Annual Report 2017
www.tiranabank.al 1
Annual Report 2017
TABLE OF CONTENTS
1. CHIEF EXECUTIVE OFFICER STATEMENT 4 2. PIREUS BANK GROUP 5 3. CORPORATION GOVERNANCE 6 4. ECONOMIC OUTLOOK 7 5. TIRANA BANK MAIN INDICATORS 9 A. RETAIL BANKING ACTIVITY B. SME BANKING C. CORPORATE BANKING DIVISION D. TREASURY DIVISION E. IT AND ORGANIZATION F. RISK MANAGEMENT G. COMPLIANCE DEPARTMENT H. FUNDS TRANSFER 6. CORPORATE SOCIAL RESPONSIBILITY 26 A. SOCIAL ACTIVITIES B. EDUCATION C. CULTURE 7. HUMAN RESOURCES 32 8. FINANCIAL STATEMENTS 36 A. FINANCIAL STATEMENTS CONTENT B. INDEPENDENT AUDITOR’S REPORT C. INCOME STATEMENT D. BALANCE SHEET E. STATEMENTS OF CHANGES IN EQUITY F. CASH FLOW STATEMENT
G. NOTES TO THE FINANCIAL STATEMENTS 9. TIRANA BANK COMMITTEES 102 TIRANA BANK ANNUAL REPORT 2017 CHIEF EXECUTIVE OFFICER 1 STATEMENT Tirana Bank has shown a steady commitment for performance, by also maintaining adequate service level to our valued clients.
The Bank’s hefty capital and strong liquidity position remain the basis for our steadily improving financial indicators, as well as for a resilient balance sheet.
With due consideration to the performance in various aspects of the Bank, I would like to extend my gratitude to:
• Our Shareholders, for the trust in their investment as well as the extensive support delivered for improving the Bank’s position and standing in the local market.
• Our esteemed Clientele allover the country, for their loyalty and collaboration with our Bank.
• Our wonderful Staff and Management at any level, for their dedication and work, the great sense of achievement shown over the years, as well as for the extensive efforts made towards the turnaround in the financial results and keeping the Bank afloat in the business.
The Bank remains a systemic institution for the local financial industry, it holds a strong reputation among peers and is perceived to be a local ‘brand’, able to cope successfully with sound strategic developments.
Dritan Mustafa - Chief Executive Officer
6 2 PIRAEUS BANK GROUP CORPORATE PROFILE, WHO WE ARE
Piraeus Bank Group, with its legal seat in Athens Piraeus Bank Group December 2017 and employer to 13.300 employees, provides a wide Assets 61.6 bn € range of financial products and services for roughly Net loans 41.6 bn € 5.2 million clients. On 31 December 2017, the group’s Deposits 40.9 bn € total assets was as high as 61.6 bn €, with net loans Branch 620 standing at 41.6 bn € and client deposits at 40.9 bn €. Employees 13.3 m Clients 5.2 mio
OUR COURSE
Piraeus Bank was founded in 1916. Since then, it has and assets quality improved considerably at a quick pace, rapidly grown in size and activities, representing today the as evidenced in all financial reports. At the institutional leading Bank in Greece with 30% market share in terms of level, the year was characterized by changes in the Board loans and deposits. of Directors, including the appointment of members with Along with its organic growth, Piraeus Bank has undertaken international financial expertise and strengthening the a series of strategic actions, aiming at establishing a strong corporate governance, in compliance with international presence in the domestic market. best practices and regulatory frameworks. At the same Thus, in 1998, the Bank acquired the activities of Chase time, Piraeus Bank has reinvigorated its top management, Manhattan in Greece, took over Macedonia-Thrace by empowering its executive management team. 2017 Bank interests, and acquired the specialized bank Credit concluded with the appointment of our new CEO, Mr. Lyonnais Hellas At the beginning of 1999, the Bank acquired Christos Megalou, on April 2017. Bank’s institutional ring- Xiosbank and the activities of National Westminster Bank fencing enables further operational strengthening and Plc in Greece. In June 2000, Piraeus Bank absorbed its continuity, to our shareholders, customers and employees’ two commercial banks in Greece (Macedonia-Thrace Bank benefit. and Xiosbank). In 2002, Piraeus Bank acquired the Hellenic We have now acquired the necessary know-how, Industrial Development Bank (ETBA bank), which was experience, and decisiveness to address present challenges absorbed in December 2003. and to ensure that the well-positioning of the Bank, in In 2012, Piraeus Bank acquired the carve-out part of the order to meet the operational and corporate governance Agricultural Bank (selected assets and liabilities) and requirements, which derive from the best international Geniki Bank, a former subsidiary of Societe Generale. In practices, as well as from ECB’s recommendations. March 2013, Piraeus Bank acquired the Greek banking At the end of October 2017, Piraeus Bank issued a 5-year operations of the Bank of Cyprus, Cyprus Popular Bank covered bond, amounting to€500mn. The decision on and Hellenic Bank. In June 2013, Piraeus Bank acquired such issue was confidentially made in cooperation with Millennium Bank Greece, a BCP subsidiary. In April 2015, the European Investment Bank, the European Investment Piraeus Bank acquired the carve-out part of Panellinia Bank Fund and the European Bank for Reconstruction and healthy assets. These transactions comprise important Development. It is Piraeus Bank’s first covered bond steps towards the restructuring of the Greek banking issue, which was based on a joint decision- making with system, in which Piraeus Bank has participated from the the investors. very beginning as a core pillar. At the end of December 2017, the Group’s total equity 2017 was a critical juncture for Piraeus Bank. From the amounted to € 9.5 bn, while the regulatory CET-1 capital to financial point of view, this was the year which signaled the € 7.5 bn. On 1 January 2018, the SNRF9 Common Equity stabilization of the Bank’s financial performance. Liquidity Tier-1 i SNRF9 was as high as 15.4%, thus maintaining its strong capital base.
7 TIRANA BANK ANNUAL REPORT 2017 3 CORPORATION GOVERNANCE SENIOR MANAGEMENT BODIES BOARD OF DIRECTORS
The supreme body of Tirana Bank is the General The Board of Directors consists of an odd number, five Assembly of Shareholders, which elects the Bank’s (5) minimum and nine (9) maximum, executive and non- Board of Directors as decision-making and supervisory executive members. Executive members shall be those body. engaged in the daily management issues of the Bank; The Bank’s Articles of Association stipulate the non-executive member shall be those entrusted with operation mode of its bodies and the management of the promotion of corporate affairs. The total number of the Bank. executive members shall not constitute the majority of the This document makes special mention of the total number of Board members. The majority of Board composition of the Board of Directors as well as the members shall be independent. The capacity of the Board obligations / duties of the members thereof, according members, i.e. executive or non-executive shall be defined to Law 9901/14.04.2008 “On entrepreneurs and by the Board of the Directors. If a member is provisionally commercial Companies” and Law 9662/18.12.2006 elected by the Board, until the next general Assembly “On banks in Republic of Albania”. meeting, to fill in for a resigned, deceased or otherwise forfeited independent member, such elected member KOMITETI EKZEKUTIV shall also be independent.
Dritan Mustafa - Chairman Chief Executive Officer BOARD OF DIRECTORS Konstantinos Tsigaras Chief Financial Officer Eralda Tafaj Gurga Chief Operations Constantinos Loizides Chairman OfficerManjola Capo Head of Credit Division Bedri Çollaku V/Chairman Elona Gjipali Head of Recovery Dritan Mustafa Member & REO-s Division Agkop Mardikian Member Eranda Shehu Chief Retail Officer Christos Bougiouklis Member Grigorios Michailidis Chief Business Officer
8 4 ECONOMIC OUTLOOK WORLD ECONOMY
In 2017 the world economy has been recovering, by The changes of the USA fiscal policy in 2018 are expected growing with approximately 3.7% compared to 3.2% to stimulate the activity mostly driven by the investments in 2016. According to IMF data, the global recovery is response to corporate tax reduction. The USA DGP growth contributing to a reassessment of monetary policies in a is estimated to further increase by 2.7%. Additionally, the number of countries, during which major Central Banks growth strengthened further and the consumers› sentiment including the USA Federal Reserve System, the European considerably improved. Central Bank and the UK Bank signaled the end of an ultra easy monetary policy. Nevertheless, the monetary policy The Eurozone witnessed an economic upswing from 1.8% remained accommodative. Inflation, caused mainly by oil in 2016 to 2.4% in 2017. Contrariwise, the UK economy and raw materials price increase, was on the upswing in slackened off to 1.7% in 2017 from 1.9% in 2016. almost every country, by totally extinguishing the fear to The Eurozone and UK GDP growth is expected to slacken deflation, which had been persistently present in 2015- off at a rate of respectively 2.2% and 1.5% in 2018. 2016. China’s economy has challenged expectations of a marked slowdown in 2017, by growing from 6.7% in 2016 to 6.8% The largest economy in the world, the American economy in 2017, due to the increase of its goods global demand, grew 2.3 percent in 2017, acceleration from the 1.5 percent sustainable state expenses on infrastructure and high logged in 2016. Economic growth is sustainable, as the corporate profits. consumer’s trust has achieved its highest level since 2000, the unemployment rate has reached its lowest level over The global growth is expected to be as high as 3.9% in the last 17 years and new job positions have been created 2018. Investments increase, global markets recovery, and each month for over seven years. The Federal Reserve the high employment rate are contributing to the world- System (American Central Bank) raised the base interest scale recovery. rate by threefold in 2017 from 0.75% to 1.5%.
ALBANIAN ECONOMY
The Albanian economy has experienced a growth from thus playing an important role in maintaining the economic 3.36% in 2016 to 3.84% in 2017. Its growth rate has been upswing trend and generating the internal pressure on assessed at higher levels in the first half of the year, driven inflation. mainly by the construction sector and mostly impacted by direct foreign investment. Meanwhile, the economic Moody›s and S & P have affirmed in 2017 Albania›s growth slackened off in the second half of the year, due sovereign debt assessment rating at B1 and B + / B with to investments downswing and the external trade negative a stable outlook. The stable outlook of such assessments contribution. The economic growth in the second half of the mirrors the fiscal consolidation efforts of the country. year relied mainly on the private consumption expansion. Inflation has averagely amounted to 2.0% in 2017 compared The real GDP is expected to follow an upswing trend in 2018, to 1.3% in 2016, thus remaining under the Central Bank’s based on a positive forecasting of the internal demand, objective. The monetary policy pursued by the Central increase of European interest for Albanian commodities Bank has been rather accommodative during the year, and services, as well as banking conditions improvement.
9 TIRANA BANK ANNUAL REPORT 2017
BANKING SECTOR
Positive developments in real The private sector credit portfolio higher yield, such as Albanian state economy and banking sector have marked an average growth by 5.0% securities. Deposit performance in contributed to the financial stability. in the first quarter, thus excluding the terms of structure indicates a shift The banking sector indicators of exchange rate effect. The main cause from deposits with less than two years solvency indicators, liquidity, and leading to growth was the credit maturity to deposits with more than a reserves for specific risks have not extension in LCY. two years maturity period. Meanwhile, exceeded the regulatory level. foreign currency deposits reflect a Interest rates for deposits and LCY structural change by shifting towards The non-performing loans to total loans are at their historical minimum, demand deposits, due to low interest bank credits ratio dropped to 13.2% in compliance with the Central Bank’s rates. in December, thus reflecting the accommodative monetary policy. economic activity growth, the effects Deposits increased by a total of 4.1% of measures aiming at the further in 2017, encouraged by the increase of reduction of this ratio, and the foreign currency deposits. companies and bank’s continuous A shift has been noted in the local efforts in cleaning and restructuring currency from bank deposits their balances. towards alternative tools providing a
10 TIRANA BANK 5 MAIN INDICATORS Amount (thousand ALL)
Tirana Bank December 2017 Assets 77.843.781 Net credits 24.037.231 Deposits 60.957.146 EBA CT1 ratio 21.25 % Branch 39 Employees 439
Clients
Credit/deposits ratio 45.05 % Costs/revenues ratio 86.80 %
11 TIRANA BANK ANNUAL REPORT 2017
12 A. RETAIL BANKING ACTIVITY
Bank retail and other operations are performed by the Establishing and implementing a dedicated sale force bank through the branches network and the digital service for the retail segment through fundamental changes to channels (Winbank platform). the branch structure. Retail customers are provided with a wide range of The Retail Customers Relations Officer position has been products in deposits, credits, Albanian State investment recently established in the branch structure, dedicated securities and payment-related banking services. to the lending activity, thus materializing its activity Due attention has been paid to the further development fundamental change focusing on sales rather than in of digital banking services, and our clients’ daily routine services. improvement, so that to provide them with easy and Establishing/setting up the lending support unit (retail transparent 24/7 access to their bank accounts via our middle office) Winbank platform, ATM network and POS. This unit makes a direct contribution to the identification and improvement of issues on the lending process, as 2017 Retail Strategy aimed at increasing the number of well as sale force improvement, regarding the professional transactional clients, focusing mainly at increasing the capacitation in the lending process through continuous lending activity, deposits stability, and credits portfolio support and monitoring, and group or tailored training management/maintenance. provision. In order to successfully implement the relevant strategy and budgets, several significant changes have been made to Setting individual performance targets and index at the retail business model related to the relevant structure, branch and regional level standards and processes. The branches officially materialized individual performance indicators and targets, in the framework of their relevant Branches network structure has been merged with the budgets. retail division under the Retail Head responsibility. The merging enabled the establishment of a solid structure, Reviewing the lending policy for retail customers harmoniously combining the experience and knowledge Last revised in 2012, its update represents a quality and on competition and market, so that the retail client be relevant step, thus aligning credit terms and criteria with responsibly and proactively provided with our support. market and competition developments. Additionally, the review of this policy better serves to the client base Retail Division Restructuring requirements and supports the retail strategy for 2017. Retail division has been restructured pursuant to the The policy allows for the first time in history the financing segmentation philosophy, thus enabling the retail clients of the freelancer activity, falling under the retail structure, base, focusing not only on retail customers, but also on and introduces positive changes regarding the financing small enterprises. limit increase, clients’ age, credit deadline, employment stability, wide range of other collaterals. 13 TIRANA BANK ANNUAL REPORT 2017
RETAIL CUSTOMER DEPOSITS
Retail customer deposits balances have decreased during The decrease of foreign currency deposits has been lower, 2017, in line with the retail strategy, maintaining though a since the market has already been unified with the set high liquidity level above the liquidity ratio required by the interest rates, while the provided opportunities to invest in Bank of Albania. alternative tools are rather limited. The sharpest decrease in time deposits was noted in local However during 2017, several offers and action plans have currency (ALL), which brought about the investment of been promoted, aiming at local currency stability/increase quite a considerable part of such balances in alternative towards foreign currency deposits. tools, providing higher interest rates, especially in Albanian State Securities with a two years maturity period. Although Provision of lower interest rates by the Bank for time an upward trend has been noted in the treasury interest deposits has refrained clients from investing in such rates in the primary market in 2017, this increase has not products. This has led to a change of the deposit portfolio been reflected by our bank’s interest rates. structure, in which a shift from the time deposits products to current and savings accounts has been noted.
