Annual Report 2011 - Page 1 ANNUAL REPORT 2011

annual report 2011 - page 1 ANNUAL REPORT 2011

ANNUAL REPORT 2011

TABLE OF CONTENT

1. LETTER TO SHAREHOLDERS 8 2. PIRAEUS BANK GROUP 10 3. TIRANA BANK BRANCHES NETWORK 14 4. TIRANA BANK 1996 - 2011 16 5. ECONOMY OUTLOOK 18 5.1 INTERNATIONAL OUTLOOK 5.2 ALBANIAN ECONOMY 5.3 BANKING SECTOR 6. TIRANA BANK MAIN HIGHLIGHTS OF FINANCIAL INDICATORS AND RESULTS 22 COMPARED WITH 2010 7. MAIN ISSUES OF BANK PERFORMANCE 28 7.1 CORPORATE BANKING DIVISION 7.2 SMALL MEDIUM ENTERPRISES’ BANKING (SME) 7.3 RETAIL BANKING 7.4 BRANCH NETWORK 7.5 TREASURY 7.6 INFORMATION TECHNOLOGY AND INFRASTRUCTURE 7.7 RISK MANAGEMENT 7.8 COMPLIANCE 7.9 FUNDS TRANSFER 8. CORPORATE SOCIAL RESPONSIBILITY 34 9. HUMAN RESOURCES 36 10. FINANCIAL STATEMENTS 38 11. INDEPENDENT AUDITOR’S REPORT 42

Executive Committee

Georgios Charalampakis Bedri Çollaku Athanasios Paloudis Managing Director and Deputy Managing Director and Head of Branch Network Member of Board of Directors Member of Board of Directors and SME Division

Sotirios Kousouris Jani Gjika Manjola Capo Head of Operations Head of Corporate Head of Credit Division Banking Division Division 1. LETTER TO SHAREHOLDERS

Managing Director of Tirana Bank annual report 2011 - page 9

Dear shareholders,

2011 was a satisfactory year for Tirana Bank, despite the depressing economic situation, locally and internationally.

Tirana Bank: • Increased total assets with 3.38% reaching 93.624 million lek. • Increased the share capital with a new injection of 20 million euro, allocating invested capital in total 120.70 million euro. • Increased its provisions with the amount of 1.121 million lek protecting even more its balance sheet and keeping a total provision amount of 3.666 million lek. • Despite the difficult operating environment, it kept and it even increased its deposits to 69.902 million lek, preserving a wider deposit base by proving that the bank holds deep roots and trust among its clients. • Achieved its profit of 804 million lek (after tax). • Preserved for the most part, both net interest income and net commission income. • Improved loans to deposits ratio reaching a ratio of 84.3%. • The operative expenses are almost kept at the same level.

We strongly believe that the close relation with our clients, the constant support of our shareholders and partners, the continuous commitment of the staff in delivering quality services combined with a cooperative attitude and success driven spirit will constitute the right basis for the path towards success.

Sincerely, Georgios Charalampakis Managing Director 2. PIRAEUS BANK GROUP

Piraeus Bank Group Headquarters annual report 2011 - page 11

Michalis Sallas Chairman of BoD

The implementation of the Greek government bond exchange programme PSI (Private Sector Involvement - PSI) inevitably had very large negative effects on both financial results and equity capital of all Greek banks. To address the negative effect that PSI and economic crisis had on Greek banks’ regulatory capital, the new economic adjustment programme entirely provides for the safeguarding of capital adequacy of the Greek banks and the stability of the Greek financial system. Piraeus Bank has already received a commitment letter from the Hellenic Financial Stability Fund (HFSF) to participate in the bank’s share capital increase, which will take place in the coming months and will restore the total capital adequacy ratio to 9.7% (pro-forma). The completion of the recapitalization of the Greek banks will facilitate the enhancement of liquidity in the market and the funding of Greek companies’ investments plans, helping to stimulate the gradual recovery of the Greek economy.

Stavros Lekkakos Managing Director and CEO

Over the past year, Piraeus Group managed to preserve its organic revenue level in an unprecedentedly difficult environment: net interest income and net commission income amounted to 1.4 billion euro, remaining at the 2010 level despite a significant contraction in demand for banking services and products. At the same time, the Group’s target for reducing operating costs by 5% was achieved, with 2011 being the third consecutive year of reduced operating costs. A further reduction of approximately 10% is targeted for the year ahead. Provision expenses on loans, significantly increased compared to the 2010 level due to the deterioration in economic conditions and the implementation of a stricter loan administration policy. Consequently, the NPL ratio increased to 13.5% versus 7.5% in 2010, while the coverage of NPL by cumulative provisions and tangible collaterals stood at 100% at the end of 2011. The Group’s 2011 total net comprehensive income attributable to shareholders from continuing operations amounted to a loss of 6.3 billion euro, primarily due to the PSI impairment charge. In terms of the diagnostic exercise carried out by Black Rock Solutions, the results showed that the expected loss rate of Piraeus Bank’s loan portfolio was lower (better) than the average rate of the Greek banking system. Group performance highlights, included, pre-tax and provision 1 January – 31 December 2011 result was 385 million euro compared to 635 million euro in 2010. Piraeus Group’s participation in the • Net interest income 1.173 million “Private Sector Involvement Program” euro, -1% y-o-y. • Net commission income 190 • Piraeus Group, following the million euro, + 1% y-o-y. resolution of its Board of Directors • Net operating revenues 1.213 on 07.03.12, participated in the million euro, -18% y-o-y. PSI, with its entire portfolio of Excluding trading results (which eligible Greek Government Bonds were negatively affected by the (GGB) and loans owned, which significant reduction in the value amounted to 7.7 billion euro in of GGB’s in 2011) and the loss nominal value. from the valuation at fair value • Within this framework, the total of Citylink investment property, PSI impairment charge amounted net revenues amounted to 1,420 to 5.9 billion euro (1.1 billion million euro, -4% y-o-y. euro posted in the nine month • Operating costs decreased by 5% 2011 results and 4.8 billion euro y-o-y at 796 million euro, which in Q4 2011). It should be noted was mainly attributed to the that there was an additional reduction in expenses recorded in charge in the net trading income Greece (-6%). of the income statement, due • Personnel expenses decreased to the fair value valuation of the by 5% y-o-y at 372 million euro, Greek government bonds trading while the rationalization of general portfolio of 0.4 billion euro face administrative expenses resulted value, and 0.1 billion euro fair in a higher reduction of 8% y-o-y, value as of 31.12.11. at 335 million euro. • The total impairment charge on 2011 results loans, bonds and other assets significantly increased during • The Group’s pre-tax and provision 2011 to 7.9 billion euro versus 0.6 profit for 2011, when excluding billion euro in 2010, mainly due trading results and the loss to the PSI impairment charge from the valuation at fair value and the higher impairment of Citylink investment property, loss on loans, attributed to the amounted to 592 million euro macroeconomic conditions. In versus 638 million euro in 2010. addition to the aforementioned When the aforementioned are impairments, an amount of annual report 2011 - page 13

0.3 billion euro attributed to the regulatory capital, as they already recycling of the available for sale constituted deducted elements. portfolio’s negative reserve in • Including the after-tax impairment the income statement, and an due to the PSI, net results amount of 84 million euro related attributable to shareholders from to the impairment on the value of continuing operations amounted intangible assets (goodwill) were to -6.6 billion euro. The group’s recorded. It should be noted that net total comprehensive income, both the impairment of intangible which also includes the valuation assets and the recycling of of the available for sale portfolio the negative available for sale that affects equity capital, reserve did not affect the group’s amounted to -6.3 billion euro. 3. TIRANA BANK BRANCH NETWORK

Photo taken from Blloku Branch annual report 2011 - page 15

Tirana Bank holds the third largest Branch Network in the country with 56 branches spread from South to North, from East to West of Albania. 4. Tirana Bank 1996 - 2011 annual report 2011 - page 17

1996 Tirana Bank is licensed, 43 ATM’s operate and the bank has becoming the first private Bank in the 377 employees. country. 2007 Branch network reaches 39 1997 Year of official establishment. branches with more branches in the opening process. 45% growth rate 1998 Tirana Bank opens its new of net profit, loan portfolio grows by branches in Fier and Durrës. 55.9% (y-o-y) total assets grows by 35%. 1999 Launch of VISA purchasing service. First positive financial results 2008 The branch network growth are achieved. continues as the number reaches 45. High profits are recorded during 2008. 2000 Tirana Bank opens its new Bank has 500 employees. branches in Gjirokastra and Korça. 2009 Complete bank reorganization 2001 Rapid growth achieved, with with a client and business focus. assets’ figures tripling compared with 1997. Three new branches are opened and twenty-two are renovated. Profitability 2002 Year of network expansion. of 13.2 million euro despite crisis. First VISA Credit Card is issued. NPL portfolio and deposits fully protected. 2003 Two more Tirana Bank agencies are opened. 2010 Record profitability excluding foreign exchange gains. Expansion 2004 Tirana Bank network has 22 of branch network reaching 56 branches with the opening of seven other branches. Self-funding status, due branches, becoming the Bank with the to high deposits increase. Significant second largest branch network. penetration into the public and institutional sector. Successful 2005 The branch network is further protection of balance sheet. expanded to reach the number of 34 branches, covering most of the 2011 Maintain a wide network of country. Huge organizational reshuffle 56 branches with motivated staff takes place and more aggressive and special care towards customers, retail activity starts. despite the first crisis’ signs appear in the local market which certainly 2006 Year of strong growth both brings a shift of priorities. Continuous in Corporate and Retail, coupled focus on strengthening the capital with the launch of new products. The and following a correct and effective branch network reaches 36 branches, management of liquidity. 5. ECONOMY OUTLOOK annual report 2011 - page 19

5.1 INTERNATIONAL OUTLOOK In 2012, the growth of the emerging economies will slow down by 1% During 2011 the global economy points on average; going from 5.5% was characterized by strong growth in 2011, to 4.5% in 2012, elements of financial uncertainty, partly as a result of slower export price instability and a “still-in-crisis” growth and partly because several of economic situation. Halfway through them, during the previous years, have this decade, it is forecasted that been growing above trend. the global growth will likely slow to approximately 2-3% per year (on During 2016-2020, the emerging and average), which is a rate below the developing countries are projected to average of the last decade. grow at 3.5%.

The growth of advanced economies The greatest challenge for the is expected to slow down from an global economy in a “slow growth early meager 1.5% in 2011 to 1.3% environment” is to increase its in 2012. For the next-coming years own productivity without losing job (2013-2016), the outlook suggests opportunities for millions of people some recovery, bringing such who are looking for reasonable countries back to the pre-recession income to support their living growth trend of 2%. standards.

Estimated annual growth in GDP for 2012 (%)

8 % 8

7 5.8 % 6 5 4.4 % 4 % 4 3.6 % 3 2.7% 1.6 % 2 1 0 Central & Eastern Commonwealth Developing Latin America Middle East Sub-Saharian UK Europe of independent Asia and the Caribbean and North Africa Africa states Source: International Monetary Fund 5.2 ALBANIAN ECONOMY these countries are facing. The GDP distribution by-sector is The Albanian economy, despite the divided among: (1) Agriculture, which negative impact of the recent global accounts 50% of employment, but financial crisis as well as the effects only 20% of GDP, (2) Industry, another of the crisis of its neighbor countries, 20% of GDP and 20% of the labor to whose economies it’s highly force and (3) Services at about 60% dependent, has outperformed other of GDP, but that employ only 30% of countries in the region. According to the employment. INSTAT and Ministry of Finance, the growth for 2011 is 3.1%. c. Consumer Price Index (CPI) The annual change of CPI was 1.7% a. Inflation at the end of 2011. The main impact During the year 2011, as an average, was given by petrol-related products, has been low, stable and within the which signed a price increase of 3.4% targets of the Bank of Albania. and certain imported nonalcoholic beverages. b. Remittances As a significant historical catalyst for During 2011 the local currency was the economic growth, the remittances depreciated against Euro. There have declined from 12-15% of are several factors that have given GDP before 2009, to 6-7% in 2011, their influence on that: i.e. the fact mostly from the immigrants residing that more than 70% of the trade is in Greece and Italy. To a wide point done with EU countries, the visa this is definitely due to the crisis that liberalization, the majority of loans

5 Inﬂation (%)

4.2 4 3.5 3.5 3.4 3.3 3.1 3

2 2.5 2 2.1 2.2 2.2 1.7

1 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: INSTAT, Bank of Albania annual report 2011 - page 21

in Euro, the transfer of the profit of The credit risk remains the primary foreign businesses to their mother risk to the local banking system. companies, etc. The Albanian banking system Related to USD, the local currency continued to expand its activity during was appreciated during the first three 2011 and lending to the economy. quarters and was depreciated during The financial situation and the the last quarter of 2011. At the same profitability indicators have improved time, in the global market, Euro has the system’s activity, with a very good gained points vs. USD by 5.6% during capitalization. 2011. The banking sector, for years now, remains the main actor of the financial intermediation in Albania, 5.3 BANKING SECTOR whose financing continues to rely mainly on the public deposits, which During 2011, the Bank of Albania show an increase of 14% in annual adapted a flexible monetary policy terms. framework and a sizeable foreign exchange reserve system. At the During 2011, in response to the same time, the banking sector is increased level of NPLs, the banking a sound one, with stable liquidity sector has increased provisions and positions. Nevertheless, the non- has established adequate reserve performing loans continued to grow funds to buffer the shocks on further and the NPL ratio reached the borrowers’ repayment capacity and level of 18% by the end of the year. the market equilibrium.

Exchange Rate (EUR-ALL) 145

143 142.4 141.41 141.75 142.1 141 140.44 139.92 140.95 140.57 138.93 140.19 139 139.74 139.31

137

135

Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Source: Bank of Albania 6. TIRANA BANK MAIN HIGHLIGHTS OF FINANCIAL INDICATORS AND RESULTS COMPARED WITH 2010

Photo taken during an Executive Committee meeting annual report 2011 - page 23

• Profit before taxes amounted impact in their deposits. Nevertheless 707.9 million lek this was compensated by the retail • Both net interest income and net customers, showing the strong commission income are preserved confidence on Tirana Bank. in the most part • The operative expenses are Total equity amounted to 16.764 almost kept at the same level million lek, showing an increase of • Total assets increased by 3.38% 27% compared to year 2010. The • Loan to deposits ratio improved total regulatory capital was 12.611 by reaching a ratio of 84.3% million lek, with a capital adequacy • NPLs ratio was estimated at ratio of 17.7%. 11.8%.

Total outstanding loan portfolio at Profit and Loss Analysis the end of the year amounted to Net interest income and net 58.451 million lek, decreased by commission income were preserved 7% compared to previous year. Non in the most part. performing loans amounted to 6.974 Operational costs are kept at the million lek with a NPL ratio of 11.8% same level compared to a year before at the end of the year, reflecting the reflecting a good administration from difficulties of the business due to the the bank. global crisis. Total deposits at year end amounted Expenses for provisions amounted to to 69.902 million lek, increased by 1.121 million lek, increased by 176% almost 2% compared to previous compared to year 2010, reflecting the year. The business customers have increase in NPLs, but in compliance liquidity problems with a negative with the Bank of Albania requests.

2000 94 5000 Total Operating 2010 2010 Income 2011 90 2011 Operating Expenses 1500 4000

86 3000 1000

82 2000 500 78 1000 (Vaule in %)

(Value in million lek) 0 74 (Vlaule in million lek) 0 Pro t before Taxes Loans to Deposits Ratio 2010 2011 MAIN INDICATORS

Total assets (in thousands lek) 90,558,535 93,623,945 81,425,293 84,641,423

67,103,490

49,817,567 40,250,568 31,736,550

2004 2005 2006 2007 2008 2009 2010 2011

Customer deposits (in thousands lek) 68,580,659 69,902,068

55,721,495 51,190,651 51,941,132 42,573,707 34,143,065 27,733,073

2004 2005 2006 2007 2008 2009 2010 2011

Loans (in thousands lek) 60,404,366 54,503,195 57,163,534 54,785,214

40,898,835

25,701,296

15,826,357 8,910,091

2004 2005 2006 2007 2008 2009 2010 2011 annual report 2011 - page 25

1,668,024 Proﬁt and loss before tax (in thousands lek) 1,567,290

1,153,449 1,005,422 844,630 707,976 588,076

292,695

2004 2005 2006 2007 2008 2009 2010 2011

Employees 501 460 478 469 438 377 349

258

2004 2005 2006 2007 2008 2009 2010 2011

56 56 Branch Network 47 45 38 36 34

2004 2005 2006 2007 2008 2009 2010 2011

*Year 2009 adjusted for the exchange rate revaluation of the Share Capital Main Indicators (in thousands lek) 2011 2010 change % Total assets 93.623.945 90.558.535 3.4 Loans and advances (Net) 54.785.214 60.404.366 (9.3) Customer deposits 69.902.068 68.580.659 1.9 Paid in capital 10.954.079 7.219.972 51.7 Number of the branches 56 56 - Staff 469 478 (1.9)

Incomes & Expenses (in thousands lek) 2011 2010 change % Net interest income 3.486.114 3.627.525 (3.9) Net commission income 270.632 284.182 (4.8) Operational expenses1 1.956.902 2.015.023 (2.9) Provisions 1.121.272 406.560 175.8 Profit before taxes2 707.976 1.663.768 (57.4) Profit after taxes 764.784 1.495.944 (48.9)

Main Ratios 2011 2010 ROA (after tax) 0.83 1.71 ROE (after tax) 5.10 12.01 Cost / Income 51.70 49.32 Loans / Deposits 84.00 91.70 Net Interest Margin 3.79 4.10

1. Year 2010 adjusted for the additional expense from the Deposits Insurance Premium (66.3 million Lek) 2. Year 2009 adjusted for the exchange rate revaluation of Share Capital annual report 2011 - page 27 7. MAIN ISSUES OF BANK PERFORMANCE annual report 2011 - page 29

7.1 CORPORATE BANKING DIVISION to face such new reality, being supportive to its clients by offering a. Corporate Business Environment quick solutions in their restructuring During 2011 the effects of financial requests and being more prudent in crisis in Europe reached also the new financings. economic activity in Albania. Starting with the challenging construction In view of this new strategy, Project and real estate sectors, the waves Finance and Real Estate Department of the crisis touched through established in 2010 with the scope other sectors of economy such as to support with new financings manufacturing and trade. The impact companies in these sectors, changed was direct in some specific sectors into the Department for Structured such as manufacturing and trading Finances, reflecting thus the main of construction materials, iron, fuels, mission, which now is connected which due to the strong competition with the pro-active support of and over-investments, created clients, restructuring of clients who financial difficulties for many related face financial difficulties, as well as businesses. cautiously considering new structured financings in specific sectors of Some of the companies in these the economy. The new department sectors faced worsening of their reports to Corporate Banking Division. financial situation, decrease of In 2011 total outstanding of corporate revenues, and decrease of gross loans portfolio decreased with 4.8% profit margins causing financial compared to 2010: from 37.300 difficulties in proper repayments of million lek in 2010, in 35.478 million obligations toward third parties and lek in 2011. especially toward banking institutions. As a result of the decrease of demand The main objective during this period as well as the shrinkage of the market was the reorganization of the existing pie, the competition became tougher clients’ portfolio, restructuring of and a new map reconfiguration problematic loans, improvement of emerged in all these sectors. securities and collateral positioning of the bank in order to face the increasing b. Corporate Banking Figures and trend of non performing loans, which Strategy from 2.6% in 2010 increased to 5.6% In such challenging business of total portfolio in 20111. environment, the Corporate Banking strategy for 2011 was the re- 1 According to IFRS – International Finan- organization of the Division in order cial Reporting Standards 7.2 SMALL MEDIUM ENTERPRISES’ have been increased with 9% during BANKING (SME) 2011.

