Risk Service
established within the Placement and Risk Management Department is performed by observing
the following limits:

December 31, 2008
26


4.6. Counterparty Risk (Continued)

- the Banks exposure towards a single entity or a group of related entities must not exceed 20% of
the Banks capital and
- the Banks exposure towards its related party must not be above 5% of the Banks capital.

The Risk Management Service reviews the total Banks exposure towards a single entity or a
group of related entities, as well as the total exposure towards the Banks related parties in the
manner prescribed in the Decision on Risk Management by Banks and the Law on Banks so that:

- sum of all great exposures must not exceed 400% of the Banks capital,
- the total of the Banks exposure to the Banks related party must exceed 20% of the Banks
capital.

If the aforesaid exposures attain a level 10% below the prescribed limits observed individually, the
Risk Management Service informs the Asset and Liability Management Board, i.e. the Executive
Board in the aim of limiting further exposure.

The Risk Management Service informs the Board in charge of monitoring and managing risk,
Asset and Liability Management Board in respect of the Banks exposure towards related parties
and related parties themselves on quarterly basis. The Asset and Liability Management Board
reviews the report, and together with its recommendations forwards the report to the Executive
Board and to the Board for monitoring the Banks business operations further delivering the report
for the adoption to the Management Board.

4.7. Operational Risk

Operational risk relates to the probability of negative effects on the Banks financial results and
capital based on omissions in the work of its employees, inadequate internal procedures and
inadequate management of information and other systems, as well as from unforeseen external
events.

The Bank identifies events representing sources of operational risk, where the sources of
operational risk are considered to be the following categories of events:

- internal frauds,
- external frauds,
- omissions in relations with employees and in the system, safety at work,
- issues with customers, placements, products and in the business practice of the Bank,
- damage suffered by the Banks tangibles,
- interruptions in the operations and errors in the Banks systems and
- transactions, delivery and managing processes in the Banks.

The business lines are the operations based on which the Bank disaggregates its activities and
based on which events representing sources of operational risks are monitored. The business lines
include:
- financing the corporate sector,
- trade and sale,
- retail operations,
- commercial banking,
- payments and calculation,
- agency services,
- services of asset management and
- brokerage services rendered to retail customers.

December 31, 2008
27


4.7. Operational Risk (Continued)

The Management Board monitors the disaggregation of business activities of the Bank, where the
process of classifying the Banks business activities is the subject of internal audit.

Following the identification of potential events which are at the same time the cause of operational
risk, the Bank applies itself to the measuring stage. The measurement is performed cyclically
through the records and analysis of event database.

For the record-keeping needs, a database is established regarding the following events:

- events that have occurred as a result of operational risk which have led to a loss exceeding (or
estimated to be in excess of) RSD 10.000,00 in its gross amount
- events that have occurred as a result of operational risk which could have led (but did not lead)
to a loss exceeding (or estimated to be in excess of) RSD 10.000,00 in its gross amount

Organizational parts are under obligation to prepare daily reports (e-mails) to the Risk
Management Department regarding the events that have occurred and which are included in the
database. Such reports are also prepared in the case when there are no events to report. Recording
events in databases are also the responsibility of heads of departments, heads of branch offices and
their deputies.

The Risk Management Department is responsible for monitoring all events recorded in respect of
operational risk and reporting to competent bodies.

Risk management is the process of balancing costs, hedging against risks as opposed to costs of
risk exposure. When the cost of hedge and cost of risk exposure are almost equal, the measures
taken by the Bank with respect to operational risk management are balanced in an adequate way
and thought through.

There are three basic choices available to the Bank with respect to operational risk management:

- to accept risk in cases when the risk exposure is insignificant, and the Bank is more than
adequately hedged against these risks (full observance of the measures implied by the
Operating Policy, procedures, laws, insurance, acquisition of the necessary equipment and the
like),
- to distribute risk in certain instances it is cheaper to distribute risk to third parties than its
direct hedge (maintenance agreements, supervision),
- to avert risk act preventively, i.e. establish in all organizational parts the necessary safety
measures so that the event does not happen at all or take such measures that the incident
becomes less probable (preventive periodic controls and supervisions, constant education of
employees, making plans for introducing new technological solutions)
- contingency plans with the object of securing continued operations, in case of serious
disruptions in the Banks business operations caused by the situations that are outside the
Banks control, prepare the contingency plan which must be adopted by the Banks
Management Board. The plan sets the priorities in hedging against risk, profitability,
procedures for incidental situations, back-up locations, back-up hardware in a distant location,
back-up IT communication system, measures for regular plan verification and revisions aiming
to improve the plan, and all in the aim of securing continued bank operations in extraordinary
situations.

December 31, 2008
28


4.7. Operational Risk (Continued)

The Risk Management Department is under obligation to submit the report to the NBS on the
losses that have occurred as a consequence of operational risk, as well as those that could have,
but did not occur, exceeding (or estimated to be in excess of) 1% of the Banks capital, as well as
measures taken for the purpose of adequate managing increased operational risks no later than
five working days from the day the loss occurred.

The Risk Management Department reports to the Board in charge of risk managing and
monitoring business activities and the Asset and Liability Management Board on monthly or
quarterly basis regarding events that have occurred due to operational risk. The Asset and Liability
Managed Board considers the Report and, with its suggestions, forwards it to the Executive Board
and the Board in charge of risk managing and monitoring business activities, which is then
submitted to the Management Board.

4.8. Country Risk

The risks inherent in the country of origin of the entity to which the Bank is exposed (country risk)
are the risks from negative effects on the financial results and the Banks capital due to the Banks
inability to collect its receivables from this entity for the reasons of political, economic or social
nature of the country of the entitys origin.

Country risk comprises:

- political and economic risk of the country implying the probability of incurring loss due to the
Banks inability to collect receivables for reasons of limitations imposed by the enactments of
state and other bodies of the country of debtors origin, as well as general and system
circumstances in the country,
- transfer risk implying the probability of loss being incurred due to the inability to collect
receivables stated in the currency that is not the official currency of the debtors country of
origin, and due to the limitations to discharging amounts to creditors from other countries
denominated in a certain currency, as determined by the enactments of state and other bodies in
the debtors country of origin.

The limits of exposures to country risk are individually determined by the Bank, and in case a
concentration is identified in certain geographical areas these limits are determined for each
individual region.

The first step in setting limits to country risk exposure is to determine the resources available for
the loss absorption.

It is necessary to decide how much capital will be provided per each risk category, starting from
the A category (the smallest risk), from B to E categories (category with greatest possible risk).

The choice of agencies rating country risk determines which categorizations lists will be regularly
assumed and applied internally. The Bank chose to rely on the categorization of Euromoney,
Moodys and ICERC.

December 31, 2008
29


4.8. Country Risk (Continued)

For the countries with the least assessed risk, the Bank may allocate a proportionally greater
section of capital given the small exposure to the country risk inherent in the debtors country of
origin.

Risk categorization (Euromoney):

A smallest risk, country is reliable with respect to liability settlement,
B very high quality very reliable,
C1 dependant on the economic conditions still good quality,
C2 special notice able to meet its financial liabilities,
D1 susceptible to the changes in economic terms currently able to meet its financial liabilities,
D2 currently very likely to default on its financial liabilities dependant on the favorable
economic conditions and
E high risk highly likely to default on its financial liabilities.

The initial limit to country risk exposures per different countries of debtors origin represents only
a generally acceptable limit that is based on the information available to all and is not adjusted to
the Banks specific characteristics.

All limits of exposures per countries of origin are considered and adopted by the Banks
Management Board.

Individual exposure limits per countries of debtors origin are formally considered at least twice a
year and ad hoc, if there are significant changes or development in the entity in question
(recapitalization, increase in capital on other grounds).

