Jc^8gZY^i7Vc`VHadkZc^_VY#Y# bVgi^ch`V&)%!&%%%A_jWa_VcV GZ\^hig^gVcVeg^D`gd cZbhdY^ÓjkA_jWa_Vc^i#gZ\#ka#&$&%*'&$%% BVi^ÓcViZk^a`V*))+*)+ >YZci^[^`VX^_h`ViZk^a`VoV99KH>*.+''-%+ Dhcdkc^`Ve^iVaYgj WZ&+#'*-#('&!'+:JG ´aVc^XVh`je^cZJc^8gZY^iciZgcVi^dcVa BVg Zih 110 2007 Annual Repor t · UniCredit Bank G^h` BVcV\ZbZci ;^cVcXZ BVg Zig^h 7Vc DeZgVi^dch 8dgedgViZ 7Vc ^c\ HVaZhCZildg 7dVgYBZbWZg HiV[[;jcXi^dc 9^k^h^dc 9ZeVg ibZci$Jc^i 7gVcX]l^i]8dgedgViZ9Zh` BRANCH LJUBLJANA BTC BRANCH KRANJ BRANCH TRBOVLJE Šmartinska 140, SI-1000 Ljubljana Na skali 1, SI-4000 Kranj Ulica 1. junija 2, SI-1420 Trbovlje Phone: + 386 (0)1 5876 757 Phone: + 386 (0)4 2018 171 Phone: + 386 (0)3 5612 561 BRANCH LJUBLJANA WOLFOVA BRANCH MARIBOR BRANCH VELENJE Wolfova 1, SI-1000 Ljubljana Svetozarevska 6, SI-2000 Maribor Šaleška 20a, SI-3320 Velenje Phone: + 386 (0)1 5876 418 Phone: + 386 (0)2 2285 320 Phone: + 386 (0)3 8987 300 BRANCH LJUBLJANA CELOVŠKA BRANCH MURSKA SOBOTA Celovška 150, SI-1000 Ljubljana Trg zmage 5, SI-9000 Murska Sobota Phone: + 386 (0)1 5000 540 Phone: + 386 (0)2 5341 440 BRANCH LJUBLJANA TRŽAŠKA BRANCH NOVA GORICA Tržaška 19, SI-1000 Ljubljana Tolminskih puntarjev 2b, SI-5000 Nova Phone: + 386 (0)1 2410 360 Gorica Phone: + 386 (0)5 3383 130 BRANCH CELJE AškerËeva 14, SI-3000 Celje BRANCH NOVO MESTO Phone: + 386 (0)3 4252 470 Glavni trg 20, SI-8000 Novo mesto Phone: + 386 (0)7 3737 400 BRANCH KOPER Ferrarska 5a, SI-6000 Koper BRANCH PTUJ Phone: + 386 (0)5 6101 055 Ulica heroja Lacka 1, SI-2250 Ptuj Phone: + 386 (0)2 7980 340 Introduction 1 January 2007 Fast Update of ATM Network Operations At the occasion of the transition to the euro, we connected our ATMs in the first possible moment and thus ensured a smooth supply of euros for our clients within a few minutes past midnight. 14 February 2007 Collaborated with Two Banks to Co­organize the First Issue of Euro Bonds Together with Societe Generale of Paris and Dresdner Kleinwort, we co-organized the first issuance of euro bonds for the Republic of Slovenia in the amount of 1 billion euros on the euro market. March 2007 First, Short-term Investment Product with Guaranteed Principal Value Offered in Slovenia We proved our commitment to innovativeness—which is also written in our mission statement—with a new product-structured deposit dedicated to investors who require higher return but are unwilling to bear higher risks. April 2007 The Word Slovenija to Become Part of Official New Name We obtained consent from the Government of the Republic of Slovenia to use the word Slovenija in the Bank’s new name. 25 April 2007 Bank’s New Supervisory Board Instated Federico Ghizzoni became the Chairman of the Supervisory Board. Three other members and the Vice Chairman also resumed their functions. May 2007 Balkan Express Structured Deposit Offered We offered yet another innovative product to our investors - a structured deposit, which, in terms of return, is less risky than investment funds as repayment of the principal value is guaranteed. At the same time, the interest rate is not capped and is dependent upon stock growth of selected companies. June 2007 Proposed New Name Confirmed In line with the re-branding process currently being carried out across UniCredit Group, the General Meeting of Shareholders of Bank Austria Creditanstalt d.d., Ljubljana accepted the proposal for the Bank’s new name - UniCredit Banka Slovenija d.d. June 2007 New Internal, Joint Agreement Achieved and New Legal Document on Systemization Adopted We adopted a new systemization and a new joint agreement, both of which contributed to a more transparent organization of work within the Bank and to regulation of rights and duties from the employment agreement. 20 June 2007 Organized Europa Forum Event The main topic of the Europa Forum, where we hosted many respected experts in the fields of economics, law, and politics, focused on opportunities in the Central and Eastern European markets. August 2007 New Name Entered into Registry of Companies The Court order of 31 August 2007 for entry of the Bank’s new name into the registry of companies. August 2007 Built Strong Employee Morale at Krvavec We invited all of our employees for a fun-filled and adventurous social event at Krvavec. We introduced them to the Bank’s new corporate image, premiered the new corporate ad campaign, but primarily focused on deepening relationships with our employees. 1 September 2007 New Name, New Challenges Our Bank took over the name of the largest banking network in Central and Eastern Europe - UniCredit Group. The re-branding project was accompanied by many activities and by integrated corporate communications. September 2007 Interactive Web Site Unveiled We moved to the new web site www. unicreditbank.si, which contains state-of­the-art design, rich content, and new user functionality, including access to secure on-line banking. 1 October 2007 Introduced Two New Pioneer Investments Umbrella Funds The Slovenian investment market became richer by 17 funds, which belong to two umbrella funds -Pioneer Funds and Pioneer P. F. (Portfolio Funds). The first covers the regions of Europe, America and developing markets, while the latter invests funds globally. October 2007 Updated Cards with Chip Technology As one of the first banks in Slovenia, and in line with EMV standard requirements, we conducted the replacement of all of our banking cards and introduced new ones with chips. 14 November 2007 Donated Funds for the Purchase of a French Horn As part of tradition, we have been supporting the work of The Slovenian Philharmonic Orchestra. This year we made a donation for the purchase of a concert French horn and we invited our partners to the year-end gala concert of the Philharmonic Orchestra. 30 November 2007 Signed Third-in-a-row Agreement with the European Investment Bank We signed the third-in-a-row agreement for an EIB credit line (EIB Global Loan) with the representatives of the European Investment bank, this time in the amount of 20 million euros. The funds were dedicated to financing projects of small and medium Slovenian companies. December 2007 Bond Issued for Droga Kolinska We organized the issue of Droga Kolinska Živilska industrija d.d. bond, where the Bank acted as lead manager for a placement of 30 million euros on the domestic market. We thus demonstrated the distribution capacity of the Bank on the Slovenian bond market. December 2007 New Year’s Donation for New Births We made a donation to five local maternity hospitals for the purchase of new equipment. December 2007 Named the Bank’s ombudsman Through an independent ombudsman organization, which was appointed for UniCredit Banka Slovenija d.d. in December, we strived to uphold equitable relations and the Bank’s reputation, in line with the Group’s value system. Business Report After the strong growth of the Slovenian economy in 2006 (5.2 %), the growth in 2007 was even higher (roughly 6 %), so the economy experienced the highest economic growth since the country’s independence. High growth was fuelled by exports and the construction sector, which in 2007 experienced better than anticipated conditions. The year 2007 was marked by numerous reforms including: adoption of the euro, tax reforms, continued privatization of state-owned companies and deregulation of the electricity market. However, their positive impact on the economy is yet to be seen. For the year 2008, ease of economic growth is expected due to reduced economic growth of main European trading partners, lower growth in domestic consumption and investments due to higher inflation forecasts that have been building during the second half of 2007 as well as the higher cost of financing resulting from the credit crisis in global financial markets. Nevertheless, we expect the trend of sound public finances and positive developments in the labour market to continue. On the demand side of strong economic growth in 2007, the most important component of growth was lively investment activity, in particular gross investments into fixed assets growing by roughly 17 % annually and driven by high debt financing and good weather conditions. The growth of lending to non-banking sector reached roughly 32 %. This robust growth in lending is on one hand related to strong growth of the economy, lively activity in constructions sector, still relatively favourable interest rates and favourable effects of the tax legislation changes on household income. Lending activity to non-banking sector also resulted in altered structure of the Bank’s balance sheet towards higher share of loans to this sector to roughly 64 % of total assets with further growth tendency. On the other hand, private consumption has slowed to 2.7 %. The biggest contributor to private consumption was the real growth of salary net expenses (7.7 %), which was partially caused by the tax reform and by higher employment rates. At the same time, the unemployment rate fell to the lowest level so far, to 4.5 % as measured by ILO standards. Public consumption experienced the same trend as private consumption, namely a slower annual growth compared to the last year. Net exports had a negative impact on GDP growth because high growth of exports was accompanied by an even higher growth of imports thus having a negative impact on the current account deficit that widened to 3.4 % of GDP. Strong expansion of industry and high productivity continued and reached roughly 10 % and 8 % respectively. They are thus considered the strongest generators of economic growth. The expansion in construction was marked also by exceptionally high growth of gross value added (17 %), accompanied by high growth in financial services (15 %), public services and trade in motor vehicles. Inflation has risen to 5.6 % in 2007 compared to 2.8 % the previous year (while the average inflation was 3.6 %), which can be explained by a rise in energy costs that pushed inflation higher by 0.9 base points, a rise in food prices (2.2 base points), services and euro adoption (0.3 base points). The economy has successfully defied the hike in energy and metals prices as an effect of geopolitical tensions, high demand from China and the hike in grains prices. When commodities were priced higher in the final products, namely food and services, the inflationary expectations rose and demands for higher wages have emerged at home as well as in other European countries. Apart from inflation, 2007 also will be remembered for the crisis in sub-prime mortgage lending in the USA that has forced many banks and other financial investors to write off significant amounts of their assets. This has caused banks to re-evaluate credit risk and become reluctant to lend to each Source: Bank of Slovenia Business Report Economic Environment in 2007 other, which caused liquidity problems in money markets in particular as well as in financial markets. In an environment of highly integrated global financial markets, the crises spilled over to Europe and other economies fast and left its trace in the form of higher refinancing costs and lack of financial resources also in Slovenia. UniCredit Banka Slovenija d.d., however, was in a position to weather the storm well due to its good access to international markets and the strength of UniCredit Group. Despite facing the crisis on international markets, the Bank does not anticipate adverse implications for its operations and will continue the activities in line with the goals set for 2008. In summary, 2007 was exceptional in the area of GDP growth due to strong expansion of industrial production and construction supported by high debt financing. The economy has performed well despite external shocks such as the high prices of energy, commodities and food and the credit crisis in the USA. Looking forward, we project the Slovenian national economy to be in good condition and able to cope with the challenges of increasing inflation or the possible spill over effects from negative developments in the global financial markets. We also expect Slovenia to continue its favourable economic growth, albeit at a lower pace than in the previous year. Business Report New Name, New Horizons Our name is the building block of our identity. It establishes us internally and represents us externally. A good name is not established overnight. Instead, it grows with us. We have been establishing it through our knowledge, experience and well-founded investments. We have been establishing it with responsible behaviour and with many years of success for the entire UniCredit Group. All of these endeavours have been heading in the same direction - upwards. A good name is not solely a matter of size or superior business performance but rather is reflected in the trust and satisfaction of our clients, shareholders and employees. It takes a long time to develop a good name; and it is far easier to damage it. We have adopted our new name with wisdom and responsibility. It is well recognized both at home and abroad; it is the name of one of the largest financial groups in Europe, connecting more than 9,000 branch offices in 23 countries and representing security and stability for more than 40 million customers. It provides them with confidence and ensures fast and safe financial solutions for an easy and secure path towards the future. We have put a new name on the outside but we have remained the same or even better on the inside. An established name with a strong tradition and reputation is a commitment for us to preserve the values, to justify and further build a good name for the Bank and the entire Group. This can be achieved through successful performance, development of a better selection of products and services, by stimulating employee potential and with awareness of the needs of our customers and our surroundings. At UniCredit Banka Slovenija d.d. we want to become the first name you think of, when thinking about your tomorrow. Nearly three years after the creation of UniCredit Group in 2005, we can state with pride, that UniCredit Banka Slovenija d.d. truly has become a member of a uniquely European banking group with the largest network and regional coverage in Central and South Eastern Europe. As a Group, we adhere to commonly held principles and a distinct set of values. We adopt these in our efforts to attain our vision and confirm our identity. Mission and Vision Our mission is to create a new way of banking by thriving to serve our clients with innovative solutions. Our vision is based on our determination to focus on people as individuals. Our aim is to enhance their potential and make their plans and visions come true. Values Our set of values is based on integrity as a condition of sustainability, which makes it possible to transform profit into value for all our stakeholders. Within UniCredit Group we share the following values as stated in our Integrity Charter: fairness, transparency, respect, reciprocity, freedom of action and trust. We see adherence to these values as a prerequisite for maintaining the confidence placed in the Bank and the Bank’s reputation. Value-based management and transparency of results The overall management and steering of the Bank is based on the principles of value-based management. In line with UniCredit Group the Bank implemented EVA (Economic Value Added) as the main performance measure. EVA measures the profit contribution in excess of the cost of capital and is applied not only at the overall bank level but also is taken into consideration in individual loan decisions. EVA today is a standard performance measure, which combines both growth via the development of risk weighted assets and the capital allocation needed to generate profitability enhancements as value drivers. The Bank consequently aims to ensure that the capital gets invested into the business segments, product areas and services where the highest added value can be generated. Transparency on value creation and/or value destruction is of utmost importance for sustainable results. Divisional business model UniCredit Group’s business model is based on specialisation in specific customer segments. For business activities such as investment banking, trading, international corporate banking or asset management, it is clear that customer needs, service models and market segments are more closely related than the national market practice. However, we also believe that this applies to retail banking in an environment of industrialised banking while still taking Business Report Mission, Vision and Strategy into account local market specifics. relationships and take account of customer satisfaction in our incentive It goes without saying that our main system. objective is to meet every client’s personal • Diversity: We want to use all our needs in line with the idea that all employees’ various talents despite business is local through discretionary or age, gender, religion, health or sexual standardised products. However, in creating orientation. and developing products we try to unlock • Corporate citizenship: We want to be a the economies of scale on the revenue as committed and valuable member of local well as on the cost side and profit from communities by supporting them through membership in the Group. Consequently, our corporate sponsorship activities. also in our bank, the organisational set up • Ecological sustainability: We attach great follows the group standards and allows importance in our current business to know-how and best-practice transfer ecological sustainability. We encourage throughout the Group. and support an awareness of the interdependence of environmental topics It also is seen as a competitive advantage and banking business. to be able to serve customers through an • Training, encouragement and our extensive network of leading local banks. incentive systems are intended to enable We are able to support international group our employees to take an entrepreneurial clients operating in the Slovenian market approach while simultaneously fostering as well as Slovenian customers in their work/life balance. attempts to extend their business abroad. In trading and investment banking, we profit from the competencies and placing power of UniCredit Markets & Investment banking. In asset management, we benefit from the expertise of Pioneer Investments - a global top player. Global Banking Services, a global UniCredit division, supports us in maintaining cost efficiency and unlocking synergies via IT harmonisation, group-wide procurement or process design. From profit to value UniCredit Banka Slovenija d.d., in line with the Group’s focus, believes that financial targets can only be achieved through sustainable development with the following principles in mind: • We aim to build long-term customer Business Report In 2007, UniCredit Banka Slovenija d.d. achieved the best results in its history with pre-tax profits of 19.71 million euros. This means an increase of 4.96 million euros, or 33.6 %, which is remarkable, considering that 2007 was the first business year following the euro’s introduction. It was a major challenge, in 2007, to offset the income losses from the euro’s introduction (international payment fees as well as FX conversions and Central Bank arbitrage) with additional, preferable non-risk income. In 2007, the net financial and operating income rose by 7.42 million euros, or 15.3 %, to 56.03 million euros with improved results in all business segments. Fortunately, the growth of the income components also was in line with the strategy: risk-free fee and commission income showed the absolute highest growth (3.94 million euros); additionally, the risk-free deposit margins grew in absolute terms by 3.75 million euros, supported by the yield curve development. At the same time, administration costs and depreciation increased by 3.56 million euros, or 12.5 %, to 32.01 million euros with the major increase in staff expenses stemming from the increase in number of employees. Improved credit risk management and general sound economic situation led to slightly lower loan impairment and provisions which were 4.65 million euros, compared to 4.76 million euros in 2006. In line with the principles of value-based management, the Bank focused on a structural improvement of its result. Consequently, the Bank avoided entering into transactions below the economic minimum margin and had a special focus on low capital consuming business. These efforts were rewarded by achieving an EVA* (calculated based on UniCredit Group’s methodology) of 7.2 million euros. The return on post-tax equity improved from 7.67 % in 2006 to 9.77 % in 2007. Annual return on post-tax equity 10.0% 9.5% 9.0% 8.5% 8.0% 9.77 % 7.5% Year 2006 * EVA (economic value added) is the key measure of UniCredit Banka Slovenija’s value creation capabilities. It covers the absolute contribution to results by the entire bank, the business segments or the subordinated levels, which exceed or fall short of the cost of capital (excess corporate profit). The cost of capital, pursuant to the capital asset pricing model (CAPM), is the (minimum) return which a shareholder can expect from UniCredit Banka Slovenija d.d. by virtue of its specific business and risk profile (as opposed to the fully diversified market portfolio). The Income statement for 2007 The interest net income increased year on year from 32.90 million euros to 35.75 million euros, which is an 8.7 % growth rate. In the customer business the margins on the asset side were further under pressure and EVA generating business was difficult to find in segments such as key accounts. Increased business volumes and good margin contributions on the assets side are deriving from business with retail and Year 2007 mid-market clients. However, the upward shifts of the euro yield curve supported an increase of the margins on the liability side. The flatness of the euro yield curve gave only limited potential to create a mismatch result out of yield curve positioning in the Asset/Liability management. However, ALM had good net interest income contributions out of the liquidity positions of the bank. The fee and commission net income grew in 2007 by 30 % and reached 17.08 million euros (2006: 13.15 million euros). Tailor-made solutions as well as the Bank’s innovative approaches, resulted in the increase of attractive products and service competence. Security and custody fees are strongly above the previous year and in total amount to 3.61 million euros (2006: 2.57 million). Especially the inbound custody business (assets under custody amounted to 1,218 million euros) and the equity brokerage turned out to be a good source of income for the bank. Also the investment fund fees (assets under management: 63.51 million euros) contributed with upfront and trailer fees. In 2007, the Bank entered into a new business field -it originated two bond issues. Loan and lending related fees increased from 3.24 million euros in P & L income 100 80 68% 64% 20 NET INTEREST INCOME NET FEE INCOME TRADING RESULT 0 OTHER INCOME Share 2006 Share 2007 2006 to 4.98 million euros in 2007. In the corporate business, the Bank approximates the effective yield concept by accruing fees in interest net income; however, it does not do the same for retail business. In both business segments, the appropriate system support will be implemented in 2008. Besides increased business, the fact that the Bank insures fewer loans than in the past is another reason for the positive development. Consequently, lending fee income in retail increased by 85.1 %. Payment and foreign trade related fees increased in 2007 from 5.28 million euros to 5.52 million euros. Given the increased transaction volumes, the profitability of the business unfortunately declined after introduction of the euro, as most former foreign payments are now domestic payments. The focus on innovative solutions for clients with derivative instruments launched in 2005 further paid off in 2007. The Bank achieved a net fee result of 2.73 million euros, which is 0.94 million euros more out of this business than in 2006. In 2007, the Bank reports a loss of 0.75 million euros in realized gains and losses on financial assets and