2011 provided positive results for Tirana Bank had an increase of 15% SMEs businesses in Tirana Bank. both in number of cards issued The bank’s Business Centers were during 2011 and in number of reorganized, ensuring completion transactions, with a weight of 90% and concentration of all clients’ files for purchases in sales terminals and data with an objective to further (POS) transactions. recognize each individual client.

A special care was dedicated to 7.4 BRANCHES NETWORK improving the analysis quality and creating better support by providing In total, the number of Tirana Bank sustainable solutions to Tirana branches at the end of the year was Bank’s clients as well as look for 56 branches & agencies in which work opportunities to expand existing SME 60% of the total bank employees. portfolio. The branch network is divided into 6 regions managed by the respective regional managers. 7.3 RETAIL BANKING At the same time the branch network has been regenerated with motivated A range of different product staff who shares good experience categories is available to attract and and best practices. In addition, it match the needs of a wide range of has been established a new role for customers, strengthening Tirana each branch staff focused in sales Bank’s presence in the market acquisitions and the role of branch and creating attractive value manager as a team leader. propositions to customers. For better service toward our customers, City Park Agency is 2011 ended with positive results opened even during week ends while for retail deposits, against a market Tirana Business Center has been that experienced difficulties because established. of the global economic crisis. The main focus was in deposits growth The number of onsite and offsite and attracting new relationships, ATM’s counts 83 and further ones but in the same time preserving the are also planned to be located existing portfolio and customer’s or reallocated of the existing base.The retail deposit balances ones during 2012. annual report 2011 - page 31

7.5 TREASURY 7.6 INFORMATION TECHNOLOGY AND INFRASTRUCTURE a. Balance sheet, interest rate risk and liquidity exposure The support of information technology The changes in the regulatory has been always considered by framework toward higher obligatory Tirana Bank as an important factor liquidity ratios in total of the balance in its strategies for success. This sheet and separately for local and support has been mainly channeled in foreign currency were efficiently reducing risks, improving the quality managed proving that the bank is in of service and reducing operational a very good liquidity position in local costs for the entire bank. and foreign currency as well. Two such main projects consisted in: A new policy has been designed for a. Relocation of bank core systems bank’s product pricing, in order to and respective backup systems in harmonize the balance sheet interest Piraeus Group Data centers in Athens rate reprising gaps. and Thessaloniki, where as a benefit Tirana Bank will now have: better b. Foreign exchange hardware systems, more professional Competitive pricing, has been the support on them, less operation costs strategy in order to sustain a healthy and a state-of-the-art high availability relationship with customers in a very solution. competitive market. b. The centralization of branch data c. Securities investments rooms where as a benefit Tirana Bank The strategy was to back-up will improve the quality of service, investments in Albanian government support and reduce risks. A pilot bonds not only with bank’s excess project is running in some branches of the liquidity in local currency and will continue with a detailed plan but also through funds provided and full implementation on 2012. from banking channels always in compliance with established 7.7 RISK MANAGEMENT limits, constantly and positively contributing in the profit and loss of a. Stress testing the bank, reaching an outstanding The results derived from this tool portfolio of 92.3 million euro eq. by were positive, as a prerequisite of the the end of the year. regulator and as part of the strategy of the whole group, by estimating any potential vulnerability to various conceivable scenarios in order to operations activity with AML rules and adverse and prevent unexpected procedures of branch network. situations, especially from certain high-risk categories. At the same time, together with all 7.9 FUNDS TRANSFER the banks of the Albanian banking system, Tirana Bank took part in a Tirana Bank kept its performance “Bottom-Up Stress Test”, under the both in terms of volume and the guidance of the Bank of Albania. quality of payments, reaching almost 11% of the volume of Albanian b. Risk control self-assessment market. project This methodology implemented in Tirana Bank was awarded by all the business units of the bank, Deutsche Bank, for the third intended to effectively manage consecutively year, with the “EUR the operational risk that exists in STP Excellence Award for the the bank’s activities as well as to Exceptional Quality of Payment improve further the internal control Messages” reaching a rate of 98.96% environment for the mitigation of globally. certain types of risk. At the end, it was possible to identify and assess a various number of potential-risk events, define a list of key risk indicators and prepare an adequate action plan for the control of the operational risk exposures.

7.8 COMPLIANCE

During 2011, Compliance has been undergoing major structural changes, especially in staffing and auditing activity.

Considering that AML (Anti Money Laundering) legal framework changed during the year, the focus has been to implement full compliance in the daily annual report 2011 - page 33 8. CORPORATE SOCIAL RESPONSIBILITY annual report 2011 - page 35

On its 15th anniversary, Tirana Bank in the project “One Citizen, one continues to reinforce the belief Tree” by supporting also in 2011 that corporate social responsibility a clean and healthy environment. represents a key factor that enables Another interesting project was the conditions for a logical relation organized together with the and compliance among profit and Municipality of Pogradec to provide people both inside and outside the citizens a clean city. business environment. As an integral part of Piraeus Bank c. Cultural activities Group, Tirana Bank has exerted During 2011 Tirana Bank had the every effort to follow the lines of pleasure to support cultural and “green banking”, as well as to pay traditional activities like: attention in supporting events and - “Don Carlos” Opera sponsorships. - New year’s eve festival The commitment to support “Ndërmendje”, in Shkodër continuously social, environmental, - The popular games in Shkodër, cultural and educational activities in etc. contribution to the community has been the prevailing philosophy of d. Educational activities corporate social responsibility also during 2011. Supporting new generations has been and will always remain a a. Social activities priority in the framework of the Tirana Bank has continued the activities that reinforce the relations collaboration with Albanian Red with the community. In this regard Cross for the engagement of Tirana Tirana Bank has supported the Bank’s employees in the voluntary Children’s Cultural Centre of Durrës blood donation. 248 employees by sponsoring the participation of a have embraced this humanitarian team in the Mathematics Olympiad initiative and 120 of them were that was held at the University of able to donate blood. In the same Milan. Also during this year the path has been implemented for bank has supported the project for Easter celebration the sponsoring the “digitalization of classes” in the in collaboration with the disabled Regional Educational Directorate of association “Mother Teresa”. Korça. b. Environmental activities Tirana Bank has embraced the initiative of the Municipality of Tirana 9. HUMAN RESOURCES annual report 2011 - page 37

DEVELOPMENTS FOR 2011

A specific evaluation process “Lead 360°” was applied for the evaluation of competences and behavior skills, of all managerial staff, giving them the opportunity to maintain and develop strong areas, but also to contribute for the reinforcement of managerial behavior and skills that are crucial for their role.

Training man-hours offered to the staff was increased with 43% in comparison with 2010. New training initiatives, such as: “Credit School”, “Corporate academy” etc, have been undertaken by the bank, in cooperation with Piraeus Bank Group for further strengthening of critical competencies, skills and other elements in the field of credit and corporate banking, ensuring business continuity and the sustainable development of the Group. 10. FFinancialINANCIAL statements STATEMENTS annual report 2011 - page 39 10. Financial statements TABLE OF CONTENT

GENERAL INFORMATION AUDITOR’S REPORT STATEMENT OF COMPREHENSIVE INCOME STATEMENT OF FINANCIAL POSITION STATEMENT OF CHANGES IN EQUITY STATEMENT OF CASH FLOWS

1. CORPORATE INFORMATION 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1 BASES OF PREPARATION 2.2 FOREIGN CURRENCY TRANSLATION 2.3 FINANCIAL INSTRUMENTS – INITIAL RECOGNITION AND SUBSEQUENT MEASUREMENT 2.4 REPURCHASE AND REVERSE PURCHASE AGREEMENTS 2.5 DETERMINATION OF FAIR VALUE 2.6 IMPAIRMENT OF FINANCIAL ASSETS 2.7 LEASING 2.8 REVENUE RECOGNITION 2.9 CASH AND CASH EQUIVALENTS 2.10 PROPERTY AND EQUIPMENT 2.11 INTANGIBLE ASSETS 2.12 IMPAIRMENT OF NON FINANCIAL ASSETS 2.13 FINANCIAL GUARANTEE CONTRACTS 2.14 PENSIONS AND OTHER POST EMPLOYMENT BENEFITS 2.15 PROVISIONS 2.16 INCOME TAX 2.17 COMPARATIVES 3. FINANCIAL RISK MANAGEMENT 3.1 CREDIT RISK 3.1.1 CREDIT RISK MEASUREMENT 3.1.2 RISK LIMIT CONTROL AND MITIGATION POLICIES 3.1.3 IMPAIRMENT AND PROVISIONING POLICIES 3.1.4 MAXIMUM EXPOSURE TO CREDIT RISK BEFORE COLLATERAL HELD OR OTHER CREDIT ENHANCEMENTS 3.1.5 LOANS AND ADVANCES 3.1.6 LOANS AND ADVANCES RENEGOTIATED 3.1.7 REPOSSESSED COLLATERAL 3.1.8 CASH AND BALANCES WITH CENTRAL BANK 3.1.9 DEBT SECURITIES, TREASURY BILLS AND OTHER ELIGIBLE BILLS 3.1.10 CONCENTRATION OF RISKS OF FINANCIAL ASSETS WITH CREDIT RISK EXPOSURE 3.2 MARKET RISK 3.2.1 FOREIGN EXCHANGE RISK 3.2.2 INTEREST RATE RISK 3.3 LIQUIDITY RISK 3.3.1 LIQUIDITY RISK MANAGEMENT PROCESS 3.3.2 OFF- BALANCE SHEET ITEMS 3.4 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES 3.5 CAPITAL MANAGEMENT 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS 5. INTEREST AND SIMILAR INCOME 6. INTEREST AND SIMILAR EXPENSE 7. NET FEES AND COMMISSION INCOME 8. OTHER GAINS 9. OTHER OPERATING INCOME 10. PERSONNEL EXPENSES 11. OTHER OPERATING EXPENSES 12. INCOME TAX EXPENSE 13. CASH AND BALANCES WITH CENTRAL BANK 14. LOANS AND ADVANCES TO BANKS 15. LOANS AND ADVANCES TO CUSTOMERS 16. FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS 17. FINANCIAL ASSETS AVAILABLE FOR SALE 18. FINANCIAL ASSETS HELD TO MATURITY 19. INTANGIBLE ASSETS 20. PROPERTY AND EQUIPMENT 21. OTHER ASSETS 22. DUE TO BANKS 23. DUE TO CUSTOMERS 24. OTHER LIABILITIES annual report 2011 - page 41

25. PROVISIONS 26. PAID – IN CAPITAL AND SHARE PREMIUM 27. OTHER RESERVES 28. DIVIDEND PER SHARE 29. CASH AND CASH EQUIVALENTS 30. RELATED PARTIES 31. PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT CATEGORY 32. EVENTS AFTER THE REPORTING DATE

GENERAL INFORMATION

Board of directors during 2011

Mr. Ilias Milis (Chairman) Mr. Georgios Papaioannou Mr. Georgios Charalampakis Mr. Bedri Çollaku Mr. Georgios Poulopoulos Mr. Vasileios Koutentakis Mr. Georgios Mantakas

Registered office

Rr. “Ibrahim Rugova”, PO BOX 2400/1 Tirana, Albania

Auditor

PricewaterhouseCoopers Audit sh.p.k Blvd. “Dëshmorët e Kombit” Twin Towers, Tower 1, 10th floor Tirana, Albania Telephone +355 42 242254/280423 Facsimile +355 42 241639 11. INDEPENDENT AUDITOR’S REPORT annual report 2011 - page 43

To the shareholders and Board of Directors of Tirana Bank sh.a

We have audited the accompanying financial statements of Tirana Bank sh.a which comprise the statement of financial position as of 31 December 2011 and the statements of comprehensive income, changes in equity and cash flows for the year then ended and a summary of significant accounting policies and other explanatory notes.

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

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

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

Opinion In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of Tirana Bank sh.a as of 31 December 2011 and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

PricewaterhouseCoopers Audit sh.p.k 26 June 2012 Tirana, Albania STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2011

Notes 2011 2010

Interest and similar income 5 6,268,489 6,324,543 Interest and similar expense 6 (2,782,375) (2,697,018) Net interest income 3,486,114 3,627,525

Provisions for impairment of loans and advances 15 (1,121,272) (406,560) Net interest income after provision for loan 2,364,842 3,220,965 impairment Fee and commission income 7 287,831 297,242 Fee and commission expense 7 (17,199) (13,060) Net fee and commission income 270,632 284,182

Foreign exchange translation gains less losses 8 62,081 476,495 Other gains/(losses) 8 (57,873) (311,029) Other operating income 9 25,196 8,178 Personnel expenses 10 (576,866) (590,031) Other operating expenses 11 (992,476) (970,897) Depreciation and amortization 19, 20 (387,560) (454,095)

Profit before income tax 707,976 1,663,768

Income tax expense 12 56,808 (167,824)

Profit for the year 764,784 1,495,944

Other comprehensive income: Available-for-sale investments: - Gains less losses arising during the year 43,301 (5,957) - Income tax recorded directly in other comprehensive income (4,330) 596 Other comprehensive income/(loss) for the year 38,971 (5,361) Total comprehensive income for the year 803,755 1,490,583

The accompanying notes on pages 44 to 129 form an integral part of these financial statements. The financial statements were approved by the Board of Directors on 14 May 2012 and signed on their behalf by:

Georgios Charalampakis Aleko Polo Managing Director Financial Control Department annual report 2011 - page 45 STATEMENT OF FINANCIAL POSITION As at 31 December 2011

AKTIVE Notes 2011 2010 ASSETS Cash and balances with the Central Bank 13 8,611,453 8,055,897 Loans and advances to banks 14 12,262,981 1,255,537 Loans and advances to customers 15 54,785,214 60,404,366 Financial assets designated at fair value through profit or loss 16 4,489,432 13,376,734 Financial assets available for sale 17 5,493,816 35,836 Financial assets held to maturity 18 5,600,728 5,180,359 Intangible assets 19 363,453 334,761 Property and equipment 20 1,303,404 1,547,353 Deferred tax assets 12 32,009 - Other assets 21 681,455 367,692

TOTAL ASSETS 93,623,945 90,558,535

LIABILITIES AND EQUITY Due to banks 22 6,777,366 7,426,735 Due to customers 23 69,902,068 69,586,443 Deferred tax liabilities 12 - 52,365 Corporate income tax payable - 8,565 Other liabilities 24 171,150 242,620 Provisions 25 8,950 43,956 TOTAL LIABILITIES 76,859,534 77,360,684

Equity Paid-in capital 26 10,954,079 7,219,972 Share premium 26 1,735,494 1,735,737 Other reserves 27 1,442,284 1,183,565 Retained earnings 2,632,554 3,058,577 TOTAL EQUITY 16,764,411 13,197,851

TOTAL LIABILITIES AND EQUITY 93,623,945 90,558,535

Georgios Charalampakis Aleko Polo Managing Director Financial Control Department STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2011

Paid-in Share Retained Other Total Capital Premium Earnings Reserves Equity

At 1 January 2010 6,938,124 1,735,737 2,017,207 1,016,200 11,707,268 Profit for the year - - 1,495,944 - 1,495,944 Other comprehensive income for the year - - - (5,361) (5,361) Total comprehensive income for the year - - 1,495,944 (5,361) 1,490,583 Capitalization of retained earnings into paid-in capital and 281,848 - (281,848) - - share premium (Note 25) Transfer from retained earnings to other reserves (172,726) 172,726 - At 31 December 2010 7,219,972 1,735,737 3,058,577 1,183,565 13,197,851

At 1 January 2011 7,219,972 1,735,737 3,058,577 1,183,565 13,197,851 Profit for the year - - 764,784 - 764,784 Other comprehensive loss for the year - - - 38,971 38,971

Total comprehensive income for the year - - 764,784 38,971 803,755 Capitalization of retained earnings into paid-in capital and 971,302 (243) (971,059) - - share premium (Note 25)

Capital increase 2,762,805 2,762,805

Transfer from retained earnings to other reserves - - (219,748) 219,748 - At 31 December 2010 10,954,079 1,735,494 2,632,554 1,442,284 16,764,411

Georgios Charalampakis Aleko Polo Managing Director Financial Control Department annual report 2011 - page 47 STATEMENT OF CASH FLOWS For the year ended 31 December 2011

Notes 2011 2010 Cash flow from OPERATING ACTIVITIES Profit before tax 707,976 1,663,768 Adjustments for: Depreciation and amortization 19, 20 387,560 454,095 Changes in loan impairment 15 1,121,272 493,494 Net changes in fair value of financial assets (26,410) (72,619) Net interest income 5, 6 (3,486,114) (3,627,525) Other non-cash items 9, 16 (22,104) 26,714 (1,317,820) (1,062,073) Increase in compulsory reserve with the Central Bank (6,817) (1,034,742) Decrease/(increase) in loans and advances to customers 4,715,716 (3,565,380) Increase in other assets (313,763) (112,001) Decrease in due to banks (679,739) (8,614,838) Increase in due to customers 330,663 12,859,164 (Decrease)/increase in other liabilities (71,470) 3,160 Interest received 6,124,596 6,367,594 Interest paid (2,720,456) (2,521,452) Income tax paid (39,803) (78,870) Net cash generated from operating activities 6,021,107 2,240,562 Cash flow from INVESTING ACTIVITIES Purchase of property & equipment 20 (69,018) (212,155) Purchase of intangible assets 19 (116,187) (150,597) Proceeds from sale of property & equipment - 6,083 Proceeds from maturing financial assets designated at fair value through profit and loss 16 13,376,734 15,134,238 Proceeds from sale of financial assets designated at fair value through profit or loss 16 - 456,718 Proceeds from matured financial assets held-to-maturity 18 3,693,200 1,770,000 Purchase of financial assets designated at fair value through profit and loss 16 (4,480,643) (13,914,477) Purchase of financial assets held-to-maturity 18 (4,190,595) (4,222,000) Purchase of financial assets available for sale (5,440,359) - Net cash from/(used in) investing activities 2,773,132 (1,132,190) Cash flow from FINANCING ACTIVITIES Increase of share capital 2,762,805 - Net cash (used in)/from financing activities 2,762,805 - Net increase/(decrease) increase in cash and cash equivalents 11,557,044 1,108,372 Cash and cash equivalents at 1 January 29 2,902,876 1,794,504 Cash and cash equivalents at 31 December 29 14,459,920 2,902,876

Georgios Charalampakis Aleko Polo Managing Director Financial Control Department 1. CORPORATE INFORMATION

Tirana Bank sh.a. is a banking institution operating in accordance with the provisions of Law 9901, dated 14 April 2008 “On Entrepreneurs and Commercial Companies”, and Law 9662, dated 18 December 2006 “On Banks in the Republic of Albania”, as well as other relevant laws. According to article 4 of its Statute, the object of the Bank is to execute, on its behalf or on behalf of third parties, any and every operation acknowledged or delegated by law to banks. Tirana Bank sh.a. is incorporated and domiciled in Albania and operates in Albania. Tirana Bank sh.a. is an 96.71% owned subsidiary of Piraeus Bank S.A.