The limits of country risk exposures are regularly controlled in various manners having in mind
the need for constant readiness for contingencies.

The limits of exposures to country risk are individually determined by the Bank, and in case a
concentration is identified in certain geographical areas these limits are determined for each
individual region.

4.9. Capital Adequacy Management

Establishing the process of internal assessment of capital adequacy based on the set goals and
risks management principles, as well as on identifying, measuring, assessment and monitoring risk
inherent in the Banks business operations and for the purpose of estimating capital necessary for
the risk amortization.

With the object of timely diminishing the risk impact that may give rise to negative effects on the
Banks financial results and capital, the minimum of acceptable capital adequacy ratio of 13.5%
has been established, so the Bank would harmonize its operations with the legal requirements
imposed by the Law on Banks, as well as decisions and guidances of the NBS.

December 31, 2008
30


4.9. Capital Adequacy Management (Continued)

The capital adequacy ratio, representing the proportion between capital and the sum of assets
weighted with credit risk, capital requirements regarding currency risk multiplied by reciprocal
value of the capital adequacy ratio and capital requirements arising from other market risks, is
under the influence of the following:

- capital conditioned by the financial result,
- risk-weighted assets and off-balance sheet items,
- total net open foreign currency position and
- value of items in the trading book.

With the aim of maintaining capital adequacy ratios at the level of the limit set by the Executive
Board, the Finance and Accounting Department determines the level of the Banks capital at
quarterly basis.

The calculation of capital accounts for both the financial result at the end of month for which the
capital is calculated and the carrying values of other items, except for the outstanding amount of
special reserves for potential losses, provided by the Placement Sector.

Capital requirements in respect of credit risk include determining the risk-weighted balance sheet
assets and off-balance sheet items the calculation of which is based on the classification of
balance-sheet assets and off-balance sheet items comprised in the banking book.

Capital requirements regarding currency risk are determined by the sector in charge of asset
management.

Pursuant to Item 17 of the Decisions on Capital Adequacy in Banks and goals determined and
principles of risk management, the value of items included in the trading book and their
participation in the total Banks operations should be maintained within the agreed limits, so the
Bank should not be obligated to calculate and securitize the coverage of capital requirements for
price risk arising from securities (debt and equity securities), which are the responsibility of the
Investment banking Sector.

In accordance with the legal requirements and secondary legislation acts, the Bank is under
obligation to secure the preconditions for successful operations under acceptable risk parameters
so as to achieve the set targets and/or positive financial result and maintain the Banks capital and
eliminate the possibility of sanctions imposed by a regulatory body due to unidentified other
market risks and for failure to comply with the capital requirements for other market risks, as
provided under the NBS Decision and the Banks internal procedures and Guidances.

The sector of finance and accounting Department of plan, analysis and reporting determines
capital adequacy ratio on quarterly basis and reports to the Placement and Risk Management
Sector thereof, and this Sector forwards the information necessary to the Risk Management and
Monitoring Board.

The reports on risk are prepared by the operating services within the set timelines and are
delivered to the Placement and Risk Management Sector for consideration. The report of Risk
Management and Monitoring Board with its suggestions is submitted to the Asset and Liability
Management Board which makes adequate decisions.

December 31, 2008
31

5. INTEREST INCOME AND EXPENSE

a) Interest Income
Year Ended December 31,
2008 2007
National Bank of Serbia:
- repo transactions 176,078 92,630
- obligatory reserve 8,975 7,117
- Deposits 2,417 3,772
Banks and other financial organizations 32,450 43,701
Corporate entities 354,981 273,315
Public sector 191 472
Retail 128,407 115,817
Other customers 1,237 568
Securities 13,440 11,646

718,176 549,038

b) Interest Expenses
2008 2007

National Bank of Serbia 389 194
Banks and other financial organizations 142,885 38,011
Corporate sector 50,928 49,584
Public sector 30,697 27,506
Retail 95,018 62,654
Other customers 15,566 30,807

335,483 208,756

6. FEE AND COMMISSION INCOME AND EXPENSE

a) Fee and Commission Income
2008 2007
Payment transaction fees from:
- banks 3,880 4,983
- corporate customers 146,998 123,211
- retail customers 13,794 16,968
Cash payment transactions 9,649 7,940
Loan origination fees 31,673 19,264
Exchange operations 37,730 26,683
Safekeeping charges 1,316 999
ATM charges 6,337 1,298
Fees and commission charged for other banking services 74,010 80,562
Payment card charges 23,801 22,223
Broker-dealer services 6,378 8,824
Other fees and commissions 13,035 15,914
Fees for issued guarantees, letters of credit and
other contingent liabilities

25,183

29,366

393,784

358,235

December 31, 2008
32

6. FEE AND COMMISSION INCOME AND EXPENSE (Continued)

b) Fee and Commission Expense
2008 2007
Fee and commission expense arising from domestic
payment transfers

15,123

15,391
Fees and commissions on payment cards 38,219 23,722
Other fees and commissions 7,195 11,712

60,537 50,825

7. FOREIGN EXCHANGE (LOSSES) /GAINS, Net
2008 2007
Foreign exchange gains:
- unrealized foreign exchange gains 2,309,712 1,524,022
- realized foreign exchange gains 56,257 56,004
2,365,969 1,580,026
Foreign exchange losses:
- unrealized foreign exchange losses (2,389,016) (1,531,392)
- realized foreign exchange losses (5,913) (4,018)
(2,394,929) (1,535,410)

(28,960) 44,616

8. NET IMPAIRMENT LOSSES AND PROVISIONS

a) Credited/(charged) to results
2008 2007
Reversal of allowance for impairment of balance
sheet assets (Note 8b) 885,756

108,160
Reversal of provisions against off-balance sheet items
(Note 26b) 102,724

21,773
Reversal of provisions against retirement benefits (Note 27b) 1,904 -
Suspended interest collected 491 -
Losses on impairment of placements:
- loans and deposits (757,970) (94,352)
- interest, fees and commissions (27,094) (7,698)
- securities and equity investments (9,812) (10,957)
- other placements and assets (263,437) (50,056)
- off-balance sheet positions (Note 26b) (120,826) (19,975)
Provisions for employee retirement benefits (Note 26b) - (5,443)

(188,264) (58,548)

December 31, 2008
33

8. NET IMPAIRMENT LOSSES AND PROVISIONS (Continued)

b) Movements on accounts of allowance for impairment of receivables
2008

Loans and
Advances
Interest , Fees
and
Commissions
Securities and
Equity
Investments
Other
Placements
and Other
Assets Total

Balance, beginning of year 482,353 17,897 63,090 210,171 773,511
Charge for the year (Note 8a) 757,970 27,094 9,812 263,437 1,058,313
Foreign exchange fluctuations 17,474 562 (1) 36,062 54,097
Reversal of provisions (Note 8a) (605,701) (20,097) (18,601) (241,357) (885,756)
Write-offs (226) - - (522) (748)

Balance, end of year 651,870 25,456 54,300 267,791 999,417

c) Special reserve for potential losses

In accordance with the regulations of the National Bank of Serbia as of December 31, 2008, a
special reserve for potential losses on the Banks aggregate credit risk exposure was as follows:

December 31, December 31,
2008 2007
Special reserve for potential losses determined as per
the National Bank of Serbia requirements with respect to:
- balance sheet exposures 1,233,260 1,004,555
- off-balance sheet exposures 63,747 92,436
1,297,007 1,096,991
Allowances for impairment and provisions determined
in accordance with the internally adopted methodology
(IAS 39):

- allowance for impairment of balance sheet items (999,417) (773,511)
- provision for losses contingent on off-balance sheet
items (41,681)

(23,579)
(1,041,098) (797,090)
Provisions determined in accordance with the internal
methodology exceeding the amount of provision as per
the NBS Decision 1,651

22,419
Provisions for potential losses contingent on
balance sheet assets and off-balance sheet items 257,560

322,320
Reserve for potential losses formed in prior years (11,878) (11,878)
Additional provision for potential losses to be set aside as
appropriation of retained earnings

245,682

310,442

In accordance with the National Bank of Serbia Decision on the Classification of Balance Sheet
and Off-Balance Sheet Exposures, the difference between the amount of special reserve for
potential losses calculated in accordance with the National Bank of Serbia requirements and the
amount of allowance for impairment of balance sheet items and provision for losses contingent on
off-balance sheet items estimated in accordance with the internally adopted methodology, is
presented as reserve for potential losses within equity.