liabilities not measured at fair value through profit and loss (2006 saw a profit of 0.69 million euros in this same segment). Within this position, the Bank reports the result of the sale of available for sale bonds. In 2007, the Bank decided to participate in the buy-back of Republic of Slovenia bonds at favourable market rates and recorded a loss of 0.6 million euros. The interest rate hedges related to these positions were not terminated at that time. Economically, the Bank profited by participating in those buy-backs organized by the Ministry of Finance. Additionally, the Bank reports in this position, write-offs of loans carried at effective interest method and their recoveries, both summing up to 0.12 million euros net loss (2006: 0.14 million euros gain). The reason for the lower result in 2007 is the IFRS adoption with strict policy on write-offs. Recoveries of written-off loans derive in both years from loans written-off before IFRS adoption. The activities of the treasury department trading on the Bank’s own account are reflected in the profit and loss statement in positions 9, 10 and 11. The trading result doubled in 2007 and reached 3.76 million euros after 1.84 million euros in 2006. The Bank strongly profited from the anticipated Slovenian credit spread compression after introduction of the euro. However, positioning on the yield curve also resulted in significant profits. Moreover, the activities on the foreign currency markets contributed positively to overall trading results. Within position “Gains and losses on derecognition of assets other than held for sale”, the Bank reports gains and losses on derecognition of its property and equipment as well as intangible assets. Naturally, the increased business also is reflected in increasing costs. Expanding the number of employees as well as opening new branches to increase regional presence for retail and corporate business and the investment in IT infrastructure lead to higher expenses. Also, the re-branding, which took place in 2007, was supported by heavy marketing activities. However, the Bank manages its administrative costs tightly and cautiously. The administration costs amount to 28.84 million euros (2006: 25.52 million euros) in total, which is an increase of 3.32 million euros or 13 %. Business Report Financial Results Staff expenses increased in 2007 by 2.30 million euros to 15.42 million. The increase in number of employees accounts for the majority of this increase. By the end of 2007, the Bank employed 450 full-time employees (FTE) (2006: 417 FTE) while in 2007, on average, 434 FTE (2006, on average: 405 FTE) worked for the Bank. For the first time in 2007, the Bank recognised expense of unused holidays, which amounts to 0.45 million euros. Other administrative costs increased in 2007 by 1.02 million euros to 13.42 million euros. On the one hand, marketing costs increased by 1.68 million euros to 2.89 P & L expense 100 80 60 40 million euros, due to the re-branding of the Bank, while communication costs remained at the same level -1.28 million euros. On the other hand, IT related costs decreased by 1.59 million euros to 2.18 million euros, as the euro introduction costs in 2006 were a one-off cost. Depreciation increased from 2.92 million euros in 2006 to 3.16 million euros in 2007. The Bank tries to reduce the impairment losses on financial assets by state-of-the-art risk management techniques and a focus on clients with high credit worthiness. In 2007, the impairment of assets including provisions 42% 39% 20 PROVISIONS DEPRECIATION OTHER ADMIN. EXPENSE STAFF EXPENSE 0 Share 2006 Share 2007 amounts to 4.31 million euros (2006: 5.41 million euros) which is a decrease of 1.10 million euros or 20.4 %. In 2007, the Bank achieved a pre-tax profit of 19.71 million euros, compared to 14.75 million euros in 2006, which is an increase of 33.6 %. Within the tax expenses of 4.53 million euros (2006: 3.82 million euros), the Bank records current taxes of 3.52 million euros (2006: 8.95 million euros) and a deferred tax of 1.01 million euros (2006: profit of 5.13 million euros). The net profit for the financial year amounts to 15.18 million euros after 10.93 million euros in 2006, which is an increase of 39 %. The Balance Sheet for 2007 UniCredit Banka Slovenija d.d. has been among the fastest growing banks in recent years and has more than doubled total assets since 2003. However, the drastic reduction in the corporate customer margins on the asset side, which are often already below the Bank’s internal minimum margin levels, as well as the implementation of value-based management, lead to a focus on profitable rather than unlimited growth in the customer business. In addition, with the euro introduction, the Bank of Slovenia stopped the issuance of depository receipts in which UniCredit Banka Slovenija d.d. strongly invested in the past (year end 2006: 187.78 million euros) with the intention to achieve arbitrage profits. Lacking an investment alternative with the same risk profile, the Bank reduced its deposits due to banks after the maturity of the depository receipts. Also, the loans and receivables to banks were lowered by 12% 9% 37% 230.50 million euros because of limited risk/return profile. Consequently, total assets decreased in 2007 by 54.60 million euros to 2,132.69 million euros. In line with international practice, the local International Markets unit takes interest rate positions via interest rate swaps (IRS). The interest rate swap market normally pays higher interest rates than the bond market and additionally consumes minimal liquidity. Bonds are primarily bought for complying with the liquidity regulation of the Bank of Slovenia or with the intention to run a credit risk position, which involves the reduction of the interest rate risk embedded in the bond via payer IRS. For accounting reasons, it is preferable to run such positions in the trading portfolio. Consequently, also in 2007, the financial assets held for trading significantly increased by 71.84 million euros to 189.26 million euros. The position includes, in addition to debt instruments, the positive market value of financial derivatives, which accounted for 54.26 million euros (2006: 24.13 million euros) by the end of the year. This increased market value is the result of an increase in derivatives business, which mainly is customer driven, along with a strong increase in the euro yield curve in 2007. Available for sale financial assets were reduced in 2007 from 157.86 million euros to 115.38 million euros. The position consists of the Bank’s equity model book investment as well as convergence positions the bank entered into ahead of the euro introduction in Slovenia. Loans and receivables to non banks rose by 328.60 million euros (2006: 258.76 million euros) and reached 1,595.23 million euros by the end of the year. Out of this, 1.084 million euros relates to the corporate Assets 100 3% 3% 90 80 70 60 50 40 30 20 7% 5% 5% 10 9% 9% 0% 0 1% 1% OTHER LOANS TO BANKS LOANS TO CUSTOMERS HELD TO MATURITY AVAILABLE FOR SALE HELD FOR TRADING CASH AND OTH. BAL. WITH CB Share 2006 segment, the remaining 511 million euros to the retail segment. The high growth in the retail segment is the result of the increased focus of the Bank on the retail business. Loans and receivables to banks decreased from 378.78 million euros in 2006 to 148.16 million euros in 2007. Within the held to maturity investments, UniCredit Banka Slovenija d.d. reported in 2006 its holdings in depository receipts issued by the Bank of Slovenia. With the abolishment of this instrument after the euro introduction, the Bank did not allocate assets to the held to maturity portfolio. The increase on the asset side was mainly financed by financial liabilities measured Share 2007 at amortized cost, which decreased from 1,999.90 million euros in 2006 to 1,904.25 million euros by the end of 2007. Loans and deposits from customers increased from 594.16 million euros to 721.54 million euros whereas the loans and deposits from banks decreased at the same time from 1,405.74 million euros to 1,182.71 million euros or by 16.2 %. Financial liabilities held for trading more than doubled in 2007 to 50.45 million euros. The position comprises solely of the negative market value of derivatives which is a consequence of customer driven business. The shareholder’s equity increased in Business Report Financial Results Liabilities 100 7% 8% 70 27% 34% 60 50 40 30 20 10 0 2007 by the profit carried forward from 2006. In order to finance future growth and to stay in line with the capital adequacy regulations set by the Bank of Slovenia, the Bank will retain the full 2007 profit and not pay dividends. The shareholder’s equity amounts to 163.62 million euros (2006: 146.87 million euros). In line with valid regulations, UniCredit Banka Slovenija d.d. voluntarily had an interim audit by KPMG with an unqualified opinion and allocated the nine month profit to eligible capital for capital adequacy. The capital adequacy ratio amounted to 8.5 % by the end of 2007 (2006: 9.5 %). CAPITAL OTHER LOANS FROM BANKS DEPOSITS FROM CUSTOMERS DEPOSITS FROM BANKS HELD FOR TRADING Retail and Small Business Banking General overview The year 2007 at UniCredit Banka Slovenija d.d. was characterized by an increased focus on retail business. In addition to an annual revenue increase of 34 %, there also were a number of important achievements. Some of the most important of these achievements were: establishment of stable and ambitious management and sales staff; implementation of segment and product specialists’ functions; introduction of a structured sales approach; and the beginning of a re-engineering project of key business processes. Also, strong customer satisfaction ratings were achieved, preparing the ground for further expansion of retail banking in coming years. Our focus has been on satisfying customer needs and finding the optimal solution to these needs. With more than 100 sales representatives in 14 branches across the country and with the substantial help of our Mobile Sales Force (MSF) partners, we successfully took care of our many clients. Customer satisfaction has been assessed through a structured and certified survey, which UniCredit Group conducts biennially. Through this survey, we have discovered that our clients are among the most satisfied banking clients in Slovenia. 1. Mass & affluent segment Mass & affluent segment remains the most important segment in terms of revenue as it contributed 34.2 % of total Bank’s revenues in 2007. It also is the segment with the highest revenue growth, which in 2007 amounted to 35 %. Loans are still the core product for this Client segments 30 25 20 15 10 revenues 19.459 14.636 0 5 PRIVATE CLIENTS BUSINESS CLIENTS MASS & AFFLUENT 2006 segment. The biggest revenue growth share is contributed to competitive offer and successful sales of housing mortgage loans. The volume growth was as high as 47 %, which clearly outgrew the market in total loan volume growth. On the other hand, we also were very active and competitive with our deposits offer. In 2007, we were the first bank to introduce structured deposits in the market. Two successful auctions of new products and an attractive pricing policy enabled us constantly to increase the total deposit volume and revenues. By revising our transaction account packages offer at the beginning of the year, we decreased the number of available packages, but brought their content closer to the specific needs of the sub segment. 2. Small business segment The small business clients segment was to some extent negatively affected by the 2007 introduction of the euro, since income generated from foreign currency conversions and foreign payments processing mostly vanished overnight. However, the introduction of the euro also brought new opportunities, which we successfully have been capitalizing on. The small business segment also was redefined and shifted to the retail division at the beginning of 2007. Financing products are still the most demanded by clients in this segment. Together, working capital and investment finance loans account for the majority of total segment revenues. Despite the recent liquidity/credit crunch, which was more clearly present in the local environment in the last quarter of 2007, we have provided sufficient funds to our clients at market conditions. We thus satisfied most of their needs and ensured a continuous development and growth of their businesses. With the content redesigning and repricing of our transaction account packages, we Business Report Bank’s Segment Performance Review successfully met the needs of micro and small businesses. In 2007, we thus acquired many new clients with business transaction accounts. 3. Private Banking segment The Bank’s offer for Private segment of the most demanding individual clients continues to develop. We still are introducing and developing new approaches, while several new, sophisticated products, in particular investment ones, and services have been introduced to the Slovenian market. Nevertheless, our privileged club of “Plemeniti Package”, private banking products and services, has grown considerably and it indicates that long-term target goals will be exceeded. The late introduction of Pioneer Investments investment funds on the market in September, together with the afore mentioned liquidity/credit crisis, was the reason for lower than expected volume of fund sales in 2007. However, the introduction and sale of funds went smoothly and according to plan. Therefore, we optimistically expect an increased volume of Pioneer Investments funds sold in the future. The funds can also be offered in combination with various banking products such as Lombard loans or insurance products. Thanks to the close cooperation with the Corporate Banking division, especially with the Structured Finance department, the volume of loans sold far exceeded the target. Tailor-made financing of management buy-outs (MBO), particularly in the Mid-market segment, enabled the Bank to get access not just to the new private banking clients but also to potential higher volume of assets under management for those clients in the future. PRODUCTS Loans are still the main driving force of the Bank’s growth and are contributing a considerable part to total retail banking revenues. Notwithstanding, we believe there is still further growth potential in the mid-term. Favourable money market trends positively supported the banking sector in 2007 by generating above average revenues from deposit business for most banks. Additionally, at UniCredit Banka Slovenija d.d. we managed to increase the total deposit volume compared to last year. Though revenues from other banking services also increased, this field remains the largest not exploited enough growth potential for the Bank. In the future, we plan to increase its share in total revenues mainly through higher volumes of Pioneer Investments investment funds sold. FUTURE FORECAST By and large, UniCredit Banka Slovenija d.d Products will continue to follow its ambitious goals in the retail sector by: • increasing revenues and profitability; • maintaining our leadership position in customer satisfaction; • enhancing our financial solution offers; • improving our processes in order to provide even more convenient solutions for our clients; • additional investments and training of our advisors toward becoming top financial advisors in personal and corporate banking. Positive results in 2007 gave us additional confidence leading up to the next major step-substantial expansion of our retail business over the next three years. In 2008, we will start implementing an ambitious plan. The first step will involve opening six new branches and pursuing a new call centre with state-of-the-art solutions. The second step will be to shift our sales focus in addition to mortgage loans also to include Pioneer Investments funds, which 100 90 80 70 60 50 30 40 10,150 13,732 BANKING SERVICES 20 OFF-BALANCE 10 DEPOSITS 0 2006 2007 LOANS were introduced in September 2006. We will maintain the most competitive offer for these two products. In addition, we intend to enhance our offer of investment products with a new insurance partner. By taking these steps, our existing and new business clients would be able to use the entire branch network for their business support, not just the regional hubs anymore. The Bank also intends to develop closer relationships with their clients, especially micro companies. Asset management and a few other investment services will be introduced for our most demanding Private banking clients. Last but not least, we are set to further invest in developing our sales staff knowledge and upgrading their skills in order to be able to better capitalize on business potential and clients’ trust. Corporate Banking GENERAL OVERVIEW A strong macro-economic environment coupled with increasing economic growth of 6 % in 2007 continued to attract new competitors while current market players were fighting vigorously in almost all market segments of our business. In the first half of 2007, we saw a continuing trend of declining interest margins. This indicated that interest margins on the Slovenian banking market for companies holding a comparable credit rating were lower than European, while non-interest revenues continued to gain importance compared with interest revenues. During the second half of the year, declining trust in the banking system, stemming from the US banking crisis, was felt in Slovenia as well. The inter-bank money market became very sensitive to the news about the losses related to American mortgage loans. All of these factors created a feeling of uncertainty with higher prices of inter-bank loans and consequently higher prices of customer loans. Slovenia, a member of the European Union since 2004, also experienced strong competitive pressures in 2007 in certain economic segments as well as performance deterioration in some business entities. The introduction of the euro as a common currency meant an additional loss of revenues in the areas of payment transactions and currency swaps. The corporate business line at UniCredit Banka Slovenija d.d. recorded good results in 2007 and thus, despite the high level of competitiveness of this industry and the continued falling interest margins in the first half of the year, exceeded its goals. The revenues were 14 % above budget and 12 % above the preceeding year. The growth of revenues in the real estate financing segment reached as high as 29 %. The Bank has thus managed to maintain solid growth, which is a major success, considering the circumstances as well as the Bank’s somewhat altered policy of focusing more on the relationship between risk and return on capital and seeing increased credit risk in some situations. The overall market share in the loans segment dropped somewhat. This is to a large extent a direct result of the Bank’s conservative approach as the foundation for comprehensive assessment of companies’ credit ratings. We decline many businesses, which we deem to be too high-risk. Additionally, compared to our competitors, we have been less aggressive in making loan deals, if the offered deal did not meet the required return/risk ratio. On the other hand, we have increased market share in non-interest revenues, in particular with risk management products for corporate clients and partially with special banking products, such as project financing, retail financing, managing cash and the so called group payment products (inside the UniCredit Group). SEGMENTS AND PRODUCTS Despite the fact that a slight decline was recorded on the corporate liabilities side in 2007, significant growth was achieved within the framework of some sectors. One example is a segment of mid-size companies, where the volume of deposits increased by 36 % over the previous year. The volume increase of the Bank’s loans to corporations was 15 % bigger than in 2006, and even higher within some segments, including the real estate and project financing segments, where the growth rate was as high as 43 %, and in the segment of mid-size companies, where we recorded 38 % growth. The volume of foreign payment transactions in the segment of electronic payment orders rose by 50 %, while the volume of domestic payment transactions in the segment of electronic payment orders rose by 54 %. The overall number of transactions rose by 21 %. Due to the harmonisation of the payment system with the European directives on the one hand and the introduction of the euro on the other hand, the Bank planned for a loss of revenues in the amount of approximately 1 million euros. This projection was based on the following assumptions: lower non-interest revenues in the area of currency swaps; lower fees in payment transactions or levelling fees for domestic payment transactions with fees for cross-border payment transactions; and lower fees for managing money. In reality, Business Report Bank’s Segment Performance Review the lost revenue was 15 % to 20 % higher than planned. Despite that, we were more than able to compensate for the loss with additonal income in other areas. As a part of caring for better performance of its partners who increasingly appreciate the advantages of protection against currency, commodity and interest risks in 2007, the Bank also increased its offer of instruments aimed at reducing such risks. The Bank was successful in interest hedging (interest swap), in composite hedging instruments used for hedging interest risks and in foreign-currency forward contracts used for hedging currency risks. In terms of total market share, in this segment we were the absolute No. 1 player on the Slovenian market with market share of over 50 % and with a 141 % increase in 2007. The Bank also has been building its expertise about products and services in the challenging and complex area of project financing, where it has successfully carried out several deals. We further improved our offer in the area of cash management and took several additional steps in the provision of more complex services like automatic cash pooling. The group of companies that decide on such services has been growing resulting from the establishment of their subsidiaries abroad. Within the framework of the re-branding project, which encompassed the entire Bank, we have, among other things, successfully renovated our web site. It is now more user friendly, confirmed by positive feed-back from existing and potential clients. Besides exceeding our goal in terms of total revenues, we also significantly increased our contribution to the overall profit of the Bank through cost and process efficiency. FUTURE FORECAST UniCredit Banka Slovenija d.d will continue to follow its ambitious goals in the area of corporate banking, with particular focus on the following: • further growth of revenue, profitability and above-average growth of non-interest revenues; • increased client satisfaction compared to other banks and to the previous period; • maintaining or achieving a leading position in the area of products such as structured deposits, instruments for reducing risks, issuing bonds, project financing and others; • improving the sales process in terms of better transparency and efficiency for clients as well as for employees; • developing the knowledge, experience and satisfaction of our team, which is a necessary requirement for long-term success. In 2008, we expect even fiercer competition in the banking industry, while the changed economic environment in the country will also contribute to difficult conditions for doing business. The anticipated higher inflation growth rate and growth of the GDP will lead to deteriorated conditions for companies. This consequently would mean a change of conditions for the Bank, since risks would increase. Despite announcements about lower economic growth, in the range of 4 % to 5 %, our aim will continue to be ensuring quality business solutions for our clients and exceeding set goals with well trained and experienced banking staff. International Markets The International Markets business segment comprises the Bank’s