The Bank has 56 branches (2010: 56) within the Republic of Albania and has no overseas operations.

The financial statements for the year ended 31 December 2011 were authorized for issue by the Board of Directors on 14 May 2012. Approval of the financial statements by the Shareholders will take place in the Annual General Meeting of the Shareholders.

Principal activity The Bank’s principal business activity is commercial and retail banking operations within the Republic of Albania. The Bank has operated under a full banking licence issued by the Central Bank of the Republic of Albania (“Bank of Albania” or “BoA”) since 1996.

2. SUMMARY OF SIGNIFICANT 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 years presented, unless otherwise stated.

2.1 BASIS OF PREPARATION

The financial statements have been prepared on a historical cost basis, except for available-for- sale financial investments and financial assets designated at fair value through profit or loss that have been measured at fair value. The financial statements are presented in Albanian Lek and all values are rounded to the nearest thousand (Lek ‘000) except when otherwise indicated.

The Bank’s financial statements have been prepared on a going concern basis, which assumes that the Bank will continue in operational existence for the foreseeable future. annual report 2011 - page 49

a. Impact of the economic crisis and situation in Greece Since late 2009, fears of a European sovereign debt crisis developed among investors as a result of the rising government debt levels, together with a wave of downgrading of government debt in some European states. Concerns intensified in early 2010 making it difficult for Greece to re- finance its government debt without external assistance.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.1 BASIS OF PREPARATION (continued)

On the Greek debt front, a new funding program was agreed with the European Commission, the ECB and the Euro-zone member-states, in the Euro-group meeting held on 21 February 2012. The new program aims to bring the country’s public debt to GDP ratio to 116.5% by 2020, below the 120.0% target envisioned in the European Council session held on 26 and 27 October 2011 via Private Sector’s Involvement (PSI) in the reduction of Greek debt.

Private Greek Government Bonds’ holders (GGB) (individuals and legal entities) participating in the programme received new GGBs with a face value equal to 31.5% of the nominal value of the exchanged bonds, and notes (annual and biannual) issued by the European Financial Stability Facility (EFSF), with a face value equal to 15% of the nominal value of the exchanged bonds.

The new funding program is expected to have a significant beneficial effect on the country’s solvency outlook. This is due, not only to the reduction of public debt, but also to the expected decline of interest expenditure from 2012 onwards. The funding program constitutes a credible opportunity for the Greek economy to remove uncertainty surrounding it since the middle of 2010, regarding both sustainability of fiscal position as well as preservation of the country’s Euro-zone participation.

In addition, the Euro-group confirmed that the necessary elements have been put in place for Member States to carry out the relevant national procedures to allow for the support by EFSF, including the necessary financing for recapitalisation of Greek banks following their participation in the recent sovereign debt restructuring (PSI). Greek banks’ participation in the PSI had a significant negative impact on their equity and capital adequacy.

In the context of the recapitalization process of the Greek banks, Bank of Greece (BoG) requested and received (at end January 2012) their detailed Strategic-Business Plans for the period 2012- 2015. The banks’ capital needs will be based on these plans, including the PSI impact and the results of BlackRock Solutions diagnostic exercise - commissioned by Bank of Greece - on the domestic loan portfolios of the Greek banking groups.

In February 2012, the Greek parliament adopted the necessary legal framework to enable the necessary financing for the recapitalization of Greek banks. The Greek banking sector recapitalization should be consummated by the end of September 2012, in order for the Greek banking groups to comply with a 9% Core Tier 1 ratio by September 2012 and 10% by June 2013. b. Position of the Group The group has incurred substantial impairment losses as a result of the Hellenic Republic’s debt restructuring (“PSI”). Such losses had a respective impact on the accounting and regulatory capital of the group as of 31 December 2011

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.1 BASIS OF PREPARATION (continued)

The Group’s after tax result from continuing operations recorded a loss of 6.6 billion euro in 2011, while total comprehensive income, in which the valuation of the AFS portfolio has affected total equity, amounted to a loss 6.3 billion euro. The Group’s total capital adequacy ratio turned negative, mainly due to the PSI impact.

The critical events which have occurred in 2012 to address the capital deficiency of the Group are: a) Bank of Greece’s (“BoG”) recommendation of 18 April 2012 to the Hellenic Financial Stability Fund (“HFSF”) for the Group’s accession to the provisions of the Memorandum of Economic and Financial Policies for the recapitalisation of Greek financial institutions, and b) HFSF’s commitment of 20 April 2012, following the relevant application submitted by the Group, that it will participate in the share capital increase planned to take place in 2012 according to the provisions of the aforementioned Memorandum.

For 2012, the fiscal situation in Greece remains the main risk factor for the Greek banking sector and Piraeus Bank. Any possible negative outcome in this field strongly affects the Bank’s liquidity and the asset quality.

It shall be noted that, the HFSF has already provided in this framework a commitment letter up to the amount of 5.0 billion euro for its participation in the impending share capital increase of Piraeus Bank. The Greek banking sector recapitalization should be consummated by the end of September 2012, in order for the Greek banking groups to comply with a 9% Core Tier 1 ratio by annual report 2011 - page 51

September 2012 and 10% by June 2013. The bank’s management has a reasonable expectation that the recapitalisation of the Bank will be successfully completed within the timetable provisionally agreed between the Bank, the BoG and the HFSF. c. Position of the Bank In the current environment the focus of the bank has been on liquidity and capital adequacy. As disclosed in notes 22 and 23, the bank’s main source of funding is locally collected deposits from corporate and retail customers.

In 2011 due to banks decreased by around 9% while due to customers increased by 0.4%. In December 2011, the Bank’s Assembly of Shareholders increased the bank’s equity by an additional 20 million euro through cash injection. The bank’s capital adequacy ratio (as prescribed by BoA) as at 31 December 2011 amounts to 17.6% and is higher than the specifically-set regulatory minimum of 15%. Additionally, the bank’s liquidity ratio as of 31 December 2011 was 30.58 % (2010; 29.71%), which is in compliance with the article 71 of the Bank of Albania regulation on liquidity, dated 14 October 2009. Following the global situation at the year-end and as of 14 May 2012, the date of approval of these financial statements, the bank’s exposure to the persons related to the

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.1 BASIS OF PREPARATION (continued) bank is in compliance with the regulatory requirements and did not exceed the amount prescribed by the Law.

Consequently, the going concern assumption has been applied in the preparation of the financial statements.

Management prepared these financial statements on a going concern basis, which assumes that the bank will continue to operate in the foreseeable future. In order to assess the reasonability of this assumption, management reviews the forecasts of the future cash inflows and the support provided by shareholders.

Based on the current financial plans, the actual situation of the bank and the support of the parent bank, the management is satisfied that the bank will be able to continue to operate as a going concern in the foreseeable future and, therefore, this principle is applied in the preparation of these financial statements. Statement of compliance The financial statements of Tirana Bank sh.a have been prepared in accordance with International Financial Reporting Standards (IFRS’s) and interpretations issued by the International Accounting Standards Board (IASB).

The accounting policies adopted are consistent with those of the previous financial year. a. New and amended standards adopted by the Bank There are no new standards and amendments to standards relevant to the bank for application for the financial year, beginning 1 January 2011. b. New and amended standards and improvements to IFRS mandatory for the first time for the financial year beginning on or after 1 January 2011, but not currently relevant to the Bank IAS 24 (revised), “Related party disclosures” (effective 1 January 2011) - This revised standard removes the requirement for government related entities to disclose details of transactions with the government and other government-related entities and it clarifies and simplifies the definition of a related party. The amendment is not applicable to the bank as it does not have such related party transactions.

Amendments IAS 32, “Financial instruments: Presentation”, on “Classification of rights issues” (effective 1 February 2010) - The amendment addresses the accounting for rights issues (rights, options or warrants) that are denominated in a currency other than the functional currency of the issuer. Before the amendment, such rights issues were accounted for as derivative liabilities. The amendment states that, if such rights are issued pro rata to an entity’s existing shareholders for a fixed amount of any currency, they should be classified as equity, regardless of the currency in which the exercise price is denominated. annual report 2011 - page 53

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.1 BASIS OF PREPARATION (continued)

The amendment is not applicable to the bank as it does not have right issues, options or warrants.

Amendment to IFRS 1 “First time adoption”, on financial instrument disclosures (effective 1 July 2010) - This amendment provides first-time adopters with the same transition provisions as included in the amendment to IFRS 7, “Financial instruments: Disclosures”, regarding comparative information for the new three-level classification disclosures. This amendment is not applicable to the bank as it is not a first time adopter.

Annual improvements to IFRS’s 2010 (effective 1 January 2011) - This set of amendments includes changes to six standards and one IFRIC: • IFRS 1, “First time adoption” • IFRS 3, “Business combinations” • IFRS 7, “Financial instruments; Disclosure” • IAS 1, “Presentation of financial statements” • IAS 27, “Separate financial statements” • IAS 34, “Interim financial reporting” • IFRIC 13, “Customer loyalty programs” None of the improvements is applicable to the financial statements of the Bank.

IFRIC 19, “Extinguishing financial liabilities with equity investments” (effective 1 July 2010) - This interpretation clarifies the accounting when an entity renegotiates the terms of its debt with the result that the liability is extinguished through the debtor issuing its own equity instruments to the creditor. A gain or loss is recognized in the profit and loss account based on the fair value of the equity instruments compared to the carrying amount of the debt. The interpretation is not relevant to the Bank’s financial statements as it does not have such transactions.

Amendment to IFRIC 14, “Prepayments of a minimum funding requirement” (effective 1 January 2011) - This amendment will have a limited impact, as it applies only to entities that are required to make minimum funding contributions to a defined benefit pension plan. It removes an unintended consequence of IFRIC 14, “IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction”, relating to voluntary pension pre-payments when there is a minimum funding requirement. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.1 BASIS OF PREPARATION (continued)

The interpretation is not relevant to the bank’s financial statements because it does not make contributions to pension plans. c. New and amended standards and improvements to IFRS that have been issued, but are not yet effective Amendments to IFRS 7, “Financial instruments: Disclosures” on de-recognition (effective for annual periods beginning on or after 1 July 2011). These amendments arise from the IASB’s review of off-balance sheet activities.

The amendments will promote transparency in the reporting of transfer transactions and improve users’ understanding of the risk exposures relating to transfers of financial assets and the effect of those risks on an entity’s financial position, particularly those involving securitization of financial assets. It is not expected to have any impact on the Bank’s financial statements.

Amendment to IAS 12, “Income taxes” on deferred tax (effective for annual periods beginning on or after 1 January 2012) - IAS 12, “Income taxes”, currently requires an entity to measure the deferred tax relating to an asset depending on whether the entity expects to recover the carrying amount of the asset through use or sale. It can be difficult and subjective to assess whether recovery will be through use or through sale when the asset is measured using the fair value model in IAS 40, “Investment property”. This amendment therefore introduces an exception to the existing principle for the measurement of deferred tax assets or liabilities arising on investment property measured at fair value. As a result of the amendments, SIC 21, “Income taxes − recovery of revalued non depreciable assets”, will no longer apply to investment properties carried at fair value. The amendments also incorporate into IAS 12 the remaining guidance previously contained in SIC 21, which is withdrawn. It is not expected to have any impact on the bank’s financial statements.

Amendment to IAS 1, “Financial statement presentation” regarding other comprehensive income (effective for annual periods beginning on or after 1 July 2012); The main change resulting from these amendments is a requirement for entities to group items presented in Other comprehensive income (OCI) on the basis of whether they are potentially re-classifiable to profit or loss subsequently (reclassification adjustments). The amendments do not address which items are presented in OCI. The bank is evaluating the impact of these amendments to its financial statements. annual report 2011 - page 55

IFRS 9, “Financial instruments – classification and measurement” (effective for annual periods beginning on or after 1 January 2015); This is the first part of a new standard on classification and measurement of financial assets and financial liabilities that will replace IAS 39, “Financial instruments: Recognition and measurement”. IFRS 9 has two measurement categories: amortized cost and fair value. All equity instruments are measured at fair value. A debt instrument is measured at amortized cost 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.1 BASIS OF PREPARATION (continued) only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest. For liabilities, the standard retains most of the IAS 39 requirements. These include amortized cost accounting for most financial liabilities, with bifurcation of embedded derivatives. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. This change will mainly affect financial institutions. It is not expected to have any impact on the bank’s financial statements.

IFRS 13, “Fair value measurement” (effective for annual periods beginning on or after 1 January 2013); This standard aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements of this standard provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs. It is not expected to have any impact on the bank’s financial statements.

Disclosures - Offsetting Financial Assets and Financial Liabilities - Amendments to IFRS 7 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2013). The amendment requires disclosures that will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off. The bank is considering the implications of the amendment, the impact on the bank and the timing of its adoption by the bank. annual report 2011 - page 57

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.1 BASIS OF PREPARATION (continued)

Other new standards and amendments to existing standards which are not expected to be relevant to the Bank’s operations: • Amendment to IFRS 1; “First time adoption”, on fixed dates and hyperinflation (effective for annual periods beginning on or after 1 July 2011). • Amendment to IAS 19; “Employee benefits” (effective for annual periods beginning on or after 1 July 2012). • IFRS 10; “Consolidated financial statements” (effective for annual periods beginning on or after 1 January 2013). • IFRS 11; “Joint arrangements” (effective for annual periods beginning on or after 1 January 2013). • IFRS 12; “Disclosures of interests in other entities” (effective for annual periods beginning on or after 1 January 2013). • IAS 27 (revised 2011); “Separate financial statements” (effective for annual periods beginning on or after 1 January 2013).IAS 28 (revised 2011); “Associates and joint ventures” (effective for annual periods beginning on or after 1 January 2013). • IFRIC 20; “Stripping costs in the production phase of a surface mine” (effective for annual periods beginning on or after 1 January 2013).

2.1 FOREIGN CURRENCY TRANSLATION

The financial statements are presented in Albanian Lek, which is the bank’s functional and presentation currency.

Transactions and balances Transactions in foreign currencies are initially recorded in the functional currency at the rate of exchange ruling at the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the reporting date. All differences are taken to “Foreign exchange translation (losses)/gains” in profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.2 FOREIGN CURRENCY TRANSLATION (continued)

The applicable rates of exchange (Lek to foreign currency unit) for the principal currencies as at 31 December 2011 and 2010 were as follows:

2011 2010

USD 107,54 104,00

EUR 138,93 138,77

2.3 FINANCIAL INSTRUMENTS – INITIAL RECOGNITION AND SUBSEQUENT MEASUREMENT a. Date of recognition Purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the marketplace are recognized on the trade date, i.e. the date that the Bank commits to purchase or sell the asset. b. Initial recognition of financial instruments The classification of financial instruments at initial recognition depends on the purpose for which the financial instruments were acquired and their characteristics.All financial instruments are measured initially at their fair value plus, in case of financial assets and liabilities not at fair value through profit and loss, transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets.

The bank classifies its financial assets in the following categories: held-to-maturity financial investments, loans and receivables and financial assets designated at fair value through profit or loss. The Bank did not classify any financial assets as available-for-sale during reporting period. c. Financial assets held to maturity Financial assets held to maturity are those investments which carry fixed or determinable payments and have fixed maturities and which the bank has the intention and ability to hold to maturity. If the bank were to sell other than an insignificant amount of held to maturity investments, the entire category would be reclassified to available for sale. annual report 2011 - page 59

Financial assets held to maturity are subsequently measured at amortized cost using the effective interest rate method, less allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. The amortization is included in “Interest and similar income” in profit or loss. The losses arising from impairment of such investments are recognized in profit or loss as “Impairment losses on financial investments”, if any.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.3 FINANCIAL INSTRUMENTS – INITIAL RECOGNITION AND SUBSEQUENT MEASUREMENT (continued) d. Loans and receivables Loans and receivables include “Due from banks” and “Loans and advances to customers”, which are financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. They are not entered into with the intention of immediate or short- term resale and are not classified as “Financial assets held for trading”, designated as “Financial investment available-for-sale” or “Financial assets designated at fair value through profit or loss”. After initial measurement, amounts due from banks and loans and advances to customers are subsequently measured at amortized cost using the effective interest rate method, less allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the effective interest rate. The amortization is included in “Interest and similar income” in profit or loss. The losses arising from impairment are recognized in profit or loss in “Impairment losses on loans and advances”. e. Financial assets designated at fair value through profit or loss This category includes treasury bills issued by the Albanian Government.