2016 2017
14 RETAIL CUSTOMERS LENDING
2017 has been quite a dynamic year with regards to the The promotion of consumer and mortgage loans have retail customers lending, during which the annual target been at our focus for 2017,therefore we have actively was met with new disbursements up to 106%. Based participated in three promotional campaign, of which mainly in our clients base requirements and expectations, two were dedicated to mortgage loans and the other to as well as on the banking sector positive developments, consumer loans. all the features and retail customers credit products terms Despite achieving great results on the disbursement have been revised and improved. volume, we invested as well in the diligent management of In line with the Central Bank guidelines on encouraging the current portfolio, aiming at maintaining the performing lending in local currency, the sale force has played an balances and returning bad credits into performing loans. essential advisory and guiding role for the clients seeking Performing portfolio balances have increased by 11% to be financed in the Euro currency. During 2017, only 18% compared to the last year whereas bad credit balances of disbursements in mortgage loans were in Euro currency. were considerably reduced- more than 40% of the foreseen This phenomenon has influenced the yearly change of budget for 2017- thus marking a historical decrease of non- credit portfolio structure, in which the ALL balances are performing loans by 11.8%. reaching up to 50% of this portfolio.
2016 2017
The main objectives for the retail customer lending are:
• Increase of the retail customer performing portfolio;
• Continuous monitoring and management the non- performing loans, by working hard towards its recovery;
• Deeper penetration in our current client base, of both payroll and standard clients;
• Provision and development of new opportunities to attract new clients.
15 TIRANA BANK ANNUAL REPORT 2017
winbank ATMs
In line with market developments, our bank continues to Tirana Bank has 70 ATMs (38 in its branches 33 in other commit itself to innovation, aiming at further improving the premises). The ATM network has obtained a certification banking electronic platform (Winbank). During 2017, other with regards to the capacity to read “EMV Chip” for VISA services were added to the platform such as: cards, offering card holders the highest levels of transaction -Utility payments (OSSHE, UKT) and all fixed and mobile security. In addition to money withdrawal, our customers operators can change their PIN codes and receive a mini-statement - Dues and taxes payment (VAT, tax deducted at source, of their account. social insurances) The main goal for 2017 was to increase the quality and the - Launch of digital time deposit «E-deposit» availability of our entire ATM network in order to increase - Credit application/ Credit Card customer service. We believe we have achieved our goal, The electronic platform Winbank provides online access to maintaining a high availability standard at 95% in all our banking services, and account check 24 hours 7 days a ATMs throughout the year. week. The number of users for all banking electronic services is increasing, thus positively influencing on the number and value of online transactions. During 2017, the monthly average number of active users increased by 37.41%, while the number of transactions through Winbank increased by 39.72%.
POS CALL CENTER
Our POS network is present in more than 30 cities, offering Call Center provides continuous services and assistance this service to more than 30 different business categories to clients through incoming calls 24 hours a day, seven such as hotels, tourist agencies, shops, restaurants, gas days a week, and 365 days a year (24/7/2018). The activity stations, supermarkets and the largest shopping malls in of Call Center focuses mainly in two directions: client the country. Our POS network offers to VISA’s cardholders service through incoming calls, by providing information on (debit and credit) the possibility to make purchases at POS bank services and products as per any client’s needs, and and make cash advance withdrawals in our branches. monitoring card transactions. When deemed necessary During 2017, the bank’s focus was to improve the POS the card holder is contacted and the authentication of service and increase the volume of payments on these actions is confirmed, thus helping in fraud prevention. terminals.
CARDS
Cards marked a stable performance, by simultaneously maintaining their position in the market. Portfolio activation and cards use promotion, has been among the main priorities for 2017, thus encouraging the client to perform their daily-purchases-related transactions within the country with their cards. The results show a significant average increase mainly during the last 3-4 years, by 36% in terms of card transactions number and 28% in terms of purchases volumes at the points of sale (POS), by increasing the profitability of cards business. Tirana Bank continues to be in a great competitive advantage in the market with the Debit Card “On the Spot”, considering it a significant service provided to our customers by offering the debit card immediately when the client applies in the branch. Additionally, in line with the recent technological novelties, the Contactless Debit Card has been successfully launched for the first time in the market, the additional safety elements of which enable clients to make faster payments in any sale point. Tirana Bank always cares about the cards safety therefore during 2017 has remained vigilant for customer’s data protection by ensuring more security.
16 B. SMALL AND MEDIUM ENTERPRISES (SME)
In 2017, the Bank’s main goal was to increase the credit A dedicated attention has been paid to the non-performing level for small and medium enterprises, as a tool to revitalize loan portfolio, regarding both the meeting of extra the small and medium enterprise, and to consequently needs for the financing of current clients, and the credit optimize bank’s revenues deriving from this client base. For terms renegotiations in accordance with the monetary this purpose, the bank has been focusing on bank-client policies of the bank of Albania and the domestic banking relations, undertaking a number of initiatives in the frame sector competition. This has been achieved regardless of promoting its image as a bank favoring enterprises and of an aggressive and competitive market environment, entrepreneurs, which praises those willing and daring to characterized by continuous pressures. Our readiness to make business. Total new disbursements for 2017 reached lend mirrors our understanding of the long-term business EUR 10.00 million, versus EUR 5.00 million in 2016, while partnership, representing a joint interest to both parties. the number of clients for the SME Department increased by 25%. Our aim remains supporting those businesses stimulating the use of internal sources and the creation of new job The close client-bank relation aids the bank in easily keeping positions, thus contributing to the imports development track of and identifying the companies encountering and reduction in the country. difficulties in paying off loan obligations, and consequently to adopt at the soonest possible an alternative to adjust the business cash flow with other payment plans, thus mitigating the risk such companies face.
C. CORPORATE BANKING DIVISION
Tirana Bank has been and continues to be a trusted The proven combination of corporate customer advisors principal bank for corporate customers providing and product specialists enables Tirana Bank to act as a customized, effective solutions to each problem by virtue reliable and trustworthy partner to its customers. Total of its comprehensive service approach and understanding new disbursements for 2017 reached EUR 15.3 million, of its customers. being in line with the bank’s strategy and budgeted figures for corporate clients, while the number of clients for the 2017 has been a year of continuance of reactivation and Corporate Division increased by 28%. The bank extended reassessment of our corporate clients for Business Lines. its customer base with new corporate clients, who are On the other hand, Corporate has given a great importance leading companies in their respective sectors. to the enlargement of Corporate customers’ pool by supporting financially new corporate customers. On the In addition to competitive and attractive financing terms, other hand, Corporate Banking System has paid due our aim is to provide full support to our customers in all importance to the enlargement of Corporate clients base, segments and business cycles, by continually improving by financially supporting new corporate customers. Our service quality and our products and services offer with focus was, not only to increase credit portfolio, but as well new benefits, operating under the demanding conditions in to diversify our investments on different market sectors the market. Through our long-term successful cooperation economy. Supported by experienced staff and the spirit with local and international financial institutions, in 2017 of teamwork, the Banking Service achieved a great deal of we made available more attractive funding terms to our our ambitious targets of the bank in this sector. customers, resulting in new credit lines. The total Corporate Banking at the end of 2017 reached EUR 65.8 Million.
17 TIRANA BANK ANNUAL REPORT 2017
D. TREASURY DIVISION
One of the main functions of the Treasury Division is to The activities of Treasury Division focus on providing control and manage the liquidity surplus and to ensure financial and investment products tailored to customer that all bank business lines have access to the liquidity requirements, as well as consultancy services related they may need for their business activity. In this way, this to the products being offered. Mediation in securities division ensures that the bank remains financially secure, markets has been performed on an ongoing basis, adding stable and capable of functioning efficiently. Among value to bank activities and further enhancing customer other functions we can mention: maximizing profits at a relations with the bank. Treasury activities continued to predetermined level, and safeguarding from the risk arising provide significant benefits to the bank and on December from interest rate movements and foreign exchange rates. 31, 2017, treasury transactions accounted for 66% of total bank assets. 2017 was marked by a very low level of interest rates, based on the Central Bank’s accommodative monetary Treasury and Financial Markets Division is an important policy. The Treasury Division has actively participated in player in the foreign exchange market and financial the management of deposit balances, ensuring funds markets as a result of its trading and sales activity. Foreign stability and low cost levels. exchange operations have continued to be beneficial to the As the main contributor to ALCO and the main pricing bank, reflecting swearing and careful sales. center for bank activities, we continuously monitor and analyze the world’s largest economies, macroeconomic All treasury actions have been performed in compliance trends, and Bank of Albania monetary policies and indexes, with the bank’s policies and with regulatory requirements. as well as assess their potential impacts in our domestic Our financial results in 2017 were consistent with the economy, particularly in the banking sector. objectives and were achieved thanks to efficient work.
E. IT AND ORGANIZATION
In the framework of harmonizing IT & Organization Strategy with the Bank’s Business Strategy, and in accordance with regulatory requirements, the Information Technology and Organization Units have been focusing on the following projects and activities:
• Improvement of the Bank’s IT operations reliability and quality, by using cutting edge technology; • Institutional obligations as per regulatory changes; • Review and upgrade procedures and operations; • Upgrade and further Integration of the information systems; • Mitigation of Risks in IT systems infrastructure.
IT SYSTEMS DEVELOPMENT AND UPGRADE
Information systems development and improvement for 2017, have been mainly driven by the optimization and the increase of the reliability of IT infrastructures solutions, procedures, and systems which is being required by the constant business, economic and technological environment changes, with the main goal of achieving economies of scale, increased security, functionality, integrated management from the end user and the competitiveness of the Bank.
18 MIGRATION TO CHIP & CONTACTLESS VISA DEBIT CARD
In 2017, the Bank upgraded its Debit Card Management operations with documents, the bank has implemented a and related systems in order to emboss new VISA document management system. This system will ensure Debit Cards. The new cards will be equipped with chip the fulfillment of the regulatory request, and will be and contactless features. These two new features will instrumental to the bank in facilitating the organization of significantly increase the transactions security and enable documentary information in an electronic format. very quick transactions for small amounts. Banking systems upgrades to facilitate Bank Business In order to comply with regulatory requirements, system’s needs upgrades and changes have been implemented in the banking systems. Following the business needs and technological changes, the Bank performed several upgrades in 2017 such as: As per the new regulatory instructions, the bank needs to “Payroll Application Upgrade and Centralization”, “In- provide for several developments and changes in Money House Application Platform Upgrade”, “Retail Loan Laundry systems, Credit Register and Deposit assurance Origination System Upgrade”, “HR Systems Upgrade”, etc. system. Also to comply with the requirements of the Albanian Deposit Insurance Agency and to improve the
OPERATION & TECHNOLOGICAL ORGANIZATIONAL INTERVENTIONS INFRASTRUCTURES & CENTRAL SUPPORT
In line with the goal to constantly improve the availability and During the last year, the Organization has paid a special the efficiency of the Bank’s Technological Infrastructures attention to the improvement of basic procedures related on the one hand, and effectively and safely manage their to operational systems of the Bank. The detection and operations on the other, a series of interventions have been correction of malfunctions and problems in the Ban made, the most important of which are as follows: system during the previous years have been particularly Upgrade of Wintel Core Systems infrastructure and emphasized. improvement of DR site and solution The main scope of this project has been the upgrade of the Bank’s Core Wintel Systems in Primary and Disaster sites as per: 1. Processing power, 2. Storage volumes and speed, 3. Synchronization solution and recovery time minimizing
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F. RISK MANAGEMENT
The Board of Directors and the Senior Management acknowledge that the Bank is exposed to various types of risks deriving from its operations. Taking into account the current economic, financial and market environment, the Bank has been focusing on the effectiveness of its risk management practices, aiming to mitigate the risks while maximizing the return for the shareholders.
The efficient risk management is considered vital for the Bank in achieving its strategic objectives and ensuring quality returns to its shareholders on an on-going basis.
The mission of the Risk Management Department is to:
“Create added value for shareholders, by using risk management best practices for the optimization of the Bank’s risk-return profile, while ensuring compliance with regulatory requirements”.
The Bank pays particular attention to the effective risks monitoring and management, with the view to maintain stability, financial soundness and its operations continuity.
The BoD is responsible for developing and supervising the implementation of the risk management framework, which is ensured as well through a number of specialized committees. Risk Management Department is administratively independent from the other units of the Bank. The Bank has established detailed processes and adequate risk control mechanisms for identifying/managing/monitoring/reporting risks. This ensures independence between risk taking, risk management, and control functions.
The existing organizational structure ensures division of responsibilities and aims to prevent instances that could lead to a conflict of interest.
The Bank must have sufficient liquidity and capital resources to maintain a stable and recurring profitability. It aims to maintain an independent risk management culture with the active involvement of the top management.
The Bank aims as well to maintain a culture of continuous improvement of processes, policies, models and tools for measuring and monitoring risk exposures.
Through the Risk and Capital Strategy, the principles of an integrated risk management framework are set to achieve the Bank’s strategic and business objectives as determined by the BoD, without exceeding the risk taking ability.
The risk management framework is constantly evaluated and evolving, taking into account the current economic and market dynamics, the regulatory requirements, and international best practices. Its effectiveness is assessed by means of:
• Parallel assessment of the bank’s results/profile vs the risk appetite and business objectives;
• Monitoring of KRIs, specific per each type of risk.
Risk Management Department consists of the following risk lines/units:
• Credit risk management unit;
• Market, liquidity and operational risk unit;
• Capital management unit;
• Information security unit.
The department is subject to the independent audit of the Internal Audit review in terms of the adequacy and effectiveness of the applied risk management processes.
20 The purpose of the Risk Management Governance Framework is to promote an effective and prudent management of all risks, ensuring appropriate allocation of responsibilities and accountability based on the risk origin, aiming at aligning the risk taking process with the Bank’s risk appetite. A robust communication of risk information is essential across the Bank, with the focus on maintaining risk awareness at all levels and in particular at BoD and Senior Management levels.
For the implementation of the adopted principles, the risk management governance framework is organized in two main dimensions. The first dimension classifies the risk management operations in four lines of defense, while the second one addresses the hierarchy levels in which the above-mentioned activities take place.
The first governance dimension is composed of The second governance dimension constitutes 4 lines of defense as described below: of three levels: strategy, tactics, and operations.
• The first line of defense is comprised by the • Strategy level – Includes the risk management units that are closest to the origin of risk. functions that are executed at a BoD level.