activities in currency, interest rate and fixed income trading, sales of treasury products to corporate and institutional customers, and debt capital markets origination. Thus, this segment links international financial markets with customers and the Bank. In line with this focus, 2008 will see the integration of equity execution and custody units to form an effective structure with clear governance. This reorganization will enable us to further broaden and deepen the range of products and services offered to our customers. The various units are to benefit from each other in terms of know-how sharing, placement power and market presence, and this backed also by the strength of a large international financial group with proven competence in trading in international financial markets and investment banking ultimately will benefit customers. GENERAL OVERVIEW For International Markets business segment, 2007 was a very successful year. Total revenues increased by 0.6 million and reached 8 million euros despite a loss of traditional income components related to introduction of the single European currency, euro, in Slovenia and giving up domestic currency related conversion and interest trading business. By consuming only 4 % of the Bank’s capital, International Markets business segment increased its share in total profit of the Bank to 25 %. Return on allocated capital reached 81 %. Contributions to the strong overall performance came from both customer business and trading activities. SEGMENTS AND PRODUCTS Currency and interest rate trading: against the background of major market weakness and increased volatilities originated by the US sub-prime credit crisis, the trading unit added substantial contribution to total revenues in 2007, amounting to 4.7 million euros. The strongest contribution came from interest rate derivatives trading. Treasury corporate sales: The trend for corporate customers to hedge against excessive currency, interest rate and commodity volatilities continued in 2007. Treasury corporate sales responded to growing demands from customers with a range of new and innovative products from the family of interest rate and foreign exchange derivatives as well as commodity derivatives. In 2007, the Bank kept its clear leading position in Slovenia in the area of risk reduction and optimization strategies. The new trend is the ambition of customers to use market volatility and restructure existing hedge portfolios to further reduce interest expense and improve income. As an innovation leader in Slovenia, UniCredit Banka Slovenija d.d. will continue introducing new, tailor made solutions to its customers in this know-how intensive business. A new customer group for derivatives is private customers who are increasingly interested specifically in innovative investment products. Within UniCredit Banka Slovenija d.d., the Treasury corporate sales unit has a functional responsibility for product development and execution of market risk related products with corporate customers, with profits generated in this business segment allocated to the Corporate Banking division. Institutional sales: In 2006 the Bank decided to bundle all aspects of relationship with institutional customers (insurance companies, investment funds, pension funds and other financial institutions) in one organizational unit in order to better understand the needs of this customer segment and to increase the quality of service. Institutional sales activities generated significant increase in transaction volumes and revenues in 2007, results amounting to 1.6 million euros and more than doubling the result achieved in 2006. Approximately equal contributions came from derivatives and operational products such as currency conversions and equity brokerage. Debt securities issuance business: In 2007, UniCredit Banka Slovenija d.d. took a top position as lead manager and underwriter for the successful execution of two high profile issuances in Slovenia. In March, the Bank acted as a joint-lead manager for inaugural issue of the Republic of Slovenia in EMU in the amount of one billion euros, significantly oversubscribed and placed with a tight pricing Another success was the first issue of Droga Kolinska Živilska industrija d.d., lead managed by UniCredit Banka Slovenija d.d. and placed with a volume of 30 million euros on the domestic market, demonstrating the distribution capacity of the Bank on the Slovenian bond market. Quite generally, the new issue business continues to be negatively effected by the restrictions of withholding tax regulations, pricing potential new corporate issue out of international markets. Nevertheless, we anticipate the trend for corporate customers to diversify their refinancing base to continue in 2008. With a dedicated sales force in Slovenia and more than 200 professional sales people across Europe, the Bank is best equipped to serve its customers and to execute a broad range of debt securities instruments both domestically and internationally. Equity brokerage: Supported by an increased volatility in the fall of 2007, the brokerage unit achieved yet another record year in 2007, both in terms of traded volumes as well as market position. UniCredit Banka Slovenija d.d. continues to act as the broker of choice for international dealers and brokers active in Slovenia. The Bank concluded the year as the second biggest broker on Ljubljana Stock Exchange, with a turnover of 341 million euros. Positive trends are increasing outbound flows of Slovenian customers who appreciate our market access and quality of service. In 2008 we will continue investing in this area in order to increase further the efficiency and product quality offered to this customer segment. Custody: The developments in Custody are in line with positive trends in Brokerage as both assets under management and number of processed transactions reached record levels in 2007. Despite ongoing pressure on fees, Custody managed the best result in history with revenues of 1.6 million euros. UniCredit Banka Slovenija d.d. secured a custodian mandate in the upcoming introduction of Euroclear and Clearstream link with the Slovenian securities registry, which will help to mitigate potential loss of the traditional fee income in this segment. Besides keeping its position as a top inbound custodian in Slovenia, the Bank plans to significantly increase its share on outbound flows in 2008 by both increasing relationship capacity and improving product quality. Sales Support UniCredit Banka Slovenija d.d. is aware that the products and services it offers have to address the specific needs of its clients in order to achieve maximum client satisfaction. This is one of the Bank’s key strategic guidelines. In 2007, the Sales Support division prepared sales actions, organized them and monitored their efficiency, adequate management of sales segments and development of new products. Client satisfaction index Business Report Bank’s Segment Performance Review measurements, which are performed jointly with UniCredit Group, within corporate banking and retail banking units, produced a desirable result last year concerning operations with the general public, which placed the Bank in first place among banks. As far as corporate operations are concerned, the Bank has been achieving outstanding client satisfaction results for the past few years. Client satisfaction index concerning operations with the general public is calculated by an independent institution TNS, enabling the Bank to compare its results with those of other banks within the UniCredit Group and other banks in Europe and Slovenia. In 2007, the Bank achieved the best result in the Group and exceeded client satisfaction of competitive banks in Slovenia, amounting to 70 points on average. The Bank achieved 99 points and was placed among the best five percent of the banks in Europe. The Bank will strive to preserve high client satisfaction in all segments in the future as well. Introduction of new products in 2007 High Customer was marked by successful launches of two structured deposits, the introduction of which followed innovation, which is a part of the Bank’s strategy. The Bank introduced Lombard/collateralized loans and cross-border credit plus, which are interesting mainly for clients who need cross-border support. In the fall, the Bank started promoting sales of the Pioneer Investments umbrella fund, which brought an international fund operator to Slovenia. In 2007, the Bank successfully continued to use alternative communication channels such as direct mail, to cooperate with its partners and to increase cross-selling. Last year’s advertising campaigns were marked by the renaming of the Bank and its brand. It was taken into consideration that clients’ needs vary with regard to individual segments. As far as communication with companies is concerned, the Bank focuses on organizing various events and thus attends to effective transfer of best practice knowledge from the field of structured financing and derivatives. The Bank also published the first issue of Azimut, our magazine targeted at key clientele. The Retention 90 70 68 69 50 30 Low Customer Retention Competitors in Slovenia Finance - Europe UniCredit Banka Slovenija d.d. - Retail banking - Retail banking - Retail banking Number of interviews 2.474 800.000 1.515 Source: Customer Satisfaction Study Slovenia, November 2007 and TNS Group, 2003 - 2006 purpose of the magazine is to innovatively underline the Bank’s care for the development of an individual and its keen interest in social development. The Bank made a shift in the tone of its marketing campaign focused on communicating with the general public. A corporate advertising campaign actively announced the brand change. UniCredit Bank brand is based on a unique, identifiable, modern, dynamic, and emotional basis, which will be noticed in all future communication tools as well. Current research shows that UniCredit Bank brand quickly became synonymous with excellence also in the Slovenian banking market. The Brand Equity Index Study, carried out Group-wide, enables us to verify awareness, reputation and inclination to repeated purchase. We are proud that through the re-branding campaign we have achieved 40 % aided awareness and up to 80 % aided awareness in some segments. Our clients already recognize key attributes of our brand, such as innovativeness, helping clients to achieve their goals, and a high level of customer satisfaction through quality service. We use these research results also in measuring performance success and for remunerating managers, who consider the client satisfaction index a vital element of their annual performance goals. Challenges of the Year 2008 Year 2007 is marked as the year the Slovenian economy achieved the highest economic growth since its declaration of independence. The main factors were high export growth and domestic investments, mainly in the construction industry. Concerning domestic consumption, High Customer Retention 90 70 71 50 30 Low Customer Retention Competitors in Slovenia -Corporate banking Number of interviews 400 Source: Customer Satisfaction Study Slovenia, October 2007 state and household spending remained moderate. Also, financial brokerage marked high growth on account of very positive ››terms of trade«, which specifically applies to various loan arrangements throughout the non-banking sector. In other words, the financial crisis, with which the rest of the world has been dealing since the second half of 2007, has not had substantial impact on the Slovenian economy yet, except that the price of financial brokerage has begun to increase and access to foreign banking sources has become more difficult. Considering the results of the previous year, which were positive for the entire EMU as well, the OECD and other renowned analysts share the opinion that we can all expect an impact of the financial crisis in 2008. This impact will reflect first in slowing economic growth while inflation will also remain at high levels and also at a much higher level than the ECB price target. Such external conditions also will affect the Slovenian economy decrease of foreign demand and consequently modest investment growth UniCredit Banka Slovenija d.d. -Corporate banking 407 will result in more moderate growth of the Slovenian GDP. Despite these factors, our projections remain optimistic, meaning that the positive guidelines of financial brokerage will continue. Though they will not be on par with 2007, they will continue at reduced pace, particularly in the area of credit activity in the corporate and retail sectors. The Slovenian market also will face higher inflation in 2008 compared to the European market, which means that the real interest rate will be lower than in other countries of the European Monetary Union while anticipating that the population will consume more. Even though Slovenia has exceeded three times the average credit growth in the EMU, due to the relatively low basis it has been only gradually approaching the scope of debt within the non-banking sector of the EMU. Taking last year’s credit business trends into account, this difference still represents 2/5 in favour of Slovenia. We wish to point out that the credit business will dictate the Bank’s activities despite introduction of new Basel standards. We anticipate clients’ needs will change and instead of regular loans, the partners will demand structured and tailor made solutions, which will include all forms of financing coupled with involvement of a wider circle of financial experts. Within its corporate banking business, the Bank will continue to strengthen its presence in small and medium-sized companies, which represent the major share of the structure of Slovenian economic subjects. In order to get closer to small companies as well as individuals, UniCredit Banka Slovenija d.d. is determined to additionally expand its business network to new local areas, hence doubling the network over the next three years. The Bank is aware that the fast growth of GDP enables the citizens to have at their disposal greater financial sources, which forms the basis for new household debt, while at the same time, creating opportunity for various types of investments in the insurance and wider financial sectors too. In order to support these efforts, the Bank will cooperate with the entire UniCredit Group as much as possible and with the Pioneer Investments funds, leasing company and the insurance company within the group, while simultaneously obtaining the assets management license. Last year also demonstrated that companies and individuals found the structured investment products interesting, which is why the Bank will continue with these activities in 2008, taking into consideration current market trends at home and abroad. Increased financing of real-estate business through mortgage loans is also a good foundation for issuing mortgage bonds, in accordance with applicable legislation. On the other hand, it is common knowledge that major domestic institutional investors are investing their financial assets in foreign stocks, bonds etc. This is the reason the Business Report Bank’s Segment Performance Review Bank is interested in issuing the first bond business sector. We are convinced the of this kind in 2008, hence adding variety Bank has all the necessary prerequisites, to the investment options on the domestic in particular highly qualified employees, market while assuring important, long-term who respect ethical norms that form financial resources. the foundation for liable development, strengthening of trust and additional Volatile conditions on domestic and assurance for the quality of service. This foreign money and capital markets will awareness will be the foundation, in pose additional challenges to the Bank to accordance with the adopted instruments, offer its partners the option of reducing the for enabling the best employees to achieve interest, exchange rate and price risks with their own goals within the Bank and UniCredit different derivative instruments. Our goal is Group; those goals are related to additional to maintain the leading role in this segment professional trainings, achieving better of the Slovenian market and to further financial results and obtaining appropriate strengthen it with the synergy of the entire positions within the financial Group. financial group, UniCredit Group. The euro has brought additional market Because of greater than anticipated inflation freedom to the Slovenian market; it has pressures, all cost categories will be more increased competition and also our common exposed. This means the Bank will have responsibility. We are aware of all of this and to pay more attention to this concern and, we will make the additional, necessary efforts despite such pressures, continue with the for which we thank everyone in advance as trend of decreasing costs as it is the only we are convinced these efforts will lead us to way of achieving target profitability through the set goals and to strengthening the Bank’s organic business growth. reputation. In line with strategic three-year guidelines adopted last year we are aware that the growth of business alone, without the adequate profitability, can not be the foundation of a healthy and successful business. For this reason, we will focus on all three basic indicators of our success: return on equity, total revenue/expenses ratio, as well as market share. In order to fuel additional market growth, the Bank will need additional capital, so it anticipates that the owners will continue current business policy of reinvesting generated profits and additional investments in shareholder’s equity if necessary. Based on the stated facts or assessments concerning the development in 2008, the Bank is determined to continue with its profitable growth and primarily with its intensified activity in the retail and small Finance and Market Risk The Finance and Market Risk division within UniCredit Banka Slovenija d.d. is responsible for Accounting, Controlling, Central Bank Reporting and Taxes. In addition, the division is in charge of market and operational risk management. It’s the Division’s clear goal to support its stakeholders with timely and accurate accounting and decision relevant reporting. The main activities in 2007 were focused on the successful completion of the Basel II project, where both Accounting and Central Bank Reporting were heavily involved. A significant part of the department capacities were invested into aligning booking procedures and data input guidelines to group wide standards. Based on this, the results of the Vienna and Munich co­developed risk weighted assets calculation engine were tested for the standardised approach. Already, by March 2007, the new COREP forms were used for reporting capital requirement for market risk. Besides the Basel preparation, in 2007, Accounting and Central Bank Reporting ensured the ongoing accurate and timely reporting to the bank’s owners and the Central Bank. Within operational risk management, the preparations for the standardised approach were completed and additional efforts in compliancy with the advanced measurement approach invested. A major focus in 2007 was on the increase of the operational risk awareness of the Bank and the identification of risk mitigation strategies. In Market Risk unit we have implemented as the first bank in Slovenia derivatives netting for the calculation of the credit replacement value. Market risk is in charge of the daily performance measurement of all Treasury activities as well as the limit monitoring and the ALCO process. The role of Controlling is to ensure timely and high-quality information for targeted decision-making at all organizational levels of the Bank. In order to ensure a transparent remuneration system of sales divisions, the Controlling department participated in introducing a tool for performance measurement and sales remuneration. Furthermore, Controlling is responsible for the entire business planning process and preparation of other reports for internal and external users at the Group’s level. It also gives expert opinions related to introduction of new products, marketing campaigns, new branche openings and other strategic decisions by the Bank. The tax unit successfully completed a corporate income tax audit by the Slovenian tax authorities. In line with our contract with the IRS (US tax authority) an external audit on the implementation of the IRS agreement was performed and accepted by the IRS. The tax unit acts as an internal, professional adviser for all tax related questions. Last but not least, the Finance and Market Risk division has an important role in the Bank’s attempt to bring innovative products to the market. For identified products the division sets accounting and reporting standards, assesses tax impacts and market and operational risks related to those products. Also in 2007 several new products were launched with support of the division. Risk Management Risk management is of fundamental importance to the banking industry, which is rapidly changing and developing. Financial market sensitivity can easily create distrust based on negative information connected to operational pitfalls of an individual financial institution. A similar outcome occurred in 2007, when the American credit crisis began and agitated the financial public. UniCredit Banka Slovenija d.d. is well aware of this, therefore it treats this segment with special attention in terms of content and personnel. In risk management, the Bank abides by the strict and complex rules of the Group as well as the rules and regulations laid down by the Bank of Slovenia and other supervising institutions. The Bank has extensive experience in controlling credit risk, which is annually incorporated into carefully established procedures for permanent monitoring of its overall credit exposure. Certain procedures were adjusted to international accounting standards and Basel requirements, which further upgraded this segment to improve the process of treating and monitoring the investments. UniCredit Banka Slovenija d.d. monitors exposure of each of its individual clients or a group of clients. The Bank’s system enables it to examine the exposure based on exposure criteria connected to an individual transaction. On the basis of the internal model used for classifying clients -companies - credit risks are arranged in twenty-eight classes. When determining the credit capacity of individuals, the Bank focuses primarily on major factors influencing the individual’s credit capacity, namely checking income, salaries and the like. Based on client classifications, and considering all other available data, the Bank formulates the required and necessary impairments for individual banking risks at each client’s level. If necessary, this also is done at each transaction level. In 2007, the Bank formed additional impairments in the amount of 4.3 million euros, which conformed to its plans. Compared to 2006, the amount of formed (for more information on banking risks, see financial part of the Annual Report) Business Report Managing Business Risks impairments was actually reduced by 8.5 %, highlighting that in 2006, the Bank uniquely formed impairments in the amount of 1 million euros due to the introduction of International Accounting Standards. If there was no such effect, the level of impairments would increase by 16.2 %, which complies with the growth of the Bank’s portfolio. In 2007, the Bank substantially increased the amount of repaid, impaired loans (4.9 million euros), which shows that the department entrusted with loan renewal is well formed and organised. When forming impairments, the Bank applies various measures for early detection of potentially bad loans. The Bank follows on a monthly basis the movement of companies’ ratings, loan defaults and late bank payments and regularly follows corporate clients’ individual transactions with at least annual documented business and event review. The Bank employs a discounted future cash flow method to calculate impairments. In 2007, for the first time, the