Financial assets designated at fair value through profit or loss, are financial assets which are managed and their performance is evaluated on a fair value basis, in accordance with the bank’s risk management strategy. Financial assets designated at fair value through profit or loss, are carried at fair value. Interest earned on financial assets designated at fair value through profit or loss calculated using the effective interest method is presented in the statement of comprehensive income as interest income. All other elements of the changes in the fair value and gains or losses on derecognizing are recorded in profit or loss as other gains the period in which they arise. f. Available for sale financial assets This classification includes investment securities which the bank intends to hold for an indefinite period of time and which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices.

Investment securities available for sale are carried at fair value. Interest income on available-for- sale debt securities is calculated using the effective interest method and recognized in profit or loss for the year. Dividends on available-for-sale equity instruments are recognized in profit or loss for the year when the bank’s right to receive payment is established and it is probable that the dividends will be collected. All other elements of changes in the fair value are recognized in other comprehensive income until the investment is derecognized or impaired, at which time the cumulative gain or loss is reclassified from other comprehensive income to profit or loss for the year.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.3 FINANCIAL INSTRUMENTS – INITIAL RECOGNITION AND SUBSEQUENT MEASUREMENT (continued)

Impairment losses are recognized in profit or loss for the year when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of investment securities available for sale. A significant or prolonged decline in the fair value of an equity security below its cost is an indicator that it is impaired. The cumulative impairment loss (measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognized in profit or loss), is reclassified from other comprehensive income to profit or loss for the year. Impairment losses on equity instruments are not reversed and any subsequent gains are recognized in other comprehensive income. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through profit or loss for the year. g. Financial liabilities After initial measurement, debt issued and other borrowings are subsequently measured at amortized cost using the effective interest rate method. There is no financial liability measured at fair value through profit and loss. Any differences between proceeds net of transactions costs and the redemption value is recognized in “Interest and similar expenses” in profit or loss. Amortized cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the effective interest rate. annual report 2011 - page 61

h. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. i. De-recognition Financial assets are derecognized when the contractual rights to receive the cash flows from these assets have ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are also transferred (that is, if substantially all the risks and rewards have not been transferred, the bank tests control to ensure that continuing involvement on the basis of any retained powers of control does not prevent derecognizing). Financial liabilities are derecognized when they have been redeemed or otherwise extinguished.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.4 REPURCHASE AND REVERSE REPURCHASE AGREEMENTS

Securities sold under agreements to repurchase at a specified future date (“REPO”) are not derecognized from the balance sheet. The corresponding cash received, including accrued interest, is recognized in the statement of financial position as a “Due to Banks”, reflecting its economic substance as a loan to the bank. The difference between the sale and repurchase prices is treated as interest expense and is accrued over the life of the agreement using the effective interest rate method. Conversely, securities purchased under agreements to resell at a specified future date (“Reverse REPO”) are recorded as due from other banks or loans and advances to customers, as appropriate. The corresponding cash paid, including accrued interest, is recognised in the statement of financial position as “Due from Banks”. The difference between the purchase and resale prices is treated as interest income and is accrued over the life of the agreement using the effective interest rate method.

2.5 DETERMINATION OF FAIR VALUE

For financial instruments that are traded in active markets, the determination of fair values of financial assets and financial liabilities is based on quoted market prices or dealer price quotations. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. If the above criteria are not met, the market is regarded as being inactive. Indicators that a market is inactive are when there is a wide bid-offer spread or significant increase in the bid-offer spread or there are few recent transactions. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist and other relevant valuation models.

2.6 IMPAIRMENT OF FINANCIAL ASSETS

The bank assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred “loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments. The probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.6 IMPAIRMENT OF FINANCIAL ASSETS (continued) a. Due from banks and loans and advances to customers For amounts due from banks and loans and advances to customers carried at amortized cost, the bank first assesses whether objective evidence of impairment exists for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be recognised are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets’ carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account annual report 2011 - page 63

and the amount of the loss is recognized in profit or loss. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realized or has been transferred to the bank. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the “Provisions for impairment of loans and advances”.

The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the bank’s internal credit grading system that considers credit risk characteristics such as asset type, industry, collateral type, past-due status and other relevant factors. Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the years on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with changes in related observable data from year to year (such as changes in unemployment rates, property prices, payment status, or other factors that are indicative of incurred losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.6 IMPAIRMENT OF FINANCIAL ASSETS (continued) b. Financial assets held to maturity For held-to-maturity investments the bank assesses individually whether there is objective evidence of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets’s carrying amount and the present value of estimated future cash flows. The carrying amount of the asset is reduced and the amount of the loss is recognized in profit or loss.

If in a subsequent year the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, any amounts formerly charged are credited to the “Impairment losses on financial investments”. c. Assets classified as available for sale The bank assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of debt investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss (measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss) is removed from other comprehensive income and recognized in profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through profit or loss. d. Renegotiated loans Where possible, the bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original effective interest rate.

2.7 LEASING

The determination of whether an arrangement is, or contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. annual report 2011 - page 65

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.7 LEASING (continued)

(i) Bank as a lessee Finance leases, which transfer to the bank substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at commencement of the lease term at the fair value of the leased property or, if lower, at the present value of the minimum lease payments and included in “Property and equipment” with the corresponding liability to the lessor included in “Other liabilities”. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income in “Interest and similar expense”. The Bank did not have significant financial lease agreements during the reporting period. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the bank will obtain ownership by the end of the lease term. Any operating lease rentals payable are accounted for on a straight-line basis over the lease term and included in “Other operating expenses”. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognized as an expense in the period in which termination takes place.

(ii) Bank as a lessor Where the bank is a lessor in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the Bank to the lessee, the total lease payments are recognized in profit or loss for the year (rental income; note 2.9) on a straight-line basis over the period of the lease.

2.8 REVENUE RECOGNITION

Revenue is recognized to the extent that it is probable that the economic benefits will flow to the bank and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized.

Interest and similar income and expense Interest and similar income includes coupons earned on fixed income investments, accrued discount and premium on treasury bills and interest income on loans and advances. For all financial instruments measured at amortized cost and interest, bearing financial instruments classified as available-for-sale financial investments, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.8 REVENUE RECOGNITION (continued) a. Interest and similar income and expense (continued) The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense. Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognized using the original effective interest rate applied to the new carrying amount. b. Fee and commission income The bank earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories:

Fee income earned from services that are provided over a certain period of time Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees. Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognized as an adjustment to the effective interest rate on the loan.

Fee income from providing transaction services Fees arising from negotiating or participating in the negotiation of a transaction for a third party, (such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses) are recognized on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognized after fulfilling the corresponding criteria. c. Rental income Rental income (note 2.8) is accounted for on a straight-line basis over the lease terms on ongoing leases and is recorded in profit or loss in “Other operating income”. The bank did not have significant investment property as at year end and during the reporting period. annual report 2011 - page 67

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.9 CASH AND CASH EQUIVALENTS

Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. For the purpose of the Cash Flow Statement, cash and cash equivalents consist of cash on hand, current accounts with Central Bank and amounts due from other banks on demand and with an original maturity of three months or less. The statutory reserve with the Central Bank is not available for the bank’s day-to-day operations and is not included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Cash and cash equivalents are carried at amortised cost. Further details of what cash and cash equivalents comprises can be found in note 29.

2.10 PROPERTY AND EQUIPMENT

Property and equipment is stated at cost excluding the costs of day-to-day servicing, less accumulated depreciation and accumulated impairment in value.

Depreciation is calculated using the straight-line method to write down the cost of property and equipment to their residual values over their estimated useful lives. Land is not depreciated. The estimated useful lives are as follows:

• Own Buildings: up to 20 years • Furniture and other equipment: 5 years • Vehicles: 5 years • Computer hardware: 4 years • Leasehold improvements: the shorter of useful life and lease term

The assets’ residual value and useful lives are reviewed, and adjusted if appropriate, at each reporting date.

An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognized in “Other operating income” or “Other operating expenses” in profit or loss in the year the asset is derecognized. 2.11 INTANGIBLE ASSETS

Intangible assets acquired by the Bank are stated at cost less accumulated amortization and impairment losses, if any. Intangible assets are entirely comprised of acquired computer software which are capitalized on the basis of the costs incurred to acquire and bring to use the specific software and are amortized using the straight-line method over a useful life of four years. Amortization is charged to profit or loss from the moment the assets are available for use. Costs associated with maintaining computer software programs are recognized as an expense as incurred. Expenditure which enhances or extends the performance of computer software programs beyond their original specifications or software upgrade expenses are recognized as capital improvement and they are added to the original cost of the software, as long as they can be measured reliably.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.12 IMPAIRMENT OF NON-FINANCIAL ASSETS

The bank assesses at each reporting date or more frequently if events or changes in circumstances indicate that the carrying value may be impaired, whether there is an indication that a non-financial asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the bank makes an estimate of the asset’s recoverable amount. Where the carrying amount of an asset (or cash generating unit) exceeds its recoverable amount, the asset (or cash generating unit) is considered impaired and is written down to its recoverable amount. For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount.

2.13 FINANCIAL GUARANTEE CONTRACTS

Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities. Financial guarantees are initially recognized in the financial statements at fair value on the date the guarantee was given. Subsequent to initial recognition, the bank’s liabilities under such guarantees are measured at the higher of the initial measurement, annual report 2011 - page 69

less amortization calculated to recognize in profit or loss the fee income earned on a straight line basis over the life of the guarantee and the best estimate of the expenditure required to settle any financial obligation arising at the reporting date. These estimates are determined based on experience of similar transactions and history of past losses, supplemented by the judgment of management. Any increase in the liability relating to guarantees is taken to profit or loss under other operating expenses. Financial guarantees and commitments to provide a loan are initially recognized at their fair value, which is normally evidenced by the amount of fees received. This amount is amortized on a straight line basis over the life of the commitment.

2.14 PENSIONS AND OTHER POST EMPLOYMENT BENEFITS

The bank contributes to its employees post retirement plans as prescribed by the domestic social security legislation. Bank’s pension obligations, relate only to defined contribution plans. Defined contribution plans, based on salaries, are made to the state administered institution (i.e. Social Security Institute) responsible for the payment of pensions. Once the contributions have been paid, the bank has no further payment obligations. The contributions constitute net periodic costs for the year in which they are due and as such they are included in “Personnel expenses” in the statement of comprehensive income.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.15 PROVISIONS

Provisions are recognized when the bank has a present obligation (legal or constructive) as a result of a past event, and it is it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.

2.16 INCOME TAX

Income taxes have been provided for in the financial statements in accordance with Albanian legislation enacted or substantively enacted by the reporting date. The income tax charge comprises current tax and deferred tax and is recognized in the statement of comprehensive income except if it is recognized in other comprehensive income because it relates to transactions that are also recognized, in the same or a different period, in other comprehensive income.

Current tax Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date.

Deferred tax Deferred tax is provided on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. Deferred tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized except where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.16 INCOME TAX (continued)

Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same annual report 2011 - page 71

taxable entity and the same taxation authority.

Dividends on ordinary shares are recognized as a liability and deducted from equity when they are approved by the bank’s shareholders. Interim dividends are deducted from equity when they are declared and no longer at the discretion of the bank. Dividends for the year that are approved after the reporting date are disclosed as an event after the reporting date.

2.17 COMPARATIVES

The comparative information is presented consistently applying the Bank’s accounting policies.

3. FINANCIAL RISK MANAGEMENT

The bank’s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the financial business, and the operational risks are an inevitable consequence of being in business. The bank’s aim is therefore to achieve an appropriate balance between risk and return and minimise potential adverse effects on the bank’s financial performance. The bank’s risk management policies are designed to identify and analyse these risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up-to-date information systems. The bank regularly reviews its risk management policies and systems, to reflect changes in markets, products and emerging best practice. Risk management is carried out by a risk department in the bank under policies approved by the Board of Directors. The board provides written principles for overall risk management, as well as written policies covering specific areas, such as, credit risk, foreign exchange risk, interest rate risk and liquidity risk. In addition, internal audit is responsible for the independent review of risk management and the control environment. The most important types of risk are credit risk, liquidity risk, market risk and other operational risk. Market risk includes currency risk, interest rate and other price risk.

3. FINANCIAL RISK MANAGEMENT(continued)

3.1 CREDIT RISK

The bank takes on exposure to credit risk, which is the risk that counterparty will cause a financial loss for the bank by failing to fulfill obligations to the bank. Credit risk is the most important risk for the bank’s business; management therefore carefully manages its exposure to credit risk. Credit exposures arise principally in lending activities that lead to loans and advances, and investment activities that bring debt securities and other bills into the bank’s asset portfolio. There is also credit risk in off-balance sheet financial instruments. The credit risk management and control are centralized in credit risk management team of risk department at both local and group (Piraeus Bank SA) level and reported to the Board of Directors.

The main targets of the bank’s credit risk management are to: 1. Set centralized policies and monitor the Bank’s portfolio 2. Managing risk pro-actively to identify and analyze risk at an early stage 3. Create risk management function independent of commercial lines of the business 4. Integrate the risk management function into the organizational business process 5. Report on risk across the organization

The “Credit Risk Management Committee” is responsible for:

• Developing Credit Risk management systems and infrastructure: analyzing results and reporting to the management • Preparing the bank for Basel II implementations • Relationship with Bank of Albania (Central Bank), Piraeus Bank and/or other authorities in the terms of effectiveness of Credit Risk Management

The audit committee and internal auditing department, follow up the compliance with policies and procedures.

3. FINANCIAL RISK MANAGEMENT (continued)

3.1 CREDIT RISK (continued)

3.1.1 CREDIT RISK MEASUREMENT

The procedures described below relate to credit risk measurements for operational purpose as well as for reporting under Bank of Albania regulation. Impairment losses on loans and advances for financial reporting are determined based on the procedures described in note 3.1.3. a. Loans and advances In measuring credit risk of loan and advances to customers and to banks at a counterparty level, annual report 2011 - page 73

the bank reflects three components (i) the “probability of default” by the client or counterparty on its contractual obligations; (ii) current exposures to the counterparty and its likely future development, from which the bank derives the “exposure at default” and (iii) the likely recovery ratio on the defaulted obligations (the “loss given default”).

(i) The bank assesses the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty. They have been developed internally and combine statistical analysis with credit officer judgment and are validated, where appropriate, by comparison with externally available data. Clients of the bank are segmented into five rating classes. The bank’s rating scale, which is shown below, reflects the range of default probabilities defined for each rating class. This means that in principle, exposures migrate between classes as the assessment of their probability of default changes. The rating tools are kept under review and upgraded as necessary. The bank regularly validates the performance of the rating and their predictive power with regard to default events.

Bank’s internal ratings scale

Bank’s rating Description

A Investment grade

B Standard

C Special monitoring

D Substandard

E Doubtful and Loss

Criterion for classification of financial assets into groups A, B, C, D and E are as follows:

3. FINANCIAL RISK MANAGEMENT (continued)

3.1 CREDIT RISK (continued)

3.1.1 CREDIT RISK MEASUREMENT (continued)

Financial Assets are classified into group A if they are toward debtors that have been evaluated in investment grade ratings by external raters, e.g. Moody’s, S&P, Fitch, regardless of the internal MRA rating. The bank has no such customers as at 31 December 2011 and 2010. Financial Assets are classified into group B if they are towards:

• Bank of Albania and Albanian Government • Debtors which are not likely to default and who repay their obligations within the maturity, or with a delay of 30 days and • Exposures secured by pledging collateral graded as first class collateral

Financial Assets are classified into group C if they are towards debtors:

• Whose cash flows are assessed as adequate to duly fulfil its due obligations, regardless its present financial position is assessed as weak, without signs of further deterioration in the future and • Who settle their liabilities with delay of up to 30 days, occasionally with delay between 31 and 90 days

Financial Assets are classified into group D if they are towards debtors:

• For which it is assessed, that cash flows will not be sufficient for regular repayment of matured liabilities • That settle their liabilities with delay of up to 90 days, occasionally with delay between 91 to 180 days • That are clearly undercapitalized • That do not have sufficient long term capital resources for financing long term investments and • From whom bank does not receive currently satisfactory information or adequate documentation concerning repayment of liabilities

Financial Assets are classified into group E if they are towards debtors:

• For which exists a strong likelihood of loss of part of financial asset • That settle their liabilities with delay of more than 90 to 180 days, occasionally with delay between 181 to 360 days • Which are insolvent

3. FINANCIAL RISK MANAGEMENT (continued)

3.1 CREDIT RISK (continued)

3.1.1 CREDIT RISK (continued)

• For which a motion for commencement of process of liquidation or declaration of bankruptcy annual report 2011 - page 75

began and was filed at the provisional court • That are in the process of reform or in the process of liquidation • That declared bankruptcy • From whom no repayment is expected and • With questionable legal grounds

(ii) Exposure at default is based on the amounts the bank expects to be owed at the time of default. For example, for a loan this is the face value. For a commitment, the bank includes any amount already drawn plus the further amount that may have been drawn by the time of default, should it occur.

(iii) Loss given default or loss severity represents the bank’s expectation of the extent of loss on a claim should default occur. It is expressed as percentage loss per unit of exposure and typically varies by type of counterparty, type and seniority of claim and availability of collateral or other credit mitigation. b. Debt securities and other bills For debt securities and other bills, the risk department for managing of the credit risk exposures uses ratings depending on the issuer, which is Albanian Government. The investments in those securities and bills are viewed as a way to gain a better credit quality mapping and maintain a readily available source to meet the funding requirement at the same time.

Investment is allowed only in liquid securities that have high credit rating. Given their high credit ratings management of the Bank does not expect any counterpart to fail to meet its obligations. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet.

3.1.2 RISK LIMIT CONTROL AND MITIGATION POLICIES

The bank manages, limits and controls concentrations of credit risk wherever they are identified, in particular, to individual counterparties and groups, and to industries and countries. The bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or group of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by product and industry sector are approved by the Board of Directors. 3. FINANCIAL RISK MANAGEMENT (continued)

3.1 CREDIT RISK (continued)

3.1.2 RISK LIMIT CONTROL AND MITIGATION POLICIES (continued)

Exposure to credit risk is also managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate.

Some other specific control and mitigation measures are outlined below. a. Collateral The bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advances, which is common practice.