• The second line of defense is responsible for • Tactics level – Includes the risk management the ex-ante risk management, since it is engaged functions that are executed at a high level of in risk management activities that take place prior authority both by individuals, as well as specialized to risk taking (credit scoring, new product risk committees. assessment). • Operations level – Includes the risk management • The third line of defense is responsible both functions that are executed in various units of the for the ex-ante monitoring (e.g. participation in Bank. evaluation of products) as well as the ex-post During year 2017, Tirana Bank has paid a control and monitoring of risks. particular attention to the risks the banking • The fourth line of defense is responsible system is exposed to. In this regard, it has further for the independent review of the overall risk strengthened the organizational structure and management framework of the Bank. The fourth the control functions, aiming at enhancing its risk line checks the adequacy and effectiveness of management practices, without damaging its risk management and control mechanisms in the business operations. The main focus continued first three lines of defense. to be the improvement of the assets quality, especially non-performing portfolio recoverability.
21 TIRANA BANK ANNUAL REPORT 2017
CREDIT RISK
Credit risk is the most significant source of risk for the Bank, therefore, its effective monitoring and management are among its Management’s priorities. The implementation of the credit policy, which describes the Bank’s credit risk management principles, ensures that credit risk is uniformly and efficiently addressed and that the credit risk practices, with respect to the assessment methods and processes for credit approving, renewing and monitoring are unified with the Group’s.
• The Bank seeks to control credit risk through stringent credit criteria, which necessarily include the repayment option (first way out), the provision of collaterals (second way out) and the evaluation of the customer. The process is supported by the use of internal rating systems with strong discriminating ability and systems for credit risk measurement and calculation of capital requirements.
• The Bank focuses on deleveraging in sectors with a poor outlook and rebalancing its portfolio towards key sectors with better growth prospects.
• The Bank aims at curbing new arrears, through credit risk identification, continuous monitoring and countervailing measures.
• The Bank seeks to effectively manage its current NPL/NPE levels through the Recovery Banking Division by reducing the rate of NPL/NPE formation and ultimately lowering the absolute level of NPLs/NPEs.
• The Bank operates within the credit, approving limits defined by the Group which are regularly updated and cover all Bank activities in order to mitigate the credit risk. All lending decisions are made in compliance with the Credit Policy & Practice Manual of Piraeus Bank.
• The Group aims at the direct and centralized monitoring of all credit risk exposures at debtor portfolio level, as well as at connected borrowers level.
• The Bank has minimal appetite for FX lending risk, ensured through the implementation of appropriate credit policy statements. In general, lending in foreign currency is acceptable only when hedging is apparent.
22 LIQUIDITY RISK
Liquidity risk is the risk of not being able to fulfill the financial obligations when they are due. The Bank recognizes liquidity risk as one of the major risk types that may have a significant impact on the capacity of the Bank to fund its commercial operations and to meet its financial obligations.
The management of liquidity risk is among the Bank’s key objectives and envolves a wide range of activities, spanning from its liquidity position close monitoring to its funding sources and funds use management, in a way that does not compromise the ability of the Bank to meet its obligations.
The Bank has adopted the best practices and regulatory/supervisory guidelines in depicting the Bank’s liquidity position and the potential effects of adverse changes arising from its funding sources maturity (and non-renewal), and the potential reduction of its liquid assets.
It closely monitors liquidity costs, and has ensured compliance with the regulatory liquidity risk framework, while maintaining and regularly reviewing methodologies, policies, procedures and systems so as to effectively manage liquidity risk.
The bank has carefully monitored liquidity levels, by ensuring they remain above the regulatory minimums.
Deposits from customers are considered to be well diversified, of which 90% are deposits from retail customers, while the deposits decrease at an annual basis is assessed at ~3%. Over the past years, there has been a clear trend of shifting from time deposits to savings deposits, which has been noted in the market as well. Deposits in LCY have shown a higher decrease as compared to those in FCY, a change highly impacted by the competition of State Securities considering the very low environment of interest rates. Key liquidity indicators are above the minimum regulatory ones and indicate the abundant liquidity.
December 2017 Limit December 2016
Loans/Deposits 45% NA 49%
Net Loans/Deposits 33% NA 32%
Liquid Assets/Short Term Liabilities – Total 47% 30% (regulatory limit) 47%
Liquid Assets/Short Term Liabilities – Total FCY 54% 25% (regulatory limit) 54%
Liquid Assets/Short Term Liabilities – Total LCY 40% 25% (regulatory limit) 40%
23 TIRANA BANK ANNUAL REPORT 2017
MARKET RISK
Market risk is defined as the risk of incurring losses due to adverse changes of level or volatility of interest rates, currency exchange rates, equity prices and commodity prices.
The Bank has established and applied adequate measurement methods for the monitoring and controlling the market risk, including interest rate risk in the banking book. Market risk exposure was limited during 2017 as well.
Tirana Bank applies an interest rate risk management policy and adopts risk assessment techniques based on the Interest Rate Gap Analysis. It assesses interest rate risk through “Earnings-at-Risk” measure, which expresses the negative impact on projected annual interest rate over a specified period, caused by a change in interest rates across all maturities and currencies.
In addition, it assesses interest rate risk through the expected change in the Net Present Value of Assets and Liabilities, caused by a change of interest rates by 1 basis points.
December 2017 Limit December 2016
Net FX Open position/Regulatory Capital 5,6% 20% (regulatory limit) 3,5%
Exposure to IRR in the Banking Book/ 7,5% 20% (regulatory limit) 5,7% Regulatory Capital
12,000 EUR (internal Balance Sheet IRR Exposure (PV01) 4.400 EUR 8.590 EUR limit)
2,000 KEUR (internal Earning at Risk 1.694 KEUR 1.578 KEUR limit)
24 OPERATIONAL RISK
Operational risk has received special attention, through reviewing Bank’s operations, aiming at identifying possible improvements for the purpose of reducing operational losses and other negative impacts (being those reputational, regulatory, etc).
Careful monitoring of the operational losses, key risk indicators and annual performance of the risk control self-assessment, remained the main sources of operational risk management framework, while the Bank successfully implemented the Permanent Control platform.
Tirana Bank wishes to avoid operational risk events/losses, caused by the inadequacy and ineffectiveness of the internal control system (internal control environment), or in non- compliance with the principles and objectives of this system.
It wishes to completely avoid losses generated from internal fraud, as well as completely avoid events with significant negative impact on its reputation and corporate image.
CAPITAL ADEQUACY
The Bank recognizes the importance of maintaining a strong capital base against the risks undertaken. It has retained a sound capital base, capable to support the Bank’s business/strategic plan/s and safeguard the ability to continue its operations smoothly.
Capital requirements are calculated against all material types of risks that the Bank undertakes, in full compliance with all applicable regulatory and supervisory requirements.
Capital adequacy ratio has exceeded the minimum regulatory limit; at the end of 2017, it was at the level of 21.25% as opposed to the minimum regulatory level at 15%, thus ensuring the confidence of depositors and its sufficient armor against the challenges of the current economic conditions.
December 2017 Limit December 2016
Capital Adequacy Ratio 21,25% 15% (regulatory limit) 17,89%
Regulatory capital (in Mio €) 61,8 57,8
RWA (in Mio €) 291 323
Of which:
Credit Risk 229 222
Market Risk 0 1,9
Operational Risk 37 40
Other 24 59
The Bank aims to maintain adequate infrastructure, policies, processes and methodologies to support and meet the supervisory and regulatory compliance needs regarding capital management. 25 TIRANA BANK ANNUAL REPORT 2017
INFORMATION SECURITY
A risk management framework, aiming at mitigating the ICT and cyber risks, has been developed and documented by the Information Security Unit. A Cyber Security Awareness Program, addressed to all personnel, aiming at enhancing the risk culture in terms of Cyber Security and IT related risks. The Bank has established a framework of policies and procedures for mitigating the risk arising from the use of risk assessment models, through review, challenge, training and validation processes. Information security has been at the focus throughout 2017, and a number of projects have been implemented to increase security. Continuous awareness raising on the topic is considered of ultimate importance.
G. REGULATORY COMPLIANCE DEPARTMENT
Compliance Department role is to respect all banking and financial regulations: legal and regulatory provisions, professional and ethical standards, Group procedures as well as protect client s’ interests and Piraeus Group’s reputation. The role of Tirana Bank Compliance Department is to define and implement rules to prevent non-compliance risk, including the risks associated with money laundering and the financing of terrorism, violation of embargoes, conflicts of interest and the personal data protection of customers and employees. All these initiatives help reduce reputational risk. The Compliance Department ensures as well that effective systems are in place to achieve compliance. To this end, the compliance function: • advises operating staff by providing its opinion on transactions when such advice is requested; • is part of the product marketing process, from design up to the distribution, and issues compliance notices; • together with Legal and Human Resources ensures that conflicts of interest are identified in accordance with the Group policy on the conflict of interest as well as the local legal framework; • ensures that employees are trained in compliance issues; • ensures that customer protection is effective at every stage regarding the relations between the bank and its customers, from the provision of pre- contractual information, provision of advice, and during the duration and termination of the contract. In order to achieve compliance within Tirana Bank, the Compliance function uses the following tools and resources: • the inclusion of compliance standards in bank’s procedures; • periodic reporting on risk and compliance activities, enabling implementation of compliance systems within the Group; • AML software tools, which include customers profiling and account monitoring tools to detect unusual or suspicious transactions and tools to monitor international fund transfers for the enforcement of asset freezes and embargoes;
26 We have also enhanced our system to improve the quality of the collected know- your-customer (KYC) data, both at the beginning and throughout the business relation. Customer identification checks are the first filters at the beginning of any relation. This relies on our information on our customers and beneficial owners. We carry out suitable and risk-appropriate monitoring throughout the relation. Bank’s employees are assisted in this regard by AML software for profiling customers and detecting unusual transactions. Based on risk assessment and regulatory changes, we are continuously strengthening our overall AML/CFT system.
H. FUNDS TRANSFER
2017 was another successful year for fund transfer operations in Tirana Bank. Our efforts to provide high standards of quality in the processing of commercial payments have been acknowledged by our highly praised partner Deutsche Bank, which granted Tirana Bank the 2016 Gold Euro STP Excellence award. This award has been granted in recognition of the exceptional direct processing of international payments following the evaluation of the quality and accuracy of SWIFT payment messages routed through Deutsche Bank.
We want our customers to feel secure when transferring money either to their loved ones, or to their trusted business partners, by offering them a variety of products according to their needs and by continuously improving technical and security issues to maintain an error-free rate for remittances. Our main motivation is to offer the best customer service experience, by ensuring consistency in service quality, while embracing innovation in a fast changing environment.
27 TIRANA BANK ANNUAL REPORT 2017 CORPORATE SOCIAL 6 RESPONSIBILITY A. SOCIAL ACTIVITIES
Tirana Bank Continues to support SOS Children›s Village
Any child needs a family to care and show love to them. In this framework, Tirana Bank has continued to support SOS Families, which provide a sustainable, safe and loving care in a family environment to children who have lost their parents, or who cannot live with their biological family. Showing our continuous commitment to social issues, and our willingness to provide assistance to solving current social problems, Tirana Bank has committed itself to the “adoption” of three children from the SOS Village. The sponsoring of such children’s lifestyle is a long-term cooperation, relying on our company’s continuous support to provide tailored care and promote development, education, health care, and social, sports and entertainment activities for such children.
Donate a bag!
Get the School Year Off to a Good Start, Kids! Tirana Bank was pleased to support the initiative “Donate a bag”, organized by “Fundjavë Ndryshe” organization. 500 girls and 500 boys from families in difficult economic situations all over Albania were given as a present one bag from Tirana Bank. These bags were distributed from “Fundjavë Ndryshe” in cooperation with Tirana Bank staff in several villages and cities of the country, with the good will to wish them a good start of the school year!
28 CORPORATE SOCIAL RESPONSIBILITY
Celebrating June 1st with DSA Albania
Children of Down Syndrome Albania Foundation have staged on the occasion of this holiday a short theater play “A short delay”, based on the eponymous popular movie. This day coincides with the third anniversary of “Achievement and Development Center at the Down Syndrome Albania Foundation”. Tirana Bank has delightfully provided its support to the Foundation for the organization of this beautiful party.
Blood donation
Since 2009, Tirana Bank staff has established the blood donation practice, considering its vital importance for the lives of hundreds of people. Similar to previous years, the activity was organized not only in the premises of the Bank›s Headquarters, but also in all the Bank’s branches. This year, the blood donation activity was dedicated to the two thalassemic children of Troka family in Ada, Fier. Through continuous communication, Tirana Bank aimed to raise the awareness by inviting family members, customers and partners to participate in this humanitarian act. This initiative, which has turned into a tradition in Tirana Bank, shows the humane face of the business, thus turning into an example for other institutions, aiming at encouraging all society to act alike.
Albania ploughs the land-Eat local food
Tirana Commerce and Industry Chamber, in cooperation with the Ministry of Agriculture and Rural Development organized on 29 November 2017, in Tirana, at Mother Theresa Square the initiative “Albania ploughs the land- Eat local food” for the agricultural sector promotion. Tirana Bank was pleased to provide its support for this significant activity. The activity aimed at presenting and promoting the agricultural sector development and local production. 500 exhibitors participated in the fair, from the following main sectors: entrepreneurs in agriculture, agro-industry, winery, alcohol, agrotourism, grocery, animal husbandry, homemade products (traditional), bank, agricultural funds etc.
29 TIRANA BANK ANNUAL REPORT 2017
Tirana Bank celebrates with the oncology and haemophilia ward children
Tirana Bank put a smile on the face of many children receiving treatment in the oncology ward at the Pediatrics Hospital in Tirana. The warm party atmosphere marked by the presence of children’s dearest characters like Mickey Mouse, Spiderman, Winnie-the-pooh and Princess Aurora made the halls of this ward brimming with life. Bank’s staff managed to organize the party and buy presents on the year-end-holiday occasion thanks to a year-long fund raising, by transferring personal donations to a joint bank account. Presents purchase for hospitalized 1-14 years old children receiving treatment in this ward was made possible thanks to this initiative. Children enjoyed their time by celebrating and singing and choosing their own presents, reminding us once again that such tiny and humane gestures may add joy to the lives of those in need. Tirana Bank staff has never refrained itself from giving a helping hand to those in need, therefore the motto of this initiative was: We can’t change fate, but we can make people happy by changing their day. Tirana Bank cares!
Tirana Bank donates the New Year Tree
Donating to groups in need has always been quite meaningful, especially in this special period of the year. Tirana Bank staff organized one of the most beautiful year-end-projects: “Our spruce!” This initiative beautified and revitalized the lives of many people, who unfortunately could not celebrate in their own homes. Tirana Bank donated the New Year tree and other decorations, while its staff prepared the presents with lots of love. Tirana Bank cares!