Once a relevant Decision has been enacted by the Banks Assembly, the outstanding amount of
reserve for potential losses will be allocated from retained earnings.

December 31, 2008
34

9. STAFF COSTS
2008 2007

Net salaries and benefits 356,381 346,033
Taxes and contributions on salaries and benefits 144,125 139,603
Other staff costs 103,861 6,348

604,367 491,984

Other staff costs include retirement benefits of RSD 94,511 thousand paid to 118 employees who
have left the Bank on redundancy grounds pursuant to the Collective Bargaining Agreement.

10. OTHER OPERATING EXPENSES
2008 2007

Cost of materials 51,027 47,692
Communications 29,926 29,358
Maintenance of fixed assets 18,992 20,372
Rentals of business premises 62,943 46,029
Marketing and advertising 8,417 10,258
Cost of intellectual services 22,601 19,330
Insurance premiums 12,540 11,170
Securing property 16,936 10,461
Compensations to employees 13,345 12,184
Entertainment 5,345 6,209
Indirect taxes and contributions 104,961 101,367
Write-off of bad debts - 2,948
Donations and sponsorships 13,727 9,120
Broker charges 15,344 8,552
Other costs 24,047 15,155

400,151 350,205

December 31, 2008
35

11. (LOSSES)/GAINS ON THE VALUATION OF ASSETS AND LIABILITIES, net

2008 2007
Gains on the valuation of assets and liabilities:
- Placements with foreign currency clause 304,622 141,206
- Placements indexed to the retail price index 30,113 37,250
- Securities 23,092 52,011
- Other receivables 4,643 2,744
- Liabilities 8,746 2,679
371,216 235,890
Losses on the valuation of assets and liabilities:
- Placements with foreign currency clause (207,057) (121,333)
- Securities (214,272) (81,921)
- Other receivables
(2,436)
(2,604)
- Liabilities (31,474) (2,871)
(455,239) (208,729)

(84,023) 27,161

12. INCOME TAXES

a) Components of income tax
2008 2007

Current income tax (369) -
Deferred income tax 4,251 11,780

3,882 11,780

b) Numerical reconciliation between tax expense and the product of the accounting results
multiplied by the applicable tax rate
2008 2007

Loss before taxation (619,806) (206,502)

Income tax at the statutory tax rate of 10% (62,720) (22,216)
Tax effects of capital gains 739 1,566
Tax effects of expenses not deductible for tax purposes 1,490 3,100
Tax credits for new employees hired on open end basis - (1,566)
Tax credits for capital expenditures (369) -
Not recognized tax losses 60,659 18,632
Other 4,083 12,264

3,882 11,780

Effective tax rate (0.63%) (5.70%)

December 31, 2008
36

12. INCOME TAXES (Continued)

c) Components of deferred tax assets and liabilities

December 31,
2008
December 31,
2007
Deferred tax assets - credits for capital expenditures

17,654 13,188
Deferred tax liabilities - the difference between
depreciation and amortization recognized for tax
purposes and accounting purposes (48,201) (35,962)

(30,547) (22,774)

d) Changes in deferred tax assets/(liabilities)
2008 2007
Deferred tax assets
Increase based on recognized tax credits for
capital expenditures 4,466 13,188
Release based on unrecognized deferred tax
assets arising from provisions for retirement benefits - (1,052)


Deferred tax liabilities
Balance, beginning of year (35,962) (4,478)
Increase based on deferred tax liabilities - the difference
between depreciation and amortization recognized for tax
purposes and accounting purposes (215) (356)
Increase based on appraisal effects (12,024) (31,128)

(48,201) (35,962)

e) Unused tax losses

Total tax assets

Origination Expiry Tax
Year Year Losses

2003 2013 53,970
2004 2014 201,155
2005 2015 86,140
2006 2016 -
2007 2017 186,325
2008 2018 606,594

1,134,184

December 31, 2008
37

12. INCOME TAXES (Continued)

e) Unused tax losses (Continued)

Pursuant to Article 32 of the Corporate Income Tax Law, the losses incurred in business,
financial and non-business transaction are determined in the tax return except for those giving
rise to capital gains and losses determined in accordance with the abovementioned Law, may be
used as deductible items in calculating the tax base for the future periods, but for no longer than
10 years.

Due to the uncertainty over the availability of profit in future periods against which tax losses
could be utilized, in 2008 the Bank did not recognize deferred tax assets arising from tax losses
realized thereof in the current year.

13. CASH AND CASH EQUIVALENTS

December 31,
2008
December 31,
2007
Cash in hand:
- in RSD 224,277 208,603
- in foreign currency 180,376 202,462
Gyro account 795,657 219,438
Gold and other precious metals 2 2
Foreign currency accounts with:
- National Bank of Serbia 3,590 3,211
- domestic banks 7,791 9,345
- foreign banks 146,519 196,001
Foreign currency cheques in the process of collection 2,922 8,000
1,361,134 847,062
Less: Allowance for impairment (25) -

1,361,109 847,062

Pursuant to the Decision on Obligatory Reserves of Banks with the National Bank of Serbia, the
required reserve is to be calculated at the rate of 10% on the dinar deposits (5% of time deposits
with over 30-day maturity), to the amount of average daily balance of dinar assets in a single
calendar month to its gyro account held with the National Bank of Serbia, 45% to dinar deposits
indexed by a currency clause, at the rate of 45% to the portion of dinar basis comprised of dinar
liabilities arising from deposits and loans received from abroad up to the level of basis registered
in September 2008, at the rate of 0% to the positive difference between the portion of dinar basis
comprised of deposits and loans received from foreign creditors in the preceding calendar month
and that potion of basis dating from September 2008.

The average interest rate charged to the amount of allocated reserve in dinars during 2008
amounted to 2.50% annually.

December 31, 2008
38

14. REVOCABLE DEPOSITS AND LOANS
December 31,
2008
December 31,
2007

Obligatory reserves in foreign currencies 798,748 841,795
Securities acquired in repurchase transactions
with the Central Bank 450,000 1,400,000
Liquidity surpluses deposited with the Central Bank 50,000 250,000
Revocable placements with banks in foreign currency 7,672 6,796
1,306,420 2,498,591
Less: Allowance for impairment (20) -

1,306,400 2,498,591

In accordance with the Decision on Obligatory Reserves of Banks with the National Bank of
Serbia published in the RS Official Gazette numbers 116/2006, 3/2007, 31/2007, 93/2007,
35/2008, 94/2008, 100/2008, 107/2008, 110/2008 and 112/2008, the required reserve represents
the minimum reserve which the Bank calculates at the rate of 45% to the amount of average daily
balance of foreign currency funds registered in the previous calendar month:

The National Bank of Serbia prescribed that, exceptionally to the aforementioned, banks calculate
the required reserve by applying the following ratios:

- 40% on the portion of foreign currency reserving base comprised of obligations arising from
foreign currency savings deposited with banks;
- 20% on the portion of foreign currency reserving base comprised of subordinated obligations,
up to the level of such base as in September 2008;
- 100% on the portion of foreign currency reserving base comprised of foreign currency assets
kept by leasing companies on special accounts opened with banks;
- 0% on the amount of positive difference between the portion of foreign currency reserve base
comprised of foreign currency obligations in respect of foreign deposits and borrowings from
the previous calendar month and the same portion of foreign currency base from September
2008, while the ratio of 45% will be applied for calculating foreign currency obligatory reserves
on the portion of foreign currency reserve base comprised of foreign currency obligations in
respect of foreign deposits and borrowings up to the level of such portion of foreign currency
reserve base from September 2008;
- 0% - on the amount of positive difference between the portion of foreign currency reserve base
comprised of subordinated obligations from the previous calendar month and the same portion
of foreign currency reserve base from September 2008.