The bank implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are:

• Cash, bank’s and first class companies’ guarantees • Mortgages over residential properties • Charges over business assets such as premises, inventory and accounts receivable and • Charges over financial instruments such as debt securities and equities

Loans to corporate entities and individuals are generally secured; over drafts and credit cards issued to individuals are secured mostly by cash deposits and collateral in cases of credit customers at the full amount of principal, interest and other charges. In addition, in order to minimize the credit loss the Bank will seek additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. Debt securities, treasury and other eligible bills are generally unsecured. b. Credit-related contingencies The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as loans and are secured with same collateral as loans. Documentary and commercial letters of credit (which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the bank up to a stipulated amount under specific terms and conditions), are collateralized by the underlying shipments of goods to which they relate and therefore carry less risk than a direct loan. annual report 2011 - page 77

Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the bank is potentially exposed to loss in an amount equal to the total unused commitments.

3. FINANCIAL RISK MANAGEMENT (continued)

3.1 CREDIT RISK (continued)

3.1.2 RISK LIMIT CONTROL AND MITIGATION POLICIES (continued)

However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments.

3.1.3 IMPAIRMENT AND PROVISIONING POLICIES

The internal rating systems described in note 3.1.1 focus more on credit-quality mapping from the inception of the lending and investment activities. In contrast, impairment provisions are recognized for financial reporting purposes only for losses that have been incurred at the reporting date based on objective evidence of impairment (see note 2.1(f)). The impairment provision shown in the balance sheet at year-end is derived from each of the five internal rating grades. However, the majority of the impairment provision comes from bottom two grades. The table below shows the percentage of the bank’s on-balance sheet items relating to loans and advances and the associated impairment provision for each of the bank’s internal rating categories:

Bank’s rating 2011 2010 Loans and Impairment Loans and Impairment advances (%) provision level (%) advances (%) provision level (%) Investment Grade Standard 55.43 3.68 81.86 1.30 Special monitoring 32.70 7.12 10.39 9.22 Sub-standard 4.37 7.28 2.87 30.30 Doubtful and Loss 7.50 9.17 4.88 23.16 Total 100.00 5.41 100.00 4.02 The internal rating tool assists management to determine whether objective evidence of impairment exists under IAS 39, based on the following criteria set out by the bank:

• Delinquency in contractual payments of principal or interest • Cash flow difficulties experienced by the borrower (e.g. equity ratio, net income percentage of sales) • Breach of loan covenants or conditions • Initiation of bankruptcy proceedings

3. FINANCIAL RISK MANAGEMENT (continued)

3.1 CREDIT RISK (continued)

3.1.3 IMPAIRMENT AND PROVISIONING POLICIES (continued)

• Deterioration of the borrower’s competitive position and • Deterioration in the value of collateral

The bank’s policy requires the review of individual financial assets that are individually significant at least annually or more regularly when individual circumstances require. Impairment allowances on individually assessed accounts are determined by an evaluation of the incurred loss at balance- sheet date on a case-by-case basis, and are applied to all individually significant accounts. The assessment encompasses collateral held (including re-confirmation of its enforceability) and the anticipated receipts for that individual account.

Collectively assessed impairment allowances are provided for: (i) portfolios of homogenous assets that are not individually significant; and (ii) losses that have been incurred but have not yet been identified, by using the available historical experience and experienced judgment. annual report 2011 - page 79

3.1.4 MAXIMUM EXPOSURE TO CREDIT RISK BEFORE COLLATERAL HELD OR OTHER CREDIT ENHANCEMENTS

Maximum exposure

2011 2010 Credit risk exposures relating to on-balance sheet assets are as follows: Cash and balances with Central Bank 7,414,588 6,784,134 Loans and advances to banks 12,262,981 1,255,537 Loans and advances to customers: Loans to individuals − Consumer/Overdrafts 2,790,072 2,978,225 − Credit cards 181,876 172,588 − Mortgages 9,265,482 10,339,251 12,237,430 13,490,064 Loans to corporate entities: − Large corporate customers 1,349,632 840,843 − Small and medium size enterprises (SMEs) 41,198,152 46,073,459 42,547,784 46,914,302 Total loans and advances to customers 54,785,214 60,404,366

Financial assets designated at fair value through profit or loss 4,489,432 13,376,734 Financial assets available for sale 5,493,816 35,836 Financial assets held to maturity 5,600,728 5,180,359 Other financial assets 123,674 122,816

Credit risk exposures relating to off-balance sheet items are as follows: Letters of guarantees 1,038,110 1,819,549 Letters of credit 40,737 21,508 Loans commitment 2,020,960 2,756,832 At 31 December 93,270,238 91,757,671 3. FINANCIAL RISK MANAGEMENT (continued)

3.1 CREDIT RISK CONTINUED (continued)

3.1.4 MAXIMUM EXPOSURE TO CREDIT RISK BEFORE COLLATERAL HELD OR OTHER CREDIT ENHANCEMENTS (continued)

The above table represents a worst case scenario of credit risk exposure to the bank at 31 December 2011 and 2010, without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures set out above are based on net carrying amounts as reported in the balance sheet.

As shown above, 59% of the total maximum exposure is derived from loans and advances customers (2010: 66%); 17% represents investments in debt securities (2010: 20%), 8% represents cash and balances with Central Bank (2010: 7%) and 13% represents loans and advances to banks (2010: 1%).

Management is confident in its ability to continue to control and sustain minimal exposure of credit risk to the bank resulting from both its loan and advances portfolio and debt securities based on the following:

• 87% of the loans and advances portfolio is categorized in the top two grades of the internal rating system (2010: 92%) • Loans to SMEs, which represents the biggest group in the portfolio, are backed by collateral • 53% of the loans and advances portfolio are considered to be neither past due nor impaired (2010:75%) • The Bank has introduced a more stringent selection process upon granting loans and advances and • All investments in debt securities and other bills are in securities issued by the Albanian Government annual report 2011 - page 81

3.1.5 LOANS AND ADVANCES

31 December 2011 31 December 2010

Loans and Loans and Loans and Loans and advances to advances to advances to advances to customers banks customers banks

Neither past due nor impaired 30,941,125 12,262,981 47,375,039 1,255,537 Past due but not impaired 8,732,908 - 4,312,412 - Individually impaired 18,777,025 - 11,261,487 - Gross 58,451,058 12,262,981 62,948,938 1,255,537 Less: allowance for impairment (3,665,844) - (2,544,572) -

Net 54,785,214 12,262,981 60,404,366 1,255,537

Further information of the impairment allowance for loans and advances to banks and to customers is provided in notes 14 and 15.

3. FINANCIAL RISK MANAGEMENT (continued)

3.1 CREDIT RISK (continued)

3.1.5 LOANS AND ADVANCES (continued)

During the year ended 31 December 2011, the bank’s gross loans and advances to customers increased by 6%. When entering into new markets or new industries, in order to minimize the potential increase of credit risk exposure, the bank focused more on the business with large corporate enterprises or banks with good credit rating or retail customers providing sufficient collateral. Loans and advances neither past due nor impaired

The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the internal rating system adopted by the bank.

31 December 2011

Loans and Loans and advances to customers advances to banks Total loans and Individual (retail customers) Corporate entities advances to customers Large Consumer/ Credit Mortgages corporate SMEs Overdrafts cards customers Grades: Investment grade ------Standard 2,267,892 102,337 6,883,688 1,379,412 20,307,796 30,941,125 12,262,981 Special monitoring ------Sub-standard ------Doubtful ------Total 2,267,892 102,337 6,883,688 1,379,412 20,307,796 30,941,125 12,262,981

31 December 2010

Loans and Loans and advances to customers advances to banks Total loans and Individual (retail customers) Corporate entities advances to customers Large Consumer/ Credit Mortgages corporate SMEs Overdrafts cards customers Grades: Investment grade ------Standard 2,423,471 102,704 8,583,665 876,265 35,388,934 47,375,039 1,255,537 Special monitoring ------Sub-standard ------Doubtful ------Total 2,423,471 102,704 8,583,665 876,265 35,388,934 47,375,039 1,255,537

Loans and advances in the “Sub-standard” and “Doubtful” grades were considered not to be impaired after taking into consideration the recoverability from collateral for retail customers’ mortgage and consumer loans. annual report 2011 - page 83

3. FINANCIAL RISK MANAGEMENT (continued)

3.1 CREDIT RISK (continued)

3.1.5 LOANS AND ADVANCES (continued) a. Loans and advances past due but not impaired Gross amount of loans and advances that are past due but not impaired:

(i) Loans and advances to customers

31 December 2011 Individual (retail customers)

Consumer/ Mortgages Total Overdrafts VISA Card Past due 1 up to 90 days 216,633 1,209,347 33,612 1,459,592 Past due 91-180 days 191,020 784,043 8,757 983,820 Past due 181-360 days - 217,314 217,314 Past due > 360 days - 646,571 646,571 Total 407,653 2,857,275 42,369 3,307,297 Fair value of collateral 301,877 2,551,378 - 2,853,255

31 December 2011 Corporate entities

Large SMEs corporate Total

Past due 1 up to 90 days 2,461,874 - 2,461,874 Past due 91-180 days 2,185,703 - 2,185,703 Past due 181-360 days 626,304 - 626,304 Past due > 360 days 151,730 - 151,730 Total 5,425,611 - 5,425,611 Fair value of collateral 4,695,234 - 4,695,234 Total loans and advances past due but not impaired at 31 December 2011

31 December 2010 Individual (retail customers)

Overdrafts Mortgages VISA Card Total Past due 1 up to 90 days 276,090 1,244,801 1,545,496 24,605 Past due 91-180 days 65,516 229,705 9,959 305,180 Past due 181-360 days - 165,751 165,751 Past due > 360 days - 550,878 550,878 Total 341,606 2,191,135 34,564 2,567,305 Fair value of collateral 251,657 2,328,097 2,579,754

31 December 2009 Corporate entities Large SMEs Total corporate Past due 1 up to 90 days 1,307,621 - 1,307,621 Past due 91-180 days 104,825 - 104,825 Past due 181-360 days 232,937 - 232,937 Past due > 360 days 100,264 - 100,264 Total 1,745,107 - 1,745,107 Fair value of collateral 1,843,303 - 1,843,303

Total loans and advances past due but not impaired at 31 December 2010 4,312,412

3. FINANCIAL RISK MANAGEMENT (continued)

3.1 CREDIT RISK (continued)

3.1.5 LOANS AND ADVANCES (continued)

(ii) Loans and advances to banks

There are no loans and advances to banks as at 31 December 2011, which are past due but not impaired (2010: Nil). b. Loans and advances individually impaired

(i) Loans and advances to customers The breakdown of the gross amount of individually impaired loans and advances by class, along with the fair value of related collateral held by the bank as security, are as follows: annual report 2011 - page 85

Corporate entities

Consumer and VISA Cards Large corporate SMEs Total 31 December 2011 Individually impaired loans 410,967 18,366,058 - 18,777,025 Fair value of collateral - 18,366,058 - 18,366,058

31 December 2010 Individually impaired loans 381,197 10,880,290 - 11,261,487 Fair value of collateral - 17,735,201 - 17,735,201

The disclosed fair value of collateral is determined by local certified evaluators and represents value realizable by the legal owners of the assets. Management considers the loans covered by collateral on corporate loans as impaired because experience shows that a significant proportion of the collateral on corporate loans cannot be enforced due to administrative and legal difficulties such as decrease of collateral value at auctions administered by bailiff office, time necessary for collaterals to be enforced. The impairment provisions reflect the probability that management will not be able to enforce its rights and repossess collateral on defaulted loans. Despite difficulties in enforcing repossession of collateral, the bank’s management will vigorously pursue the outstanding debts with all possible means at their disposal.

(ii) Financial effect of collateral on provision

The financial effect of collateral is presented by disclosing impact of collateral and other credit enhancements on impairment provisions recognized at the end of the reporting period. Without holding collateral and other credit enhancements, the impairment provisions would have the effect presented by the following amounts: 3. FINANCIAL RISK MANAGEMENT (continued)

3.1 CREDIT RISK (continued)

3.1.5 LOANS AND ADVANCES (continued)

In 2011

Categories Actual allowance Collateral effect Variance *Significant loans individually impaired 2,111,806 3,035,961 (924,154)

*Significant loans not impaired individually 708,190 708,190 -

Business loans less than 50,000 euro 111,424 111,424 -

Consumer loans 241,680 241,680 -

Housing 323,653 323,653 -

Real Estate 151,528 151,528 -

VISA cards 17,542 17,542 -

Total 3,665,823 4,589,977 (924,154)

In 2010

Categories Actual allowance Collateral effect Variance *Significant loans individually impaired 941,462 3,489,543 (2,548,081)

*Significant loans not impaired individually 974,688 974,688 -

Business loans less than 50,000 euro 57,452 57,452 -

Consumer loans 124,856 124,856 -

Housing - - -

Real Estate 433,453 433,453 -

VISA cards 12,662 12,662 -

Total 2,544,573 5,092,654 (2,548,081)

(iii) Loans and advances to banks

There are no individually impaired loans and advances to banks as at 31 December 2011 and 2010. annual report 2011 - page 87

3. FINANCIAL RISK MANAGEMENT (continued)

3.1 CREDIT RISK (continued)

3.1.6 LOANS AND ADVANCES RENEGOTIATED

Restructuring activities include extended payment arrangements, modification and deferral of payments. Following restructuring, a previously overdue customer account is reset to a normal status and managed together with other similar accounts. Restructuring policies and practices are based on indicators or criteria which, in the judgment of bank management, indicate that payment will most likely continue. These policies are kept under continuous review. During year 2011 there were 263 loans renegotiated for a total of 4,484,464 thousand lek (during 2010 there were 157 loans renegotiated for a total of 2,508,921 thousand lek) as detailed in the following table.

2011 2010 Number of Outstanding balance Outstanding balance Number of loans loans

Consumer 153,886 76 90,060 45 Mortgage 610,838 126 181,637 44 SME 887,400 47 1,234,479 59 Corporate 2,832,340 14 1,002,745 9

Total 4,484,464 263 2,508,921 157

3.1.7 REPOSSESED COLLATERAL

Collateral obtained due to legal process include land, building and business premises which are not used by the bank for its core operations. Collateral obtained due to legal process are to be sold as soon as practicable with the proceeds used to reduce the outstanding indebtedness. During 2011, the bank obtained assets by taking possession of collateral for the amount of 216,571 lek (2010: 52,259 thousand lek).

3.1.8 CASH AND BALANCES WITH CENTRAL BANK

As at 31 December 2011 and 2010 the amounts due from Central Bank and corresponding banks were neither past due nor impaired. 3.1.9 DEBT SECURITIES, TREASURY BILLS AND OTHER ELIGIBLE BILLS

Held to maturity and fair value through profit and loss are made up of T-bills and bonds. The issuer of such investment securities is the Albanian Government. Standard & Poor’s Ratings Services assigned its “BB/B” foreign currency and “BB+/B” local currency sovereign credit ratings to Albania. As at 31 December 2011 and 2010 these investments were neither past due nor impaired.

3. FINANCIAL RISK MANAGEMENT (continued)

3.1.10 CONCENTRATION OF RISKS OF FINANCIAL ASSETS WITH CREDIT RISK EXPOSURE a. Geographical sectors Loans and advances to banks are held with banks in OECD countries. All other financial assets are held in Albania except for the VISA share holdings, which are held with VISA Corporation. b. Industry sectors The analysis of the bank’s main credit exposure on loans and advances to customers by industry is presented in note 15.

3.2 MARKET RISK

Market risk is the risk that changes in market prices, such as interest rate, equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor’s/issuer’s credit standing) will affect the bank’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.

The Market Risk issues are followed up in regular basis by “Asset & Liabilities Management Committee” (ALCO).

3.2.1 FOREIGN EXCHANGE RISK

The bank is exposed to currency risk through transactions in foreign currencies. The bank ensures that the net exposure is kept to an acceptable level by buying or selling foreign currency at spot when necessary to address short-term imbalances.

The management sets limits on the level of exposure by currencies, which are monitored daily. annual report 2011 - page 89

3. FINANCIAL RISK MANAGEMENT (continued)

3.2 MARKET RISK (continued)

3.2.1 FOREIGN EXCHANGE RISK (continued)

Concentrations of currency risk “on” and “off” balance sheet financial instruments:

At 31 December 2011 EUR USD Other currencies LEK Total

Assets Cash and balances with the Central Bank 4,159,581 815,017 89,077 3,547,778 8,611,453 Due from banks 9,621,957 2,204,645 436,379 - 12,262,981 Loans and advances to customers 39,449,081 1,535,319 31,995 13,768,819 54,785,214 Financial assets designated at fair value through profit or loss - - - 4,489,432 4,489,432 Investment securities available for sale - 53,457 - 5,440,359 5,493,816 Financial assets held to maturity 2,800,864 - - 2,799,864 5,600,728 Other financial assets 57,384 2,042 - 64,248 123,674

Total financial assets 56,088,867 4,610,480 557,451 30,110,500 91,367,298

Liabilities Due to banks 4,305,306 1,066 27,200 2,443,794 6,777,366 Due to customers 33,032,320 4,412,971 529,507 31,927,270 69,902,068 Other financial liabilities 89,487 12,567 146 50,945 153,145

Total financial liabilities 37,427,113 4,426,604 556,853 34,422,009 76,832,579

Net on-balance sheet currency position 18,661,754 183,876 598 14,534,719 (4,311,509) Off-balance sheet items 2,245,085 50,287 - 804,436 3,099,808 Sensitivity if exchange rates increase by 5% 933,088 9,194 - - 414,327 Sensitivity if exchange rates decrease by 5% (933,088) (9,194) - - (414,327)

The bank manages its foreign currency exposure taking into consideration that its share capital and share premium is denominated in Euro.