Bank additionally formed impairments for the so called unidentified events in the amount of 400,000 euros, which, in addition to 3.9 million euros from individual provisions, represents the total of all impairments in 2007. The amount of additional impairments is aligned with the budgeted amount, which proves that the methodology used by the Bank was adequate and correct. A detailed and regular analysis of the portfolio and numerous comparisons made on the level of UniCredit Group confirmed that the Bank has a high quality and balanced portfolio, which has been retained despite growth. Similar to previous years, the Bank maintained a stable and quality portfolio structure again in 2007, with more than 95 % exposure with the highest credit rating ‘A’. To further reduce the credit risk of its entire portfolio, the Bank provides for adequate dispersion of loans among its numerous clients and segmentation into various economic activities. The preparation of such analysis with respect to activity, size of business, credit form, etc. enables the Bank to react quickly in case of recorded deterioration of any indicators. In 2007, the Bank focused a majority of activities on meeting Basel requirements, such as checking the quality of collateral, provided as a pledge for the bank exposure. The Bank formed all the necessary project functions enabling it to implement planned activities to meet the requirements in compliance with the IRB approach. Information Technology Support In the area of information technology and optimization of business processes, 2007 was marked with several important projects at UniCredit Banka Slovenija d.d. These projects included: preparing for the introduction of Basel standards; implementing requirements from the European directive on Market in Financial Instruments (MiFiD); introducing the Slovenian clients’ credit rating information system - for individual clients -(SISBON); preparing for the introduction of a single euro payment area (SEPA); and the transition of all banking cards to chip technology. In accordance with Basel standards, in 2007 we continued with the project of setting up a back-up IT centre. As a result of these endeavours, we now have two interconnected IT centres, which alternately conduct tasks based on the current availability of resources. If one centre fails, the other one resumes the entire Bank’s information and communication support. During last year we thus completed the project of increasing the reliability of the Bank’s information support. The project began in 2005 with the transfer of the core information system to the Group’s central IT centre in Vienna, while in 2006 and 2007 we continued with the increase of reliability of all satellite systems and communications. The European MiFiD directive required numerous adjustments on the central bank information system as well as on satellite systems for supporting business with financial instruments. In order to create a better basis for expanding our offer of services related to securities trading, in the second half of 2007 we replaced the information system for this segment with a new one. We at UniCredit Banka Slovenija d.d. have always been aware of the utmost importance of exchanging data on clients’ credit ratings among Slovenian banks and consequently of the introduction of SISBON system in our bank. Therefore, we started all the required preparations in the central information system right away and we completed them on time. The introduction of the single payment area in euros (SEPA) has most certainly been one of the most demanding projects in the area of payment systems in the last years. We started preparations for this project in 2006 and upon Slovenian adoption of the euro, preparations intensified. The project was also launched at the entire UniCredit Group level. In order for the Group to remain harmonized in the European region and to achieve cost efficiency, we decided to enter SEPA payment systems through the central access point in Vienna. At the same time, we decided to support all specific services enabled by SEPA standards that were available at the national level. Year 2007 also brought the replacement Index of growth of share of users Index of card transactions growth / installation of electronic banking systems 350 250% 305 300 214,9 200% 250% 229 224 163,0 207 153,7 200% 150% 150% 100,0 100,0 100% 100 100 100 100% 50% 50% 0 0 2005 2006 2007 2005 2006 2007 Maestro Cards Online b@nk for individual clients - users MasterCard Cards E-bank and MultiCash for corporate clients - installation VISA Cards of all of our cards as we equipped them transactions (by 15 %). The share of form and manner of information storage. with chips in accordance with the EMV electronically received payment orders The Management Board of UniCredit Banka standard requirements. However, our ATMs increased to 86 % in domestic transactions Slovenija d.d. has approved the overall already had been completely adapted to and to 84 % in cross-border and security policy justifying concrete policies this technology in 2006. As a result, by international payment transactions. and instructions of safeguarding the October 2007, when the card replacement individual areas (physical access policy, process was completed, UniCredit Banka Electronic banking is a communication ‘clear desk’ and ‘clear screen’ policy, Slovenija d.d. was one of the few Slovenian channel that is becoming increasingly password policy, e-mail and the internet banks that had completely adopted the chip important in modern banking services. In policy, etc.) and providing a basis for secure technology. During the card replacement line with these changes, we introduced a business. process, we also took into consideration the series of minor additions that improved SEPA requirements related to card business. the user-friendliness of electronic banking The main objective of the Bank’s information systems; we enabled our clients access to system security is ensuring confidentiality The trend of fast growth of transactions with additional data on payment transactions and (only authorised persons have access to cards issued by the Bank, continued in 2007 improved the reliability of these systems. data and information), integrity (data is too, as we have seen an 8 % growth in VISA The trend of increasing share of users of accurate), and optimal availability (ensuring transactions, a 6 % growth in MasterCard electronic banking systems continued that authorized users have access to and a 33 % growth of Maestro transactions. throughout 2007 as well, since 27 % more information and associated assets when The number of cards issued by the Bank corporate clients and 40 % more individual required). All of this is extremely important also increased, namely by 18 % for VISA, clients were using them compared to the for successful management of the Bank, by 30 % for MasterCard and by 29 % for preceding year. its reputation and for the confidence of its Maestro. customers. Safety and security checks are INFORMATION SYSTEM SECURITY based upon safety standards of UniCredit In 2007, we continued the trend of For banks, information and information Group and Code of conduct for information increasing the number of domestic technology systems present assets of security management ISO 17799. transactions (by 18 %) as well as the great importance, requiring appropriate cross-border and international payment security measures are taken to ensure the Only authorised persons have access to Business Report Managing Business Risks 120% 100,00 100,00 100% 80% 60% 40% 20% 0 2005 Domestic payment transactions Foreign payment transactions hardware and software equipment. Access is granted by standard procedures and on the basis of attributed rights with a unique user name and password. The security and safeguarding system covers paper documents, data in electronic form, communications, all hardware and software equipment. General system and other types of control include physical and/or logical control. Physical control comprises physical protection of the building, video surveillance on all key points, entry to business premises with inductive cards and alarm protection. Logical control is implemented in terms of applied software. Password policy lays down rules for strong and secure passwords. The Bank has a back-up IT centre, ensuring high availability of all critical data and servers. Servers at the back-up location are either physically duplicated or virtualised. All communication lines to branches and external institutions are doubled. Also, communication with the public network is doubled using different internet providers. Index of growth in number of payment transactions 160% 153,37 140% 136,70 126,25 2006 2007 Firewalls on primary and backup location enable several protected areas, external and internal segments are additionally protected by routers. Additionally the Bank takes care of data protection, so that we make regularly (daily, weekly, monthly) data and system backups on tapes, which are then stored off-site, in a secure location. In the framework of the Business Continuity Management project, we have prepared business continuity plans (including alternative and recovery procedures) for business critical functions, based on risk analysis and business impact analysis. The software development policy determines the manner of ordering software (new requirements or modifications), testing in separate test environment and ‘go-live’ procedure. We are aware that technology is changing and moving forward. Therefore, we are regularly monitoring development in this field at home and abroad as UniCredit Group is focused on security. At UniCredit Banka Slovenija d.d. we are aware that the strive to increase profit must be accompanied by corporate responsibility towards the economic and social environment. These days, corporate success and stability depend upon different interest groups, so development of knowledge, innovation and a wider social responsibility are the key to success in these areas. UniCredit Group has strong, universal corporate values, stated in the Integrity Charter and representing a foundation of strengthening corporate social responsibility and managing long-term relationships. The goal of the UniCredit Group is to become the leading financial institution in corporate social responsibility by 2010. This project is of great importance to UniCredit Group, as it is essential for the Bank to create trust in the public eye locally as well as at the group level to fortify it with its actions and to communicate it to the public too. The key task of the Bank’s corporate communications which is based on two-way communication and supports the planned strategy, vision and goals of the Bank is maintaining good relationships with its audience, including employees, clients, suppliers, investors and the communities where we conduct business. Creating added value and socially responsible behaviour are the most important all-around goals involving corporate communications. Transparency, professionalism, respect and trust are the values we follow dutifully to this outcome. Relations with Employees At UniCredit Banka Slovenija d.d. we are aware that our employees are the source of power, energy and knowledge that contribute to achieving the Bank’s long-term goals and satisfaction of customers and peers. Therefore, we pay careful attention to their personal development. Employees are also ambassadors of what is going on in the company so the relationship with them is thoughtfully planned and measured. We devote a great deal of importance to internal communications and keep employees informed about important activities and directions of the Bank. EMPLOYEE COMMUNICATION The main focus of internal communication in 2007 was connected with a momentous event for the Bank, when the Bank with its owners identified with the new name as well. Communications started last spring with the publication of an internal newsletter devoted to the topic of re-branding followed by a letter from the management. In August 2007, the Bank organized an all-staff social event at Krvavec, where, in an informal setting, we introduced them to the Bank’s new corporate image and logo. Members of the Board described the meaning of the new name and of the entire banking group. The new corporate ad campaign also premiered there. Staff response to the event was extremely positive and, no doubt, contributed significantly to the overall success of such an important and demanding project as re-branding. Growth of number of employees 460 450.10 452,10 440 419.00 420 400 392.10 380 360 336.10 337.10 340 320 1. 1. 2004 1. 1. 2005 1. 1. 2006 1. 1. 2007 31. 12. 2007 1.1 2008 We kept our employees informed throughout the year about the Bank’s projects by using different communication channels such as letters from management, internal newsletters, personal letters, e-mails, personal presentations and meetings. When projects demanding high personal input from employees were completed successfully, key employees received personal acknowledgement from the Bank’s management. By doing this, we emphasized their role during the project, we acknowledged their exceeded expectations and we contributed to their motivation to do more successful work in the future. GROWTH IN NUMBER OF EMPLOYEES AND HIRING At the beginning of 2007, UniCredit Banka Slovenija d.d. had 419 employees. By the end of the year, that number had grown to 450 employees. These figures include, on average, 33 students and contract workers. The growth in number of employees in 2007 was 7 %, or 31 new co-workers, whose average age was 29. The average age of all employees is currently 36.5 years; 62 % of the staff employed by the Bank are women while 38 % are men; the gender ratio was unchanged from 2006. The Bank’s goals and strategy for new hires in 2008 are: to attract appropriate candidates for new business units; to train the Business Report Social Responsibility management toward successfully achieving strategic business goals and managing the development of young, potentially talented employees. We want to become a long-term partner of employees in banking and financial institutions, as this is the only way to achieve the goals of the individual as well as of the Bank. We wish to be candidates’ first choice in the future too. EDUCATIONAL STRUCTURE UniCredit Banka Slovenija d.d. pays particular attention to knowledge and education, as evidenced by available data showing that four percent of our employees have a Ph.D. or Master’s degree (an increase of one percentage point over 2006); 46 percent of employees have higher or university education degrees (up two percent over 2006); while 50 percent of employees have high school diplomas (a three percent decrease). A trend of an improving education structure is seen, as the level of higher or university education degrees increased by three percentage points. TRAINING AND EDUCATION The Bank has gained value throughout the years with appropriate knowledge of its products and services, by knowing its clients and with the quality of its services for clients. In 2007, we allocated 0.2 % of total revenue toward training our employees. We conducted 17,888 hours of educational and training activities (a 17 % increase), while the average stood at 42 teaching hours per employee (a 5 % increase). The topics covered by training and educational activities included banking professionalism, sales techniques, leadership techniques and improving computer skills. Since there were no computer trainings in 2006, due to activities related to the introduction of the euro, 26 % of all employees attended Excel and Access training sessions in 2007. The share of internal trainings was 24 % and comprised the following topics: products and processes (a total of approximately 61 % of all internal trainings), the introductory seminar for new employees, titled ››Welcome Amongst the Best« (a total of 25 % of all internal trainings), basics of project management (a total of eight percent of all internal trainings), plan of continuous operations (a total of six percent of all internal trainings). Nine percent of the total training and educational hours were dedicated to leadership techniques and skills, 21 % of total hours were allocated to learning foreign languages and 70 % were for professional, functional education in banking, finances, information technology, and organizational skills. DEVELOPMENT AND REMUNERATION The Bank’s strategy was introduced to employees by the Bank’s management at a full-day retreat, where every employee had an opportunity to recognize his/her role in achieving corporate goals and was then able to determine the goals for his/her own department or division. In 2007, we continued the HR project titled “Management by objectives” and the related employee remuneration, which was carried out for the third time this year. One part consists of management based on objectives set by each employee in a two-way conversation at the beginning of the year. The second part, particularly important from the development viewpoint, is an annual development interview intended for individual’s career development. Both parts are key management tools in the Bank. The result of management by objectives approach is better familiarity with the goals and strategy of the Bank and of the individual organizational units and therefore greater employee satisfaction. At the same time, the remuneration system also is connected to achieving individual goals. The annual development interview is implemented at all organizational levels and we consider it to be a competitive advantage, as assessment of behaviour and skills in accordance to the 270o method is the foundation for such an interview. Employees adopted this system and because of its added value, they use it as a tool that supports and develops communication between superiors and their co-workers. Taking into consideration experiences from the previous years, in 2007 we took a step forward and adopted the renewed and amended remuneration system for the sales divisions, namely for the Sales Network and Corporate Banking divisions. The new system more precisely and transparently defines the expectations for specific sales positions. Also, the systematization and internal collective agreement that were re-adopted in 2007 helped create a more transparent work organization in the Bank and in arranging other employment related rights and responsibilities. TAKING CARE OF VALUES We undertook some key initiatives in the areas of leadership, training and remuneration in 2007, where additional room for improvement had been identified. These activities were conducted based on the results of the first satisfaction survey, conducted at the entire UniCredit Group level. Analysis among other elements indicated strong loyalty to the Bank and employee pride to be a part of such a mature and responsible environment. The research results also led to the formation of interest groups related to sales of products and to management for which we prepared the Sales Academy and the Leadership Academy. Within the training area, we focused more on topics that allow direct application of knowledge. As mentioned earlier in this report, pertaining to remuneration, we adopted revised rules of rewarding sales personnel. On 1 October 2007, we celebrated the “Integrity Charter Day,” dedicated to a discussion of six values: equality, trust, respect, transparency, freedom of action and reciprocity. These values form the foundation of our business and strengthen our recognition on the financial intermediation market. During this day, employees from different organizational units met for short meetings and discussed values, their meaning in the work place and for everyday tasks. These meetings showed that we had made significant improvement regarding the value of transparency compared to 2006; this value came out penultimate in the opportunity for improvement. In 2007, UniCredit Banka Slovenija d.d. also named an ombudsman, as this system was established for the whole Group in September 2006. Establishing an ombudsman allows independent submission of potential complaints relating to breaches of the Integrity Charter caused by act or behaviour among employees and the Bank. UniCredit Group is introducing the ombudsman position in every country the Bank has presence. By doing this, we aim to accelerate solutions of interpersonal conflicts and difficulties, to encourage cooperation at work and to create synergies among members of the Group. The restorative justice system brings a new way of dealing with the consequences that follow illicit behaviour. It is based on the culture of selecting mediation as a way of treating illicit behaviour and as a guarantee for respecting the value system defined by the Integrity Charter. The system offers an opportunity for improved or restored communication, or suggests new means of interpersonal relations; it eases the elimination of negative consequences related to breaches of the Integrity Charter and leads to an agreement regarding future behaviour. Ombudsmen deal with topics such as discrimination in the work place, discrimination based on subjective criteria, intentional information withholding, mobbing, sexual harassment, stalking and so on. Ombudsmen are organized so that they can act independently and report to the Management Board or to other executive bodies. Each bank ombudsman, as a member of the UniCredit Group, is directly responsible to the Group ombudsman, and hence, independent of the local human resources department and local management. TAKING CARE OF EMPLOYEES In order to care for our employees, their health and well-being, we support the following activities: organized sporting events, subsidized cultural performances, New Year’s celebrations, gifts for children of employees, employee recreation days and summer picnics. Taking care of and monitoring our employees’ health is both our obligation and a commitment that expresses our support of our employees. In 2007, we thus conducted 72 preliminary medical examinations and at the end of the year, traditionally provided our employees with the option for a flu vaccination. On average, 20 % of employees take this option. We also reduced the percentage of sick-leave, namely by five percent, which increased the number of effective hours by 13 %. Due to our young employee profile, we experienced a population boom in 2007 as the number of pregnant women in the Bank jumped significantly, by 60 %. Within the framework of our care for the elderly, we also assure the possibility of participating in a voluntary supplemental pension insurance, which is used by 75 % of our employees. This figure is understandable considering the age structure and awareness of our demographic. The above described care for employees is also reflected in successfully maintaining the fluctuation rate at an acceptable level by taking into account the demographic and situation on the labour market. However, this rate increased from 5.31 % in 2006 to 6.04 % in 2007. Relationship with Clients Last year, we achieved an ambitious and thoughtfully planned marketing strategy. Many marketing-communication activities were successfully carried out in the first half of the year. By using advertising campaigns and direct mail we presented to select target segments our offer of housing loans and two structured short-term deposits, novelties on the Slovenian banking market. The second half of 2007 was marked with the Bank’s re-naming and introducing the new brand to the Slovenian market. The UniCredit Bank brand distinctively oriented towards active individuals whom the bank helps to achieve their wishes, ambitions and goals was successfully presented to clients through the corporate advertising campaign. Business Report Social Responsibility The campaign distinguished itself with clear and consistent communication in a variety of media, TV commercials (which was the main communication tool) and good positioning slogans. By an emotional and graphically effective TV commercial, enhanced by familiar music, we portrayed a life cycle in