30 B. EDUCATION
“Financial Education Through Art” Exhibition
Tirana Bank has provided its support to the opening of the “Financial Education Through Art” Exhibition, in the framework of the “Money Week” project, organized by the Albanian Association of Banks. Over 30 children from the 9-year schools in Tirana and Durrësi, under the auspices of the painter Kosta Zhongo, displayed their drawings and paintings on economic concepts. Such paintings will be part of an economic dictionary, which will provide explanations and definitions to various economic concepts.
Path towards success
Following its success in the previous year, the project “Path towards success” was reintroduced in November 9th at the Palace of Congress, hosted by Vasil Naçi. Over 2000 people, among which Businessmag, were provided with the opportunity to learn, to get motivated and to break free from the daily routine thanks to this innovative training, which reminded us the most famous international speakers in our small Albania. Tirana Bank supports this activity as the “Silver” sponsor, which was attended by many experts from various fields. In addition to the presentation, the seminar entailed exercises, aiding participant to reflect on the path they should tread into to achieve success.
31 TIRANA BANK ANNUAL REPORT 2017
C. CULTURE
Summer day in Përmet Teacher’s Day in Lezha
Convivium Slow Food Përmet and Municipality of Përmeti On March 7, we pay tribute to all teachers for their great organized for the second consecutive year Përmet Summer contribution in educating future generations. Day. The 14th of March was a real celebration, which drove Lezha Regional Education Directorate organized with the many visitors and tourists to reveal the area’s values and support of Tirana Bank the festivities of March 7, in the the traditions, transmitted from generation to generation. premises of the Palace of Culture of the city, marked by the Tirana Bank was pleased to support this holiday festivities, presence of all teachers and students of the region. thus aiding to the display of Përmet traditional dishes to a wider public.
Celebrating Greece National Day Tirana Bank celebrates “Lake Day” and the opening On March 24, the Greek Embassy in Tirana organized a of summer tourism season in Pogradec reception at Plaza Hotel to celebrate its196th independence anniversary from the Ottoman Empire. The opening of the summer tourism season is among the Tirana Bank was the general sponsor of this important most all-inclusive events of the Municipality of Pogradec, activity. Members of diplomatic bodies accredited in which has turned into a festivity intertwining culture, Tirana, politicians, members of parliament, heads of tourism, culinary, local business and many other sectors. constitutional and independent institutions, entrepreneurs The simultaneous opening of the summer tourism year on etc., were present in this reception. this day brought the cities of Ohrid, Struga and Pogradec In the opening speech, the Greek Ambassador in Tirana, closer to each other. Tirana Bank, was among the Eleni Sourani, stated the significance of this day for Greece, supporters of this project, which invited the tourists to visit and its influence on other Balkan countries. the historical and cultural assets of this beautiful city. Mrs. Sourani also expressed her highest estimations on the two peoples› friendship.
Two-day cultural activities in tribute to the Greek composer Mikis Theodorakis Tirana Bank has provided its assistance to the Orthodox Autocephalous Church of Albania in organizing a two-day cultural activity on 17-18 November 2017 in Tirana in tribute to the distinguished Greek composer, Mikis Theodorakis. Other project activities included: • «Dear poets by Mikis», organized in the Orthodox Church Cathedral in Tirana. • Concert by «The Popular Orchestra - Mikis Theodorakis» in the Orthodox Church Cathedral cultural center. In addition, an exhibition with Mikis’ personal items was organized in one of the halls of the Cultural Center.
32 Tirana Bank supports the Badminton Federation of Albania
During the 3-7 July period, the Badminton Federation of Albania organized in Korça a training camp with the Bulgarian, Macedonian, Greek and Albanian teams. Viewing Albanian footballers’ great enthusiasm and the quality physical training, Tirana Bank supported this tournament for the second consecutive year, to enable the training of the novice Albanian footballers and in making this special sport more popular in our country. In the end, the training camp organized a closing tournament called “IDAs Friends”, marked by the presence of the Balkans Federation President, Z. Kassabian. The activity was a sports festival for the city of Korça, in which many youth participated.
Song marathon (Maratona e Këngës)
Tirana Bank was the principal sponsor of the “Song Marathon” festival, organized at the downtown of Shkodra on 17 August, in cooperation with the Municipality of Shkodra. This festival drove the Shkodra’s citizens out of their homes to the city’s main square to watch closely the greatest Albanian musicians both in the country and abroad. The same festival was held in the city of Përmet on 24.08. 2018, in the downtown, which was attended by many citizens.
2018 Agenda designing, «Scanderbeg Year» project On the occasion of November holidays and taking into account the declaring of 2018 as the “Scanderbeg Year”, the Minister of State for Diaspora, a newly established ministry, asserted its involvement on the large scale governmental project by designing posters, agendas, and calendars with our national symbols. In order to support this important project, Tirana Bank sponsored the designing of 1350 agendas. In November, the ministry organized many activities and the materials were disseminated to many distinguished personalities, diplomatic bodies etc.
33 TIRANA BANK ANNUAL REPORT 2017 HUMAN RESOURCES 7 HUMAN RESOURCES DEPARTMENT Human capital is to Tirana Bank the key factor in achieving the bank’s strategic goals and objectives. The bank’s philosophy is excellent staffing according to business needs and establishment of strong relations with employees.
Moral integrity, team spirit, professional skills, trust, devotion and acceptance of diversity are the main features of our employees.
Below, you will find some highlights, regarding workforce: Number of employees at the end of 2017: 439
Distribution by Gender Hierarchy
Distribution by Generation
Average age of the Bank’s employees is 38 years. Average length of service 7.7 years.
34 RECRUITMENT
Our recruitment process aims at selecting the most qualified and experienced staff with high integrity, which is achieved through a set of standard tools, which are job simulation exercises, competency test and a structured interview by an interview panel.
Although, our staffing needs during 2017 have been covered by new employees (55 new hires), our internal candidates, due to their good performance and personal developments, are our main potential for covering our job vacancies. In this regard, we promote our internal staff by providing them with career development opportunities, with the aim of rewarding our staff.
INTERNSHIPS
During 2017, Tirana bank has established an internship practice, which provides growth and learning opportunities to the students attending local universities, or universities abroad. We have designed a working program that is suitable to interns’ needs and studies, and we also give them the opportunity, when applicable, to be our future staff.
EMPLOYEES’ TRAINING & DEVELOPMENT
Tirana bank consistently invests in the development and improvement of its employees’ competencies and skills, by creating a learning and development environment, aiming to bring out the full potential of its people. Training and development programs are a key investment for our people and for our business. During 2017, Tirana bank offered to its senior managers strategic leadership tailored training. The objective of the training was to enhance the Bank’s leadership capacities and further develop an effective common leadership culture in the Bank. Training man hours by gender: total 9367
Average age of the Bank’s employees is 38 years. Average length of service 7.7 years. 35 TIRANA BANK ANNUAL REPORT 2017
HUMAN RIGHTS
The safeguarding of human rights at work has always been of a high importance to Tirana Bank. Respect of human rights characterizes all bank policies, procedures and human management practices, by ensuring equal opportunities in the working environment, which accepts and integrates diversity.
During 2017 all the employees of the Bank participated in a lesson regarding “Human Rights, Diversity and Equal Opportunities at Work”, through the e-learning platform.
HUMAN RESOURCES COMMUNICATION PHILOSOPHY
Tirana Bank recognizes the vital importance of internal communication, as it promotes open, two-way communication between Management and employees. It creates a sense of security, dignity and collaboration, reduces any possible tensions, and achieves greater and more effective dissemination of knowledge and information, which is deemed useful for developing new products and services at all levels.
A SAFE WORK ENVIRONMENT
Tirana Bank complies with the legislative regulations regarding employees’ health and safety. Fully respecting its legal obligations, and showing particular sensitivity to employees’ physical health, the Bank takes care to provide a modern, healthy and safe workplace. Tirana Bank places special emphasis to the wellbeing of its employees. In addition to legal requirements, the Bank provides a Private Health Insurance Plan for all its employees, fully covered by the bank, the highest private health insurance plan on average per employee compared to the banking sector in Albania.
In addition, Tirana Bank offers to its employees trainings on yearly basis, related to fire protection and safety, as well as first aid, which endow the staff with skills such as: rescue operations, first aid provision, turning off fire, guide evacuation through certain actions etc.
36 REWARDING HUMAN RESOURCES
Tirana Bank offers to its employees (new or existing) a competitive remuneration package, in order to attract highly motivated employees to its team and to retain existing ones.
A remuneration policy is in place, as an integral part of the Bank’s corporate governance, aimed at deterring from excessive risk-taking and at continually strengthening the Bank’s values and long-term interests. The remuneration policy is in accordance with the Bank’s business strategy and supports its performance-driven culture, which aligns the organization’s goals with those of the interested parties, employees, management and shareholders. The remuneration-defining procedures are clear, recorded and with internal transparency.
The Remuneration Policy is based on the following principles:
• Maximization of performance;
• Talent attraction and retention;
• Alignment of remuneration and rewards with profitability, risk, capital adequacy and sustainable growth;
• Compliance with the regulatory framework;
• Internal transparency;
• Deterring from excessive risk-taking; FINANCIAL STATEMENTS 8- INDEPENDENT AUDITOR’S REPORT FINANCIAL STATEMENTS - INDEPENDENT AUDITOR’S REPORT
TABLE OF CONTENT AUDITOR’S REPORT STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME 38 STATEMENT OF FINANCIAL POSITION 39 STATEMENT OF CHANGES IN EQUITY 40 STATEMENT OF CASH FLOWS 41 1. CORPORATE INFORMATION 42 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 43 3. FINANCIAL RISK MANAGEMENT 54 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS 72 5. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS 73 6. INTEREST INCOME 82 7. INTEREST EXPENSE 82 8. NET FEES AND COMMISSION INCOME 82 9. PERSONNEL EXPENSES 83 10. OTHER OPERATING EXPENSES 83 11. INCOME TAX EXPENSE 83 12.CASH AND BALANCES WITH THE BANK 86 13.LOANS AND ADVANCES TO CUSTOMERS 89 14. FINANCIAL ASSETS AVAILABLE FOR SALE 91 15. INVESTMENT PROPERTIES 92 16. INTANGIBLE ASSETS 93 17. PROPERTY AND EQUIPMENT 94 18. OTHER ASSETS 95 19. DUE TO BANKS 95 20. DUE TO CUSTOMERS 95 21. OTHER LIABILITIES 96 22. PROVISIONS 96 23. PAID-IN CAPITAL AND SHARE PREMIUM 97 24. OTHER RESERVES 97 25. DIVIDEND PER SHARE 98 26. CASH AND CASH EQUIVALENTS 98 27. RELATED PARTIES 98 28. PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT CATEGORY 100 29. COMMITMENTS AND CONTINGENCIES 101 30. EVENTS AFTER THE REPORTING DATE 101 TIRANA BANK ANNUAL REPORT 2017
Notes 2017 2016 Interest income 6 1,884,387 2,215,787 Interest expense 7 (198,854) (364,736) Net interest income 1,685,533 1,851,051
Impairment of loans and advances 13 (130,578) (758,768)
Net interest income after provision for loan impairment 1,554,955 1,092,283
Fee and commission income 8 423,747 418,819 Fee and commission expense 8 (20,227) (16,651) Net fee and commission income 403,520 402,168
Foreign exchange gains less (losses) (254,313) (159,437)
Other operating income 190,676 94,471 Personnel expenses 9 (632,536) (534,837) Other operating expenses 10 (939,964) (942,290) Unrealised gain/ (loss) on property revaluation (118,836) (194,886)
Other Provisions 60,991 (68,298)
Depreciation and amortisation (185,621) (212,972)
(1,879,603) (2,018,249)
Profit/(Loss) before income tax 78,872 (523,798)
Income tax credit/(expense) 11 (9,493) 3,393
Profit/(Loss) for the year 69,379 (520,405)
Other comprehensive income/(expense), net of tax:
Items that may be reclassified subsequently to profit or loss:
- Net fair value (loss)/gain on available-for-sale financial assets (117,979) 113,648 - Deferred tax related to fair value loss/gain recorded directly in 17,697 (17,424) other comprehensive income Other comprehensive income/(expense)for the year (100,282) 96,224
Total comprehensive income for the year (30,903) (424,181)
Notes 31 December 2017 31 December 2016
The accompanying notes on pages 11 to 80 form an integral part of these financial statements.
Dritan Mustafa Konstantinos Tsigaras Tedi Zëri Chief Executive Officer Chief Financial Officer Financial Control Manager
40 ASSETS Cash and balances with the Central Bank 12 6,914,728 7,128,006 Loans and advances to banks 12 26,544,252 22,408,310 Loans and advances to customers 13 24,037,231 25,273,650 Financial assets available for sale 14 15,343,098 21,447,552 Prepaid corporate income tax 11 275,818 300,914 Investment properties 15 117,464 109,864 Repossessed collaterals inventory 15 2,921,930 2,746,982 Intangible assets 16 242,035 293,286 Property and equipment 17 498,064 545,496 Deferred tax assets 11 33,004 24,800 Other assets 18 857,275 1,085,894
TOTAL ASSETS 77,784,899 81,364,754
DETYRIME DHE KAPITALI Due to banks 19 1,252,282 2,286,163 Due to customers 20 60,957,146 63,585,400 Other liabilities 21 758,515 515,875 Provisions 22 312,521 441,978
TOTAL LIABILITIES 63,280,464 66,829,416
Equity Paid-in capital 23 14,754,741 14,754,741 Share premium 23 1,735,494 1,735,494 Other reserves 24 1,700,011 1,800,293
Retained earnings/(Accumulated losses) (3,685,811) (3,755,190)
TOTAL EQUITY 14,504,435 14,535,338
TOTAL LIABILITIES AND EQUITY 77,784,899 81,364,754
The accompanying notes on pages 11 to 80 form an integral part of these financial statements.
Pasqyrat financiare u miratuan nga Bordi i Drejtorëve At 25 maj 2018 dhe nënshkruan në emër të tyre nga:
Dritan Mustafa Konstantinos Tsigaras Tedi Zëri Chief Executive Officer Chief Financial Officer Financial Control Manager
41 TIRANA BANK ANNUAL REPORT 2017
Retained Paid-in Capital Share Premium Other Reserves Total Equity Earnings At 1 January 2016 14,754,741 1,735,494 1,704,370 (3,234,785) 14,959,820
Loss for the year - - - (520,405) (520,405)
Change in retained earnings - - 95,923 - 95,923
At 31 December 2016 14,754,741 1,735,494 1,800,293 (3,755,190) 14,535,338
Profit for the year - - - 69,379 69,379
Change in retained earnings - - (100,282) - (100,282)
At 31 December 2017 14,754,741 1,735,494 1,700,011 (3,685,811) 14,504,435
The accompanying notes on pages 11 to 80 form an integral part of these financial statements.