The sensitivity presented in the table above calculates the increase/decrease of pre-tax profit if at the reporting date, Lek exchange rate had increased/decreased by 10% against the respective foreign currencies with all other variables held constant. 3. FINANCIAL RISK MANAGEMENT (continued)

3.2 MARKET RISK (continued)

3.2.1 FOREIGN EXCHANGE RISK (continued)

At 31 December 2011 EUR USD Other currencies LEK Total

Assets Cash and balances with the Central Bank 3,899,827 654,428 51,330 3,450,312 8,055,897 Due from banks 735,515 520,022 - - 1,255,537 Loans and advances to customers 42,763,873 2,032,615 30,879 15,576,999 60,404,366 Financial assets designated at fair value through profit - - - 13,376,734 13,376,734 or loss Investment securities available for sale 35,836 35,836 Financial assets held to maturity - 2,794,933 - 2,385,426 5,180,359 Other financial assets 49,531 1,399 - 71,886 122,816

TOTAL FINANCIAL ASSETS 47,448,746 6,039,233 82,209 34,861,357 88,431,545

LIABILITIES AND EQUITY Due to banks 5,774,814 371,139 31,243 1,249,539 7,426,735 Due to customers 33,319,853 5,191,252 513,519 30,561,819 69,586,443 Other financial liabilities 26,550 27,923 62 167,383 221,918

Total financial liabilities 39,121,217 5,590,314 544,824 31,978,741 77,235,096

Net on balance sheet currency position 8,327,529 448,919 (462,615) 2,882,616 11,196,449 Off balance sheet items 3,134,104 44,493 - 1,419,292 4,597,889 Sensitivity if exchange rates increase by 5% 415,012 22,446 (23,131) - 414,327 Sensitivity if exchange rates decrease by 5% (415,012) (22,446) 23,131 - (414,327)

3.2.2 INTEREST RATE RISK

The bank’s operations are subject to the risk of interest rate fluctuations to the extent that interest- earning assets (including investments) and interest-bearing liabilities mature or re-price at different times or in differing amounts. In the case of floating rate assets and liabilities, the bank is also exposed to basis risk, which is the difference in re-pricing characteristics of the various floating rate indices, such as the savings rate, LIBOR and different types of interest. Risk management activities are aimed at optimising net interest income, given market interest rate levels consistent with the bank’s business strategies. annual report 2011 - page 91

Asset-liability risk management activities are conducted in the context of the bank’s sensitivity to interest rate changes. In decreasing interest rate environments, margins earned will narrow as liabilities interest rates will decrease with a lower percentage compared to assets interest rates. However the actual effect will depend on various factors, including stability of the economy, environment and level of the inflation.

3. FINANCIAL RISK MANAGEMENT (continued)

3.2 MARKET RISK (continued)

3.2.2 INTEREST RATE RISK (continued)

The bank attempts to mitigate this interest rate risk by monitoring the reprising dates of its assets and liabilities. In addition, the bank has contractual rights to revise the interest rates on the major part of its loan portfolio on a quarterly basis. The following table presents the interest rate reprising dates for the bank’s assets and liabilities. Variable-rate assets and liabilities have been reported according to their next rate change date. Fixed-rate assets and liabilities have been reported according to their scheduled principal repayment dates:

At 31 December 2011 Less than From 1 to 3 From 3 to 12 Over 1 year Non-interest Total one month months months bearing Assets Cash and balances with the Central Bank 7,414,588 - - - 1,196,865 8,611,453

Due from banks 12,228,075 - - - 12,262,981 34,906 Loans and advances to customers 18,644,377 24,603,476 10,877,935 659,426 - 54,785,214 Financial assets designated at fair 1,135,402 3,156,947 197,083 - - 4,489,432 value through profit or loss Investment securities Available for sale 5,030,731 463,085 5,493,816 Financial assets held to maturity - 189,964 707,640 4,703,124 - 5,600,728 Other financial assets - - - - 123,674 123,674

Total financial assets 39,422,442 27,950,387 16,848,295 5,825,635 1,320,539 91,367,298

Liabilities Due to banks 3,126,211 840,492 - 2,810,663 - 6,777,366 Due to customers 22,914,640 11,328,892 34,131,551 1,517,346 9,639 69,902,068 Other financial liabilities - - - - 153,145 153,145 Total financial liabilities 26,040,851 12,169,384 34,131,551 4,328,009 162,784 76,832,579 Interest sensitivity gap 13,381,591 15,781,003 (17,283,256) 1,497,626 1,157,755 14,534,719 3. FINANCIAL RISK MANAGEMENT (continued)

3.2 MARKET RISK (continued)

3.2.2 INTEREST RATE RISK (continued)

The following table includes figures of comparative period:

Less than Non- From 1 to From 3 to Over one interest Total At 31 December 2010 3 months 12 months 1 year month bearing Assets Cash and balances with the Central Bank 6,784,134 - - - 1,271,763 8,055,897 Due from banks 1,255,537 - - - - 1,255,537 Loans and advances to customers 19,503,452 32,543,367 8,223,339 134,208 - 60,404,366 Financial assets designated at fair value 898,522 3,274,454 9,203,758 - - 13,376,734 through profit or loss Investment securities available for sale 35,836 - 35,836 Financial assets held to maturity - 1,166,005 707,961 3,306,393 - 5,180,359 Other financial assets - - - - 122,816 122,816

Total financial assets 28,441,645 36,983,826 18,135,058 3,476,437 1,394,579 88,431,545

Liabilities Due to banks 4,665,448 - 2,761,287 - - 7,426,735 Due to customers 24,794,302 12,090,528 31,486,435 1,204,070 11,108 69,586,443 Other financial liabilities - - - - 221,918 221,918

Total financial liabilities 29,459,750 12,090,528 34,247,722 1,204,070 233,026 77,235,096

Interest sensitivity gap (1,018,105) 24,893,298 (16,112,666) 2,272,367 1,161,553 11,196,449

Due to specifics of Albanian market, a large amount of customer deposits has a maturity of less than one month. However, the potential negative effect of adverse evolution in interest rates is significantly reduced due to low interest rates set by the bank on customer demand deposits.

The interest rate sensitivity analysis has been determined based on the exposure to interest rate risk at the reporting date. At 31 December 2011, if interest rates had been 100 basis points higher/ lower with all other variables were held constant, the bank’s pre-tax profit for the twelve month annual report 2011 - page 93

period ended 31 December 2011 would respectively decrease/increase by approximately 133,770 thousand lek (2010: 10,034 thousand lek). Interest rate sensitivity analysis by currency is presented below.

Other EUR USD LEK Total currencies At 31 December 2011

Total interest bearing financial assets 52,328,947 4,090,003 515,049 33,112,760 90,046,759 Total interest bearing financial liabilities 37,335,246 4,411,836 556,707 34,366,006 76,669,795 Interest sensitivity gap 14,993,701 (321,833) (41,658) (1,253,246) 13,376,964 Sensitivity if interest rates increase by 100 bp 149,937 (3,218) (417) (12,532) 133,770 Sensitivity if interest rates decrease by 100 bp (149,937) 3,218 417 12,532 (133,770)

3. FINANCIAL RISK MANAGEMENT (continued)

3.2 MARKET RISK (continued)

3.2.2 INTEREST RATE RISK (continued)

Other EUR USD LEK Total currencies

At 31 December 2010

Total interest bearing financial assets 46,866,814 5,880,210 62,793 34,227,149 87,036,966 Total interest bearing financial liabilities 39,094,667 5,562,391 544,762 31,800,250 77,002,070 Interest sensitivity gap 7,772,147 317,819 (481,969) 2,426,899 10,034,896 Sensitivity if interest rates increase by 100 bp 7,772 318 (482) 2,427 10,034 Sensitivity if interest rates decrease by 100 bp (7,772) (318) 482 (2,427) (10,034)

3.3 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 fulfil commitments to lend. A liquidity risk management policy has been applied in all bank units since the end of 2003. This policy is adjusted to internationally applied practices and regulatory environments and adapted to the specific activities of Piraeus Bank. The policy specifies the principal liquidity risk assessment definitions and methods, defines the roles and responsibilities of the units and staff involved and sets out the guidelines for liquidity crisis management. The policy is focused on the liquidity needs expected to emerge, in a week’s or month’s time, on the basis of hypothetical liquidity crisis scenarios.

Furthermore, the policy defines a contingency funding plan to be used in the case of a liquidity crisis. Such a crisis can take place either due to a Tirana Bank specific event or a general market event. Triggers and warning signals serve as indicators of when the contingency plan should be put into operation. This contingency plan is mainly based on additional financing to be received from the Parent upon request.

In addition, Tirana Bank calculates and monitors the liquidity ratios, “Liquid Assets/Total Liabilities” and “Net Current Assets/Total Liabilities”, as they are defined in the Bank of Albania Directive, which refers to the control framework of banks’ liquidity adequacy, by the Bank of Albania (note 2.1.c).

The levels of these particular ratios are daily communicated to the responsible business units, and comments, as well as respective assessments, are included in the reporting package to the members of ALCO.

3. FINANCIAL RISK MANAGEMENT (continued)

3.3 LIQUIDITY RISK (continued)

The ALCO has the responsibility: to design the bank’s strategy on the assets and liabilities development, depending on the qualitative and quantitative data of the organization and development of the business environment; to ensure high competitiveness and effectiveness of the organization, maintaining assumed risk within the set limits; to manage the assets and liabilities by applying a pricing policy on products and services at the same time.

3.3.1 LIQUIDITY RISK MANAGEMENT PROCESS

Tirana Bank acknowledges that, in order to be able to meet liabilities promptly and without losses, it is essential to effectively manage liquidity risk. Liquidity risk is the risk that a financial institution will not be able to meet its obligations as they become due, because of a lack of the required liquidity. In general, liquidity management is a matter of balancing cash flows within forward rolling time bands, so that under normal conditions, the bank is comfortably placed to meet all its payment obligations as they fall due. annual report 2011 - page 95

Liquidity gap analysis provides an overview of the expected cash flows, which arise from all balance sheet items. The cash flows are assigned and aggregated to time-bands according to when they occur. The table below analyzes assets and liabilities into relevant time periods based on the remaining period at reporting date to the contractual maturity date. Assets and liabilities in foreign currency are converted into Lek using FX rates as at the year end.

The assumptions made are that scheduled payments to the bank are honoured in full and on time and in addition, all contractual payments are discharged in full – e.g. that depositors will withdraw their money rather than roll it over on maturity. Those assets and liabilities lacking actual maturities (e.g. open accounts, sight deposits, or savings accounts) are assigned to the time band less than one month.

3. FINANCIAL RISK MANAGEMENT (continued)

3.3 LIQUIDITY RISK (continued)

3.3.1 LIQUIDITY RISK MANAGEMENT PROCESS (continued)

At 31 December 2011 Less than From 1 to 3 From 3 to From 1 to 5 Over 5 Total one month months 12 months years Years Assets liquidity Cash and balances with the Central 8,611,453 - - - - 8,611,453 Bank Due from banks 12,228,075 - 34,906 - - 12,262,981 Loans and advances to customers 9,736,930 2,449,521 11,088,359 11,785,127 19,725,277 54,785,214 Financial assets designated at fair 1,135,402 3,156,947 197,083 - - 4,489,432 value through profit or loss Investment Securities available for Sale - - 5,030,731 463,085 - 5,493,816 Financial assets held to maturity - 189,964 707,640 4,703,124 - 5,600,728 Other financial assets 123,674 - - - - 123,674 Total financial assets 31,835,534 5,796,432 17,058,719 16,951,336 19,725,277 91,367,298 Liabilities liquidity Due to banks 3,966,703 - - 2,810,663 - 6,777,366 Due to customers 22,924,279 11,328,892 34,131,551 1,517,346 - 69,902,068 Other financial liabilities 153,145 - - - - 153,145 Total financial liabilities 27,044,127 11,328,892 34,131,551 4,328,009 - 76,832,579 Net liquidity gap 4,791,407 (5,532,460) (17,072,832) 12,623,327 19,725,277 14,534,719 All banks’ customer current accounts are included in liabilities maturing less than one month. Current accounts do represent balances that have a history and a deviation in amounts which is measured by the bank and is far less than the shown negative gap on tenors less than one month. Any issue arising from liquidity mismatch is managed through inter-bank activity (borrowing, lending) within the pre-approved credit lines.

The bank does not have a letter of support from Piraeus Bank SA. However, it has a credit line which includes an amount of 150 million euro that can be withdrawn by the bank in the money market (with a maturity of 3 months if used). It has also negotiated a credit limit of 10 million euro that can be used for commercial lending with a maturity of up to 12 months, which can increase to 3 years if 6 million euro out of the total 10 million euro is used for mortgage lending.

The liquidity gap of up to 3 month is high but it is improved when taking in consideration the fact that amounts due to banks is related to the loan from the parent. annual report 2011 - page 97

3. FINANCIAL RISK MANAGEMENT (continued)

3.3 LIQUIDITY RISK (continued)

3.3.1 LIQUIDITY RISK MANAGEMENT PROCESS (continued)

The following table includes figures of comparative period:

Less than From 1 to 3 From 3 to From 1 to 5 Over 5 Total A t 3 1 D e c e m b e r 2 0 1 0 one month months 12 months years years Assets liquidity Cash and balances with the Central 8,055,897 - - - - 8,055,897 Bank Due from banks 1,255,537 - - - - 1,255,537 Loans and advances to customers 8,419,511 3,049,385 13,172,924 14,750,404 21,012,142 60,404,366 Financial assets designated at fair 898,522 3,274,454 9,203,758 13,376,734 value through profit or loss Investment Securities available for Sale 35,836 35,836 Financial assets held to maturity - - - 5,180,359 - 5,180,359 Other financial assets 122,816 - - - - 122,816

Total financial assets 18,752,283 6,323,839 22,376,682 19,966,599 21,012,142 88,431,545

Liabilities liquidity Due to banks 4,318,309 347,139 2,761,287 - - 7,426,735 Due to customers 24,805,410 12,090,528 31,486,435 1,204,070 - 69,586,443 Other financial liabilities 221,918 - - - - 221,918

Total financial liabilities 29,345,637 12,437,667 34,247,722 1,204,070 - 77,235,096

Net liquidity gap (10,593,354) (6,113,828) (11,871,040) 18,762,529 21,012,142 11,196,449

The table below presents the cash flows payable by the bank under non-derivative financial liabilities by remaining contractual maturities at the reporting date. The amounts disclosed in the table are the contractual undiscounted cash flows, whereas the bank manages the inherent liquidity risk based on expected discounted cash inflows. Less than one From 1 to 3 From 3 to From 1 to Over 5 At 31 December 2011 Total month months 12 months 5 years Years Due to banks 3,969,866 - - 3,190,708 - 7,160,574 Due to customers 22,928,180 11,369,312 34,797,872 1,576,250 - 70,671,614 Other financial liabilities 153,145 - - - - 153,145

Total financial liabilities 27,051,191 11,369,312 34,797,872 4,766,958 - 77,985,333

Less than one From 1 to 3 From 3 to 12 From 1 to 5 Over 5 At 31 December 2010 Total month months months years Years Due to banks 4,320,408 349,254 2,821,353 - - 7,491,015 Due to customers 24,866,767 12,212,091 32,358,299 1,313,990 - 70,751,147 Other financial liabilities 221,918 - - - - 221,918

Total financial liabilities 29,409,093 12,561,345 35,179,652 1,313,990 - 78,464,080 annual report 2011 - page 99

3. FINANCIAL RISK MANAGEMENT (continued)

3.3 LIQUIDITY RISK (continued)

3.3.2 OFF-BALANCE SHEET ITEMS

Less than From 1 to 3 From 3 to From 1 to 5 Over 5 At 31 December 2011 one month months 12 months years Years Total

Loan commitments 299,442 222,425 1,206,486 191,611 100,997 2,020,961 Letters of Guarantees 232,681 68,302 737,127 - - 1,038,110 Letters of Credit 7,559 33,178 - - - 40,737 539,682 323,905 1,943,613 191,611 100,997 3,099,808 Operating lease commitments 17,233 51,700 137,866 813,584 253,473 1,273,866 Total 556,915 375,605 2,081,479 1,005,195 354,470 4,373,664

At 31 December 2010 Loan commitments 113,559 198,255 2,445,016 - - 2,756,831 Letters of Guarantees 74,951 133,926 1,610,673 - - 1,819,549 Letters of Credit - 21,508 - - - 21,508 188,510 353,689 4,055,689 - - 4,597,888 Operating lease commitments 17,312 51,935 136,745 856,921 361,793 1,424,706 Total 205,822 405,624 4,192,434 856,921 361,793 6,022,594

Letters of credit and guarantees given to customers commit the bank to make payments on behalf of customers contingent upon the failure of the customer to perform under the terms of the contract.

Commitments to extend credit represent contractual commitments to make loans and revolving credits. Commitments generally have fixed expiration dates, or other termination clauses.

The Tirana Bank branch network includes 45 (2010: 45) rented buildings which are rented under operating leases. The Bank’s policy is to enter into long term contracts, which vary from 10 years to 20 years. The contracts are renewed following a negotiation between both parties in order to agree new terms of the contract. 3. FINANCIAL RISK MANAGEMENT (continued)

3.4 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

Financial instruments not measured at fair value The table below summarizes the carrying amounts and fair values of those financial assets and liabilities not presented on the Bank’s statement of financial position at their fair value.

Carrying value Fair value 2011 2010 2011 2010 Financial assets Loans and advances to banks 12,262,981 1,255,537 12,262,981 1,255,537 Loans and advances to customers 54,785,214 60,404,366 47,949,484 54,742,994 Business 42,547,806 49,169,816 41,412,526 44,901,747 Consumer 2,971,926 3,302,296 2,445,976 2,611,794 Mortgage 9,265,482 7,932,254 6,914,445 7,229,453

Held to maturity Financial Investment 5,600,728 5,180,359 5,242,843 5,242,843 Financial liabilities Due to customers 55,445,680 54,613,558 59,933,860 59,534,631 Due to banks 6,777,366 7,453,923 6,777,366 7,453,923 a. Loans and advances to banks Loans and advances to other banks include inter-bank placements. The fair value of fixed rate placements and overnight deposits is their carrying amount. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and remaining maturity. With respect to deposits in Credit Institutions, these are short-term deposits, for which the carrying interest rate does not significantly differ from the market interest rate as at 31 December. b. Loans and advances to customers Loans and advances are net of allowances for impairment. The Bank’s loan portfolio has an estimated fair value which is smaller than its book value due to the higher market interest rates prevailing at the end of 2010 as a result of the global financial crisis. The majority of the loan portfolio is subject to re-pricing within a year.

The fair value of loans and advances to customers is their expected cash flow discounted at current annual report 2011 - page 101

market rates. Current market rates are interest rates we would charge at the moment (year end). c. Financial assets held to maturity The fair value of held to maturity investments is determined by using quoted prices for similar instruments as the discounting rate of future cash flows at the reporting date. Such investments are short term, and again the carrying interest rate does not significantly differ from the market interest rate as at 31 December 2010.