At December 31, 2008, the value of securities acquired in repurchase transactions with the Central
Bank in the amount of RSD 450,000 thousand (December 31, 2006: RSD 1,400,000 thousand)
relate to treasury bills purchased from the Central Bank with maturities of up to 14 days and an
annual interest ranging from 10% to 17.75%. This transaction is governed by the NBS Agreement
on the Sale of Securities with an Obligation to Repurchase.

December 31, 2008
39

15. INTEREST, FEES AND COMMISSIONS RECEIVABLES
December 31,
2008
December 31,
2007
Interest receivables:
- in RSD 54,561 32,589
59,080 35,202
Fee and commission receivables:
- in RSD 9,577 9,584
- in foreign currency 220 57
9,797 9,641
Receivables based the sale of tangibles received
in lieu of debt settlement

1,722

-

Less: Allowance for impairment (25,456) (17,897)

45,143 26,946

16. LOANS AND ADVANCES TO CUSTOMERS

December 31,
2008
December 31,
2007
Short-term loans and advances to customers:
- in RSD 60,267 160,267
65,817 166,346
Short-term loans to retail customers:
- in RSD 210,470 173,944

Short-term loans to corporate customers:
- in RSD 1,603,342 876,297
2,109,347 1,167,013
Long-term loans to retail customers:
- in RSD 322,877 302,364

Long-term loans to corporate customers:
- in RSD 769,396 421,533
1,022,005 734,718

Loans and advances, gross 3,730,516 2,544,385

Less: Allowance for impairment (Note 8b) (651,870) (482,353)

3,078,646 2,062,032

Dinar and foreign currency short-term loans were approved to legal entities and entrepreneurs for
the periods from 3 months to one year at nominal interest rates for dinar placements ranging from
5% to 33.74% annually (effective interest rates ranged from 6.21% to 33.77%) and from 9% to
12% annually for placements in foreign currency (effective interest rates ranged from 10.87% to
16.12%).

Short-term loans with up to 3-month maturity (liquidity loans) were approved at nominal interest
rate from 19.22% to 28.44% (effective interest rates ranged between 23.16% and 41.67%).

December 31, 2008
40

16. LOANS AND ADVANCES TO CUSTOMERS (Continued)

Up to one year loans in dinars were approved to retail customers for the period from 6 months to
one year, at annual interest rates ranging from 5% to 30.98% (effective interest rates ranged from
10.22% to 30.99%).

Over one year loans in dinars were approved to legal entities and entrepreneurs at nominal interest
rate between 5.5% and 16.5% annually (effective interest rate ranged between 5.5% and 25.26%),
and to those in foreign currency, the interest from 9% to 12% was applied (effective interest rate
from 10.87% to 14.22%).

Up to one year loans in dinars were approved to retail customers for the period from 1 to 3 days at
an annual interest rate from 9.2% to 19.30%.

Over one year loans in dinars were approved to retail customers for the period from 24 to 60
months at an annual interest rate from 5% to 30.98% (effective interest rate ranged from 8.35% to
30.99%).

Loan Concentration

The concentration of total net short-term and long-term loans to customers was as follows:

2008 2007

Trade 846,603 404,438
Retail customers 470,837 423,984
State administration and other public services 11,486 7,369
Agriculture, hunting, fishing and forestry 144,397 20,650
Civil engineering 143,986 179,121
Services, tourism and accommodation industry 139,692 132,717
Banks 5,536 106,079
Mining and energy industry 944,991 604,880
Other 371,118 182,794

3,078,646 2,062,032

17. SECURITIES (excluding treasury shares)
December 31,
2008
December 31,
2007
In foreign currency:
- Republic of Serbia foreign currency savings bonds 52,911 87,626

In RSD:
- Trading securities 63,869 202,905
- Securities available-for-sale 10,256 -
- Discounted bills of exchange in dinars 104,474 36,037
178,599 238,942
Other trading securities matured - 11,897
231,510 338,465

228,385 326,568

December 31, 2008
41

17. SECURITIES (excluding treasury shares) (Continued)

At December 31, 2008, bills of exchange in the amount of RSD 104,474 thousand (December 31,
2007: RSD 36,037 thousand) represent receivables maturing within the period from two to four
months at a discount rate ranging from 23.37% to 29.20% annually (effective interest rate ranging
from 25.33% to 31.27%).

18. EQUITY INVESTMENTS (interests)

December 31,
2008
December 31,
2007
Equity investments:
- banks and other financial institutions 4,250 13,697
- corporate and other legal entities 48,345 80,314
- Other customers - 2,446
52,595 96,457

1,420 45,264

19. OTHER PLACEMENTS

December 31,
2008
December 31,
2007
Short-term placements with banks:
- in RSD 111 111
Long-term placements with banks in dinars 15,092 14,388
Matured other short-term and long-term
placements in foreign currency 111,363 95,869
Other placements with the NBS 9,540 -
Short-term placements with retail customers in
dinars DINA cards 81,085 107,464
Long-term other placements with customers in
dinars DINA cards 78,903 51,842
Other placements in foreign currency 15,505 14,896
Other placements in dinars 7,980 -
Receivables in dinars for payments made
based on sureties and acceptances 92,669 99,015
967,632 1,121,824

768,333 953,451

Short-term placements with banks in foreign currency were approved to domestic banks for the
period from one to seven days at an annual interest rate ranging from 3.0% to 9.20%.

December 31, 2008
42

20. INTANGIBLE ASSETS, FIXED ASSETS AND INVESTMENT PROPERTY
2008

Land and
Buildings

Equipment and
Other Assets

Investment
Property
Construction
in Progress
and Advances

Total

Intangible
Assets
Cost
Balance, beginning of year 1,113,429 212,402 443 16,674 1,342,948 49,266
Additions 620 21,363 - - 21,983 1,271
Transfers/closing of advances - 9,512 - (9,512) - 508
Disposals and retirements - (18,446) - - (18,446) -
Sale (945) (827) (443) - (2,215) -
Appraisal effects 182,629 - - - 182,629 -
Other - 50 - - 50 -

Balance, end of year 1,295,733

224,054

-

7,162

1,526,949

51,045

Accumulated Depreciation and
Amortization

Balance, beginning of year

351,280

133,654

6

-

484,940

36,239
Charge for the year 14,451 27,443 6 - 41,900 6,438
Disposals and retirements - (18,446) - - (18,446) -
Sale (471) (806) (12) - (1,289) -
Appraisal effects 62,383 - - - 62,383 -

Balance, end of year 427,643

141,845

-

-

569,488

42,677

Net Book Value:
- as of December 31, 2008 868,090

82,209

-

7,162

957,461

8,368
- as of December 31, 2007 762,149 78,748 437 16,674 858,008 13,027

At December 31, 2008, for buildings in the net book value of RSD 184,561 thousand, the Bank
possesses adequate purchase and sale documentation, i.e., the documentation regarding the legal
grounds for their acquisition, but not the respective property titles. The forgoing buildings have
not been recorded as the Banks property, given that on the territory where they are located the
Cadastres have still not been established. The Banks management has taken all the necessary
steps to obtain such documents.