which an individual can achieve his plans, wishes and dreams. The positioning slogan ››Choose your tomorrow« places an individual into an active role and hence encourages him to plan his own future and actively follow this plan. As research showed, through use of an effective advertising campaign we achieved the desired awareness and positioning of the new ››UniCredit Bank« brand and even exceeded the customer satisfaction of our Slovenian competitors, which on average amounted to 70 points. A score of 99 points places us among the top five percent of banks in Europe. Within the framework of re-branding the Bank, we also upgraded and updated promotional material (brochures, posters, leaflets, product packaging, forms, contract forms etc.) and designed it in accordance with the new design guidelines of UniCredit Group. New appearance and content also was applied to the webpage www.unicreditbank.si which still is being upgraded in accordance with the new guidelines for design and use of the webpage. Work efficiency in this area is regularly monitored by analysing users’ experiences. We organized numerous events for business partners of the Corporate Banking and Treasury divisions. Information session events such as “Bank Austria Creditanstalt’s Financial days”, “Treasury Breakfast” and others were mainly dedicated to presentations of financing exporting businesses, managing monetary assets, derivative financial instruments for hedging exchange rates and interest risks and presentation of the issuance of Droga Kolinska bonds, while the traditional Europe Forum featured the introduction of the current topic of cross-border financing solutions for international companies. We approached target segments, composed of new and existing clients, through various communication channels and presented them with innovative and tailor-made banking products. With modern marketing communications we proved ourselves as a proactive and client-oriented bank. Media Relations We are proactive and responsive in communication with the media as we are aware the media is an important factor when building the recognition and reputation of the Bank. In order to increase the quality of appearances of our employees and the Bank in the media, we carried out a media workshop for management and employees exposed to the media, a photography workshop and a style workshop. Our intention was to familiarize employees further with the meaning of responsiveness, clarity and credibility in cooperating with the media as a means to success and reputation for the Bank. At the press conference in March 2007, we presented to the media business results from 2006; these results ranked us in 4th place in Slovenia based on assets. When we launched a new product on the Slovenian marke a short-term structured deposit we invited media representatives to a breakfast where they were able to obtain more product details in an informal setting. The media responded well to the presentation and published numerous articles. The result was a good response from the public and investors, who decided to entrust their assets to the Bank. The September press conference in front of the branch office in Ljubljana, at Wolfova street, was organized to announce that the Bank was beginning to operate under the new name. We hosted more than 20 Slovenian reporters on site. On this occasion, Chairman of the Management Board, Dr. France Arhar, unveiled the logo ››UniCredit Bank« above the branch office in the centre of Ljubljana. Number of published articles on Bank Austria Creditanstalt d.d. Ljubljana or UniCredit Banka Slovenija d.d. in previous years Month January 2005 108 2006 76 2007 179 February 75 136 114 March 127 141 126 April 95 92 101 May 132 104 128 June 125 133 157 July 80 85 83 August 101 163 81 September 189 127 116 October 141 111 122 November 137 144 125 December 73 115 122 Total 1383 1427 1454 Numerous press releases with information on the Bank and UniCredit Group events as well as the analyses of the economic environment were conveyed to the media throughout the year. Moreover, we designed and upgraded a new press centre on our webpage. Many answers to journalists’ questions were prepared (we received 456 journalist questions in 2006 and 480 in 2007). Our media presence was intensified with the active and open approach to journalists in 2007 even though the end of 2006 had been marked with the introduction of the euro and, consequently, more published articles and broadcasts. Relations with Suppliers Over the years, UniCredit Banka Slovenija d.d. has established a recognizable name as a successful and innovative bank and its suppliers contribute an important part of the reputation. At the end of 2007, we organized a meeting with our suppliers with intention to shift from a traditional relationship to a partnership with them. The latter means a relationship driven by trust and long-term business cooperation. The theme of the meeting was mutual support through which we could all develop and achieve a higher level of customer satisfaction. We expressed our gratitude to them for successful cooperation in 2007 and introduced them to significant future projects. Furthermore, we pointed out that client wishes and expectations are increasing each year, which leads to fierce competition, wherein successful corporations are aware of the importance of strategic partnership between their suppliers and the company. Suppliers are a mirror of a company so we make every effort to underline the relationship we have with our suppliers with loyalty, openness and mutual satisfaction. Relations with Local Communities A local marketing initiative came to life in 2007. On their own initiative, the Bank’s business units were independently communicating with the local market through a variety of communication channels. Besides publishing and broadcasting planned articles in local media, the business units also conducted local advertising campaigns, events, and direct marketing. They made donations to local organizations and individuals, participated in sports and cultural events and sponsored local fund raisers (traditional Kurentovanje in Ptuj, Night on the Lake, Musica Panonia, “Let’s Stay Friends” spectacle, Summer Nights in Vransko etc.). We had a presence at the Celje Fair and at the 10th Days of Quality and Innovativeness; we also made donations to the Ivan Cankar primary school. Through direct mail and other activities, we contributed to the volume of communicating these activities and the Bank’s offer. Education about media communications and expert help undoubtedly contributed to our success at the local level; experts helped our business units to set business and operating guidelines and monitored the uniform appearance of the corporate logo in the community. Sponsorship and Donations Creating lasting value is a precondition for the long-term success of a company. Therefore, we return a portion of the acquired assets back to our local communities and at the national level through sponsorships and donations. In 2007, sponsorships and donations continued to follow the determined direction, especially in culture, helping socially impaired individuals and children. Our efforts toward socially responsible behaviour brought results through contributions to projects like Red Noses, the charity bazaar of the SILA association, Project Man, Silent Angels, Association Humana and others. We honoured our tradition of supporting the Slovenian Philharmonic Orchestra’s new instrument purchase fund this time for a French horn we supported the Ana Desetnica Street Theatre Festival, the Spring Festival as well as a few others. On occasion of the New Year, we donated to five local maternity hospitals and thus connected the value of donating with the theme of new birth, which we used in our corporate communications accompanying the re-branding materials. Report from the Supervisory Board 2007 was a year of changes for the Bank. The most significant of these changes was reflected in the name change and the adjustment and integration from the old to new Bank’s regulations, which meant vigorous integration with the applicable legislation and management scheme of UniCredit Group. The Bank changed its name from Bank Austria Creditanstalt d.d. Ljubljana to UniCredit Banka Slovenija d.d. Furthermore, the Bank’s Supervisory Board also experienced changes last year. At the General Meeting of Shareholders, on 24 April 2007, the former Supervisory Board was relieved of duty; members of that Supervisory Board were Mag. Helmut Bernkopf (Chairman), Dr. Erhard Gehberger, Herbert Hangel (Deputy Chairman), Mag. Martin Klauzer and Mag. Friedrich Racher. New Supervisory Board members were appointed to take their place: Federico Ghizzoni, Mag. Wolfgang Edelmüller, Mag. Helmut Haller, Herbert Hangel and Mag. Martin Klauzer. The new Supervisory Board appointed Federico Ghizzoni as Chairman and Herbert Hangel as Deputy Chairman on 25 April 2007. The specific ownership structure, whereby Bank Austria Creditanstalt AG Vienna is almost a 100 % owner of the Bank and its majority owner is UniCredit S.p.A., is also reflected in the composition of the Supervisory Board as all of its members also are employees of these two companies. Moreover, the members are not personally, directly or indirectly, involved in the ownership structure nor are they in any business relationship with the Bank, thus avoiding any potential conflicts of interests. Regardless, the financial group UniCredit Group has all the eligible mechanisms to control and solve potential conflicts of interests, should they occur. In 2007, the Supervisory Board regularly monitored and oversaw current business operations of the Bank, financial results attained and work of the Management Board, in accordance with its powers, authorizations and duties as set out in the Articles of Association of the Bank, the Companies Act and the Banking Act. The Bank’s Management Board kept members of the Supervisory Board informed of the following issues: all important business events in the Bank and other activities related to the Bank’s operating business; the economic and political environment; important changes of legislation that affected the Bank’s operating business; and achieved financial results as compared to the adopted financial plan of operations. The Management Board also regularly informed the Supervisory Board about the expected financial results through the end of the fiscal year and about end results. The Supervisory Board met and adopted resolutions at two regular meetings as well as at correspondence sessions. At the first regular meting, which took place on 7 May 2007 all members of the Board were present: Federico Ghizzoni (via videoconference), Mag. Wolfgang Edelmüller, Mag. Helmut Haller, Herbert Hangel and Mag. Martin Klauzer. All Board members were also present at the second regular meeting, taking place on 12 November 2007 (Federico Ghizzoni, Mag. Wolfgang Edelmüller, Mag. Helmut Haller, Herbert Hangel and Mag. Martin Klauzer). In line with legislation provisions, its powers as set out in the Articles of Association and in accordance with the Bank’s need for efficient work, individual resolutions were also adopted at Supervisory Board correspondence sessions and subsequently presented and validated during the next regular meeting of the Supervisory Board. The Supervisory Board participated in the approval of all measures and activities required to implement the overall business policy of the parent banking groups. It also approved the development plan and the Bank’s basic business policies for 2007. Moreover, the Supervisory Board was regularly informed about the implementation of the plan of work of Internal Audit and its findings, as well as the inspections conducted by external institutions. The Supervisory Board also approved the Internal Audit Plan for 2007. The Bank’s Management Board presented for discussion to the Supervisory Board a resolution on use of the net profit for fiscal year 2007 in the amount of 15,181,297.60 euros and a draft resolution on use of accumulated profit for fiscal year 2007 in the amount of 7,590,648.80 euros. Given the planned expansion of operations in 2008, and in subsequent years, the Report from the Supervisory Board Repor t from the Supervisory Board Management Board proposed in accordance with the adopted mid-term plans of the Bank and with a view to meeting the capital adequacy requirements that the Bank’s net profit be allocated, in its entirety, to other Bank reserves instead of being distributed to shareholders or other persons. The Bank’s Management Board also proposed that the Supervisory Board and the General Meeting of Shareholders adopt the proposed resolution on the use of net profit for fiscal year 2007, in accordance with their powers. The adoption of such a resolution will allow for the bank’s future growth. The Supervisory Board adopted the resolution on the use of the net profit for 2007, approved the Management Board’s proposal for the use of accumulated profit for 2007, and recommended to adopt it in the proposed form at the General meeting of Shareholders. The Management Board prepared the Annual Report on the Business Operations of UniCredit Banka Slovenija d.d. in 2007 and presented it to the Supervisory Board for review by the legally prescribed deadline. Together with the Annual Report, the Supervisory Board also received the Audit Report on the review of financial statements for fiscal year 2007, prepared by the licensed auditing company KPMG Slovenija d.o.o., allowing the Supervisory Board to formulate a position on the Audit Report. The Supervisory Board reviewed the submitted Annual Report. It established that the Annual Report was consistent with the reports and information on the Bank’s performance in 2007, as well as with the reports on the economic and political environment in which the Bank operates and which were presented to the Supervisory Board during the course of the fiscal year. Comparing the Annual Report with the audited financial statements for fiscal year 2007, the Supervisory Board established that the financial results presented in the Annual Report were consistent with the Audit Report. Having examined the reports, findings and recommendations of the Internal Audit and external auditors, the Management Board took these recommendations into consideration and carried out the activities necessary for their implementation or ensured their initiation. In the opinion of the Supervisory Board, both the Management Board and the Supervisory Board fulfilled all their legal requirements in fiscal year 2007. Based on the regular monitoring of the Bank’s operations and the above mentioned reviews, the Supervisory Board approved the Annual Report on the Bank’s business operations in 2007. The Audit Report on the review of the financial statements for fiscal year 2007, which was presented to the Supervisory Board along with the Annual Report, also includes the opinion of the certified auditor. The certified auditor issued an unqualified opinion. The Supervisory Board was briefed about the Bank’s Audit Report for 2007 and had no objections thereto. The changes of the Articles of Association (adopted in 2007), which determined that the Supervisory Board meet once quarterly instead of once every six months, as previously established, also will increase the efficiency of the Board’s work. The Supervisory Board also approved the Management Board’s Rules of work procedure and adopted the Supervisory Board’s Rules of work procedure, which determine the internal organization and operations of each Board. In line with the rules of UniCredit Group, it suggested forming an audit committee. The Supervisory Board deems its work in 2007 as professional and in line with the valid legislation and internal rules of UniCredit Group. Federico Ghizzoni Chairman of the Supervisory Board UniCredit Banka Slovenija d.d. Statement of Responsibility The Management is responsible for preparing the financial statements for the financial year. These give a true and fair view of the state of affairs of UniCredit Banka Slovenija d.d. as of the end of the financial year and of the profit or loss and cash flow for that year. The financial statements are prepared on a going-concern basis. In preparing the financial statements in annual report for the year ended 31 December 2007, the management has used appropriate accounting policies, consistently applied and supported them by reasonable and prudent judgments and estimates, and ensured that all accounting standards which they consider significant have been followed. Management has the responsibility for ensuring that the Bank keeps accounting records which disclose with reasonable accuracy the Bank’s financial position and which enable the management to ensure that the financial statements comply in all material respects with the regulations of the Government of the Republic of Slovenia, the Central Bank of Slovenia and the International Financial Reporting Standards as adopted by the EU. Management also has a general responsibility to take such steps as are reasonably required to safeguard the assets of the Bank and to prevent and detect any fraud and other irregularities. Dr. France Arhar Chairman Member of the Management Board of the Management Board On behalf of the Management Statement of Responsibilit Ljubljana, 20 February 2008 Report of Auditors Accounting Report Financial Indicators 149 Balance Sheet 150 Statement of Income 151 Statement of Changes in Shareholders’ Equity 152 Cash Flow Statement 153 Summary of Accounting Policies 154 Notes on the Financial Statements 162 Balance sheet 2007 2006 2005 EUR 1,000 Volume of assets 2,132,693 2,187,291 1,883,434 Deposits, non-banks 721,539 594,162 625,401 Deposits, legal and other entities 370,875 371,466 421,512 Deposits, private customers 350,664 222,696 203,889 Loans, non-banks 1,595,225 1,266,621 1,003,896 Loans, legal and other entities 1,159,762 948,895 791,588 Loans, private customers 435,463 317,726 212,309 Equity 163,615 146,868 138,309 Impairment of assets, measured at amortised cost 16,181 12,144 13,177 Provisions for off balance sheet items 1,071 1,429 890 Off balance sheet items 5,765,607 2,600,533 1,106,695 Income statement Net interest income 35,750 32,902 29,010 Net non interest income 20,278 15,704 10,730 Staff expenses (15,424) (13,125) (11,545) Other administrative expenses (13,419) (12,399) (8,397) Depreciation (3,165) (2,919) (2,544) Provisions (4,306) (5,408) (2,954) Net income before taxes 19,712 14,754 14,299 Corporate income tax (4,531) (3,822) (3,349) Employees Number of employees at 31. 12. 450 417 391 Ordinary shares Number of shareholders 28 28 28 Book value of the ordinary shares for nominal values: EUR 417.29 - 3,766.93 3,716.33 EUR 41.73 - 376.69 371.63 EUR 4.17 41.96 37.67 37.16 Number of shares for nominal values: EUR 417.29 - 13,000 13,000 EUR 41.73 - 120,028 120,028 EUR 4.17 3,898,878 1,398,598 1,221,378 Equity Capital adequacy 8.50 9.50 10.30 Assets quality and commitments Provisions for assets measured at amortised costs/Volume of assets 0.76% 0.56% 0.70% Provisions for commitments/Off balance sheet items 9.47% 17.52% 30.39% Profitability Interest margin 1.81 1.70 1.82 Return on assets before taxes 1.00 0.76 0.64 Return on equity before taxes 12.69 10.35 9.84 Return on equity after taxes 9.77 7.67 7.61 Operating costs Operating costs/average assets volume 1.62 1.47 1.43 Liquidity Risk weighted assets 1,632,425 1,052,532 859,610 Average liquid assets/average assets 8.11 7.70 5.99 Average liquid assets/average short-term deposits nonbanks 27.85 29.46 21.92 Margin of financial brokerage 2.84 2.51 2.55 Accounting Report Dr. France Arhar Dr. Heribert Fernau Chairman of the Management Board Member of the Management Board Earning per share for 31 December 2007 amounts to 3,89 euros (2006: 2,80 euros) Dr. France Arhar Dr. Heribert Fernau Chairman of the Management Board Member of the Management Board Accounting Report Dr. France Arhar Dr. Heribert Fernau Chairman of the Management Board Member of the Management Board Dr. France Arhar Dr. Heribert Fernau Chairman of the Management Board Member of the Management Board Accounting Report General Information UniCredit Banka Slovenija d.d. is a commercial bank incorporated in Slovenia and provides a wide variety of financial services to corporate and individual customers. The Bank was registered as a joint-stock company on 24 January 1991. The Bank’s legal address is Šmartinska 140, Ljubljana, Slovenia. On 31 December 2007, the Bank was operating a total of 14 branches throughout Slovenia. The ultimate parent company of the Bank is UniCredit S.p.A., Genova. Consolidated financial statements are available from UniCredito Italiano S.p.A, Via San Protaso 1/3, 20121 Milan, Italy. The Bank’s main areas of operation are as follows: • accepting deposits from the public and placing of deposits; • providing current and term-deposit accounts; • granting short- and long-term loans and guarantees to the State Treasury, local municipalities, corporate customers, private individuals and other credit institutions dealing with finance lease and foreign exchange transactions; • treasury operations in the interbank market; • trust management and investment banking services; • performing local and international payments; and • providing retail banking services through its branch network in Slovenia. These unconsolidated financial statements have been approved for issue by the Board of Directors on 26 February 2008. Summary of Accounting Policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. STATEMENT OF COMPLIANCE These unconsolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) and interpretations approved by the International Accounting Standards Board (IASB) as adopted by the European Union. As of the date of issuing these financial statements, the IFRS as adopted by the European Union does not differ from the IFRS as issued by the IASB, except for portfolio hedge accounting under IAS 39 which has not been approved by the EU. The Bank does not use portfolio hedging and hence has determined that portfolio hedge accounting under IAS 39 would have no impact on the financial statements had it been approved by the EU as of the balance sheet date. These financial statements are prepared in accordance with the International Financial Reporting Standards (IFRS) under the historical cost convention, except for certain financial instruments measured at fair value. The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in Risk report. COMPARATIVE AMOUNTS Comparative amounts for the year 2006 have been reclassified to conform with the current year’s presentation as follows: • In Balance sheet are claims and liabilities for interests reclassified to appropriate instrument CHANGES IN ACCOUNTING POLICIES The changes in accounting policies were as follows: • All financial assets held by the Bank are recognised using trade date accounting (in 2006 settlement date accounting) except loans and receivables, which are recognized when cash is advanced to the borrowers (see Note 2). • Fair value adjustment was recognized in profit and loss statement (for financial assets held for trading) and in equity (for available for sale financial assets) (see Notes 17 and 22). • The Bank has increased the limit for recognition of small items from 100 euros to 400 euros directly through statement of income. Assets up to that amount already recognized in balance sheet, were written-off as depreciation (see Note 8). • The Bank has changed useful lives of certain groups of property and equipment as well as intangible assets (see Note 8). • Foreign currency translation (see explanation below) • The Bank recognized in 2007 for the first time the cost of compensated absences for unused holidays (see Note 27). The Bank decided voluntary to adopt all these changes. INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2007, and have not been applied in preparing these financial statements: • IFRS 8 Operating Segments introduces the “management approach” to segment reporting. IFRS 8, which becomes mandatory for the Bank’s 2009 financial