3. FINANCIAL RISK MANAGEMENT (continued)

3.4 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES (continued) d. Due to other banks and customers, other deposits and other borrowings.

The estimated fair value of deposits with no stated maturity, which includes non-interest-bearing deposits, is the amount repayable on demand.

The estimated fair value of fixed interest-bearing deposits and other borrowings not quoted in an active market is based on discounted cash flows using interest rates for new debts with similar remaining maturity. The carrying value differs from the fair value because the carrying interest rates are higher than the market interest rate as at 31 December 2011, because at year end the banks are granting higher interest rates in the competition to attract deposits.

Due to banks mainly refers to loans taken from the parent with a maturity of one month from the date of the balances sheet and therefore their fair value is consider to be approximate to the carrying value.

Financial instruments measured at fair value Fair value hierarchy The following two hierarchies have been used by the Bank in determining the fair values of its financial assets designated at fair value through profit or loss and available for sale as at 31 December 2011 and 2010:

• Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities are used to determine the fair value of financial assets. This level includes equity securities on exchange markets.

• Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

The table below summarizes the carrying amounts and fair values of those financial assets that are measured at fair value as at 31 December 2011 and 2010.

2011 2010

Level 1 Level 2 Level 1 Level 2

Financial assets Financial assets designated at fair value through - 4,489,432 - 13,376,734 profit or loss Financial assets available for sale 5,493,816 - 35,836 -

3. FINANCIAL RISK MANAGEMENT (continued)

3.5 CAPITAL MANAGEMENT

The Bank’s objectives when managing capital, which is a broader concept than the “equity” on the face of balance sheets, are:

• To comply with the capital requirements set by the Bank of Albania; • To safeguard the bank’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and • To maintain a strong capital base to support the development of its business.

Capital adequacy and the use of regulatory capital are monitored daily by the bank’s management, employing techniques based on the guidelines developed by the Basel Committee and the European Community Directives, as implemented by Bank of Albania, for supervisory purposes. The required information is filed with Bank of Albania on a quarterly basis.

Bank of Albania requires generally each bank or banking group to: (a) hold the minimum level of the regulatory capital of 1 billion lek and (b) maintain a ratio of total regulatory capital to the risk-weighted asset (the “Basel ratio”) at or above the Bank of Albania required minimum of 12% (2010: 12%). Bank of Albania has requested specifically that Tirana Bank maintains a minimum capital adequacy ratio of 15%, amidst the uncertainties of the financial crisis in Greece and its potential effect in Albania. annual report 2011 - page 103

The Bank’s regulatory capital as managed by its risk department is divided into two tiers: • Tier 1 capital: share capital (net of any book values of the treasury shares), retained earnings and reserves created by appropriations of retained earnings ; and • Tier 2 capital: qualifying subordinated loan capital, collective impairment allowances and unrealised gains arising on the fair valuation of equity and debt instruments held as available for sale.

The risk-weighted assets are measured by means of a hierarchy of four risk weights classified according to the nature of − and reflecting an estimate of credit, market and other risks associated with − each asset and counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for off-balance sheet exposure, with some adjustments to reflect the more contingent nature of the potential losses.

The table below summarizes the composition of regulatory capital and the ratios of the bank for the years ended 31 December 2011 and 2010. During those two years, the bank complied with all of the externally imposed capital requirements to which they are subject.

Deductions represent investments in group’s financial institutions in excess of 10% of regulatory capital and intangible assets. The intangible assets are also deductible amount from Tier I and Tier II capital. 3. FINANCIAL RISK MANAGEMENT (continued)

3.5 CAPITAL MANAGEMENT (continued)

2011 2010 Tier 1 capital Share capital 12,984,103 9,250,205 Statutory reserve 1,374,250 1,154,502 Revaluation differences for statutory reporting 584,619 575,867

Total qualifying Tier 1 capital 14,942,972 10,980,574

Tier 2 capital Subordinated liability - - Revaluation reserve - -

Total qualifying Tier 2 capital - -

Deductions from regulatory capital (2,331,672) (114,359)

Total regulatory capital 12,611,300 10,866,215

Risk-weighted assets: On-balance sheet 70,666,608 77,354,808 Off-balance sheet 515,409 1,907,147

Total risk-weighted assets 71,182,017 79,261,955

CAR ratio 17,72% 13,71%

The capital adequacy ratio is calculated based on the statutory financial information, shown above. annual report 2011 - page 105

4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. a. Impairment losses on loans and advances The Bank reviews its loan portfolios to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in profit or loss, the Bank makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a Bank, or national or local economic conditions that correlate with defaults on assets in the Bank. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows.

4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (continued)

The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. To the extent that the net present value of estimated cash flows differs by +/-5%, the provision would be estimated 372,644 thousand lek higher or 313,387 thousand lek lower (2009: 224,927 thousand lek higher or 218,818 thousand lek). b. Recent volatility in global financial markets The recent economic crisis has resulted in, among other things, a severe effects on the Albanian economy, a lower level of capital market funding, lower liquidity levels across the banking sector, and, at times, higher interbank lending rates and very high volatility in stock markets. Indeed the full extent of the impact of the ongoing financial crisis is proving to be impossible to anticipate or completely guard against.

Borrowers of the bank may be affected by the lower liquidity situation which could in turn impact their ability to repay the amounts owed. Deteriorating operating conditions for borrowers may also have an impact on management’s cash flow forecasts and assessment of the impairment of financial and non- financial assets. To the extent that information is available, management has properly reflected revised estimates of expected future cash flows in their impairment assessments.

The amount of provision for impaired loans is based on management’s appraisals of these assets at the reporting date after taking into consideration the cash flows that may result from foreclosure less costs for obtaining and selling the collateral.

The market in Albania for many types of collateral, especially real estate, has been affected by the recent volatility in global financial markets resulting in there being a low level of liquidity for certain types of assets. As a result, the actual realizable value on foreclosure may differ from the value ascribed in estimating allowances for impairment.

A detailed analysis of the financial crisis, particularly in Greece and its effect on the Piraeus Group and Tirana Bank itself is disclosed in note 2.1 (a).

5. INTEREST AND SIMILAR INCOME

2011 2010

Due from banks including Central Bank 189,676 124,651

Financial assets designated at fair value through profit or loss 909,778 1,231,765

Held to maturity - financial investments 469,309 231,391

Interest on loans and advances to customers 4,538,374 4,568,149

Interests on overdrafts 161,352 168,587

6,268,489 6,324,543

Loan commissions recognized in profit or loss are calculated using effective interest rate method. Interest income accrued on impaired financial assets during 2011 is 63,033 thousand lek (2010: 58,819 thousand lek). annual report 2011 - page 107

6. INTEREST AND SIMILAR EXPENSE

2011 2010

Due to banks 249,403 241,829

Due to customers 2,532,972 2,455,189

2,782,375 2,697,018

7. NET FEES AND COMMISSION INCOME

2011 2010

FX transactions 3,848 7,672

Letters of credit 29,000 33,518

Money transfer 93,111 106,583

Import-Export 120,752 102,773

Other fees received 41,120 46,696

Total fees and commission income 287,831 297,242

Credit cards (8,095) (6,335)

Correspondent banks (9,104) (2,597)

Other fees paid - (4,128)

Total fees and commission expense (17,199) (13,060)

Net fee and commission income 270,632 284,182 8. OTHER GAINS

2011 2010

Foreign exchange transaction gains less losses 62,081 480,156

Fair value gain/(loss) on financial assets designated at fair value (57,873) (3,661) through profit or loss

4,208 476,495

9 OTHER OPERATING INCOME

2011 2010

Rental income 1,377 2,164

Other operating income 23,819 6,014

25,196 8,178

The bank has entered into leasing agreements as a lessor for premises owned. These are annual contracts which are renewable upon consent by both parties. There are no contingent rents related to these operating lease agreements. The minimum non-cancellable lease payments are as follows.

2011 2010

Not later than one year 1,377 2,300

Later than one year and not later than five years - -

Later than five years - - annual report 2011 - page 109

10. PERSONNEL EXPENSES

2011 2010

Wages & salaries 505,669 521,538

Contributions to state pension funds 56,762 50,189

Social security’s costs 6,438 6,989

Other staff costs 7,997 11,315

576,866 590,031

11. OTHER OPERATING EXPENSES

2011 2010

Rental charges payable under operating leases 215,174 187,236

Fees for deposits insurance (ASD) 175,735 148,743

Telecommunication expenses 127,025 143,122 Advertising and marketing 49,304 110,396 Security and maintenance expenses 115,874 81,462

Subscriptions 71,907 79,598

Utility expenses 57,304 54,079

Stationeries and consumables 53,456 45,304

Travel expense 15,405 17,868

Other insurance expenses 9,503 11,625

Fees and other similar expenses 10,095 11,529

Other 91,694 79,935

992,476 970,897

During its operating activities, the bank enters into operating lease agreements as a lessee for the premises it uses for its branches. The operating lease agreements are denominated in EUR and USD. The minimum lease payments under non-cancellable operating leases are disclosed in note 3.3.2. 12. INCOME TAX EXPENSE

The components of income tax expense for the years ended 31 December 2011 and 2010 are:

2011 2010

Current tax

Current income tax 31,238 145,025

Deferred tax

Relating to origination and reversal of temporary differences (88,046) 22,799

Income tax expense reported in profit or loss (56,808) 167,824

12. INCOME TAX EXPENSE (continued)

Reconciliation between the tax expense and the accounting profit multiplied by Albania’s domestic tax rate for the years ended 31 December 2011 and 2010 is as follows:

2011 2010

Accounting profit before tax 707,976 1,663,768

At Albanian statutory income tax rate of 10% 70,798 166,377

Non-taxable items (13,115) 7,067

Effect of translation of equity (875) (5,620)

Income tax expense reported in profit or loss 56,808 167,824

The effective income tax rate for 2011 is 8.02 % (2010: 10.06 %). According to Albanian tax legislation the tax authorities have right to examine tax returns for the 5 years following submission of the return. annual report 2011 - page 111

The deferred tax included in the balance sheet and changes recorded in the income tax expense are as follows:

2011 2010

Financial Financial Deferred Deferred Deferred Deferred assets Income assets tax tax Income tax tax available available for sale for sale

Assets Liabilities Statement Reserve assets liabilities statement reserve

(Dr)/Cr (Dr)/Cr (Dr)/Cr (Dr)/Cr

Initial valuation and - 7,322 1,542 - - 8,864 639 - historical cost of PPE

Fair value through profit - 3,407 3,259 (2,823) - 6,666 366 - and loss

Available for sale - 6,013 (77) (1,640) - 2,264 (1,016) 596 securities

Start up costs and - 28,612 (6,572) - - 22,040 (4,740) - capitalised expenses Adjustment for depreciation of fixed 57,878 - 2,275 - 55,604 - 3,405 - assets

Loan commission deferred 19,485 - (3,600) - 23,085 - (4,508) -

Loan provisions calculated under Central Bank’s rules - - 91,220 - - 91,220 (18,715) - and IFRS

Other liabilities ------1,770 -

Total 77,363 45,354 88,047 (4,463) 78,689 131,054 (22,799) 596

Deferred tax liability, net 32,009 52,365 13. CASH AND BALANCES WITH CENTRAL BANK

2011 2010

Cash in hand Notes and coins in LEK 638,684 562,322 Notes and coins in foreign currency 558,181 709,441 1,196,865 1,271,763 Balances with the Central Bank Current account in LEK - 16,529 in foreign currency 923 1,393 923 17,922 Compulsory reserves in LEK 2,892,094 2,855,007 in foreign currency 3,504,281 3,534,551 6,396,375 6,389,558

Accrued interest 17,000 19,000

Total balances with Central Bank 6,414,298 6,426,480

Cash in transit to correspondent banks 405,596 261,305 Nostro and sight accounts with banks 594,694 96,349 Accrued interest - - Total nostro and sight accounts with banks 1,000,290 357,654

8,611,453 8,055,897 Current 8,611,453 8,055,897 Non-current - -

Compulsory reserves with Central Bank are not for everyday use by Tirana Bank and represent a minimum reserve deposit, required by the Central Bank of Albania. Such reserves are calculated as a percentage of 10% of the average amount of deposits for the month owed to banks and customers, and are both in Lek and in foreign currency (USD and Eur).

Cash and balances with Central Bank, excluding cash in hand, is included in the analysis of the maximum exposure to credit risk (Note 3.1.4). annual report 2011 - page 113

The interest rates on compulsory reserves during 2011 and 2010 fluctuated as follows:

132011 CASH AND BALANCES WITH CENTRAL BANK (continued)

Currency Minimum Maximum Method of calculation

LEK 2.97% 2.97% 70% of the yield on repurchase agreements

USD 0% 0% 70% of the Fed’s funds rate

EUR 0% 0% 70% of the ECB intervention rate

2010

Currency Minimum Maximum Method of calculation

LEK 3.50% 3.50% 70% of the yield on repurchase agreements

USD 0.09% 0.09% 70% of the one month USD LIBOR rate

EUR 0.70% 0.70% 70% of the one month EUR LIBOR rate

Current accounts with the Central Bank are non-interest bearing. The interest rates for nostros and sight accounts are floating. Nostro and sight accounts are detailed in the following table.

S&P 2011 2010 LT/ST Nostro and sight accounts with banks Deutsche Bank AG A+/A- 246,385 69,385 Deutsche Bank Trust Company Americas A/A-1 284,648 - Piraeus Bank SA CCC/C 43,201 18,997 National Westminster Bank plc A+/A-1 4,718 2,299 Raiffeisen Bank International AG A/A-1 3,172 1,854 Banca Popolare di Vicenza BBB+/A-2 6,932 1,666 Intesa Sanpaolo SpA A+/A-1 - 1,747 Standard Chartered Bank Frankfurt A+/A-1 1,460 401 Standard Chartered Bank New York A+/A-1 2,031 - Banco Popolare 2,147 - Total 594,694 96,349 14. LOANS AND ADVANCES TO BANKS

2010 2010

Term placements with banks: Resident 2,272,000 520,000 Non resident 9,989,842 735,481 12,261,842 1,255,481

Accrued interest 1,139 56

12,262,981 1,255,537

Current 12,262,981 1,255,537 Non-current - -

The interest rates for due from banks are fixed.

Loans and advances to banks are detailed in the following table.

S&P 31 December 2011 Currency In original currency In LEK ‘000 LT/ST Piraeus Bank SA CCC/C EUR 20,000,000 2,778,600 Piraeus Bank SA CCC/C USD 9,000,000 967,860 San Paolo di Torino BBB+/A-2 EUR 15,000,000 2,083,950 San Paolo Albania BBB+/A-2 USD 3,000,000 322,620 Raiffeisen Austria A/A-1 EUR 15,000,000 2,083,950 Raiffeisen Albania A/A-1 EUR 8,000,000 1,111,440 Deutsche Bank A+/A-1 EUR 10,000,000 1,389,300 Deutsche Bank A+/A-1 USD 2,000,000 215,080 Deutsche Bank A+/A-1 GBP 2,630,000 436,370 Veneto Bank BBB-/A-3 EUR 1,000,000 138,930 Credins USD 3,000,000 322,620 Standard Chartered Bank Frankfurt A+/A-1 EUR 250,000 34,732

Banka Popullore A/A-1 USD 3,500,000 376,390

Total 12,261,842 annual report 2011 - page 115

In original 31 December 2010 Currency currency In LEK ‘000 Piraeus Bank SA (London) CCC/C EUR 5,050,000 700,789 Standard Chartered Bank Frankfurt A+/A-1 EUR 34,692 National Bank of Greece (Albania) CCC/C EUR 5,000,000 520,000

Total 1,255,481

15. LOANS AND ADVANCES TO CUSTOMERS

2011 2010

Corporate lending 1,382,107 869,701

SME lending 43,739,972 47,929,801

Total corporate and SME lending 45,122,079 48,799,502

Consumer lending 2,747,813 2,808,392

Mortgage 9,738,784 10,783,053

Overdrafts 271,989 291,742

Credit cards 200,428 180,886

Loan commissions deferred (292,743) (359,509)

Accrued interest 662,708 444,872

Gross loans and advances 58,451,058 62,948,938

Less: Allowance for impairment losses (3,665,844) (2,544,572)

54,785,214 60,404,366

Current 23,999,177 24,641,820

Non-current 30,786,037 35,762,546 The table below shows the industry analysis of gross loans (without taking into consideration the “Loan commissions deferred” and “Accrued interest”) granted to corporate and SMEs clients.

2011 2010

Manufacturing 9,954,525 9,862,841

Electricity 2,906,091 2,005,967

Trade 9,990,490 11,135,380

Construction 13,141,230 15,007,241

Other industries 9,129,743 10,788,073

Total gross loans 45,122,079 48,799,502

15. LOANS AND ADVANCES TO CUSTOMERS (continued)

The interest rates for loans and overdrafts are floating as follows:

Currency Interest Rate Additional Penalty Interest Rate 2011 LEK 12 months BLR + (2-10,2)% 3,0% USD 12 months USD + (4-7.0)% 3,0% EUR 12 months EUR+ (3-7,5)% 3,0%

2010 LEK 12 months AIRTB + (2,2-10,3)% 3,0% USD 12 months USD + (4,5-7,0)% 3,0% EUR 12 months EUR + (3,5-8,7)% 3,0% annual report 2011 - page 117

The movement in allowances (impairment) for losses on loans and advances to customers is as follows:

2011 2010

At 1 January 2,544,572 2,051,078

Charge for the year 1,121,272 493,494

At 31 December 3,665,844 2,544,572

Individual impairments 2,111,806 941,461

Collective impairments 1,554,038 1,603,111

3,665,844 2,544,572

Gross Amounts of Loans, individually determined to be impaired, 18,458,041 10,942,430 before deducing any individually assessed impairment allowances

The movement in allowances for losses by classes of loans during 2011 is as follows:

Credit Corporate SME Consumer Mortgages cards and Total overdrafts

At 1 January 2011 24,962 1,948,640 124,856 433,454 12,660 2,544,572

Charge for the year 13,439 944,379 116,824 41,726 4,904 1,121,272

At 31 December 2011 38,401 2,893,019 241,680 475,180 17,564 3,665,844

15. LOANS AND ADVANCES TO CUSTOMERS (continued)

The movement in allowances for losses by classes of loans during 2010 is as follows:

Credit Corporate SME Consumer Mortgages cards and Total overdrafts At 1 January 2010 59,235 1,559,406 85,501 333,008 13,928 2,051,078

Charge for the year (34,273) 389,234 39,355 100,446 (1,268) 493,494

At 31 December 2010 24,962 1,948,640 124,856 433,454 12,660 2,544,572 The charge for impairment during 2010 differs from the amount presented in profit or loss for the year due to ALL 86,934 thousand of recovery from amounts previously written off as uncollectable. The amount of the recovery was credited directly to the provisions line in profit or loss for the year. It relates to loans and advances to customers (SME category).

16. FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS

2011 2010

At 1 January 13,376,734 14,986,551

Purchased during the year 4,480,643 13,914,477

Fair value gains 8,789 66,662

Sold during the year - (456,718)

Matured during the year (13,376,734) (15,134,238)

At 31 December 4,489,432 13,376,734

Current 4,489,432 13,376,734

Non-current - -

Financial assets designated at fair value through profit or loss, are carried at fair value which also reflects any credit risk and related write-downs. As financial assets designated at fair value through profit or loss are carried at their fair values based on observable market data, being the last auction for the trading of similar securities held by Bank of Albania, the Bank does not analyze or monitor impairment indicators. There are no any past due amounts related to these financial assets.

All financial assets designated at fair value through profit or loss, consist of treasury bills issued by the Government of Albania. Treasury bills as of 31 December 2011 relate to zero coupon treasury bills of the Albanian Government. These treasury bills have 12 months maturity and bear fixed annual interest rates ranging, during 2011, between 8.65% and 9.45%. annual report 2011 - page 119

16. FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS (continued)

31 December 2011

Change in fair Maturity Nominal value Accrued interest Discount value Fair value

Up to 1 Month 1,137,038 70,903 (73,114) 573 1,135,400

1 to 3 Months 3,178,260 180,383 (208,971) 7,276 3,156,948

3 to 6 Months 200,000 9,906 (13,762) 940 197,084

Up 12 Months - - - - -

4,515,298 261,192 (295,847) 8,789 4,489,432

31 December 2010

Change in fair Maturity Nominal value Accrued interest Discount value Fair value

Up to 1 Month 900,000 71,267 (73,907) 949 897,932

1 to 3 Months 3,298,592 215,413 (253,127) 14,015 3,274,893

3 to 6 Months 3,815,520 163,483 (280,993) 23,340 3,721,350

Up 12 Months 5,751,880 108,609 (406,664) 28,358 5,482,559

13,765,992 558,772 (1,014,691) 66,662 13,376,734

All financial assets designated at fair value through profit or loss, are issued by the Government of Albania. Albanian Government Securities are rated “B+” if in foreign currency and “B+” if in local currency by “Standard and Poor’s”. 17. FINANCIAL ASSETS AVAILABLE FOR SALE

2011 2010

Visa shares 53,457 35,836

Government bonds 409,629 -

Government treasury bills 5,030,730 -

5,493,816 35,836

Shares in Visa Inc 2011 2010

At 1 January 35,836 38,503

(Losses)/gains from change in fair value 17,621 (2,667)

At 31 December 53,457 35,836

17. FINANCIAL ASSETS AVAILABLE FOR SALE (continued)

The shares in Visa Inc held by the Bank are granted by Visa as a form of reward for the long- standing cooperation with the Bank. The shares are granted on the basis of the performance against revenue and marketing expenditure targets.

Government bonds 2011 2010

At 1 January - -

Purchase 400,000 -

Sold - -

(Losses)/gains from change in fair value 9,629 -

At 31 December 409,629 - annual report 2011 - page 121

Government treasury bills 2011 2010

At 1 January - -

Purchase 5,005,449 -

Sold - -

(Losses)/gains from change in fair value 25,281 -

At 31 December 5,030,730 -

18. FINANCIAL ASSETS HELD TO MATURITY

2011 2010

Security Investments

Cost 5,499,850 5,103,333

Accrued interest 111,638 90,570

Un-amortised discount (10,760) (13,544)

5,600,728 5,180,359

Current - - Non-current 5,600,728 5,180,359

The amount of 5,600,728 thousand lek as at 31 December 2011 is made up of 2,799,864 thousand lek, investments in Albanian Government’s Bonds denominated in Albanian Lek and 2,800,864 thousand lek of investments in Albanian Government’s Bonds denominated in Euro. 18. FINANCIAL ASSETS HELD TO MATURITY (continued)

Albanian Government Securities in foreign currency are rated “BB/B” and “BB+/B” in local currency by “Standard and Poor’s”. There are no past due amounts as at 31 December 2011.

The interest rates for Albanian Government Bonds are fixed. The maturities of the Albanian Government Bonds are as follows:

31 December 2011

Accrued Un-amortised Maturity Cost Interest discount Book Value

Up 12 Months 881,334 16,271 - 897,605

12-24 Months 4,618,516 95,367 (10,760) 4,703,123

5,499,850 111,638 (10,760) 5,600,728

31 December 2010

Accrued Un-amortised Maturity Cost Interest discount Book Value

Up 12 Months 881,333 18,315 - 899,648

12-24 Months 4,222,000 72,255 (13,544) 4,280,711

5,103,333 90,570 (13,544) 5,180,359 annual report 2011 - page 123

The movements in the Albanian Government Bonds are as follows:

Government bonds 2011 2010

At 1 January 5,103,333 2,651,333

Purchases during the year 4,190,595 4,222,000

Matured during the year (3,693,200) (1,770,000)

At 31 December 5,600,728 5,103,333

19. INTANGIBLE ASSETS

Software Cost: At 1 January 2010 595,459 Additions 150,597 At 31 December 2010 746,056

At 1 January 2011 746,056 Additions 116,187 At 31 December 2011 862,243

Amortization: At 1 January 2010 303,614 Amortization charge for the year 107,681

At 31 December 2010 411,295

At 1 January 2011 411,295 Amortization charge for the year 87,495

At 31 December 2011 498,790

Net book value At 31 December 2010 334,761 At 31 December 2011 363,453 20. PROPERTY AND EQUIPMENT

Furniture and Land and Leasehold Vehicles electronic Total buildings improvement equipment

Cost: At 1 January 2010 699,780 150,184 1,372,506 1,057,809 3,280,279 Additions - 15,627 129,132 67,396 212,155 Disposals - (8,944) (12,345) (48,964) (70,253)

At 31 December 2010 699,780 156,867 1,489,293 1,076,241 3,422,181

At 1 January 2011 699,780 156,867 1,489,293 1,076,241 3,422,181 Additions 9,670 5,693 42,999 10,656 69,018 Disposals - (8,488) (19,812) - (28,300)

At 31 December 2011 709,450 154,072 1,512,480 1,086,897 3,462,899

Depreciation: At 1 January 2010 103,314 65,953 953,119 446,150 1,568,536 Depreciation charge for the year 33,357 21,905 161,363 129,789 346,414 Disposals - (4,656) (10,193) (25,273) (40,122)

At 31 December 2010 136,671 83,202 1,104,289 550,666 1,874,828

At 1 January 2011 136,671 83,202 1,104,289 550,666 1,874,828 Depreciation charge for the year 33,610 25,342 143,044 98,069 300,065 Disposals - (6,987) (8,411) - (15,398)

At 31 December 2011 170,281 101,557 1,238,922 648,735 2,159,495

Net book value: At 31 December 2010 563,109 73,665 385,004 525,575 1,547,353 At 31 December 2011 539,169 52,515 273,558 438,162 1,303,404 annual report 2011 - page 125

21. OTHER ASSETS

2011 2010

Other financial assets

Other Debtors 117,699 94,591

Claims Visa Card 3,402 11,733

Other Accrued Interest 184 14,105

Other Receivables from Customers 2,389 2,387

Total other financial assets 123,674 122,816

Advance Payments 345 854

Inventory 94,186 90,473

Foreclosed collaterals 268,829 78,301

Prepaid Expenses 48,714 34,015

Other Assets 145,707 41,233

Total other assets 681,455 367,692

Current 681,455 367,692

Non-current - - 22. DUE TO BANKS

2011 2010 Current accounts

Residents 150,603 8,697

Non residents 35,707 128,340

186,310 137,037

Borrowings

Residents 2,348,694 3,382,534

Non residents 4,195,095 3,890,267

6,543,789 7,272,801

Accrued interest 47,267 16,897

6,777,366 7,426,735

Current 3,966,703 7,426,735

Non-current 2,810,663 -

Borrowings from non residents, mainly relate to borrowings from European Bank for Development and Piraeus Bank S.A. Greece (the Parent), to fulfil the needs of the Bank for liquidity in EUR. The accrued interest from Borrowings with non-resident banks for 2011 are 32,688 thousand lek (2010: 13,621 thousand lek). Balances due to banks bear floating rates. annual report 2011 - page 127

23. DUE TO CUSTOMERS

2011 2010

Corporate customers

Current accounts 3,770,861 4,976,299

Term deposits 3,661,454 7,156,000

Other deposits 665,173 723,919

8,097,488 12,856,218

Retail customers

Current / Savings accounts 6,920,238 6,729,235

Term deposits 51,784,226 47,457,558

Other deposits 2,099,731 1,526,540

60,804,195 55,713,333

Accrued interest 990,746 1,005,784

Cheques payables and remittances 9,639 11,108

69,902,068 69,586,443

Current 68,384,722 68,382,373

Non-current 1,517,346 1,204,070

Included in the customer accounts were deposits of 1,017,876 thousand lek (2010: 1,086,595 thousand lek) held as collateral for irrevocable commitments under documentary business. The fair value of those deposits approximates the carrying amount. The deposits to customers are with fixed rates. 24. OTHER LIABILITIES

2011 2010

Dividend payable 92 89

Payables on foreign exchange transactions 21,403 47,210

Accrued expenses 93,665 166,619

Other liabilities 37,985 8,000

Other financial liabilities 153,145 221,918

Other taxes payable 8,481 3,746

Social insurance payable 9,524 16,956

171,150 242,620

Current 171,150 242,620

Non-current - -

Accrued expenses include expenses on utilities, telephone expenses and bonuses related to current year and will be paid the year after. annual report 2011 - page 129

25. PROVISIONS

2011 2010

At 1 January 43,956 43,956

Charges to Profit or loss (35,006) -

At 31 December 8,950 43,956

During year 2011, the Bank reversed the provisions raised in 2008 for 31,811 thousand lek to cover the suspense accounts following the upgrade of the accounting software and the provisions related to a cash shortage (differences) identified in one of the ATMs of 3,195 thousand lek. The remaining provisions relate to certain tax positions taken by the bank which would most probably not be sustained if challenged by the tax authorities. According to Albanian Tax Legislation, tax authorities have the right to examine tax returns for five years following their submission.

26. PAID-IN CAPITAL AND SHARE PREMIUM

2011 2010

Paid in Capital-authorized, issued and fully paid 10,954,079 7,219,972

Share premium 1,735,494 1,735,737

During 2011, there were two increases in share capital. The first increase took place on 2 November 2011 upon the decision to capitalise the profit of 2010 for an amount of 6,859 thousand euro the equivalent of 971,302 thousand lek. The second increase took place on 16 December 2011 upon the decision to issue new shares (92,490) for an amount of 20,000 euro thousand the equivalent of 2,762,805 thousand lek. 26. PAID-IN CAPITAL AND SHARE PREMIUM (continued)

The table below shows the shareholders structure of the Bank as 31 December 2011 and 2010.

Number of shares Share in % Number of shares Share in % Shareholder’s name 2011 31 December 2011 2010 31 December 2010

Piraeus Bank S.A Greece 380,486 98,48 284,219 96,71

Dafnila S.a - - 3,777 1,29

Mr. Tzivelis Ioannis 5,877 1,52 5,877 2,00

Total 386,363 100,00 293,873 100,00

On 31 December 2011, the authorised and issued share capital of the Bank comprised of 386,363 shares with the nominal value of 216.24 euro (2010: 293,873 shares with the nominal value of 192.80 euro) all fully paid.

The movement in share capital and share premium is as follows:

Number of Share Paid-in capital shares premium

At 1 January 2010 293,873 6,938,124 1,735,737 Increase from Shareholder’s contribution - - - Increase from retained earnings - 281,848 - At 31 December 2010 293,873 7,219,972 1,735,737

Increase from Shareholder’s contribution 92,490 2,762,805 - Increase from retained earnings - 971,302 (243) At 31 December 2011 386,363 10,954,079 1,735,494 annual report 2011 - page 131

27. OTHER RESERVES

Other reserves are comprised as follows:

2011 2010 Legal and Legal and statutory AFS Total other statutory AFS Total other reserves reserves reserves reserves reserves reserves

As at 1 January 1,170,200 13,365 1,183,565 997,474 18,726 1,016,200 Revaluation of investment securities available for sale - 43,301 43,656 - (5,957) (5,957) Deferred tax on revaluation of securities available for sale - (4,330) (4,685) - 596 596

Transfer from Retained Earnings 2010 219,748 - 219,748 172,726 - 172,726

As at 31 December 1,389,948 52,336 1,442,284 1,170,200 13,365 1,183,565

27. OTHER RESERVES (continued)

Legal reserves have been established according to the Bank of Albania regulation “On the minimum initial capital for allowed activities of banks and branches of foreign licensed banks”, no.51, dated 22 April 1999. Banks and branches of foreign banks shall create reserves at 1.25% up to 2% of total risk weighted assets by deducting 1/5 of the profit after taxes before paying dividends. The statutory reserve has been established according to article no. 39 of the bank’s statute, which requires establishing of reserves by taking 5% of the bank’s net income after deducting the losses of the previous years. This procedure it’s not obligatory if the reserves exceed 1/10th of the bank’s share capital. The legal and statutory reserves are not distributable.

28. DIVIDEND PER SHARE

The General Assembly of Shareholders has decided that no dividends should be distributed from the profit of the year 2010 and that it would be used for the increase of the Share Capital of the Company. No decision is made on 2011 profits. 29. CASH AND CASH EQUIVALENTS

For the purpose of Cash Flow Statement, cash and cash equivalent comprises as follows:

Notes 2011 2010

Cash in hand 13 1,196,865 1,271,763

Current accounts with Central Bank 13 923 17,922

Cash in transit with banks 13 405,596 261,305

Nostro and sight accounts with banks 13 594,694 96,349

Due from banks 14 12,261,842 1,255,537

14,459,920 2,902,876

30. RELATED PARTIES

In the course of conducting its banking business, the bank entered into various business transactions with related parties. Related parties include (a) Piraeus Bank S.A Greece for sight deposits, inter-bank placements and borrowings, and (b) Tirana Leasing (subsidiary of the parent) for lending and deposits.

The immediate and ultimate parent of the Bank is Piraeus Bank SA (Greece).

Assets 2011 2010

Piraeus Bank SA Greece

Sight deposits 14,306 18,997

Placements 3,105,746 700,789

Due to banks (34,723) (58,835)

Borrowings (830,158) (1,142,158)

2,255,171 (481,207) annual report 2011 - page 133

30. RELATED PARTIES (continued)

Liabilities 2011 2010

Tirana Leasing (subsidiary of Piraeus Bank SA)

Loans given (Tirana Leasing) 180,248 504,019

Due to Tirana Leasing (3,977) (6,797)

176,271 497,222

Bank Directors

Loans given 31,064 48,516

Deposits (15,439) (25,480)

15,625 23,036

The interest rate applied for placements with Piraeus Bank for year 2011 vary from 0.57% to 3.60% (2010 from 0.50% to 1.80%).

For borrowings, the interest rates vary for year 2011 from 0.50% to 1.10% (2010 from 2.30% to 3.50%).

2011 2010

Income and expenses

Piraeus Bank S.A. Greece

Interest income 9,059 3,255

Interest expenses (8,223) (163,636)

Fees and commission income 5 -

Fees and commission expenses (59) (265)

782 (160,646)

Tirana Leasing

Interest income 2,001 23,206

Other expenses - -

2,001 23,206 Key management compensation

2011 2010 Short-term benefits

Salaries 29,846 43,696

Bonuses 5,954 7,189

35,800 50,885

Only short term employee benefits (i.e. salaries and bonuses) are included in key management compensation. The post employment benefits, share-based payments and long term benefits are not applicable as no such benefits are granted.

31. PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT CATEGORY

The following table provides a reconciliation of classes of financial assets with the measurement categories as of 31 December 2010:

Designated Loans and at fair value Available for Held to 2011 Total receivables through profit sale maturity and loss Cash and balances with Central Bank 8,611,453 - - - 8,611,453

Loans and advances to banks 12,262,981 - - - 12,262,981

Financial assets designated at fair value - 4,489,432 - - 4,489,432

Held to maturity financial assets - - - 5,600,728 5,600,728

Financial assets available for sale - 5,493,816 5,493,816

Loans and advances to customers 54,785,236 - - - 54,785,236

Other financial assets 123,674 - - - 123,674

Total financial assets 75,783,344 4,489,432 5,493,816 5,600,728 91,367,320

Other assets 2,256,625

Total Assets 93,623,945 annual report 2011 - page 135

Designated Loans and at fair value Available for Held to 2010 Total receivables through profit sale maturity and loss

Cash and balances with Central Bank 8,055,897 - - - 8,055,897

Loans and advances to banks 1,255,537 - - - 1,255,537

Financial assets designated at fair value - 13,376,734 - - 13,376,734

Held to maturity financial assets - - - 5,180,359 5,180,359

Financial assets available for sale - - 35,836 35,836

Loans and advances to customers 60,404,366 - - - 60,404,366

Other financial assets 122,816 - - - 122,816 Total financial assets 69,838,616 13,376,734 35,836 5,180,359 88,431,545 Other assets 2,154,281 Total Assets 90,585,826

As of 31 December 2011 and 2010, the trading securities are measured at fair value, with the changes in fair value taken to the profit and loss account for the period, the available for sale securities are measured at fair value with the changes in fair value taken to the statement of comprehensive income for the period. Loans and receivables and held-to-maturity financial assets are measured at amortized cost.

31. PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT CATEGORY (continued)

As of 31 December 2011 and 31 December 2010 all of the Bank’s financial liabilities were carried at amortised cost.

32. EVENTS AFTER THE REPORTING DATE

There are no other events after the reporting date that would require either adjustments or additional disclosures in the financial statements. ANNUAL REPORT 2011 Tirana Bank Rr. “Ibrahim Rugova” PO Box 2400/1, Tirana - Albania InfoBank: 0800 68 68 / 04 2277 700 www.tiranabank.al