At December 31, 2008, the Bank had no inscribed mortgages or other encumbrances against its
property.

21. OTHER ASSETS

December 31,
2008
December 31,
2007

Tangibles acquired in the process of collection 44,491 104,055
Receivables from employees 24,053 34,342
Prepaid expenses 3,446 3,011
Accrued interest 9,015 48,843
Receivables from payment cards 4,163 1,450
Receivables for prepaid income taxes 4,468 3,780
Receivables arising from liabilities paid 8,399 6,682
Deferrals of receivables arising from valuation of loans -
revaluation by applying retail price growth index 5,525 -
Other receivables 29,429 22,931
Inventories 5,646 5,760
138,635 230,854
Less: Allowance for impairment (72,206) (45,430)

66,429 185,424

December 31, 2008
43

21. OTHER ASSETS (Continued)

In 2007, the Bank acquired tangibles in the process of collection amounting to RSD 64,443
thousand. In 2008, no additional assets were received in this manner, but some tangibles
previously received were sold. In consideration of the departures from market values at which
these immovables have been sold or whether it is possible to sell them, the fair value of these
assets as of December 31, 2008 and 2007 amounted to RSD 95,458 thousand and RSD 36,665
thousand, respectively.

22. TRANSACTION DEPOSITS
December 31,
2008
December 31,
2007
Transaction deposits of retail customers:
- in RSD 174,454 186,702
Transaction deposits of other corporate entities:
- in RSD 978,826 1,108,213
Transaction deposits of the banking sector:
- in RSD 88 128,870
- in foreign currency 183 7,463
Transaction deposits of other customers:
- in RSD 117,493 163,123
- in foreign currency - 1,512

1,547,392 1,914,111

Transaction deposits are non-interest bearing, except for the arrangements where the interest rate
ranges from 2.4% to 13.5% annually.

23. OTHER DEPOSITS
December 31,
2008
December 31,
2007
Demand deposits:
- in RSD 316,715 338,146
Short-term deposits:
- in RSD 1,578,361 1,570,251
- in foreign currency 2,074,564 1,213,731
Long-term deposits:
- in RSD 71,669 99,139

4,773,840 4,024,348

Demand deposits in dinars mostly relate to the balances on current accounts of corporate entities,
state and other institutions. These deposits are non-interest bearing ones, save for the dinar assets
of KRT of the local self-government and in the arrangements from 0% up to 16.05% annually.

Demand deposits of corporate entities and state institutions in foreign currency are non-interest
bearing ones. Short-term deposits in foreign currency were placed at an interest rate ranging from
2.5% to 6.95% annually.

December 31, 2008
44

23. OTHER DEPOSITS (Continued)

Dinar savings were deposited at an annual interest rate ranging from 3.71% to 15.62%. Foreign
currency accounts were deposited at an interest rate from 1.80% to 8.50%.

Short-term deposits of retail customers for the purchase and sale of bonds and shares, deposits
placed as condition for obtaining loans and credit cards, as well as the accounts opened for foreign
pensions.

Short-term deposits of corporate entities denominated in dinars were deposited at interest rates
ranging from 6% to 16.50%, annually, depending on the maturity dates.

Short-term dinar deposits of banks were placed for the period from one to three months at an
interest rate ranging annually from 8% to 16.75%. Short-term foreign currency deposits with
banks were placed for the period from one to three months at an interest rate ranging annually
from 2.5% to 4.5%.

Non-interest bearing deposits of corporate customers are made of deposits for the purchase and
sale of bonds, shares and deposits paid upon loan origination.

Long-term deposits of the Bank are mostly non-interest bearing except for a special purpose
deposits dating from 2006 amounting to RSD 2,052 thousand placed for the period of three years
at an interest rate of 1% annually, which was repaid when it fell due at the beginning of 2009.

Amounts owed to customers (transaction and other deposits) are structured as follows:

December 31,
2008
December 31,
2007

Banks 2,021,574 987,042
Corporate customers 1,253,075 1,967,531
Entrepreneurs 157,368 52,272
Public sector 242,697 338,596
Foreign entities 9,465 43,413
Retail customers 2,459,895 2,227,579
Other customers 177,158 322,026

6,321,232 5,938,459

24. BORROWINGS
December 31,
2008
December 31,
2007

Short-term borrowings from banks in dinars 118,135 -
Long-term borrowings in dinars:
- NBS 3,886 4,858
- Republic of Serbia 184 184
Other financial liabilities 288 3,390

122,493 8,432

Short-term borrowings from banks in dinars are associated with the loan obtained from a domestic
bank, maturing within a year at an interest rate of three-month EURIBOR as increased by the
margin of 3.90% annually.

December 31, 2008
45

25. OTHER OPERATING LIABILITIES
December 31,
2008
December 31,
2007

Accounts payable 21,027 24,822
Liabilities to other customers for receipts
from retail customers 8,693 7,957
Advances received 3,271 2,914
Deferred liabilities for accrued interest:
- in RSD 4,824 3,803
Deferred loan origination fees 16,262 17,848
Other liabilities 19,857 14,303

102,823 81,818

26. PROVISIONS

a) Structure of provisions

December 31,
2008
December 31,
2007

Provisions for off-balance sheet items 41,681 23,579
Provisions for litigations 5,020 5,020
Provisions for employee benefits 8,633 13,316

55,334 41,915

b) Movements in provisions

December 31,
2008
December 31,
2007
Provisions for potential losses on off-balance sheet items
Balance, beginning of year 23,579

25,377
Charge for the year (Note 8a) 120,826 19,975
Release (Note 8a) (102,724) (21,773)


Retirement benefits
Charge for the year (Note 8a) - 5,443
Release of provisions (1,904) -
Payments (2,779) (2,644)


Provisions for potential losses on litigations


December 31, 2008
46

26. PROVISIONS (Continued)

b) Movements in provisions (Continued)

At December 31, 2008, based on the assessment of the Banks management, the total amount
sought in litigations filed against the Bank amounted to RSD 6,520 thousand. The Banks
management allocated provisions for losses contingent on these legal suits in the amount of RSD
5,020 thousand. The aforementioned amount does not include potential penalties which could be
additionally assessed upon the resolution of these litigations. The Companys management does
not anticipate losses in the forthcoming period based on other legal suits filed against the Bank.

27. SHARE CAPITAL

The Banks share capital was formed through the initial contributions and common share issues
which followed. At December 31, 2008, the Banks share capital comprised of 142,655 common
shares with the par value of RSD 10 thousand per share.

Holders of common shares are responsible for the Banks liabilities and are exposed to the risk
present in the Banks business operations commensurately with the number of shares in their
possession. The shares are transferable to other entities pursuant to the provisions of the Articles
of Incorporation. The holders of common shares are also entitled to a dividend.

Capital Adequacy and Ratios Prescribed by the Law on Banks

The Bank is required to maintain the minimum capital adequacy ratio of 12%, as established by
the NBS. As of December 31, 2008, the Banks capital adequacy ratio was higher than the
prescribed minimum.

The Bank is also required to maintain certain ratios pertaining to the volume of its activities and
composition of risk assets in compliance with the Law on Banks and with the NBS requirements.
As of December 31, 2008, all ratios were within their prescribed limits, except for the ratio of total
Banks investments in the non financial sector entities and in fixed assets which amounted to
106.09% and did not comply with the prescribed ratio of the maximum 60% of the Banks equity.