statements, will require the disclosure of segment information based on the internal reports regularly reviewed by the Bank’s Chief Operating Decision Maker in order to assess each segment’s performance and to allocate resources to them. • Revised IAS 23 Borrowing Costs removes the option to expense borrowing costs and requires that an entity capitalises borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The revised IAS 23 will become mandatory for the Bank’s 2009 financial statements and will constitute a change in accounting policy for the Bank. In accordance with the transitional provisions the Bank will apply the revised IAS 23 to qualifying assets for which capitalisation of borrowing costs commences on or after the effective date. • IFRIC 11 IFRS 2 - Bank and Treasury Share Transactions requires a share-based payment arrangement in which an entity receives goods or services as consideration for its own equity instruments to be accounted for as an equity-settled share-based payment transaction, regardless of how the equity instruments are obtained. IFRIC 11 will become mandatory for the Bank’s 2008 financial statements, with retrospective application required. It is not expected to have any impact on Bank’s financial statements. • IFRIC 12 Service Concession Arrangements provides guidance on certain recognition and measurement issues that arise in accounting for public-to-private service concession arrangements. IFRIC 12, which becomes mandatory for the Bank’s 2008 financial statements, is not expected to have any effect on its financial statements. • IFRIC 13 Customer Loyalty Programmes addresses the accounting by entities that operate, or otherwise participate in, customer loyalty programmes for their customers. It relates to customer loyalty programmes under which the customer can redeem credits for awards such as free or discounted goods or services. IFRIC 13, which becomes mandatory for the Bank’s 2009 financial statements, is not expected to have any impact on its financial statements. • IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction clarifies when refunds or reductions in future contributions in relation to defined benefit assets should be regarded as available and provides guidance on the impact of minimum funding requirements (MFR) on such assets. It also addresses when a MFR might give rise to a liability. IFRIC 14, which becomes mandatory for the Bank’s 2008 financial statements, is not expected to have any impact on its financial statements. FOREIGN CURRENCY TRANSLATION Functional and presentation currency: Items included in the financial statements are measured in euros, which is the Bank’s functional and presentation currency. Comparative financial statements for 2006 were originally represented in the Slovenian tolar, translated to euro with the fixed rate of 239,64. Accounting Report Summary of Accounting Policies Transactions and balances: Foreign currency transactions are translated into the functional currency using the European Central Bank exchange rates at the dates of the transactions. The Bank has changed its policy in 2007. Up to 12 December 2007, the European Central Bank exchange rate was used for foreign currency translation of balances next day after being published. From 12 December 2007 on, European Central Bank exchange rate is used already on its publishing date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year­end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement except when deferred in equity as qualifying cash flow hedges and available-for-sale investments. Forward transactions denominated in a foreign currency are translated into euro using the forward rate. The spot rates of exchange used in preparation of the Bank’s balance sheet as of the reporting date were as follows: Currency 31. 12. 2007 31. 12. 2006 EUR 1.0000 1.0000 USD 1.4721 1.3172 CHF 1.6547 1.6080 FINANCIAL ASSETS The Bank classifies its financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets. The Bank determines the classification of its investments at initial recognition. The Bank has changed in 2007 its policy on recognition and derecognition of financial assets. All financial assets held by the Bank are recognized and derecognized using trade date accounting except loans and receivables, which are recognized when cash is advanced to the borrowers. When a financial asset is recognised initially, the Bank measures it at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. The Bank derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Bank is recognised as a separate asset or liability. The Bank derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. (a) Financial assets at fair value through profit or loss This category contains financial assets held for trading and those which are upon initial recognition designated by the Bank as at fair value through profit or loss. • A financial asset is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Derivatives are also categorized as held for trading unless they are designated as hedging instruments. Subsequent to the initial recognition these financial assets are accounted for and stated at their fair value, which approximates the price quoted on recognised stock exchanges or calculated by acceptable valuation models. The Bank includes unrealised gains and losses in ‘Gains and losses on financial assets and liabilities held for trading’. Interest earned on trading securities is accrued on a daily basis and reported in ‘Interest income’ in the income statement. Their amount is presented in Note 18. • The Bank’s financial assets are designated at fair value through profit and loss when doing so significantly reduces measurement inconsistencies that would arise if the related derivatives were treated as held for trading and the underlying financial instruments were measured at effective interest method. Loans measured at fair value through profit and loss are fixed-rate loans which are hedged at the loans’ reference rate with interest rate swaps. Loans are designated at their fair value through profit and loss in order to avoid a mismatch in the presentation of the economic content of a transaction. The change in fair value of loans is based on a marked to model methodology on a monthly basis. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: • Those that the Bank intends to sell immediately or in the short term, which are classified as held for trading, and those that the Bank upon initial recognition designates as at fair value through profit or loss • Those that the Bank upon initial recognition designates as available for sale; or • Those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration. Loans and receivables are carried at effective interest method. As long as the Bank did not apply program solution for recognizing fees for corporate loans using effective interest method, those fees are accrued linearly. The Bank assesses at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the Bank estimates the recoverable amount of the asset. An individual assessment of financial assets is used for all loans, apart from private customers, where a portfolio assessment of the quality of a financial asset is applied. Insignificant third-party expenses, such as legal fees incurred in securing a loan are treated as part of the cost of the transaction while for material third-party expenses they are amortised over the useful life of the loan. All loans and receivables are recognised when cash is advanced to borrowers. (c) Held to maturity investments Held to maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank has the positive intention and ability to hold to maturity. This portfolio comprises debt securities. Held-to-maturity investments are measured at effective interest method. The Bank assesses at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the Bank estimates the recoverable amount of the asset. (d) Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as loans and receivables, held-to-maturity investments or financial assets at fair value through profit or loss. This portfolio includes both equity and debt securities. Subsequent to their initial recognition, available-for-sale financial assets are remeasured at their fair value. In circumstances where the quoted market prices are not readily available, the fair value of debt securities is estimated using the present value of future cash flows and the fair value of unquoted equity instruments is estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specific circumstances of the issuer. A gain or loss on an available-for-sale financial asset is recognised directly in equity, through the statement of changes in equity, except for impairment losses and foreign exchange gains and losses, until the financial asset is derecognised, at which time the cumulative gain or loss previously recognised in equity is recognised in profit or loss. However, interest calculated are accrued daily using the effective interest method and is recognised in profit or loss. Dividends on an available-for-sale equity instruments are recognised in profit or loss when the Bank’s right to receive payment is established. DERIVATIVE FINANCIAL INSTRUMENTS In the normal course of business, the Bank is a party to contracts for derivative financial instruments, which represent a very low initial investment compared to the notional value of the contract. The derivative financial instruments used include interest rate and currency forward, swap and option contracts. These financial instruments are used by the Bank to hedge interest rate risk and currency exposures associated with its transactions in financial markets, to open its positions actively and to sell those instruments to the customers. Derivative financial instruments are initially recognised at cost and subsequently remeasured at their fair value. Fair values are obtained from quoted market prices, discounted cash flow models and options pricing models as appropriate. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the ‘Gains and losses on financial assets and liabilities held for trading’ as they arise. All derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Accounting Report Summary of Accounting Policies The fair value of derivative instruments held for trading is disclosed in Notes 2 and 12, while notional contract values are disclosed in Note 32, ‘Off balance sheet items, financial derivatives.’ FOREIGN CURRENCY CONTRACTS Foreign currency contracts are agreements to exchange specific amounts of currencies at a specified rate of exchange, on a spot date (settlement occurs two days after the trade date) or on a forward date (settlement occurs more than two days after the trade date). The notional amount of these contracts does not represent the actual market or credit risk associated with these contracts. Foreign currency contracts are used by the Bank for risk management and trading purposes. FOREIGN EXCHANGE SWAPS AND INTEREST RATE SWAPS The Bank enters into foreign-exchange swap and interest rate swap transactions. The foreign exchange swap transaction is a complex agreement concerning the swap of certain financial instruments, which usually consist of a prompt trade and one (FX swap) or more (cross-currency swap) future contracts. Interest rate swaps oblige two parties to exchange one or more payments calculated with reference to fixed or periodically reset rates of interest applied to a specific notional principal amount. The notional principal is the amount upon which interest rates are applied to determine the payment streams under interest rate swaps. Such notional principal amounts often are used to express the volume of these transactions but are not actually exchanged between the counter-parties. The Bank’s interest rate swaps were used for the management of interest rate exposures and have been accounted for at a mark-to-market value. OPTION CONTRACTS Option contracts represent the formal reservation of the right to buy or sell an asset at the specified quantity within a given time in the future and at a certain price. The buyer of the option has the right, but not the obligation, to exercise the right to buy or sell an asset and the seller has the obligation to sell or purchase the asset at the specified quantity and at the price defined in the option contract. HEDGING INSTRUMENTS a) fair value hedge In 2007, the Bank had not implemented fair value hedging b) cash flow hedge In the case of the designation of a derivative as a cash flow hedge, the hedging instrument is recognised at its fair value. Changes in fair value are separated into an effective portion attributable to the hedge and an ineffective portion not attributable to the hedge. A hedge is highly effective if the actual changes are within the range of 80-125 %. A hedge will be regarded as effective if, for each time bucket, the netted cash flows associated with the hedging instruments are smaller than or equal to the cash flows of the hedged item(s).The effective portions are to be recognised directly in equity (cash flow hedge reserve). The ineffective portions are reported in the income statement if the hedging instrument is a derivative. In order to avoid ineffectiveness, projections are made, especially for limits and potential causes of ineffectiveness. The market risk department runs an efficiency test at the end of each month. PROPERTY, PLANT AND EqUIPMENT AND INTANGIBLE ASSETS Property, plant and equipment as well as intangible assets are initially recognised at cost. The Bank has chosen for measurement after recognition cost model, that means asset is carried at its cost less any accumulated depreciation and any accumulated impairment losses. Depreciation is calculated on a straight-line basis. Land and assets in the course of construction are not depreciated. The useful lives are set out below: Leasehold improvements 31.12.2007 10 years 31.12.2006 10 years Hardware 4 years 4 years Furniture, devices and motor vehicles 4-10 years 8-10 years Intangible assets - software 5 years 5 years The Bank periodically reviews the useful life and extends the period of depreciation if appropriate. Leasehold improvements are capitalised and depreciated over the lesser of their useful life or the remaining lease term on a straight-line basis. If of a minor extent, repairs and renewals are charged to the income statement when the expenditure is incurred. The Bank assesses whether assets may be impaired. If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. That reduction is an impairment loss. A reversal of an impairment loss for an asset is recognised immediately in profit or loss. The carrying amount of an item of property, plant and equipment is derecognised on disposal or when no future economic benefits are expected from its use or disposal. The gain or loss arising from derecognition of an item is included in profit or loss when the item is derecognised. The gain or loss arising from derecognition of an asset is determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item. OTHER ASSETS Other assets consist of prepaid expenses, accrued income, other assets held-for-sale and similar assets that are not disclosed under any other item. Assets held-for-sale are stated at their fair value. FINANCIAL LIABILITIES Financial liabilities are recognized at fair value. After initial recognition, the Bank measures all financial liabilities at amortised cost using the effective interest method. The Bank had not yet recognized any financial liabilities at fair value through profit or loss. The position financial liability held for trading represents negative market value of trading derivatives. PROVISIONS A provision is recognised when the Bank has a present obligation as a result of a past event and when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are recognised for: • potential losses relevant to the risks resulting from off-balance sheet items; • jubilee awards and severance payments; • pending or threatened litigation. . CASH FLOW STATEMENT For the purpose of the cash flow statement, cash is defined as cash in hand and current accounts with banks, including the compulsory minimum reserve with the Bank of Slovenia. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. It comprises financial assets held for trading, available for sale and held to maturity financial assets. EMPLOYEE BENEFITS The Bank provides its employees with jubilee awards and severance payments. The employees are entitled to claim jubilee awards in circumstances where they have been employed by the Bank for a defined period of time. The employees are entitled to receive severance payments if they are employed by the Bank until their retirement age and were employed by the Bank for a minimum defined period. Valuations of these obligations are carried out by independent qualified actuaries using projected unit credit method. The actuarial parameter and assumptions included in the calculation of the obligation are: • discount rate determined by reference to market yields as of the balance sheet date on high quality corporate bonds for the Euro-zone; • estimated future salary increases; • anticipated increase of jubilee awards; • mortality rates - Slovenian mortality table 2000 - 2002; • fluctuation (termination without payment) depending on Bank’s past experience in service time; • retirement age: 58 for women, 60 for men; • Bank’s most recent employee data (the length of employment with the Bank, age, gender, average salary); • average monthly salary in the Republic of Slovenia; • if, on the valuation date, the calculated retirement age has already been reached or exceeded, the retirement has been assumed to take place 6 months after the valuation date. These obligations are measured at the present value of future cash outflows. The gains and losses are recognised in the income statement. Actuarial gains and losses, arising from experience adjustments and from changes in actuarial assumptions, in excess of the greater of ten percent of the value of plan assets or ten percent of the defined benefit obligation, are charged or credited to income over the expected average remaining working life-time of the related employees. The Bank recognized in 2007, for the first time, the cost of compensated absences for unused holidays. Accounting Report Summary of Accounting Policies The Bank additionally provides short-term benefits to its employees such as contributions to retirement pension insurance and recognises the costs of these contributions as incurred. SHAREHOLDERS’ EqUITY Shareholders’ equity is composed of paid-in capital, i.e., capital made available to the company by the shareholders (basic equity capital plus share premium), and retained earnings (fair value reserve for available-for-sale securities and cash flow hedges, reserves from profit, retained earnings and income from the current financial year.) EARNINGS PER SHARE The Bank presents earnings per share data for its ordinary (all) shares. Earning per share is calculated by dividing the Bank’s profit or loss by the average number of shares outstanding during the period. The Bank has no preference shares or convertible bonds therefore no diluted earning per share is calculated. FINANCIAL COMMITMENTS AND CONTINGENCIES Off balance sheet commitments from guarantees, both financial and service, represent irrevocable obligations that the Bank will make payments in the event a customer cannot fulfill its obligations vis-a­vis third parties. A documentary letter of credit is an irrevocable undertaking of the issuing Bank acting at the request of a customer (buyer) to make payment to the beneficiary (seller) or to pay or accept bills of exchange drawn by the beneficiary against stipulated documents, provided all terms and conditions of the letter of credit are complied with. The documentary letters of credit are collateralised depending on the creditworthiness of the customer and on the same basis as guarantees or loans. The primary purpose of unused credit facilities (loan commitments) is to ensure that funds are available to a customer as required. Commitments to grant loans issued by the Bank represent issued loan commitments and the unused part of approved overdraft loans. The risk associated with off balance sheet financial commitments and contingent liabilities is assessed similarly as for loans to customers taking into account the financial position and activities of the entity to which the Bank issued the guarantee and taking into account the collateral obtained. INTEREST INCOME AND EXPENSE Interest income and expense are recognised in the income statement using the effective interest method. As long as the Bank did not apply program solution for recognizing fees for corporate loans using effective interest method, those fees are accrued linearly. When loans become impaired, they are written down to their recoverable amounts and interest income thereafter recognised based on the rate of interest that was used to discount the future cash flows for the purpose of measuring the recoverable amount. IMPAIRMENT LOSSES ON LOANS AND RECEIVABLES The Bank assesses at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the Bank estimates the recoverable amount of the asset. When asset’s carrying amount exceeds its recoverable amount impairment loss is recognised. Recoverable amount is present value of expected cash flows, including amounts recoverable from guarantees and collateral, discounted at the original effective interest rate of loans computed at initial recognition. FEE AND COMMISSION INCOME AND EXPENSE Fees and commissions are in principle recognised on completion of the underlying. Derivative transaction fees are recognised based on the conditions of the underlying contracts. TAXATION Taxes are calculated in accordance with the Corporate Income Tax Regulations. Generally, the taxable profit is based on the profit or loss recognised in the income statement prepared pursuant to the IFRS. It is adjusted for tax purposes as follows from the tax regulations. Tax expense (tax income) comprises current tax expense (current tax income) and deferred tax expense (deferred tax income). The tax rate of current corporate income tax is 23 % (in 2006, 25 %), for deferred taxes 22 % (in 2006, 23 %) was used, which is the corporate income tax in 2008. Deferred taxes are provided for temporary differences arising between the tax bases of assets and liabilities and their carrying amount in the balance sheet (Note 10 and 15). Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences. Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of deductible temporary differences, the carryforward of unused tax losses and the carryforward of unused tax credits. The Bank is subject to various indirect operating taxes. These are included as a component of administrative expenses. FIDUCIARY ACTIVITIES Assets managed by the Bank in its capacity as a nominee, trustee or agent are not assets of the Bank and are accordingly not included in these financial statements. SEGMENT REPORTING The Bank did not decide to disclose segment information as its equity is not publicly traded and it is not in the process of issuing equity or debt securities in public securities markets. Additionally, the Bank’s segment information is part of consolidated financial statements of Bank Austria Creditanstalt AG Vienna. REGULATORY REqUIREMENTS The Bank is subject to the regulatory requirements of the Bank of Slovenia. These regulations include limits and other restrictions pertaining to minimum capital adequacy requirements, the classification of loans and off balance sheet commitments and provisioning to cover credit risk, liquidity, interest rate and foreign currency position. As of 31 December 2007, the Bank was in compliance with all regulatory requirements. RELATED PARTIES Related parties are those counter parties that represent: enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control by, the reporting enterprise; key management personnel, that is, those persons having the authority and responsibility for planning, directing and controlling the activities of the Group, including directors and officers of the Bank and close members of the families of such individuals; and enterprises in which a substantial interest in the voting power is owned directly or indirectly by any person described above or over which such a person is able to exercise a significant influence. This includes enterprises owned by directors or major shareholders of the Bank and enterprises that have a member of key management in common with the Bank. In considering each possible related-party relationship, attention is directed to the substance of the relationship and not merely the legal form. Accounting Report Notes on the Balance Sheet Note 2: Financial assets held for trading Note 1: Cash and cash balances with central banks EUR 1,000 Debt instruments 31. 