Dritan Mustafa Konstantinos Tsigaras Tedi Zëri Chief Executive Officer Chief Financial Officer Financial Control Manager
42 Notes 2017 2016
CASH FLOW FROM OPERATING ACTIVITIES Profit/(Loss) before tax 78,872 (523,798)
Adjustments for: Depreciation and amortisation 17, 18 185,621 Impairment of loans and advances 13 130,578 Net changes in fair value of financial assets 5,6 (118,836) Net interest income (1,685,533) 262,687
Other non-cash items (214,539) (1,165,568)
(1,386,165)
Increase in compulsory reserve with the Central Bank 361,227 536,951
Decrease/(increase) in loans and advances to customers 1,030,410 2,194,070
Decrease/(Increase) in other assets 160,322 (389,333)
(Decrease)/Increase in due to banks (1,033,881) 261,533
Decrease in due to customers 2,597,005) (328,416)
(Increase)/Decrease in Repossessed collaterals inventory (301,384) 407,699
(Decrease)/increase in other liabilities 242,640 159,183
Interest received 1,959,818 1,645,448
Interest paid (230,103) (197,903)
Income tax paid 25,096 -
Net cash generated from operating activities (1,769,025) 3,123,664
CASH FLOW FROM INVESTING ACTIVITIES Purchase of property & equipment 17 57,307) (52,006) Purchase of intangible assets 16 (29,631) (66,605) Purchase of financial assets available for sale 14 (7,499,004) (8,572,805) Proceeds from maturing available for sale financial assets 14 13,638,858 7,691,275 Net cash from/(used in) investing activities 6,052,916 (1,000,141)
CASH FLOW FROM FINANCING ACTIVITIES
Increase of share capital - -
Net cash (used in)/from financing activities - -
Net increase/(decrease) increase in cash and cash equivalents 4,283,891 2,123,523
Cash and cash equivalents at 1 January 23,953,064 21,829,541 Cash and cash equivalents at 31 December 26 28,236,955 23,953,064
The accompanying notes on pages 11 to 80 form an integral part of these financial statements.
Dritan Mustafa Konstantinos Tsigaras Tedi Zëri Chief Executive Officer Chief Financial Officer Financial Control Manager
43 TIRANA BANK ANNUAL REPORT 2017
Corporate 1. 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 amended, Law 10481 dated 17 November 2011, as well as other relevant laws. According to article 4 of its Statute, the scope of work 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 owned by Piraeus Bank S.A which owns 98.83 % of shares. The Bank has 39 branches (2016: 39) within the Republic of Albania and has no overseas operations. The total number of the Bank’s employees is 439 (2016: 432) The financial statements for the year ended 31 December 2017 were authorized for issue by the Board of Directors on 25 May 2018. Approval of the financial statements by the Shareholders will take place in 39 the Annual General Meeting of the Shareholders. Branches Principal activity in the Republic The Bank’s principal business activity of Albania is commercial and retail banking operations within the Republic of Albania. The Bank has been operating under a full banking licence issued by the Central Bank of the Republic of 439 Albania (“Bank of Albania” or “BoA”) since 1996. Number of Bank employees
44 Summary of significant 2. 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.
2.1STATEMENT OF COMPLIANCE The financial statements of Tirana Bank Sh.A. have been prepared in accordance with International Financial Reporting Standards (IFRSs) and IFRIC interpretations. The accounting policies adopted are consistent with those of the previous financial year.
2.2 BASIS OF PREPARATION The financial statements have been prepared on a historical cost basis, except for available-for-sale financial investments 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.
a) Position of the Group b) Position of the Bank Piraeus Group branch network at 31st December 2017 In the current environment the focus of the Bank has been totaled 753 units, of which 620 operated in Greece and 133 on liquidity and capital adequacy. As disclosed in Notes 20 in 5 other countries. The branch network in Greece was and 21, the Bank’s main source of funding is locally collected reduced by 40 units and abroad by 128 units during 2017 deposits from corporate and retail customers. as a result of the rationalization plan. At the same time, The Bank’s capital adequacy ratio (as prescribed by the Group’s headcount totaled 15.115 employees in the BoA) as at 31 December 2017 amounts to 21.25% (2016: continuing operations, of which 13.253 were employed in 17.89%) and is higher than the specifically-set regulatory Greece (2016: 18,075 and 14,492 respectively). minimum of 15%. Additionally, the Bank’s liquidity ratio The Group’s international continuing operations on 31st as of 31 December 2017 was 46.7% (2016: 47%), which December 2017 accounted for 6% of its total; assets, 17.7 is in compliance with the article 71 of the Bank of Albania % of its branch network and 12.3% of its headcount. regulation on liquidity, dated 14 October 2009. Bank is in compliance with the regulatory requirements and 2017 was a significant year for Piraeus Bank. From a did not exceed the amount prescribed by the Law. financial point of view, this was the year which showed Consequently, the going concern assumption has been e stabile financial performance of the bank, especially applied in the preparation of the financial statements. during the second half of the year, when market conditions Management prepared these financial statements on a allowed it. The improvement in liquidity and asset quality going concern basis, which assumes that the Bank will accelerated and that was visible across financial ratios. continue to operate in the foreseeable future. In order to On an institutional level, the year was characterized by the assess the reasonability of this assumption, management completion of the changes in the Board of Directors, in reviews the forecasts of the future cash inflows and the compliance with international best practices and regulatory support provided by shareholders. rules, which was sealed with the Group’s new CEO taking Based on the current financial plans, the actual situation office on April 2017. The institutional ring-fencing of the Bank of the Bank, management is satisfied that the Bank will allows further strengthening and unceasing operational be able to continue to operate as a going concern in the continuity to the benefit of the shareholders, customers and foreseeable future and, therefore, this principle is applied in employees. the preparation of these financial statements. The main accounting policies used in the preparation of these financial statements are set out below.
45 TIRANA BANK ANNUAL REPORT 2017
2.3 FOREIGN The applicable rates of exchange (Lek to foreign currency unit) for the principal CURRENCY currencies as at 31 December 2017 and 2016 were as follows:
TRANSLATION 2017 2016 The financial statements are USD 111.10 128.17 presented in Albanian Lek, which EUR 132.95 135.23 is the Bank’s functional and presentation currency.
Transactions and balances Transactions in foreign currencies 2.4 FINANCIAL INSTRUMENTS – INITIAL are translated into the respective RECOGNITION AND SUBSEQUENT MEASUREMENT functional currency of the operation at the spot exchange a) Date of recognition rate at the date of the transaction. Purchases or sales of financial assets that require delivery of assets within the Monetary assets and liabilities time frame generally established by regulation or convention in the marketplace denominated in foreign are recognised on the trade date, i.e. the date that the Bank commits to purchase currencies at the reporting date or sell the asset. are retranslated into the functional currency at the spot exchange b) Initial recognition of financial instruments rate at that date. The foreign The classification of financial instruments at initial recognition depends on currency gain or loss on monetary the purpose for which the financial instruments were acquired and their items is the difference between characteristics. All financial instruments are measured initially at their fair value amortised cost in the functional plus, in case of financial assets and liabilities not at fair value through profit and currency at the beginning of the loss, transaction costs. Fair value at initial recognition is best evidenced by the period, adjusted for effective transaction price. A gain or loss on initial recognition is only recorded if there is interest and payments during the a difference between fair value and transaction price which can be evidenced period, and the amortised cost in by other observable current market transactions in the same instrument or by foreign currency translated at the a valuation technique whose inputs include only data from observable markets. spot exchange rate at the end of c) Financial assets held to maturity the period. Financial assets held to maturity are those investments which carry fixed or Non-monetary assets and determinable payments and have fixed maturities and which the Bank has the liabilities denominated in foreign intention and ability to hold to maturity and which do not meet definition of loans currencies, which are stated at and receivables. If the Bank were to sell other than an insignificant amount of held historic cost, are translated at to maturity investments, the entire category would be reclassified to available for the prevailing foreign exchange sale. rate at the date of the transaction. Financial assets held to maturity are subsequently measured at amortised cost Non-monetary assets and using the effective interest rate method, less allowance for impairment. Amortised liabilities denominated in foreign cost is calculated by taking into account any discount or premium on acquisition currencies that are measured at and fees that are an integral part of the effective interest rate. The amortisation is fair value are retranslated into the included in “Interest and similar income” in profit or loss. The losses arising from functional currency at the spot impairment of such investments are recognised in profit or loss as “Impairment exchange rate at the date that the losses on financial investments”, if any. fair value was determined. Foreign currency differences d) Loans and receivables arising on translation are Loans and receivables include “Due from banks” and “Loans and advances to generally recognised in profit or customers”, which are financial assets with fixed or determinable payments and loss, except for foreign currency fixed maturities that are not quoted in an active market. They are not entered differences arising from the into with the intention of immediate or short-term resale and are not classified as translation of available-for-sale “Financial assets held for trading”, designated as “Financial investment available- equity instruments, which are for-sale’ or “Financial assets designated at fair value through profit or loss”. recognised in OCI. After initial measurement, amounts due from banks and loans and advances to
46 customers are subsequently measured at amortised cost As at December 31, 2017 and 2016 the Bank classified its using the effective interest rate method, less allowance financial assets available-for-sale financial investments, for impairment. Amortised cost is calculated by taking loans and receivables. The Bank did not classify any into account any discount or premium on acquisition and financial assets designated at fair value through profit or fees and costs that are an integral part of the effective loss during reporting period. interest rate. The amortisation is included in “Interest and g) Financial liabilities similar income” in profit or loss. The losses arising from After initial measurement, debt issued and other borrowings impairment are recognised in profit or loss in “Impairment are subsequently measured at amortized cost using losses on loans and advances”. the effective interest rate method. There is no financial e) Financial assets at fair value through profit or loss liability measured at fair value through profit and loss. This category includes treasury bills issued by the Albanian Any differences between proceeds net of transactions Government. costs and the redemption value is recognised in “Interest Financial assets at fair value through profit or loss include and similar expenses” in profit or loss. Amortized cost is financial assets which are managed and their performance calculated by taking into account any discount or premium is evaluated on a fair value basis, in accordance with the on the issue and costs that are an integral part of the Bank’s risk management strategy. Financial assets at effective interest rate. fair value through profit or loss are carried at fair value. All changes in the fair value and gains or losses on h) Offsetting financial instruments derecognising are recorded in profit or loss as other gains Financial assets and liabilities are offset and the net amount the period in which they arise. reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts f) Available for sale financial assets and there is an intention to settle on a net basis, or realize This classification includes investment securities which the asset and settle the liability simultaneously. the Bank intends to hold for an indefinite period of time and which may be sold in response to needs for liquidity or i) Derecognition changes in interest rates, exchange rates or equity prices. Financial assets are derecognised when the contractual Investment securities available for sale are carried at fair rights to receive the cash flows from these assets have value. Interest income on available-for-sale debt securities ceased to exist or the assets have been transferred and is calculated using the effective interest method and substantially all the risks and rewards of ownership of the recognised in profit or loss for the year. Dividends on assets are also transferred (that is, if substantially all the available-for-sale equity instruments are recognised in risks and rewards have not been transferred, the Bank profit or loss for the year when the Bank’s right to receive tests control to ensure that continuing involvement on the payment is established and it is probable that the dividends basis of any retained powers of control does not prevent will be collected. All other elements of changes in the fair derecognising). Financial liabilities are derecognised when value are recognised in other comprehensive income until they have been redeemed or otherwise extinguished. the investment is derecognised or impaired, at which time the cumulative gain or loss is reclassified from other comprehensive income to profit or loss for the year. The fair value of AFS monetary financial assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate prevailing at the end of the reporting period. The foreign exchange gains and losses that are recognised in profit or loss are determined based on the amortised cost of the monetary asset. Other foreign exchange gains and losses are recognised in other comprehensive income.
47 TIRANA BANK ANNUAL REPORT 2017
2.5 REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
Securities sold under agreements to repurchase at a date (‘reverse repos’) are recorded as due from other banks specified future date (“repos”) are not derecognised from or loans and advances to customers, as appropriate. The the balance sheet. The corresponding cash received, corresponding cash paid, including accrued interest, is including accrued interest, is recognised in the statement recognised in the statement of financial position as “Due of financial position as a “Due to Banks”, reflecting its from Banks”. The difference between the purchase and economic substance as a loan to the Bank. The difference resale prices is treated as interest income and is accrued between the sale and repurchase prices is treated as interest over the life of the agreement using the effective interest expense and is accrued over the life of the agreement using rate method. the effective interest rate method. Conversely, securities purchased under agreements to resell at a specified future
2.6 DETERMINATION OF FAIR VALUE
For financial instruments that are traded in active markets, present value techniques, comparison to similar instruments the determination of fair values of financial assets and for which market observable prices exist and other relevant financial liabilities is based on quoted market prices or valuation models. Valuation techniques such as discounted dealer price quotations. A financial instrument is regarded cash flow models or models based on recent arm’s length as quoted in an active market if quoted prices are readily transactions or consideration of financial data of the and regularly available from an exchange, dealer, broker, investees, are used to measure fair value of certain financial industry group, pricing service or regulatory agency, and instruments for which external market pricing information is those prices represent actual and regularly occurring not available. market transactions on an arm’s length basis. If the above Fair value measurements are analysed by level in the fair criteria are not met, the market is regarded as being value hierarchy as follows: (i) level one are measurements inactive. Indicators that a market is inactive are when at quoted prices (unadjusted) in active markets for identical there is a wide bid-offer spread or significant increase in assets or liabilities, (ii) level two measurements are valuations the bid-offer spread or there are few recent transactions, a techniques with all material inputs observable for the asset significant decrease in the average daily trading volume of or liability, either directly (that is, as prices) or indirectly (that all the shares under consideration in country 2 over the last is, derived from prices), and (iii) level three measurements 5 years, etc.. are valuations not based on solely observable market data For all other financial instruments not listed in an active (that is, the measurement requires significant unobservable market, the fair value is determined by using appropriate inputs). valuation techniques. Valuation techniques include net
48 2.7 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 (negative) 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 high probability that they will enter bankruptcy or other financial reorganisation 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. a) Due from banks and loans and advances to customers For amounts due from banks and loans and advances to customers carried at amortised 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 and the amount of the loss is recognised 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 realised 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 recognised, 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.