December 31, 2008
47

28. OFF-BALANCE SHEET ITEMS

December 31,
2008
December 31,
2007
a) Managed funds
Short-term placements 22,479 22,739
Long-term placements - 1,301
22,479 24,040
b) Guarantees, other contingent
liabilities and commitments
Payment guarantees:
- in RSD 663,298 618,190
Performance bonds:
- in RSD 134,208 159,710
Sureties and acceptances:
- in RSD 180,697 236,855
Irrevocable commitments:
- unused loan facilities 319,457 232,872
- unused overdraft facilities 175,236 160,933
- unused limits on credit cards 166,674 116,275
Not covered foreign currency letters in credit 51,584 13,566
1,729,846 1,606,028
c) Other off-balance sheet items
Foreign currency savings bonds 6,263,272 5,991,181
Unsecured loro guarantees 40,455 33,395
Other off-balance sheet items 46,787 10,793
6,350,514 6,035,369

8,102,839 7,665,437

29. RELATED PARTY TRANSACTIONS

At December 31, 2008, the Banks total receivables from the Management and Executive Board
members, as well as the receivables due from the Banks employees based on the credit card
operations, overdrafts on current accounts and loans, aggregated to RSD 110,803 thousand
(December 31, 2007: RSD 102,207 thousand).

The total gross salary paid to the members of the management, i.e., the President and the
Executive and Management Board members in 2008, amounted to RSD 10,241 thousand (RSD
7,215 thousand in the net amount) (December 31, 2007: RSD 8,885 thousand, RSD 6,282
thousand in the net amount).

December 31, 2008
48

30. CREDIT RISK

a) Maximum Exposure to Credit Risk per Balance Sheet Assets and Off-Balance Sheet
Items

The following table represents the worst case scenario of credit risk exposures as of December 31,
2008 and 2007 without the effects of collaterals and hedges against credit risk. The exposures to
credit risk are presented at their carrying values as of the reporting date.

December 31,
2008
December 31,
2007
Maximum exposures arising from balance sheet assets
Revocable deposits and loans 7,671 6,796
Receivables arising from interest, fees and commissions, fair
value adjustments of derivatives and other receivables 70,587 43,671
Loans and advances to customers 3,730,516 2,544,385
Securities (excluding treasury shares) 114,730 250,840
Equity investments (interests) 52,596 96,457
Other placements 943,000 1,107,434
Other assets 65,861 112,458
4,984,961 4,162,041

Maximum exposure per off-balance sheet items 1,729,846 1,606,028

Total exposure 6,714,807 5,768,069

December 31, 2008
49

30. CREDIT RISK (Continued)

b) Loans and Placements

The following table presents the structure of loans and placements of the Bank at December 31, 2008 and 2007 pursuant to the placement quality. The table
accounts for balance sheet and off-balance sheet exposures of the Bank.

Receivables not
Matured
(Group
Allowance for
Impairment)

Receivables
Past Due
(Group
Allowance for
Impairment)

Provided For
(Individual
Allowance for
Impairment)

Total Gross

Group Allowances for
Impairment
Individual
Allowance for
Impairment

Group
Allowance for
Impairment of
Receivables not
Matured
Group
Allowance for
Impairment of
Receivables
Past Due
Total
Allowance for
Impairment

Total Net
December 31, 2008
Consumer 14,486 15,496 2,535 32,517 62 905 2,535 3,502 29,015
Housing 3,799 8,682 - 12,481 16 131 - 147 12,334
Cash and other 159,527 137,979 - 297,506 686 3,314 - 4,000 293,506
Agriculture 4,557 223 - 4,780 20 5 - 25 4,755
Cards 301,393 25,209 - 326,602 1,714 1,745 - 3,459 323,143
Overdrafts per current
accounts 221,717

99,619

9,356

330,692

1,249

13,423

9,356

24,028

306,664
Total 705,479 287,208 11,891 1,004,578 3,747 19,523 11,891 35,161 969,417
SME and largecorporate
entities 131,449

107,399

4,380,816

4,619,664

2,241

3,034

767,330

772,605

3,847,059
Entrepreneurs 46,608 236,286 7,997 290,891 143 912 7,997 9,052 281,839
Total 178,057 343,685 4,388,813 4,910,555 2,384 3,946 775,327 781,657 4,128,898
Receivables frombanks 621,961 - 177,713 799,674 2,051 - 177,713 179,764 619,910
Total 800,018 343,685 4,566,526 5,710,229 4,435 3,946 953,040 961,421 4,748,808

Total 1,505,497

630,893

4,578,417

6,714,807

8,182

23,469

964,931

996,582

5,718,225

December 31, 2008
50


b) Loans and Placements (Continued)

Receivables not
Matured
(Group
Allowance for
Impairment)

Receivables Past
Due
(Group
Allowance for
Impairment)

Provided For
(Individual
Allowance for
Impairment)

Group Allowances for
Impairment

Total Gross
Group
Allowance for
Impairment of
Receivables not
Matured
Group
Allowance for
Impairment of
Receivables
Past Due
Individual
Allowance for
Impairment
Total
Allowance for
Impairment

Total Net
December 31, 2007

Consumer - - 1,674 1,674 - - 1,633 1,633 41
Housing - 1,797 - 1,797 - 343 - 343 1,454
Cash and other - 2,652 - 2,652 - 420 - 420 2,232
Agriculture - - - - - - - - -
Cards - - - - - - - - -
Overdrafts per current accounts - 13,411 10,388 23,799 - 13,409 10,388 23,797 2
Total - 17,860 12,062 29,922 - 14,172 12,021 26,193 3,729
SME and largecorporate
entities -

-

923,258

923,258

-

-

601,665

601,665

321,593
Entrepreneurs - - 6,576 6,576 - - 4,658 4,658 1,918
Total - - 929,834 929,834 - - 606,323 606,323 323,511
Receivables frombanks - 164,574 164,574 - - 164,574 164,574 -
Total - - 1,094,408 1,094,408 - - 770,897 770,897 323,511

Total -

17,860

1,106,470

1,124,330

-

14,172

782,918

797,090

327,240

December 31, 2008
51


c) Credit Risk Assessment of Receivables that are neither Past Due nor Impaired
Acceptable Risk Special Notice Substandard

Total gross

Consumer 14,486 - - 14,486
Housing 3,799 - - 3,799
Cash and other 159,527 - - 159,527
Agriculture 4,557 - - 4,557
Cards 301,393 - - 301,393
Overdrafts per current accounts 221,717 - - 221,717
Total 705,479 - - 705,479
SME and large corporate entities 124,284 7,165 - 131,449
Entrepreneurs 46,608 - - 46,608
Total 170,892 7,165 - 178,057
Receivables frombanks 621,961 - - 621,961
Total 792,853 7,165 - 800,018

Total, December 31, 2008 1,498,332

7,165

-

1,505,497

Total, December 31, 2007 -

-

-

-

In 2007, the Bank applied the methodology based on individual assessment of risk exposures for
corporate entities that are more than 90 days in default. For receivables from retail customers with
more than 90 days in default, the allowance for impairment was estimated collectively, with the
exception of receivables subject to litigations that are adjusted in full.

d) Credit Risk Assessment of Receivables that are Past Due but not Impaired

Up to 30
days
From 30 to
60 days
From 60 to
90 days
From 90 to
180 days
From 180
to 365 days
From 1 to
5 Years
Over 5
Years Total
December 31, 2008
Consumer 13,745 1,503 132 79 37 - - 15,496
Housing 8,682 - - - - - - 8,682
Cash and other 111,057 20,396 4,181 1,878 467 - - 137,979
Agriculture 223 - - - - - - 223
Cards 14,608 5,313 2,484 2,339 465 - - 25,209
Overdrafts per current accounts 90,031 2,695 1,667 2,719 2,507 - - 99,619
Total 238,346 29,907 8,464 7,015 3,476 - - 287,208
SME and large corporate
entities 101,834