12. 2007 135,007 31. 12. 2006 93,290 Treasury bills, Republic of Slovenia - 3,656 Bonds, Republic of Slovenia 100,717 74,665 Bonds, banks 30,069 14,969 Bonds, corporates 4,221 - Positive market value of derivatives 54,256 24,129 Forwards 1,532 230 Options 27,602 7,223 Swaps Total 25,122 189,263 16,677 117,419 The ECB requires credit institutions established in the euro-zone to hold deposits in accounts with their national central bank. These are called ‘minimum’ or ‘required’ reserves. The reserve coefficient is 2 % for overnight deposits, deposits with an agreed maturity or period of notice up to two years, debt securities issued with a maturity of up to two years and money market paper. Liabilities vis-a-vis other credit institutions, subject to the euro system’s minimum reserve requirements, the ECB and euro-zone national central banks are excluded from the reserve base. The lump-sum allowance is 100,000 euros. The minimum calculated amount of the obligatory reserve as per 31 October 2007, amounted to euros 12,313 thousand. The Bank has to fulfill the requirements in the period from 12 December 2007 until 15 January 2008. Financial instruments held for trading are shown at their fair value. Using the settlement date accounting in financial year 2007, the amount of financial assets held for trading on 31 December 2007, would be higher in the amount of 1,957 thousand euros. Other assets presented in note 11 would be lower for the same amount. Bonds are mark-to-market based on prices derived in the internal model. Foreign currency forwards are mark-to market based on Wall Street. For the calculation of the net present value of interest rate derivatives, the valuation system OPUS is used and for the calculation of the fair value of foreign currency options, Wall Street is used. For equity options and commodity derivatives, the fair value is based on the valuation provided by HVB Munich. Debt instruments EUR 1,000 Balance at 1. 1. 2007 30,359 2006 28,963 Increases 1,178 4,182 New loans 1,137 4,182 Positive changes in fair value 41 - Decreases (11,093) (2,786) Sales/redemptions (11,055) (2,077) Negative changes in fair value - (660) Exchange rate differences (38) (49) Balance at 31. 12. 20,444 30,359 EUR 1,000 Balance at 1. 1. 2007 93,290 2006 60,645 Increases 240,421 317,837 Purchase 240,125 317,394 Positive changes in fair value 296 443 Decreases (198,704) (285,192) Sales/redemptions (195,900) (284,409) Negative changes in fair value (2,804) (783) Balance at 31. 12. 135,007 93,290 Note 3: Financial assets designated at fair value through profit or loss The loans and advances to customers have been matched with interest rate swaps as part of a documented interest rate risk management strategy. An accounting mismatch would arise if the loans and advances were accounted for at amortized cost, because the related derivatives are measured at fair value, with movements in the fair value taken through the income statement. By designating those loans and advances at fair value, the movement in the fair value of the long-term debt will be recorded in the income statement. Note 4: Available-for-sale financial assets Accounting Report Notes on the Financial Statements Note 5: Derivatives -Hedging instruments, Assets and Liabilities Assets Equity investments EUR 1,000 Balance at 1. 1. 2007 400 2006 629 Increases 1 401 Purchase - - Positive changes in fair value and foreign exchange differences 1 401 Decreases (51) (630) Sales (9) (544) Negative changes in fair value and foreign exchange differences (42) (86) Balance at 31. 12. 350 400 Debt securities EUR 1,000 Balance at 1. 1. 2007 157,458 2006 95,332 Increases 11,719 79,272 Purchase 11,690 53,888 Positive changes in fair value 29 25,250 Foreign exchange differences - 134 Decreases (54,150) (17,145) Sales/redemption (53,306) (14,474) Negative changes in fair value (844) (2,672) Balance at 31. 12. 115,027 157,458 EUR 1,000 Balance at 1. 1. 2007 863 2006 - Increases 3,453 863 Interest 2,034 602 Positive changes in fair value 1,419 261 Decreases (2,499) - Interest (2,499) - Balance at 31. 12. 1,818 863 Liabilities EUR 1,000 Balance at 1. 1. 2007 667 2006 - Increases 113 667 Interest 31 660 Positive changes in fair value 82 7 Decreases (689) - Interest (689) - Balance at 31. 12. 91 667 Equity securities available for sale are shown at their purchase value or are impaired, when their market value is lower. Available-for-sale debt securities have fixed-rate coupons. Derivatives - Hedging instruments, net EUR 1,000 31. 12. 2007 31. 12. 2006 Cash flow hedge 1,727 196 Total 1,727 196 Derivatives - concluded as hedging instruments represent cash flow hedge - macro hedging of the selected portfolio. The effectiveness of the cash-flow-hedge is described in “Risk report”. Note 6: Loans and receivables Loans and receivables to banks EUR 1,000 31. 12. 2007 31. 12. 2006 On demand 8,394 211,463 Short-term loans 83,991 29,057 Long-term loans 55,778 138,261 Total 148,163 378,781 EUR 1,000 Balance at 1. 1. 2007 378,781 2006 331,010 Increases 37,290,945 54,038,854 New loans 37,284,265 54,029,916 Positive changes in fair value and foreign exchange differences 6,680 8,938 Decreases (37,521,563) (53,991,083) Repayments Negative changes in fair value and foreign exchange differences (37,512,039) (9,524) (53,980,079) (11,004) Balance at 31. 12. 148,163 378,781 Accounting Report Notes on the Financial Statements EUR 1,000 Balance at 1. 1. 2007 1,266,621 2006 1,006,969 Increases 2,426,916 1,695,653 New loans 2,342,463 1,663,915 Positive changes in fair value and foreign exchange differences 84,453 31,738 Decreases (2,098,312) (1,436,001) Repayment Impairment Write offs Negative changes in fair value and foreign exchange differences (2,000,770) (4,037) (160) (93,345) (1,397,956) 861 (88) (38,818) Balance at 31. 12. 1,595,225 1,266,621 Loans to corporate include loans to sole traders. The balance of the loans to the employees on 31 December2007 amounts to 12,343 thousand euros and 11,157 thousand euros for 31 December 2006. The amount excludes the loans to the management, which are disclosed in “Related Parties”. Note 7: Held-to-maturity financial assets Impairment losses for loans to customers EUR 1,000 Balance at 1. 1. 2007 12,144 2006 13,177 Reconcilliation of excluded income for interests - (927) Increase 10,734 16,653 Decrease (6,697) (16,759) Decrease of impairment losses (6,697) (12,310) Use of impairment losses - (4,449) Balance at 31. 12.. 16,181 12,144 Note 8: Property, plant and equipment The Bank has increased the limit for the direct recognition of small items in the profit or loss statement from 100 euros to 400 euros. Assets up to that amount previously recognized in the balance sheet, were written-off as depreciation. As a result, depreciation was higher by 31 thousand euros. Due to the change of the useful life for cars and save-deposit-boxes is the amount for property, plant and equipment lower by 59 thousand euros. Depreciation is higher for the same amount. Accounting Report Notes on the Financial Statements Note 9: Intangible assets Cost Balance at 1. 1. Additions Transfer from work in progress Disposals Balance at 31. 12. Depreciation Balance at 1. 1. Depriciation Disposals Balance at 31. 12. Net book value Balance at 1. 1. Balance at 31. 12. Intangible assets solely comprise computer software. Note 10: Taxes 16,640 2,300 (311) (410) 18,220 10,579 1,329 (410) 11,497 On 31 December 2007, tax assets balancing equity amounts to 492 thousand euros (31 December 2006, 0 euros). Tax liabilities 6,061 balancing equity, presented in note 14, on 31 December 2007 6,722 amounts to 350 thousand euros (31 December 2006, 126 thousand euros). Total effect, increasing the equity, amounts to 268 thousand euros. Other changes in deferred tax assets and liabilities are balancing income statement as expense and amounts to 1,013 thousand euros. Deferred tax assets EUR 1,000 Current tax assets 31. 12. 2007 4,753 31. 12. 2006 766 Deferred tax assets 3,482 4,163 Assets/liabilities held for trading 2,690 3,868 Loans and receivables with banks and customers 167 146 Available-for-sale financial assets 30 89 Available-for-sale reserve 492 - Tangible and intangible assets 37 - Provisions for severance and jubileeum salaries Total 66 8,235 60 4,929 EUR 1,000 2007 2006 Balance at 1. 1. 4,163 377 Increases 644 4,147 Decreases (1,325) (361) Balance at 31. 12. 3,482 4,163 Other assets Financial liabilities measured at amortised costs Time deposits from banks Note 11: Note 13: EUR 1,000 Claims to foreign banks 31. 12. 2007 5,728 31. 12. 2006 1 Claims to customers 1,507 1,375 Prepaid expenses and accrued income 4,505 1,656 Assets, held for sale 1,920 2,030 Other claims 731 5,871 Fees and commisions 510 549 Prepayments 60 15 Provisions for fees and commisions (11) (14) Provisions for other assets (2,181) (1,573) Other assets Total 155 12,924 62 9,972 Note 12: Financial liabilities held for trading Accounting Report Notes on the Financial Statements Deposits from customers have both, index-linked and fixed interest rate. Included in customer accounts were deposits of 708 thousand euros (2006, 2,106 thousand euros) held as collateral for irrevocable commitments under import letters of credit. The fair value of those deposits approximates the carrying amount. Note 14: Provisions For 31 December 2007, the share capital amounts to 16,258,321 euros, which represent 3,898,878 pieces of ordinary shares. The difference from the conversion of the nominal value of the share capital in euros amounts to 11,408 euros and is reclassified to the share premium. All issued shares were fully paid ordinary shares. The holders of ordinary shares are entitled to receive dividends when declared and are entitled to vote per share. All shares rank equally with regard to the Bank’s residual assets. The Bank has paid out no dividends for the year 2007 and 2006. Earning per share for 31 December 2007, amounts to 3.89 euros (31 December 2006, 2.80 euros). Accounting Report Notes on the Financial Statements Reserves and retained earnings EUR 1,000 Share premium 31. 12. 2007 61,885 31. 12. 2006 61,873 Changes in fair value for effective part, cash flow hedge 1,241 194 Changes in fair value, available-for-sale financial assets (1,743) (2,262) Reserves from profit 78,384 52,357 Statutary reserve 1,294 1,294 Other banking reserve 77,090 51,063 Retained earnings - 12,970 Net profit for the year Total equity 7,591 147,358 5,466 130,598 Accumulated profit EUR 1,000 Profit/loss for the current year 31. 12. 2007 15,181 31. 12. 2006 10,932 Accumulated profit/loss from the previous years - 12,970 Increases of reserves - decree of Management and Supervisory board Total 7,591 7,591 5,466 18,436 For shareholders’ - - For other reserves 7,591 18,436 For transfer to the next year - - Earning per share Earning per share 2007: Net profit for the year (15.181 thousand euros) / Number of shares (3.898.878) = 3,89 euros / share Earning per share 2006: Net profit for the year (10.932 thousand euros) / Number of shares (3.898.878) = 2,80 euros / share Revaluation reserve EUR 1,000 2007 2006 Balance at 1. 1. (2,068) 268 Changes in fair value for effective part, cash flow hedge 194 - Thereof deferred taxes Changes in fair value, available-for-sale financial assets (60) (2,262) (65) -268 (89) Thereof deferred taxes Increases 1,998 1,998 Changes in fair value for effective part, cash flow hedge 1,047 (290) 951 406 254 -149 47 Thereof deferred taxes Changes in fair value, available-for-sale financial assets Thereof deferred taxes Decreases (432) (2,739) Changes in fair value for effective part, cash flow hedge --(432) 152 (60) (60) (2,679) (23) Thereof deferred taxes Changes in fair value, available-for-sale financial assets Thereof deferred taxes Balance at 31. 12. (502) (2,068) Changes in fair value for effective part, cash flow hedge 1,241 (350) (1,743) 493 194 (60) (2,262) (65) Thereof deferred taxes Changes in fair value, available-for-sale financial assets Thereof deferred taxes Notes on the income statement Note 18: Net interest income Interest income and similar income Interest income on impaired financial assets in 2007 amounts to 2,496 thousands euros. The amount represents the best estimation based on the interest income for the clients of which loans on 31 December 2007 were impaired. Due to the change in accounting policy in the year 2007, interest income and expense from financial assets and liabilities held for trading (financial derivatives) were presented in financial statements for 2006 within position “Gains and losses on financial assets and liabilities held for trading”. In the financial statements for 2007 the result is presented as interest income or expenses. Interest income from financial assets and liabilities held for trading for 2006 would be according to the new accounting policy 6,496 thousands euros and interest expenses for financial assets and liabilities 6,728 thousands euros. Note 19: Dividends Note20: Fee and commission net income Fee and commission income Accounting Report Notes on the Financial Statements Fee and commission expenses Note 22: Gains and losses on financial assets and liabilities held for trading Note 21: Gains and losses on financial assets and liabilities, not designated at fair value through profit or loss Note 23: Gains and losses on financial assets and liabilities, designated at fair value through profit or loss Note 24: Exchange differences Note 25: Note 27: Gains and losses on derecognition Administration costs of assets other than held for sale Staff costs Gains and losses on derecongition of assets represent the the income and losses from derecognition of property, plant and equipment. Note 26: Other operating net income Salaries and wages for 2007 include the costs for unused holidays in the amount of 446 thousand euros and the costs for equity-settled­share-based-payments in the amount of 39 thousand euros. UniCredit Group established a medium/long-term share option program, granting equity instruments issued by UniCredito Italiano S.p.A. to selected managers and employees of the various Group subsidiaries. In compliance with IFRS, the subsidiaries, whose employees have been granted equity instruments issued by the Parent company, must pay the latter for the allocation granted to their employees. UniCredit Banka Slovenija d.d. recognised the amount for the equity settled share based payments first in 2007. Fair value calculation criteria for equity settled Stock Options: The fair value has been measured by applying the “Hull and White” model. The model is based on trinomial tree price distribution using the Boyle’s algorithm and estimates the early exercise probability on the basis of a deterministic model connected to reaching a Market Share Value equals to an exercise price-multiple and probability of beneficiary’s early exit after the end of the Vesting Period. Vesting dates of the equity-share-based-payments in euros: Vesting Date Employees entitled Accrued amount at the evaluation date 18 November 2005 2 20,686 13 June 2006 2 13,284 12 June 2007 2 4,624 Accounting Report Notes on the Financial Statements Other administration costs Costs for Auditing and Supervision include the audit of the Annual Report: 98 thousand euros from KPMG Slovenija, podjetje za revidiranje, d.o.o. which does not conduct other services for the Bank. Other costs included in Auditing and Supervision are costs for Deloitte revizija d.o.o in the amount of 22 thousand euros, for independent opinion for the Bank’s Internal audit department and costs for tax audit, conducted by Ernst & Young d.o.o., in the amount of 5 thousand euros. The Bank rents a number of branch and office premises. The rent typically runs for a definite or indefinite period, with an option to renew the rent after that date or to cancel it, when both parties agree, if the cancellation period is not specifically stated in the contract. The minimum future obligations for rental payments are as follows: Less than 1 year: For the year 2007, the obligation amounts to 1,045 thousand euros and 1,073 thousand euros for 2006. There are no future obligations for more than 1 year. Note 28: Depreciation Note 29: Provisions Net exposure for available-for-sale financial assets is presented in note 4, net exposure for financial assets, measured at costs, in note 6, and exposure for fees and other assets, in note 11. Note 31: Tax expense (income) related to profit or loss from continuing operations with explanation of effective tax rate EUR 1,000 2007 2006 Current taxes 3,518 8,951 Deferred taxes 1,013 (5,130) Total 4,531 3,821 Accounting Report Notes on the Financial Statements Notes on the cash flow statement Obligatory reserve deposits are not available for use in the Bank’s day-to-day operations. Cash-in-hand is non-interest bearing. Obligatory reserves and other balances with the Central Bank bear fixed interest-rate, the interest rate is prescribed by the Bank of Slovenia. Money market placements are both index-linked and fixed-rate assets. Financial assets held for trading and financial assets available-for-sale are debt securities from Republic of Slovenia. Held-to-maturity investments are 60-day bills from the Bank of Slovenia. The represented amount for financial instruments included in cash and cash equivalents for the year 2006 do not include the amount for interests. Notes on the off balance sheet items Note 32: Off balance sheet items Commitments, contingent liabilities and financial derivatives Financial derivatives Guarantees Statement of income for fiduciary business EUR 1,000 Creditors for forwards 31. 12. 2007 129,928 31. 12. 2006 139,062 Creditors for options 2,441,898 1,046,749 Creditors for interest rate swaps Trading Cash flow hedge Creditors for commodity swap Total Total for trading Total for hedging 2,597,194 2,427,631 169,563 9,360 5,178,380 5,008,817 169,563 928,240 853,510 74,730 -2,114,051 2,039,321 74,730 Fiduciary activities Fiduciary activities include businesses for syndicated loans, agency services and brokerage and custody businesses. Balance sheet for fiduciary businesses Accounting Report Notes on the Financial Statements Settlement business EUR 1,000 Assets To current account 748 31. 12. 2007 106 106 31. 12. 2006 -- Liabilities To current account 627 Net Short-term liabilities to the Central Securities Clearing Corporation 106 11 95 --- Related parties The Bank is controlled by its parent company Bank Austria Creditanstalt AG Vienna, incorporated in Austria, which owns 99.99 % of the ordinary shares. The remaining shares are held by legal entities and private customers. The ultimate parent of the Bank is UniCredito Italiano S.p.A. The Bank enters into a number of banking transactions with related parties in the normal course of business. These include loans, deposits, foreign currency, and derivatives transactions. The volumes of related-party transactions, outstanding balances at the year-end, and relating expense and income for the year are as follows: Balance sheet The loans to the management are in line with the Bank’s lending policy to customers and are fully collateralized by a mortgage. The loans and advances to banks in the Group are unsecured, carry variable interest rates, and are repayable on demand or on time. Statement of income Post balance sheet events The Bank asks for authorization to increase the capital in the amount of 20 million euros. Legal disputes As of the balance sheet date, UniCredit Banka Slovenija d.d. was not involved in any material claims and legal proceedings. Statement of a material effect on the financial statement UniCredit Banka Slovenija d.d., as a member of UniCredit Group, enters in to several business transactions with related parties from the Group. Such transactions are done at normal market conditions and have no negative impact on presented financial statements. Regarding the 545th paragraph of The Companies Act, we declare that in 2007 and 2006, there were no harmful transaction or other actions done, which would in any way harm the business of the Bank. The average number of employees with the individual contract in 2007 was 7. Risk Report Overall Risk Management In the field of risk management, UniCredit Banka Slovenija d.d. works closely with the risk control and risk management units of Bank Austria Creditanstalt AG, Vienna and of course also supports UniCredit’s efforts to establish uniform group-wide risk management and controlling procedures. UniCredit Banka Slovenija d.d. identifies, measures, monitors, and manages the following categories of risk, which are in line with the group’s risk point of view: • market risk (foreign exchange, interest rate, and equity trading risk) • liquidity risk • credit risk • operational risk • business risk • real estate risk • risks arising from the Bank’s shareholdings and equity interests The Asset/Liability Committee (ALCO) is the overall risk management committee of UniCredit Banka Slovenija d.d. ALCO determines the principles of risk management in the overall bank risk policy and validates on a regular basis the Bank’s risk map. It approves the establishment of limits for all relevant risks and the risk control procedures. ALCO is responsible for the management of balance-sheet structure positions, controls liquidity and interest rate risk, and deals with cross-divisional risk management issues arising between sales units and the overall bank management. ALCO decides on operational risk issues and gets informed on the development of the credit portfolio as well as the economic capital. All risk management activities of UniCredit Banka Slovenija d.d. are combined within two divisions, which are both independent from the business units up to the Management Board level: • The Credit risk management division deals with the assessment of the client’s rating, is responsible for the valuation of collateral and the treatment of problem loans in the work out process and is in charge of running the credit committees. • The Finance and market risk division on the other hand covers the areas of market risk and operational risk management as well as the calculation of the economic capital. Finance and market risk is also in charge of the ICAAP process, which includes the capital value based management. Both divisions were heavily involved in the Basel II implementation. UniCredit Banka Slovenija d.d. applies from 1 January 2008 the STA approach for credit risk and started the preparations for IRB. Also for market and operational risk, the Bank applies the standardized approach. However, for operational risk, the Bank is in preparations for the advanced measurement approach (AMA) and intends to apply for model approval in 2008. UniCredit Banka Slovenija d.d. applies the principle of dual management and control. In line with this principle, for pricing purposes in customer business (micro control), both the minimum Tier 1 capital required pursuant to the Basel I Act and economic capital are expected to yield a specific return (to cover unexpected losses). Beyond compliance with the regulatory capital rules pursuant to the Basel I Act, economic capital is intended to reflect the Bank’s specific risk profile in a comprehensive and more consistent way. With the exception of liquidity risk, economic capital is calculated using uniform value-at-risk methods across all types of risk. A specific factor taken into account in the required risk capital is business risk, which