49 TIRANA BANK ANNUAL REPORT 2017
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 asset’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 recognised 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 recognised, 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. Impairment losses are recognised 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. 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 recognised 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 recognised 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 recognised in profit or loss, the impairment loss is reversed through profit or loss for the year.
d) Kontrata të ristrikturuara Kur është e mundur, banka mundohet të ristrukturojë një hua në vend që të marrë kolateralin. Kjo mund të përfshijë shtyrjen e marrëveshjeve të ripagesës dhe një marrëveshje të re për kushtet e kredisë. Me ri-negocimin e kushteve, kredia nuk konsiderohet At në vonesë. Drejtimi rishikon vazhdimisht kreditë e ristrukturuara për t’u siguruar që të gjitha kriteret përmbushen dhe pagesat e ardhshme kanë mundësi të kryhen. Kreditë vazhdojnë të jenë subjekt i një vlerësimi individual apo kolektiv për zhvlerësim, të llogaritur duke përdorur normën efektive fillestare të interesit të kredisë.
50 2.8 LEASING 2.9 REVENUE RECOGNITION
The determination of whether an arrangement is, or contains Revenue is recognised to the extent that it is probable a lease is based on the substance of the arrangement and that the economic benefits will flow to the Bank and the requires an assessment of whether the fulfilment of the revenue can be reliably measured. The following specific arrangement is dependent on the use of a specific asset recognition criteria must also be met before revenue is or assets and the arrangement conveys a right to use the recognised asset. a) Interest and similar income and expense i. Bank as a Lessee Interest and similar income includes coupons earned on Finance leases, which transfer to the Bank substantially all fixed income investments, any discount and premium on the risks and benefits incidental to ownership of the leased zero coupon treasury bills recognised using in profit or item, are capitalised at commencement of the lease term loss the effective interest rate method and interest income at the fair value of the leased property or, if lower, at the on loans and advances. For all financial instruments present value of the minimum lease payments and included measured at amortised cost and interest bearing financial in “Property and equipment” with the corresponding instruments classified as available-for-sale financial liability to the lessor included in “Other liabilities”. Lease investments, interest income or expense is recorded at payments are apportioned between the finance charges the effective interest rate, which is the rate that exactly and reduction of the lease liability so as to achieve a discounts estimated future cash payments or receipts constant rate of interest on the remaining balance of the through the expected life of the financial instrument or liability. Finance charges are charged directly against a shorter period, where appropriate, to the net carrying income in “Interest and similar expense”. The Bank did amount of the financial asset or financial liability. not have significant financial lease agreements during the The calculation takes into account all contractual terms of reporting period. the financial instrument (for example, prepayment options) Capitalised leased assets are depreciated over the shorter and includes any fees or incremental costs that are directly of the estimated useful life of the asset and the lease term, attributable to the instrument and are an integral part of if there is no reasonable certainty that the Bank will obtain the effective interest rate, but not future credit losses. The ownership by the end of the lease term. Any operating carrying amount of the financial asset or financial liability lease rentals payable are accounted for on a straight-line is adjusted if the Bank revises its estimates of payments basis over the lease term and included in “Other operating or receipts. The adjusted carrying amount is calculated expenses”. When an operating lease is terminated before based on the original effective interest rate and the change the lease period has expired, any payment required to be in carrying amount is recorded as interest income or made to the lessor by way of penalty is recognized as an expense. Once the recorded value of a financial asset or expense in the period in which termination takes place. a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be ii. Bank as a Lessor recognised using the original effective interest rate applied Where the Bank is a lessor in a lease which does not to the new carrying amount. transfer substantially all the risks and rewards incidental to ownership from the Bank to the leasee, the total lease Fee and commission income payments are recognised in profit or loss for the year (rental The Bank earns fee and commission income from a diverse income – note 2.8, c) on a straight-line basis over the period range of services it provides to its customers. Fee income of the lease. can be divided into the following two categories:
i. 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 recognised as an adjustment to the effective interest rate on the loan. 51 TIRANA BANK ANNUAL REPORT 2017
ii. 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 recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria.
b) Rental income Rental income 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.
2.10 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 27.
2.11 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 derecognised 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 recognised in “Other operating income” or “Other operating expenses” in profit or loss in the year the asset is derecognised.
52 2.12 INTANGIBLE ASSETS 2.13 INVESTMENT PROPERTIES
Intangible assets acquired separately Investment properties are properties held to earn rentals Intangible assets with finite useful lives that are acquired and/or for capital appreciation (including property under separately are carried at cost less accumulated amortisation construction for such purposes). Investment properties and accumulated impairment losses. Amortisation is are measured initially at cost, including transaction costs. recognised on a straight-line basis over their estimated Subsequent to initial recognition, investment properties are useful lives. The estimated useful life and amortisation measured at fair value. All of the Bank’s property interests method are reviewed at the end of each reporting period, held under operating leases to earn rentals or for capital with the effect of any changes in estimate being accounted appreciation purposes are accounted for as investment for on a prospective basis. Intangible assets with indefinite properties and are measured using the fair value model. useful lives that are acquired separately are carried at cost Gains and losses arising from changes in the fair value of less accumulated impairment losses. investment properties are included in profit or loss in the period in which they arise. Internally-generated intangible assets - research and development expenditure An investment property is derecognised upon disposal or Expenditure on research activities is recognised as an when the investment property is permanently withdrawn expense in the period in which it is incurred. from use and no future economic benefits are expected An internally-generated intangible asset arising from from the disposal. Any gain or loss arising on derecognition development (or from the development phase of an internal of the property (calculated as the difference between the project) is recognised if, and only if, all of the following have net disposal proceeds and the carrying amount of the been demonstrated: asset) is included in profit or loss in the period in which the • the technical feasibility of completing the intangible asset property is derecognised. so that it will be available for use or sale; • the intention to complete the intangible asset and use or Investment properties includes collateral obtained due to sell it; legal process include land, building and business premises • the ability to use or sell the intangible asset; which are not used by the Bank for its core operations. • how the intangible asset will generate probable future economic benefits; • the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and • the ability to measure reliably the expenditure attributable to the intangible asset during its development. The amount initially recognised for internally-generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally- generated intangible asset can be recognised, development expenditure is recognised in profit or loss in the period in which it is incurred. Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. Intangible assets include the Bank’s software with an estimated useful life of five years.
53 TIRANA BANK ANNUAL REPORT 2017
2.14 IMPAIRMENT OF NON- 2.15 FINANCIAL GUARANTEE FINANCIAL ASSETS CONTRACTS
The Bank assesses at each reporting date or more Financial guarantee contracts are contracts that require frequently if events or changes in circumstances indicate the issuer to make specified payments to reimburse the that the carrying value may be impaired, whether there is an holder for a loss it incurs because a specified debtor fails indication that a non-financial asset may be impaired. If any to make payments when due, in accordance with the terms such indication exists, or when annual impairment testing of a debt instrument. for an asset is required, the Bank makes an estimate of the Such financial guarantees are given to banks, financial asset’s recoverable amount. Where the carrying amount of institutions and other bodies on behalf of customers to an asset (or cash-generating unit) exceeds its recoverable secure loans, overdrafts and other banking facilities. amount, the asset (or cash-generating unit) is considered Financial guarantees are initially recognized in the financial impaired and is written down to its recoverable amount. statements at fair value on the date the guarantee was For assets excluding goodwill, an assessment is made at given. Subsequent to initial recognition, the bank’s liabilities each reporting date as to whether there is any indication under such guarantees are measured at the higher of that previously recognised impairment losses may no the initial measurement, less amortization calculated to longer exist or may have decreased. If such indication recognize in profit or loss the fee income earned on a exists, the recoverable amount is estimated. A previously straight line basis over the life of the guarantee and the recognised impairment loss is reversed only if there has best estimate of the expenditure required to settle any been a change in the estimates used to determine the financial obligation arising at the reporting date. These asset’s recoverable amount since the last impairment loss estimates are determined based on experience of similar was recognised. If that is the case, the carrying amount transactions and history of past losses, supplemented by of the asset is increased to its recoverable amount to the the judgment of Management. Any increase in the liability extent that the increased carrying amount of an asset other relating to guarantees is taken to profit or loss under other than goodwill attributable to a reversal of an impairment operating expenses. loss does not exceed the carrying amount that would have Financial guarantees and commitments to provide a loan been determined (net of amortisation or depreciation) had are initially recognised at their fair value, which is normally no impairment loss been recognised for the asset in prior evidenced by the amount of fees received. This amount years. is amortised on a straight line basis over the life of the commitment.
2.16 PENSIONS AND OTHER POST- 2.17 PROVISIONS EMPLOYMENT BENEFITS Provisions are recognised when the Bank has a present The Bank contributes to its employees post retirement obligation (legal or constructive) as a result of a past plans as prescribed by the domestic social security event, and it is it is more likely than not that an outflow of legislation. Bank’s pension obligations, relate only to resources will be required to settle the obligation; and the defined contribution plans. Defined contribution plans, amount has been reliably estimated. based on salaries, are made to the state administered Where there are a number of similar obligations, the institution (i.e. Social Security Institute) responsible for the likelihood that an outflow will be required in settlement is payment of pensions. Once the contributions have been determined by considering the class of obligations as a paid, the Bank has no further payment obligations. The whole. A provision is recognized even if the likelihood of an contributions constitute net periodic costs for the year outflow with respect to any item included in the same class in which they are due and as such they are included in of obligations may be small. “Personnel expenses” in the statement of comprehensive Provisions are measured at the present value of the income. 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.
54 2.18 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 recognised in the statement of comprehensive income except if it is recognised in other comprehensive income because it relates to transactions that are also recognised, 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.(2017:15%, 2016: 15%).
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 recognised 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 recognised 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 utilised 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 utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised 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 realised 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 taxable entity and the same taxation authority.
Dividends on ordinary shares are recognised 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.
55 TIRANA BANK ANNUAL REPORT 2017
Financial risk 3. management
The Bank’s activities expose it 3.1 CREDIT RISK to a variety of financial risks and The Bank takes on exposure to credit risk, which is the risk that counterparty those activities involve the analysis, will cause a financial loss for the Bank by failing to fulfil obligations to evaluation, acceptance and the Bank. Credit risk is the most important risk for the Bank’s business; management of some degree of risk management therefore carefully manages its exposure to credit risk. Credit or combination of risks. Taking risk exposures arise principally in lending activities that lead to loans and is core to the financial business, and advances, and investment activities that bring debt securities and other the operational risks are an inevitable bills into the Bank’s asset portfolio. There is also credit risk in off-balance consequence of being in business. sheet financial instruments. The credit risk management and control are The Bank’s aim is therefore to achieve centralised in credit risk management team of risk department at both local an appropriate balance between risk and group (Piraeus Bank SA) level and reported to the Board of Directors. 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 The main targets of the Bank’s Credit Risk Management are to: these risks, to set appropriate risk limits and controls, and to monitor the • Set centralized policies aligned with the Group Policies and in compliance risks and adherence to limits by means with Central Bank requirements; of reliable and up-to-date information • Monitor the Bank’s portfolio. systems. • Managing risk pro-actively to identify and analyse risk at an early stage The Bank regularly reviews its risk • Create risk management function independent of commercial lines of the management policies and systems to business reflect changes in markets, products • Integrate the risk management function into the organizational business and emerging best practice. process Risk management is carried out by • Report on risk across the organization a risk department in the Bank under policies approved by the Board of Directors. The Board provides written principles for overall risk management, The Credit Risk Management Committee is responsible for: as well as written policies covering specific areas, such as, credit risk, • Developing Credit Risk management systems and infrastructure: analysing foreign exchange risk, interest rate risk results and reporting to the management and liquidity risk. In addition, internal audit is responsible • Preparing the Bank for Basel II implementations for the independent review of risk management and the control • Relationship with Bank of Albania (Central Bank), Piraeus Bank and/or environment. other authorities in the terms of effectiveness of Credit Risk Management The most important types of risk are credit risk, liquidity risk, market risk The Audit Committee and Internal Auditing Department follow up the and other operational risk. Market risk compliance with policies and procedures. includes currency risk, interest rate and other price risk
56 3.1.1 CREDIT RISK MEASUREMENT
Proçedurat e përshkruara At poshtë lidhen me matjen e rrezikut të kredisë me qëllim operacional si dhe me raportimin sipas rregullores të Bankës së Shqipërisë. Humbjet e zhvlerësimit të huave dhe paradhënieve për raportim financiar përcaktohen duke ndjekur proçedurat e përshkruara në shënimin 3.1.3. a) Loans and advances In measuring credit risk of loan and advances to customers and to banks at a counterparty level, 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 of the grade 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: Financial Assets are classified into Group A if they are toward debtors that have been evaluated in investment grade ratings by external rating agencies, e.g. Moody’s, S&P, Fitch, regardless of the internal MRA rating. The bank has no such customers as at 31 December 2017 and 2016. 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.
57 TIRANA BANK ANNUAL REPORT 2017
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; • for which a motion for commencement of process of liquidation or declaration of bankruptcy 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
58 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. 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, banks 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 minimise 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.
59 TIRANA BANK ANNUAL REPORT 2017
(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 authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions – are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct loan. Commitments to extend credit represent unused portions of authorisations 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. 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 recognised for financial reporting purposes only for losses that have been incurred at the reporting date based on objective evidence of impairment (see Note 2.7). 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
2017 2016
Loans and advances Impairment provision Loans and advances Impairment provision (%) level (%) (%) level (%)
Investment Grade - - - - Standard 64.89 0.64 53.05 1.30 Special monitoring 8.75 9.37 9.28 10.15 Sub-standard 2.08 20.26 3.25 22.94 Doubtful and Loss 24.29 43.35 34.42 44.23 Total 100.00 12.18 100.00 17.60
60 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; • 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.
3.1.4 MAXIMUM EXPOSURE TO CREDIT RISK BEFORE COLLATERAL HELD OR OTHER CREDIT ENHANCEMENTS
Maximum exposure
2017 2016 Credit risk exposures relating to on-balance sheet assets are as follows: Cash and balances with Central Bank 5,222,274 5,583,251 Loans and advances to banks 26,544,252 22,408,522 Loans and advances to customers:
Loans to individuals
− Consumer/Overdrafts 1,854,145 1,594,628 − Credit cards 134,162 135,686 − Mortgages 5,989,826 5,731,887
7,978,133 7,462,201 Loans to corporate entities:
− Large corporate customers 2,134,042 1,993,133 − Small and medium size enterprises (SMEs) 13,925,056 15,818,316
16,059,098 17,811,449 Total loans and advances to customers 24,037,231 25,273,650 Financial assets available for sale 15,333,682 21,447,552 Financial assets held to maturity - - Credit risk exposures relating to off-balance sheet items are as follows: Letters of Guarantees 329,461 370,609 Letters of Credit 21,242 - Loans Commitment 4,794,011 7,931,132 At 31 December 76,282,153 83,014,716
The above table represents a worst case scenario of credit risk exposure to the Bank at 31 December 2017 and 2016, 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. 61 TIRANA BANK ANNUAL REPORT 2017
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: • 73,64 %of the loans and advances portfolio is categorised in the top two grades of the internal rating system (2016: 62,33%); • Loans to SMEs, which represents the biggest group in the portfolio, are backed by collateral; • 51,98% of the loans and advances portfolio are considered to be neither past due nor impaired (2016: 43,65%); and • The Bank has introduced a more stringent selection process upon granting loans and advances.