5,565

-

-

-

-

-

107,399
Entrepreneurs 225,646 10,640 - - - - - 236,286
Total 327,480 16,205 - - - - - 343,685
Receivables frombanks - - - - - - - -

Total 565,826

46,112

8,464

7,015

3,476

-

-

630,893
Collateral fair value 40,599 6,829 1,285 492 136 - - 49,341

Up to 30
days
From 30 to
60 days
From 60 to
90 days
From 90 to
180 days
From 180
to 365 days
From 1 to
5 Years
Over 5
Years Total
December 31, 2007
Consumer - - - - - - - -
Housing - - - 306 1,491 - - 1,797
Cash and other - - - 1,745 907 - - 2,652
Agriculture - - - - - - - -
Cards - - - - - - - -
Overdrafts per current accounts - - - 294 13,117 - - 13,411
Total - - - 2,345 15,515 - - 17,860
SME and large corporate
entities -

-

-

-

-

-

-

-
Entrepreneurs - - - - - - - -
Total - - - - - - - -
Receivables frombanks - - - - - - - -

Total -

-

-

2,345

15,515

-

-

17,860
Collateral fair value - - - 548 297 - - 845

December 31, 2008
52


e) Concentrations per Industries

All financial assets are placed on the territory of the Republic of Serbia.

Revocable
Deposits
and Loans

Interest
Receivables
Extended
Letters
and
Deposits

Securities

Equity
Investment

Other
Placements

Other
Assets

Total
Agriculture, hunting, fishing
and forestry -

5,063

144,397

9,898

-

1,545

2,612

163,515
Mining, energy and processing
industry -

12,950

944,991

55,989

-

22,262

6,251

1,042,443
Civil engineering - 1,844 143,986 6,866 - 1,863 1 154,560
Trade - 17,589 846,603 12,104 - 2,497 283 879,076
Services, tourism,
accommodation and traffic -

1,455

139,692

3,552

3

-

45

144,747
State administration and other
public services -

102

11,486

52,911

-

-

6,463

70,962
Banks 1,306,400 604 5,536 62,013 1,417 578,576 8,419 1,962,965
Other - 3,351 371,118 25,052 - 4,771 15,848 420,140
Retail - 2,185 470,837 - - 156,819 26,507 656,348

December 31, 2008 1,306,400

45,143

3,078,646

228,385

1,420

768,333

66,429

5,494,756

December 31, 2007 2,498,591

26,946

2,062,032

326,568

45,264

953,451

185,424

6,098,276

f) Maturities of Off-Balance Items

Undrawn Credit
Facilities Guaranties
Not Covered
Letters of
Credit Sureties Total
December 31, 2008
Up to one year 620,359 98,512 51,584 27,127 797,582
From1 to 5 years 41,008 737,686 - 153,570 932,264

661,367

836,198

51,584

180,697

1,729,846
December 31, 2007
Up to one year 497,589 636,240 13,566 90,822 1,238,217
From1 to 5 years 12,491 209,287 - 146,033 367,811

510,080

845,527

13,566

236,855

1,606,028

December 31, 2008
53

31. LIQUIDITY RISK

The maturities of assets and liabilities, pursuant to their outstanding maturities, as of December
31, 2008 were as follows:

Up to 1
Month
From 1 to 3
Months
From 3 to
12 Months
From 1 to 5
Years
Over 5
Years

Total
ASSETS
Cash and cash equivalents 1,357,519 - - - 3,590 1,361,109
Revocable deposits and loans 1,306,400 - - - - 1,306,400
Receivables arising frominterest, fee and
commission, trade, fair value adjustments
of derivatives and other receivables 45,143

-

-

-

-

45,143
Loans and deposits to customers 413,447 597,922 1,367,388 483,541 216,348 3,078,646
Securities (excluding treasury shares) 163,243 64,171 971 - - 228,385
Equity investments (interests) - - - - 1,420 1,420
Other placements 607,207 21,576 87,289 45,938 6,323 768,333
Intangible assets - - - - 8,368 8,368
Fixed assets and investment property - - - - 957,461 957,461
Deferred tax assets - - - - 17,654 17,654
Other assets 25,108 13,219 28,102 - - 66,429

Total assets 3,918,067

696,888

1,483,750

529,479

1,211,164

7,839,348

Up to 1
Month
From 1 to 3
Months
From 3 to
12 Months
From 1 to 5
Years
Over 5
Years

Total

LIABILITIES
Transaction deposits 1,547,392 - - - - 1,547,392
Other deposits 2,542,108 1,463,707 754,508 13,500 17 4,773,840
Borrowings 19,977 39,378 60,039 3,099 - 122,493
Interest, fee and commission payables and
change in the value of derivatives 19,691

-

-

-

-

19,691
Provision 41,702 42 5,206 998 7,386 55,334
Tax liabilities 3,716 - - - - 3,716
Tax and dividend payables - 369 - - - 369
Deferred tax liabilities - - - - 48,201 48,201
Other liabilities 67,821 19,675 15,327 - - 102,823
Equity - - - - 1,165,489 1,165,489

Total liabilities 4,242,407

1,523,171

835,080

17,597

1,221,093

7,839,348
Liquidity gap:

- December 31, 2008 (324,340) (826,283) 648,670 511,882 (9,929) -
- December 31, 2007 414,479 (655,633) 429,954 461,498 (650,298) -

The Banks liquidity, as its ability to discharge its liabilities when due, depends on the balance
sheet structure of the Bank, as well as the matching between inflows and outflows of assets. The
structure of assets and liabilities as of December 31, 2008 according to their maturities indicates
the existence of a liquidity gap in the period up to one month and from 1 to 3 months. The
primary weakness of the aforementioned mismatch is inherent in the fact that short-term sources
of assets were placed for a longer time period.

December 31, 2008
54

32. MATURITIES OF FINANCIAL LIABILITIES (undiscounted cash flows)

Up to 1
Month
From 1 to 3
Months
From 3
to12
Months
From 1 to
5 Years
Over 5
Years Total
LIABILITIES
December 31, 2008
Other deposits 2,714,204 1,570,143 808,476 14,123 17 5,106,963
Borrowings 20,642 40,669 60,926 3,145 - 125,382
Interest, fee and commission
payables and change in the value
of derivatives

19,691

-

-

-

-

19,691
Tax liabilities 3,716 - - - 3,716

TOTAL LIABILITIES

4,410,056

1,630,487

884,729

17,268

17

6,942,557

Up to 1
Month
From 1 to 3
Months
From 3
to12
Months
From 1 to 5
Years
Over 5
Years Total
LIABILITIES
December 31, 2007
Other deposits 2,584,987 1,095,950 538,351 21,726 1,404 4,242,418
Borrowings - - 995 3,965 3,575 8,535
Interest, fee and commission
payables and change in the value
of derivatives

13,067

-

-

-

-

13,067
Tax liabilities 2,983 - - - - 2,983

TOTAL LIABILITIES

4,608,476

1,105,972

550,970

25,691

4,979

6,296,088

December 31, 2008
55

33. INTEREST RATE RISK

The Decision issued with reference to interest rates, established the framework for determining
interest rates on placements and liabilities in 2008. The Bank strives to ensure the preservation of
the real value of sources and placements.

An Asset and Liability Management Board was established within the Bank which is in charge of
interest rate risk management.