reflects the influence of external factors such as consumer behavior or the competitive situation on the market value of business divisions or subsidiaries. Unexpected losses over a period of one year are calculated with a confidence level of 99.95 %. Market Risk UniCredit Banka Slovenija d.d. takes on exposures to market risks, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risks arise from open positions in interest rate, currency, credit spread and equity products. All of these are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as interest rates, credit spreads, foreign exchange rates, and equity prices. UniCredit Banka Slovenija d.d. transfers all market risks, via a market-based fund transfer pricing system, to the trading desk. MARKET RISK MANAGEMENT TECHNIqUES Market risk management encompasses all activities in connection with UniCredit Banka Slovenija’s treasury operations and management of the balance sheet structure. Risk positions are aggregated at least daily, analyzed by the independent market risk management unit and compared with the risk limits set by the ALCO committee. At UniCredit Banka Slovenija d.d., market risk management includes ongoing reporting on the risk position, limit utilization, and the daily presentation of results of treasury operations. The ALCO sets the risk limits for the Bank’s market risk activities at least once a year in close cooperation with the respective units in Bank Austria Creditanstalt AG Vienna. The entire set of rules for treasury operations and market risk management is laid down in the INM Rulebook and is divided into three parts (General Part, Specific Part, and Unit Parts). Only authorized risk-takers are permitted to enter into risk positions. UniCredit Banka Slovenija d.d. uses for its market risk management the ‘NORISK’ risk model which was developed by the Strategic Risk Management unit of Bank Austria Creditanstalt AG Vienna and has been used for several years by UniCredit Banka Slovenija. In 2004, the variance/covariance approach of the system was extended to include a simulation approach. Ongoing refinement work which is done by the abovementioned Strategic Risk Management unit in Vienna includes reviewing the model as part of back-testing procedures, integrating new products, and adjusting the system to general market developments. In this context, in UniCredit Banka Slovenija d.d., a product introduction process has been established in which the risk management unit plays a decisive role in approving new products together with the sales units. Based on aggregated data, the ‘NORISK’ risk management system provides the major risk parameters for treasury operations once a day. Besides Value at Risk (VaR for internal risk measurement on the basis of a one-day holding period and a confidence interval of 99 %), the present value of the basis point (PVBP) is calculated. Basis point limits per currency and maturity band, basis point sums per currency and/or per maturity segment (total of absolute basis point values) are used for risk management. Other factors of equal importance are stress-oriented volume and position limits. Additional elements of the limit system are loss-warning level limits. Monitoring income trends by means of stop-loss limits provide an early indication of any accumulation of position losses. Regular stress scenario calculations complement the information provided to ALCO and the Management Board. Such stress scenarios are based on assumptions of extreme movements in individual market risk parameters. UniCredit Banka Slovenija d.d. analyses the effect of these fluctuations and a liquidity disruption in specific products and risk factors on the Bank’s results and net asset position. These assumptions of extreme movements are dependent on currency and liquidity and are set by the Bank in close cooperation with the Strategic Risk Management unit in Bank Austria Creditanstalt AG Vienna on a discretionary basis. The results of these stress tests are taken into account in establishing limits. In addition to the risk model results, income data from market risk activities are also determined and communicated on a daily basis. These data are presented over time and compared with current budget figures. Reporting covers the components reflected in IFRS-based net income and the marking to market of all investment positions regardless of their recognition in the IFRS-based financial statements (‘total return’). UniCredit Banka Slovenija d.d. implemented in 2006 the ‘MARCONIS’ system, which was developed by Bank Austria Creditanstalt AG Vienna. ‘MARCONIS’ reviews completely and systematically the market conformity of each treasury transaction. Interest rate risk and liquidity risk from customer transactions is attributed to Bank’s Treasury operations through a matched funds transfer pricing system applied throughout the Group. This makes it possible to attribute market and liquidity risk and contribution margins to the Bank’s business divisions in line with the principle of causation. ALCO ensures that the Bank’s overall maturity structure is optimized, with the results from maturity transformation being reflected in the International markets division. Factors taken into account in this context include the costs of compensation for assuming interest rate risk, liquidity costs, and country risk costs associated with foreign currency financing. INTEREST RATE, FOREIGN EXCHANGE AND SPREAD RISK The results of the internal model based on VaR (one day, confidence interval of 99 %) for 2007 are higher than the previous year’s results. The main reason for this is that the Bank also measures, since July 2007, the spread risk in the VaR calculation. The below presented VaR table includes the interest, FX and spread positions of the Bank. Risk Report Risk Repor t UniCredit Banka Slovenija d.d. did not hold any equity positions in 2007 and 2006 respectively. VaR of UniCredit Banka Slovenija d.d., 2006-2007 EUR 1,000 Minimum Maximum Average Slovenia 47.26 775.00 239.91 19.09 1,016.64 405.55 The Bank positions itself mainly in EUR, USD and CHF, with all other currencies, open positions are significantly lowe Interest rate basis point shift for 2007 Annual max, min, average Absolute average 810 17,283 1,425 19,545 Interest rate basis point shift for 2006 Spread basis point value Basel II establishes for the first time a relation between ‘interest rate risk in the banking book’ and the Bank’s capital by comparing a change in the market value of the banking book after a 2 % interest rate shock with the Bank’s net capital resources. In the event that such an interest rate shock absorbs more than 20 % of a Bank’s net capital resources, the bank supervisory authority could require the Bank to take measures to reduce risk. A 2 % interest rate shock at year end would absorb about 3.9 % of the Bank’s net capital resources; this calculation also includes the current investment of equity capital as an open risk position. This means that the figure for UniCredit Banka Slovenija d.d. is far below the outlier level of 20 %. Besides VaR, FX positioning also is monitored by each currency on an aggregated position level. Larger positions were held only in the major currencies. Open FX position during 2007: EUR 1,000 Currency AUD max. short (587) max. long 630 BAM (70) 69 BGN (41) 30 CAD (696) 114 CHF (4,969) 1,527 CZK (127) 29 DKK (21) 94 GBP (2,672) 2,423 HKD (150) 35 HRK (297) 201 HUF (93) 569 JPY (3,687) 4,077 NOK (43) 41 PLN (123) 195 RSD (94) 132 SEK (275) 59 SKK (19) 30 USD (5,067) 19,625 Risk Report Risk Repor t Risk Report Risk Repor t Liquidity Risk Liquidity risk is the risk that the Bank is unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn. The consequence may be the failure to meet obligations to repay depositors and fulfill commitments to lend. UniCredit Banka Slovenija d.d. deals with liquidity risk as a central risk in banking business by introducing and monitoring short-term and medium-term liquidity limits. In this context, the liquidity situation for the next few days and also for longer periods is analyzed against a standard scenario and against scenarios of a general and a bank-specific liquidity crisis. The degree of liquidity of customer positions and proprietary positions is analyzed on an ongoing basis. Procedures, responsibilities, and reporting lines in this area have been laid down in the liquidity policy and include a contingency plan in the event of a liquidity crisis. Besides the primary resources available to the Bank, UniCredit Banka Slovenija d.d. funds itself at the liquidity centre in Bank Austria Creditanstalt AG, Vienna at the liquidity costs of UniCredit Group. Current management of the Bank’s customer business takes account of liquidity costs. The applicable alternative costs are debited or, on the basis of an opportunity approach, credited to the various products on the assets side and the liabilities side which have an effect on liquidity. In the current controlling process, this ensures the proper pricing of our business. Risk Report Risk Repor t Credit Risk Credit risk is the risk that a counterparty will cause a financial loss for the Bank by failing to keep its obligations. Credit risk is a significant risk for the Bank’s business, therefore, management carefully manages its exposure to credit risk. The credit risk the Bank is exposed to is a result of lending activities (loans, advances, guarantees) and derivatives sales (positive market value of a transaction). Credit risk management is centralized for the entire corporate and business client segment while partially decentralized in the Retail segment. Credit risk control is centralized. Credit risk management and credit control reports to the board member responsible for risk. CREDIT RISK MEASUREMENTS In measuring credit risk, corporate customers and business clients are assessed with a rating that reflects the probability of default. In addition to rating, also exposure as well as repayment potential is assessed based on the available cash flow projection. The Bank assesses the probability of default as mentioned for all corporate and business clients based on a system developed for group needs but calibrated on local circumstances. Rating is a result of financial data and qualitative factors and warning signals. The Bank is using ten major rating classifications with additional sub-classifications. All together there are 28 different rating classes, starting at 1 and finishing with rating 10. For reporting to national bank, the Bank uses a mapping system presented in Table 1. Table 1: Bank’s rating structure and mapping to national bank rating system Rating class 1 Classification of exposure Performing National bank classification A 2 Performing A 3 Performing A 4 Performing A 5 Performing A 6 Performing A 7 Performing B 8 Non Performing C 9 Non Performing D 10 Non Performing E The Bank is creating impairments based on evidence that a customer is in delay. The portfolio is checked on a monthly basis by the risk control department. In such cases, the Bank prepares expected cash flow calculation and asses needed impairments. RISK LIMIT CONTROL AND MITIGATION POLICIES The Bank manages limits and controls concentration of credit risk whenever they are identified, in particular, to individual clients and groups of related clients. The Bank uses, in the corporate segment, the system of individual approval of any exposure, while in the business client segment and in retail also a scoring tool is partially used for some credit risk products. Approvals are based on cash flow capability of clients to repay loans or other credit risk exposures. The approval process is defined with the Bank’s decree and delegated approval rights are implemented. Each exposure in the corporate and business segment sector is regularly, at least once per year, checked and monitored via annual reviews. In addition to this, the Bank has established a Credit Risk department that is responsible for monthly monitoring of whole portfolios segmented on different levels. Such analyses are the basis for further decisions about general credit policy of the Bank. COLLATERAL In order to mitigate credit risk, the Bank is taking collateral in order to secure risk exposure. The Bank has implemented a collateral guideline that defines appropriate types of collateral. In general, collateral types for loans and other credit risk exposures can be segmented in: • Mortgages over residential and business properties; • Pledge over movables and cash deposits; • Charges over financial instruments such as bonds and shares. Long term loans and other credit risk exposure are in general secured. According to collateral guidelines also collaterals in the corporate and business clients segment is subject to at least an annual reviewing process. Such approach gives the Bank a better view of the current status and actual value of collateral. Table 2: Bank’s total exposure (including on and off balance) according to rating structure and collateral Rating class A Exposure (EUR Million) 2.067,22 Collateral value (EUR Million) 749,72 B 15,03 7,96 C 20,05 9,70 D 5,73 1,78 E 7,21 3,11 Total 2.115,24 772,27 As of 31 December 2007, the Bank is recognizing 29.5 million euros of unprovided, overdue liabilities. The system the Bank is using is able to start to monitor delays immediately after maturity. The mentioned amount did not result in activation in any of the default events. IMPAIRMENT AND PROVISIONING POLICIES The Bank has a defined procedure and internal policy about the monitoring of portfolio as well as for creation of impairments. Internal policy also is in line with strict regulation by the national bank. The Bank has a support system to create impairment on a client or even for each single deal. The Bank implements a so called “default event” on the client level if any client is in delay for more than 90 days with payment to the Bank. Consequence of such action is downgrade of the client and creation of impairment on the client or transaction level, depending on the situation. This procedure is prescribed by guidelines. The responsibility for the portfolio monitoring is with the Credit Risk Control department, checking the whole portfolio at least on a monthly basis. According to guidelines, the Bank has five different impairment classes for the retail segment and 29 different impairment classes for the corporate and business classes. Calculation of needed impairment is prepared on the basis of past experience with the client and expected future cash flow from the client. The Bank’s criteria for creation of impairments: • Delay in contractually agreed payments of principal, interest and/ or other fees • Cash flow difficulties • Breach of loan covenants or conditions • Bankruptcy or any other legal proceedings that can result in loss for the Bank In addition to this, the Bank is using two status for clients that are in delay of payments to the Bank. The so called “watch loan” status means that the client is still performing but is repaying liabilities with delay. In such cases, Work-out department, organized within Credit Risk Management Division, is involved in direct activity with such clients. The other status is so called “Work-out” status. This status means that the contract with the client is cancelled and the Work-out department is responsible for recovery or restructuring of exposure of the client. Table 3: Bank’s exposure according to rating structure and created impairments Rating class A Exposure (EUR Thsd) 2.067,22 Impairments (EUR Thsd) 1,87 B 15,03 1,07 C 20,05 4,84 D 5,73 4,09 E 7,21 6,89 Total 2.115,24 18,76 Risk Report Risk Repor t Operational Risk Operational Risk is defined as risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The definition includes legal risk but excludes strategic and reputation risk. The Bank collects all losses and profits related to operational risk events above 100 euros and all potential losses above 10,000 euros and allocates the operational risk events in line with ORX standards to the following seven categories: • Internal fraud; • External fraud; • Employment practices and workplace safety; • Clients, products and business practices; • Damage to physical assets; • Business disruption and system failures; • Execution, delivery and process. Operational risk losses regularly get reconciled with the Bank’s profit and loss statement. Scenario analysis estimates the operational risk exposure of UniCredit Banka Slovenija d.d. The scenarios are defined by analyzing internal losses, external events deemed relevant, key operational risk indicators’ trend, processes, products and event types. The experience of process managers and operational risk managers as well as suggestions from internal audit or ALCO is taken into consideration. Once scenarios are identified, the Operational Risk Management function interviews the relevant process owners. Results, in terms of worst case scenarios, critical processes, mitigation proposals or impacts on capital at risk, are described in specific scenario reports produced by the Banks’ Operational risk management function. UniCredit Banka Slovenija d.d. currently works on the implementation of key risk indicators, which reflect the operational risk profile of the Bank and correlate to different levels of risk. Such key risk indicators will allow operational risk management and ALCO to have an early warning system and set mitigation measures before the operational risk hits the Bank. Legal Risks Provisions have been made for pending legal risks in line with the estimated probability of costs arising from litigation. Business Risk Business risk is defined as adverse, unexpected change in business volume and/or margins that cannot be attributed to other risk types, resulting in fluctuations of revenues and costs, not considering extraordinary items. The changes in business volume result from unexpected development of market trend, unexpected customer behaviour or new market participants/products. The calculation of business risk is based on an earnings-at-risk model using historical time series of revenues and costs. Business risk is currently monitored within the risk capital planning process. Risks Arising from the Bank’s Shareholdings and Equity Interests UniCredit Banka Slovenija d.d. is not actively making long-term investments in shares on its own account for the purpose of realizing short-term trading or long-term substantial value increases. The shareholdings of the Bank are either closely related to the Bank’s business (SWIFT; Ljubljana Stock Exchange etc.) or the result of restructuring attempts. Real Estate Risk UniCredit Banka Slovenija d.d. only has a minor exposure in real estate financing and does not invest in real estate itself. Financial Derivatives Derivatives are classified as interest rate contracts or foreign exchange contracts according to the underlying financial instrument. The breakdown of transactions by the remaining period to maturity and the classification of instruments as interest rate and foreign exchange contracts follow international recommendations. In all categories of transactions, a distinction is made between over-the­counter (OTC) and exchange-traded contracts, whereas UniCredit Banka Slovenija d.d. was engaged only in OTC business in 2007. UniCredit Banka Slovenija d.d. is a business partner in plain-vanilla and structured transactions for corporate customers and closes the risk positions opened, which exceed available market risk limits with specialized trading desks within UniCredit Group. UniCredit Banka Slovenija d.d. also uses derivatives to optimize its balance sheet structure. Those derivatives, which are designated as cash flow hedges are kept in separate portfolios. The efficiency test is performed on a monthly basis, both in 2007 and 2006 there were no inefficiencies detected. For portfolio management and risk management purposes, contracts are valued at current prices using recognized and tested models. Market values show the contract values as of the balance sheet date, while positive market values of OTC contracts indicate the potential default risk arising from the relevant activity. For the purposes of credit risk management, UniCredit Banka Slovenija d.d. has used a new counterparty model since 2006. In the old system, OTC derivatives (forward transactions, swaps, and options bought) were taken into account with their respective positive market value and an add-on depending on the product, currency and maturity similar to the regulatory requirements. The new model is based on the simulation approach. The exposure of any individual counterparty is evaluated by running a path simulation of its portfolio based on the individual products contained therein. The future present value of the whole portfolio is calculated based on scenarios representing volatilities and correlations of a three-year time series of the risk factors. The limit utilization is the maximum of the 97.5 % quantiles of each grid point. Risk Report Risk Repor t Risk Report Risk Repor t Fair Value of Financial Assets and Liabilities FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE USING A VALUATION TECHNIqUE The total amount of the change in fair value estimated using a valuation technique that was recognized in profit and loss during the period is 239,156 euros (2006: 464,187 euros). The Bank calculates for all OTC traded instruments, valuations which are based on current market data available from independent market data providers, whereas the models behind are state of the art and embedded in the trading systems Wall Street and Opus. FINANCIAL INSTRUMENTS NOT MEASURED AT FAIR VALUE UniCredit Banka Slovenija d.d. measures all bonds and investments at fair value. The fair value of floating rate placements such as EURIBOR or LIBOR linked loans is the carrying amount. The Bank has granted only a minor amount of fixed rate loans and deems the difference of fair value and carrying amount as immaterial. Capital Management UniCredit Banka Slovenija d.d. focuses within the Internal Capital Adequacy Assessment Process (ICAAP) on the economic view of matching the economic capital (capital demand) with the risk-taking capacity (shareholder’s equity) in line with Pillar II of the new Basel accord. The economic capital gets calculated retrospectively on a quarterly basis but also gets monitored within the yearly planning process. As both capital demand and capital supply evolve over time, the Bank ensures that, on one side, capital demand mainly driven by business plans and by risk-profile forecasts in combination with macro-economic scenarios does not exceed capital supply, and on the other side, that capital supply mainly influenced by planned capital transactions and expected profits is kept at a level to cover the calculated risks at all times. Simultaneously, the Bank has to consider the regulatory view. Here, the regulatory capital for credit risk, market risk, and in the future, under Basel II, also for operational risk, accounts for the capital demand, while balance-sheet capital (Tier1, Tier 2 and Tier 3) constitutes the capital supply side. Capital adequacy is monitored continuously by the Bank’s management and filed with the Bank of Slovenia on a quarterly basis. The Bank of Slovenia requires each bank to maintain a ratio of total regulatory capital to the risk weighted asset (the capital adequacy ratio) at or above the internationally agreed minimum of 8 %. In order not to violate the 8 % ratio, UniCredit Banka Slovenija d.d. underwent, in line with legislation, an interim audit on the nine-month result and allocated the interim profit based on an unqualified opinion to the eligible capital. The table below summarizes the composition of the regulatory capital and the capital adequacy ratio for the years ending 31 December 2007 and 2006. Graphic development and Composition: Mercurio S.r.l. Studi di promozione pubblicitaria - Milan Publisher: UniCredit Banka Slovenija d.d. Šmartinska 140, 1000 Ljubljana tel: (+386) 1 5876 600 fax: (+386) 1 5876 684 e-mail: info@unicreditgroup.si Printed: Tiskarna Schwarz Eg^ciZYdcXZgi^[^ZYgZXnXaZYX]adg^cZ"[gZZeVeZg#