3.1.5 LOANS AND ADVANCES
Loans and advances are summarised as follows: 31 December 2017 31 December 2016
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 14,228,527 26,544,252 13,388,710 22,408,310 Past due but not impaired 5,698,629 - 5,338,148 - Individually impaired 7,444,629 - 11,944,854 - Gross 27,371,785 26,544,252 30,671,712 22,408,310 Less: allowance for impairment (3,334,554) - (5,398,062) - Net 24,037,231 26,544,252 25,273,650 22,408,310
Further information of the impairment allowance for loans and advances to banks and to customers is provided in Notes 12 and 13.
a) 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 (classified as standard) can be assessed by reference to the internal rating system adopted by the Bank.
31 December 2017
Loans and advances to customers
Individual (retail customers) Corporate entities Large Total Loans and Loans and Consumer/ corporate advances to advances Overdrafts Credit cards Mortgages customers SMEs customers to banks
1,390,534 116,201 3,494,560 1,567,418 7,659,814 14,228,527 22,408,310
31 December 2016
Hua dhe paradhënie për klientët Individual (retail customers) Corporate entities Large Total Loans and Loans and Consumer/ corporate advances to advances Overdrafts Credit cards Mortgages customers SMEs customers to banks 1,138,763 106,006 3,175,530 1,882,091 7,086,320 13,388,710 22,408,310
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 customer mortgage and consumer loans.
62 Loans and advances past due but not impaired Gross amount of loans and advances that are past due but not impaired: Loans and advances to customers
31 December 2017 Individë Consumer/ Overdrafts Mortgages Visa Card Total Past due 1 up to 90 days 402,596 2,052,697 26,002 2,481,295 Past due 91-180 days - 99,524 - 99,524 Past due 181-360 days - 17,947 - 17,947 Past due > 360 days - 67,198 - 67,198 Total 402,596 2,237,366 26,002 2,665,964 Fair value of collateral 313,852 2,209,786 1,918 2,525,556
31 December 2017 Corporate and SMEs Past due 1 up to 90 days 2,309,925 Past due 91-180 days 60,407 Past due 181-360 days 53,110 Past due > 360 days 609,224 Total 3,032,666 Fair value of collateral 2,988,402 Total loans and advances past due but not impaired at 31 December 2017 5,698,630
31 December 2016 Individë Consumer/ Overdrafts Mortgages Visa Card Total Past due 1 up to 90 days 370,761 2,020,703 29,666 2,421,130 Past due 91-180 days - 76,831 - 76,831 Past due 181-360 days - 23,007 - 23,007 Past due > 360 days - 29,211 - 29,211 Total 370,761 2,149,752 29,666 2,550,179 Fair value of collateral 302,830 2,117,409 - 2,420,239
31 December 2016 Corporate and SMEs Past due 1 up to 90 days 1,918,739 Past due 91-180 days 144,778 Past due 181-360 days 190,526 Past due > 360 days 533,926 Total 2,787,969 Fair value of collateral 2,651,493 Total loans and advances past due but not impaired at 31 December 2017 5,338,148
63 TIRANA BANK ANNUAL REPORT 2017
Loans and advances to banks There are no loans and advances to banks as at 31 December 2017, which are past due but not impaired (2016: Nil).
b) Loans and advances individually impaired 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:
Consumer Corporate and and Visa Cards Mortgage SMEs Total 31 December 2017 Individually impaired loans 1,205 95,777 6,715,518 6,812,500 Fair value of collateral - 76,452 6,302,233 6,378,685
31 December 2016 Individually impaired loans 1,134 189,193 10,551,949 10,742,276 Fair value of collateral 1,134 111,608 9,933,870 10,046,612
Detajimi i shumës bruto të huave dhe paradhënieve të zhvlerësuara në mënyrë kolektive sipas kategorisë së bashku me vlerën e drejtë të kolateralëve përkatës të regjistruar si siguri për bankën janë si në vijim:
Consumer Corporate and and Visa Cards Mortgage SMEs Total 31 December 2017 Collectively impaired loans 243,423 363,849 24,857 632,129 Fair value of collateral 101,229 351,065 12,086 464,380
31 December 2016 Collectively impaired loans 341,088 708,778 152,712 1,202,578 Fair value of collateral 185,866 675,207 91,871 952,944
The disclosed fair value of collateral is determined by local certified valuators and represents value realisable 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 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. There are no individually impaired loans and advances to banks as at 31 December 2017 and 2016.
64 3.1.7 CASH AND BALANCES WITH CENTRAL BANK
As at 31 December 2017 and 2016 the amounts due from Central Bank and corresponding banks were neither past due nor impaired.
3.1.8 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 2017 and 2016 these investments were neither past due nor impaired.
3.1.9 CONCENTRATION OF RISKS OF FINANCIAL ASSETS WITH CREDIT RISK EXPOSURE
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.
Industry sectors The analysis of the Bank’s main credit exposure on loans and advances to customers by industry is presented in Note 13.
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.
65 TIRANA BANK ANNUAL REPORT 2017
Concentrations of currency risk – on and off-balance sheet financial instruments: Other At 31 December 2017 EUR USD LEK Total currencies Assets Cash and balances with the Central 3,202,924 411,662 18,214 3,281,928 6,914,728 Bank Due from banks 24,738,436 1,276,316 64,625 464,874 26,544,252 Loans and advances to customers 13,527,180 1,063,069 17,802 9,429,181 24,037,231 Investment securities available for sale 2,998,893 - - 12,344,205 15,343,098 Financial assets held to maturity - - - - - Total financial assets 44,467,433 2,751,047 100,641 25,520,188 72,839,309
Liabilities Due to banks 135,922 - 15,954 1,100,405 1,252,282 Due to customers 25,956,351 2,539,180 528,443 31,933,173 60,957,146 Total financial liabilities 26,092,273 2,539,180 544,397 33,033,578 62,209,428 Net on-balance sheet currency 18,375,160 211,867 (443,756) 10,629,881 position (7,513,390) Off-balance sheet items 4,704,308 116,848 479,840 271,545 5,572,540 Sensitivity if exchange rates in- (8,098) (49) 999 (7,148) crease by 5% Sensitivity if exchange rates de- 8,098 49 (999) 7,148 crease by 5%
The Bank manages its foreign currency exposure taking into consideration that its share capital and share premium is denominated in EUR. 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 5% against the respective foreign currencies with all other variables held constant.
Other EUR USD LEK Total At 31 December 2016 currencies Assets Cash and balances with the Central Bank 3,303,747 430,288 19,579 3,374,392 7,128,006 Due from banks 21,211,939 877,447 118,924 200,000 22,408,310 Loans and advances to customers 14,160,930 1,853,344 21,157 9,238,218 25,273,650 Investment securities available for sale 8,611,330 195,211 - 12,641,010 21,447,552 Financial assets held to maturity - - - - - Total financial assets 47,287,946 3,356,290 159,660 25,453,620 76,257,518
Liabilities Due to banks 1,363,068 - 23,955 899,140 2,286,163 Due to customers 26,961,802 2,609,159 586,866 33,427,573 63,585,400 Total financial liabilities 28,324,870 2,609,159 610,821 34,326,713 65,871,563 Net on-balance sheet currency position 18,963,076 747,131 (451,161) (8,873,093) 10,385,955 Off-balance sheet items 7,952,830 58,497 - 740,248 8,751,575 Sensitivity if exchange rates in- crease by 5% 12,856 1,227 670 14,753 Sensitivity if exchange rates de- crease by 5% (12,856) (1,227) (670) (14,753)
66 3.2.2 INTEREST RATE RISK
The Bank’s operations are subject to the risk of interest rate percentage compared to assets interest rates. However the fluctuations to the extent that interest-earning assets (including actual effect will depend on various factors, including stability of investments) and interest-bearing liabilities mature or re-price the economy, environment and level of the inflation. at different times or in differing amounts. In the case of floating The Bank attempts to mitigate this interest rate risk by monitoring rate assets and liabilities, the Bank is also exposed to basis the reprising dates of its assets and liabilities and setting product risk, which is the difference in re-pricing characteristics of the reprising terms in order to manage gain / loss from changes in various floating rate indices, such as the savings rate, LIBOR and market base rates. In addition, the Bank has contractual rights to different types of interest. revise the interest rates on the major part of its loan portfolio on Risk management activities are aimed at optimising net interest a quarterly basis. income, given market interest rate levels consistent with the The following table presents the interest rate reprising dates for Bank’s business strategies. the Bank’s assets and liabilities. Variable-rate assets and liabilities Asset-liability risk management activities are conducted in the have been reported according to their next rate change date. context of the Bank’s sensitivity to interest rate changes. Fixed-rate assets and liabilities have been reported according to In decreasing interest rate environments, margins earned will their scheduled principal repayment dates: narrow as liabilities interest rates will decrease with a lower
Less than From 1 to 3 From 3 to 12 Over Non-interest Total At 31 December 2017 one month months months 1 year bearing
ASSETS Cash and balances with the Central 5,222,274 - - - 1,692,454 6,914,728 Bank Due from banks 26,544,252 - - - - 26,544,252 Loans and advances to customers 5,039,065 4,123,027 14,779,866 95,273 - 24,037,231 Investment Securities Available for 401,898 4,173,070 3,028,658 7,739,472 - 15,343,098 Sale Financial assets held to maturity ------Total financial assets 37,207,489 8,296,097 17,808,524 7,834,745 1,692,454 72,839,309 Liabilities Due to banks 1,252,282 - - - - 1,252,282 Due to customers 27,559,640 6,534,067 23,074,425 3,695,710 93,304 60,957,146 Total financial liabilities 28,811,922 6,534,067 23,074,425 3,695,710 93,304 62,209,428
Interest sensitivity gap 8,395,567 1,762,030 (5,265,901) 4,139,035 1,599,150 10,629,881
The following table includes figures of comparative period:
Less than From 1 to 3 From 3 to 12 Over Non-interest Total At 31 December 2016 one month months months 1 year bearing ASSETS Cash and balances with the Central Bank 5,583,463 - - - 1,544,543 7,128,006 Due from banks 22,408,310 - - - - 22,408,310 Loans and advances to customers 6,405,384 5,857,480 12,733,731 277,055 - 25,273,650 Investment Securities Available for Sale 23,283 8,535,336 5,322,420 7,566,513 - 21,447,552 Financial assets held to maturity ------Total financial assets 34,420,440 14,392,816 18,056,151 7,843,568 1,544,543 76,257,518 Liabilities Due to banks 2,286,163 - - - - 2,286,163 Due to customers 25,653,076 7,448,555 26,789,302 3,589,111 105,356 63,585,400 Total financial liabilities 27,939,239 7,448,555 26,789,302 3,589,111 105,356 65,871,563 - 67 Interest sensitivity gap 6,481,201 6,944,261 (8,733,152) 4,254,457 1,439,187 10,385,955 TIRANA BANK ANNUAL REPORT 2017
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 2017, 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 period ended 31 December 2017 would respectively increase/decrease by approximately LEK 90,305 thousand (2016: LEK 89,468 thousand).
Interest rate sensitivity analysis by currency is presented below.
Other At 31 December 2017 EUR USD currencies LEK Total Total interest bearing financial assets 43,683,400 2,590,698 82,427 24,780,664 71,137,189 Total interest bearing financial liabilities 26,022,893 2,536,819 544,348 33,012,063 62,116,123 Interest sensitivity gap 17,660,507 53,879 (461,921) (8,231,399) 9,021,066 Sensitivity if interest rates increase by 100 bp 176,605 539 (4,619) (82,314) 90,211 Sensitivity if interest rates decrease by 100 bp (176,605) (539) 4,619 82,314 (90,211)
Other At 31 December 2016 EUR USD currencies LEK Total Total interest bearing financial assets 46,546,507 3,155,150 140,081 24,871,237 74,712,975 Total interest bearing financial liabilities 28,245,196 2,606,417 610,820 34,303,775 65,766,208 Interest sensitivity gap 18,301,311 548,732 (470,739) (9,432,537) 8,946,767 Sensitivity if interest rates increase by 100 bp 183,013 5,487 (4,707) (94,325) 89,468 Sensitivity if interest rates decrease by 100 bp (183,013) (5,487) 4,707 94,325 (89,468)
3.3 LIQUIDITY RISK
Liquidity risk is the risk that the Bank is unable to meet its as indicators of when the contingency plan should be put payment obligations associated with its financial liabilities into operation. This contingency plan is mainly based on when they fall due and to replace funds when they are additional financing to be received from the Parent upon withdrawn. The consequence may be the failure to meet request. obligations to repay depositors and fulfil commitments to In addition, Tirana Bank calculates and monitors the lend. Liquidity ratios, “Liquid Assets/ Total Liabilities” and “Net A Liquidity Risk Management Policy has been applied Current Assets/Total Liabilities”, as they are defined in in all Bank units since the end of 2003. This policy is the Bank of Albania Directive, which refers to the control adjusted to internationally applied practices and regulatory framework of banks’ liquidity adequacy, by the Bank of environments and adapted to the specific activities of Albania (note 2.1.b). Piraeus Bank. The levels of these particular ratios are daily communicated The policy specifies the principal liquidity risk assessment to the responsible business units, and comments, as well definitions and methods, defines the roles and as respective assessments, are included in the reporting responsibilities of the units and staff involved and sets out package to the members of ALCO. the guidelines for liquidity crisis management. The policy is The ALCO has the responsibility: to design the bank’s focused on the liquidity needs expected to emerge, in one strategy on the assets and liabilities development, week or one month, on the basis of hypothetical liquidity depending on the qualitative and quantitative data of the crisis scenarios. organization and development of the business environment; Furthermore, the Policy defines a contingency funding plan to ensure high competitiveness and effectiveness of the to be used in the case of a liquidity crisis. Such a crisis can organization, maintaining assumed risk within the set take place either due to a Tirana Bank specific event or a limits; to manage the assets and liabilities by applying a general market event. Triggers and warning signals serve pricing policy on products and services at the same time.
68 3.3.1 LIQUIDITY RISK MANAGEMENT PROCESS
The table below analyses assets and liabilities into relevant the bank are honoured in full and on time and in addition, time periods based on the remaining period at reporting all contractual payments are discharged in full – e.g. that date to the contractual maturity date. Assets and liabilities depositors will withdraw their money rather than roll it over in foreign currency are converted into LEK using EX rates on maturity. Those assets and liabilities lacking actual as at the year end. maturities (e.g. open accounts, sight deposits, or savings The assumptions made are that scheduled payments to accounts) are assigned to the time band less than one month.