Up to One
Month

From 1 to
3 Months

From 3
to12
Months

From 1 to
5 Years

Over 5
Years
Non-
Interest
Bearing
Assets/
Liabilities

Total
ASSETS
Cash and cash equivalents 795,657 - - - 3,590 561,862 1,361,109
Revocable deposits and loans 507,652 - - - - 798,748 1,306,400
Receivables arising frominterest,
fee and commission, trade, fair
value adjustments of derivatives
and other receivables 45,143

-

-

-

-

-

45,143
Loans and deposits to customers 407,912 597,922 1,367,388 483,541 216,348 5,535 3,078,646
Securities (excluding treasury shares) 36,271 64,171 971 - - 126,972 228,385
Equity investments (interests) - - - - - 1,420 1,420
Other placements 584,070 21,576 87,289 45,938 6,323 23,137 768,333
Intangible assets - - - - - 8,368 8,368
Fixed assets and investment property - - - - - 957,461 957,461
Deferred tax assets - - - - - 17,654 17,654
Other assets - - - - - 66,429 66,429

Total assets 2,376,705

683,669

1,455,648

529,479

226,261

2,567,586

7,839,348

LIABILITIES

Transaction deposits 501,232 - - - - 1,046,160 1,547,392
Other deposits 2,357,486 1,458,031 739,292 8,536 - 210,495 4,773,840
Borrowings 19,689 39,378 60,039 2,914 - 473 122,493
and change in the value of
derivatives -

-

-

-

-

19,691

19,691
Provision - - - - - 55,334 55,334
Tax liabilities - - - - - 3,716 3,716
Tax and dividend payables - - - - - 369 369
Deferred tax liabilities - - - - - 48,201 48,201
Other liabilities - - - - - 102,823 102,823
Equity - - - - 1,165,489 1,165,489

Total equity and liabilities 2,878,407

1,497,409

799,331

11,450

-

2,652,751

7,839,348

Net interest rate exposure:
- December 31, 2008 (501,702) (813,740) 656,317 518,029 226,261 (85,165) -
- December 31, 2007 (41,125) (636,407) 431,141 429,376 143,586 (326,571) -

December 31, 2008
56

34. CURRENCY RISK

The following table shows the net foreign currency position of the Banks assets and liabilities as
of December 31, 2008:

USD

EUR

Other
Currencies

Total
Foreign
Currency

Local
Currency

Total

Cash and cash equivalents 18,762 218,889 103,525 341,176 1,019,933 1,361,109
Revocable deposits and loans 194,990 611,410 - 806,400 500,000 1,306,400
Receivables arising frominterest,
and other receivables 683

10,355

115

11,153

33,990

45,143
Loans and deposits to customers 107,143 1,397,064 3,991 1,508,198 1,570,448 3,078,646
Securities (excluding treasury shares) - 52,911 - 52,911 175,474 228,385
Equity investments (interests) - - - - 1,420 1,420
Other placements 2,019 526,416 62,695 591,130 177,203 768,333
Intangible assets - - - - 8,368 8,368
Fixed assets and investment property
-

-

-

-

957,461

957,461
Deferred tax assets - - - - 17,654 17,654
Other assets 88 9,270 132 9,490 56,939 66,429
Total assets

323,685

2,826,315

170,458

3,320,458

4,518,890

7,839,348

LIABILITIES
Transaction deposits 15,967

252,192

8,372

276,531

1,270,861

1,547,392
Other deposits 286,809 2,394,690 212,342 2,893,841 1,879,999 4,773,840
Borrowings 195 118,198 - 118,393 4,100 122,493
and change in the value of
derivatives 61

245

-

306

19,385

19,691
Provision - - - - 55,334 55,334
Tax liabilities - - - - 3,716 3,716
Tax and dividend payables - - - - 369 369
Deferred tax liabilities - - - - 48,201 48,201
Other liabilities 5,709 34,659 3,276 43,644 59,179 102,823
Equity - - - - 1,165,489 1,165,489

Total liabilities 308,741

2,799,984

223,990

3,332,715

4,506,633

7,839,348

Net currency exposure:
- December 31, 2008 14,944 26,331 (53,532) (12,257) 12,257 -
- December 31, 2007 28,662 1,081,071 14,274 1,124,007 (1,124,007) -

At December 31, 2008, loans and other placements in dinars hedged by indexing dinar exchange
rate to foreign currencies, amounted to RSD 890,338 thousand and were presented within foreign
currency exposure. The liabilities with currency clause of RSD 213,845 thousand are also
included within the foreign currency exposure.

December 31, 2008
57

34. CURRENCY RISK (Continued)

Total Foreign
Currency
Changes in
Exchange
Rates 10%
Changes in
Exchange
Rates -10%*
Sensitivity analysis (currency risk)
Cash and cash equivalents 341,176 34,118 (34,118)
Revocable deposits and loans 806,400 80,640 (80,640)
Receivables arising from interest,
and other receivables 11,153

1,115

(875)
Loans and deposits to customers 1,508,198 150,820 (75,323)
Securities (excluding treasury shares) 52,911 5,291 (5,291)
Other placements 591,130 59,113 (57,137)
Other assets 9,490 949 (567)

TOTAL ASSETS 3,320,458

332,046

(253,951)

Transaction deposits 276,531 27,653 (27,653)
Other deposits 2,893,841 289,383 (289,383)
Borrowings 118,393 11,839 (11,839)
and change in the value of derivatives 306

31

(31)
Other liabilities 43,644 4,364 (4,364)

TOTAL LIABILITIES 3,332,715

333,270

(333,270)

December 31, 2008 (12,257) (1,224) 79,319
December 31, 2007 1,124,007 (112,401) (17,122)

* The Bank has placements with contractual currency clause and according to the contractual
terms, the repayment of these loans cannot be below the exchange rate as of the release date.

35. IMPACT OF THE FINANCIAL CRISIS ON THE BANKS BUSINESS OPERATIONS

The Banks operations are under the influence of the financial crisis and deterioration of economic
conditions. In 2009, further decline in the market conditions is anticipated as in the first months of
2009, economic activities in the country have grown weaker and liquidity has decreased, making it
more difficult for the Bank to collect its receivables. With regards to the current crisis on the
global market and its ever growing impact on the Serbian market, the adverse effects on the
Banks business operations is to be expected.

Owing to the application of internal procedure and policies applied in managing assets and
liabilities, as well as risks, despite the impact of financial crisis in the IV quarter of the previous
year, the Bank did not register significant deterioration in business operations from the aspect of
all risks (liquidity, credit, interest and currency risks) except for the negative effects of
withdrawing foreign currency savings deposits of private individuals in the first half of the month
of October. Decrease in savings deposits of private individuals and their amount increased towards
the end of year.

The Asset and Liability Management Board monitors and considers liquidity risk, delinquencies in
customer liability settlement and currency risk on daily basis.

December 31, 2008
58

35. IMPACT OF THE FINANCIAL CRISIS ON THE BANKS BUSINESS OPERATIONS
(Continued)

The main problem of the Bank is insufficient capital in the last decade. In the conditions of
financial crisis which will peak in 2009, with negative trends in all aspects of operations, the
solution is the increase in capital which would help the Bank survive on the market and provide
grounds for further development. Increase in capital would help maintain adequate level of
liquidity, proper securitization of credit portfolio which means forming reserves to be one step
ahead of deteriorating ambient in which the Banks customers operate, as well as capital adequacy
above the prescribed level.

36. EXCHANGE RATES

The official exchange rates for major currencies used in the translation of balance sheet
components denominated in foreign currencies as of December 31, 2008 and 2007, were as
follows:

December 31,
2008
December 31,
2007

USD 62.9000 53.7267
EUR 88.6010 79.2362
CHF 59.4040 47.8422

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Translation of the Independent Auditors Report and Financial Statements Issued in the Serbian language

CREDY BANKA A.D., KRAGUJEVAC

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