Less than From 1 to 3 From 3 to 12 From 1 to 5 At 31 December 2017 one month months months years Over 5 Years Total Assets liquidity Cash and balances with the Central 6,914,728 - - 6,914,728 Bank - - Due from banks 26,544,252 - - - - 26,544,252 Loans and advances to customers 2,258,372 1,504,051 6,907,618 10,020,735 3,346,455 24,037,231 Investment Securities available for Sale 401,898 4,173,070 3,019,242 7,739,472 - 15,333,682 Financial assets held to maturity ------Total financial assets 36,119,250 5,677,121 9,926,860 17,760,207 3,346,455 72,829,893
Liabilities liquidity Due to banks 1,252,282 - - - - 1,252,282 Due to customers 27,640,865 6,488,424 22,961,144 3,532,965 333,748 60,957,146 Total financial liabilities 28,893,147 6,488,424 22,961,144 3,532,965 333,748 62,209,428 Net liquidity gap 7,226,103 (811,303) (13,034,284) 14,227,242 3,012,707 10,620,465
All Bank’s customer current accounts are included in liabilities maturing less than one month. Current accounts do represent balances that have an history and a deviation in amounts withdrawn by the Bank in the Money Market (with a maturity which is measured by the Bank and is far less than the shown of 3 months if used). It has also negotiated a credit limit of negative gap on tenors less than one month. Any issue arising EUR 10 million that can be used for commercial lending from liquidity mismatch is managed through inter-bank with a maturity of up to 12 months, which can increase to 3 activity (borrowing, lending) within the pre-approved credit years if EUR 6 million out of the total EUR 10 million is used lines. for mortgage lending. The Bank has a credit line with Piraeus Bank S.A which The following table includes figures of comparative period: includes an amount of EUR 175 million that can be
Less than From 1 to 3 From 3 to 12 From 1 to 5 At 31 December 2016 one month months months years Over 5 Years Total Assets liquidity Cash and balances with the Central 7,128,006 - - 7,128,006 Bank - - Due from banks 22,408,310 - - - - 22,408,310 Loans and advances to customers 4,824,167 2,632,214 4,528,335 5,998,911 7,290,023 25,273,650 Investment Securities available for Sale 23,283 8,535,336 5,322,420 7,566,513 - 21,447,552 Financial assets held to maturity ------Total financial assets 34,383,766 11,167,550 9,850,755 13,565,424 7,290,023 76,257,518
Liabilities liquidity Due to banks 2,286,163 - - - - 2,286,163 Due to customers 25,758,431 7,448,555 26,789,302 3,589,112 - 63,585,400 Total financial liabilities 28,044,594 7,448,555 26,789,302 3,589,112 - 65,871,563 Net liquidity gap 6,339,173 3,718,995 (16,938,548) 9,976,312 7,290,023 10,385,955 69 TIRANA BANK ANNUAL REPORT 2017
Off-balance sheet items
Less than one From 1 to 3 From 3 to 12 From 1 to 5 Over 5 Years Total At 31 December 2017 month months months years Loan commitments 4,468,798 27,342 247,667 14,821 35,383 4,794,011 Letters of Guarantees 40,244 12,896 276,321 - - 329,461 Letters of Credit - 21,242 - - - 21,242 Total 4,509,042 61,480 523,988 14,821 35,383 5,144,714
At 31 December 2016 Loan commitments 7,586,107 3,132 287,714 10,366 43,813 7,931,132 Letters of Guarantees 16,536 46,529 307,544 - - 370,609 Letters of Credit ------Total 7,602,643 49,661 595,258 10,366 43,813 8,301,741
Letters of credit and guarantees given to customers The Tirana Bank branch network includes 39 (2016: 39) commit the Bank to make payments on behalf of customers rented buildings which are rented under operating leases. contingent upon the failure of the customer to perform The Bank’s policy is to enter into long term contracts, under the terms of the contract. which vary from 10 years to 20 years. The contracts are Commitments to extend credit represent contractual renewed following a negotiation between both parties in commitments to make loans and revolving credits. order to agree new terms of the contract. Commitments generally have fixed expiration dates, or other termination clauses.
3.4 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
Financial instruments not measured at fair value The table below summarises 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 2017 2016 2017 2016 Financial assets
Loans and advances to banks 26,544,252 22,408,310 26,544,252 22,408,310 Loans and advances to customers 24,037,231 25,273,650 23,200,582 24,979,927
Financial liabilities Due to customers 60,957,146 63,585,400 60,992,112 63,664,489 Due to banks 2,286,163 2,286,163 2,286,163 2,286,163
Loans and advances to banks Loans and advances to customers Loans and advances to other banks include inter-bank Loans and advances are net of allowances for impairment. placements. The fair value of fixed rate placements The Bank’s loan portfolio has an estimated fair value which and overnight deposits is their carrying amount. The is smaller than its book value due to the higher market estimated fair value of fixed interest bearing deposits is interest rates prevailing at the end of 2016 as a result of the based on discounted cash flows using prevailing money- actual market conditions. The majority of the loan portfolio market interest rates for debts with similar credit risk and is subject to re-pricing within a year. remaining maturity. With respect to deposits in Credit The fair value of loans and advances to customers is their Institutions, these are short-term deposits, for which the expected cash flow discounted at current market rates. carrying interest rate does not significantly differ from the Current market rates are interest rates we would charge at market interest rate as at 31 December. the moment (year-end).
70 Financial assets held to maturity Financial instruments measured at fair value The fair value of held to maturity investments is determined Fair value measurements are analysed by level in the fair by using quoted prices for similar instruments as the value hierarchy as follows: discounting rate of future cash flows at the reporting date. (i) Level 1 are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities; Due to other banks and customers, other deposits (ii) Level 2 measurements are valuations techniques with all and other borrowings. material inputs observable for the asset or liability, either The estimated fair value of deposits with no stated directly (that is, as prices) or indirectly (that is, derived from maturity, which includes non-interest-bearing deposits, is prices); and the amount repayable on demand. (iii) Level 3 measurements are valuations not based on The estimated fair value of fixed interest-bearing deposits observable market data (that is, unobservable inputs). and other borrowings not quoted in an active market is Management applies judgement in categorising financial based on discounted cash flows using interest rates for instruments using the fair value hierarchy. If a fair value new debts with similar remaining maturity. The carrying measurement uses observable inputs that require value differs from the fair value because the carrying significant adjustment, that measurement is a Level 3 interest rates are higher than the market interest rate as measurement. The significance of a valuation input is at 31 December 2017, because at year end the banks are assessed against the fair value measurement in its entirety. granting higher interest rates in the competition to attract Recurring fair value measurements are those that the deposits. accounting standards require or permit in the statement Due to banks mainly refers to loans taken from the parent of financial position at the end of each reporting period. with a maturity of one month from the date of the balances Fair values analysed by level in the fair value hierarchy and sheet and therefore their fair value is consider to be carrying value of assets not measured at fair value are as approximate to the carrying value. follows:
31 December 2017
Level 1 Level 2 Level 3 Total
FINANCIAL ASSETS Loans and advances to banks - 26,544,252 - 26,544,252 Loans and advances to customers - - 23,200,582 23,200,582 Investments securities held to maturity - - - - Investment securities available for sale - 15,333,682 - 15,333,682 FINANCIAL LIAIBILITIES Customer accounts - - 60,992,112 60,992,112 Due to banks - - 1,252,282 1,252,282
31 December 2016
Level 1 Level 2 Level 3 Total
FINANCIAL ASSETS Loans and advances to banks - 22,408,310 - 22,408,310 Loans and advances to customers - - 24,979,927 24,979,927 Investments securities held to maturity - - - - Investment securities available for sale 5,828,976 15,618,576 - 21,447,552 FINANCIAL LIAIBILITIES Customer accounts - - 63,664,489 63,664,489 Due to banks - - 2,286,163 2,286,163
71 TIRANA BANK ANNUAL REPORT 2017
3.5 CAPITAL MANAGEMENT
The Bank’s objectives when managing capital, which is a The Bank’s regulatory capital as managed by its Risk broader concept than the ‘equity’ on the face of balance Department is divided into two tiers: sheets, are: • Tier 1 capital: share capital (net of any book values of the • to comply with the capital requirements set by the Bank treasury shares), retained earnings and reserves created of Albania; by appropriations of retained earnings ; and • to safeguard the Bank’s ability to continue as a going • Tier 2 capital: qualifying subordinated loan capital, concern so that it can continue to provide returns for collective impairment allowances and unrealised gains shareholders and benefits for other stakeholders; and arising on the fair valuation of equity and debt instruments • to maintain a strong capital base to support the held as available for sale. development of its business. The risk-weighted assets are measured by means of a Capital adequacy and the use of regulatory capital are hierarchy of four risk weights classified according to the monitored daily by the Bank’s management, employing nature of − and reflecting an estimate of credit, market and techniques based on the guidelines developed by the Basel other risks associated with − each asset and counterparty, Committee and the European Community Directives, as taking into account any eligible collateral or guarantees. implemented by Bank of Albania, for supervisory purposes. A similar treatment is adopted for off-balance sheet The required information is filed with Bank of Albania on a exposure, with some adjustments to reflect the more quarterly basis. contingent nature of the potential losses. Bank of Albania requires generally each bank or banking The table below summarises the composition of regulatory Group to: (a) hold the minimum level of the regulatory capital capital and the ratios of the Bank for the years ended 31 of 1 billion LEK and (b) maintain a ratio of total regulatory December 2017 and 2016. The Bank complied with all of capital to the risk-weighted asset (the ‘Basel ratio’) at or the externally imposed capital requirements to which they above the Bank of Albania required minimum of 12% (2016: are subject in 2017. 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.
2017 2016
Tier 1 capital
Share capital 16,490,344 16,490,344 Statutory reserve 1,374,250 1,374,250 Revaluation differences for statutory reporting (181,922) 97,756 Total qualifying Tier 1 capital 17,682,672 17,962,350 Tier 2 capital
Subordinated liability - - Revaluation reserve - - Total qualifying Tier 2 capital - -
Deductions from regulatory capital (9,462,534) (10,097,085) Total regulatory capital 8,220,138 7,865,265 Risk-weighted assets:
On-balance sheet 37,968,803 42,958,307 Off-balance sheet 713,203 731,302 Total risk-weighted assets 38,682,006 43,689,609
CAR ratio 21.25% 17.89%
The capital adequacy ratio is calculated based on the Bank of Albania’s financial
72 Critical accounting estimates 4. 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.
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.
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 LEK 206,343 thousand higher or LEK 205,507 thousand lower (2016: 338,000 thousand higher or LEK 338,000 thousand).
73 TIRANA BANK ANNUAL REPORT 2017
Uncertain tax positions Determining fair values The Bank’s uncertain tax positions are reassessed by Information about fair values of financial assets and management at the end of each reporting period. Liabilities liabilities that were valued using assumptions that are not are recorded for income tax positions that are determined based on observable market data is disclosed in Note 3.4 by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the end of the reporting period, and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognised based on management’s best estimate of the expenditure required to settle the obligations at the end of the reporting period.
74 Adoption of New or Revised 5. Standards and Interpretations
(a) Standards and Interpretations effective in the current period The following new amendments to the existing standards issued by the International Accounting Standards Board (IASB) are effective for the current reporting period:
• Amendments to IAS 7 “Statement of Cash Flows” - Disclosure Initiative (effective for annual periods beginning on or after 1 January 2017),
• Amendments to IAS 12 “Income Taxes” - Recognition of Deferred Tax Assets for Unrealised Losses (effective for annual periods beginning on or after 1 January 2017),
• Amendments to IFRS 12 due to “Improvements to IFRSs (cycle 2014-2016)” resulting from the annual improvement project of IFRS (IFRS 1, IFRS 12 and IAS 28) primarily with a view to removing inconsistencies and clarifying wording (amendments to IFRS 12 are to be applied for annual periods beginning on or after 1 January 2017).
The adoption of these amendments to the existing standards and interpretations has not led to any changes in the Company’s accounting policies.
(b) Standards and Interpretations in issue not yet adopted At the date of authorisation of these financial statements, the following new standards, amendments to existing standards and new interpretation were in issue, but not yet effective:
IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted. It replaces IAS 39 Financial Instruments:
Recognition and Measurement In October 2017, the IASB issued Prepayment Features with Negative Compensation (Amendments to IFRS 9). The amendments are effective for annual periods beginning on or after 1 January 2019, with early adoption permitted. The Bank will apply IFRS 9 as issued in July 2014 initially on 1 January 2018 and will the amendments to IFRS 9 on 1 January 2019. The Bank has finalized the impact assessment of transition to IFRS 9. Including the impact of transition to the new standard, the total provisions fund does not exceed the level of this fund for regulatory purposes.
Classification – Financial assets IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics. IFRS 9 includes three principal classification categories for financial assets: measured at amortized cost, FVOCI and FVTPL. It eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale.
75 TIRANA BANK ANNUAL REPORT 2017
A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as at FVTPL: • it is held within a business model whose objective is to hold assets to collect contractual cash flows; and • its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding. A financial asset is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVTPL: • it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and • its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. All financial assets not classified as measured at amortized cost or FVOCI as described above are measured at FVTPL. In addition, on initial recognition the Bank may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortized cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. A financial asset is classified into one of these categories on initial recognition. Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of IFRS 9 are not separated. Instead, the hybrid financial instrument as a whole is assessed for classification.
Business model assessment The Bank has finalized its business model as well as the SPPI testing and has concluded as below stated:
Government bonds and treasury bills portfolio For the Bank’s treasury products (bonds and t-bills), the identified business model is: • the “Hold to collect and sell” that requires measurement at fair value through other comprehensive income (FVTOCI).
According to IFRS 9 (4.1.2A), a financial asset shall be measured at fair value through other comprehensive income if both of the following conditions are met: • the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and • the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Tirana Bank does not maintain securities portfolio for trading purposes therefore, with the objective of actively buying/selling depending on the assets’ fair value.
Loans and advances to customers For the Bank’s loans and advances to customers portfolio the business model identified is the “Hold to collect” business model and therefore, loans classified in this business model will be measured at amortized cost. Any loans that will fail the SPPI test will be measured at fair value through PL. According to the IFRS 9 (4.1.2), a financial asset shall be measured at amortized cost if both of the following conditions are met: • the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and • the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
The Bank’s business model is to originate loans and to collect their contractual cash flows. Any sales of financial assets within this business model are carried out due to the loans’ credit deterioration and in order to reduce NPE’s and NPL’s and does not in any case reflect the initial purpose of the lending activity.
76 IAS 39 IFRS 9 Impact on total Portfolio Measurement Business model Measurement equity No impact on initial Loans and advances to customers Amortized cost Hold to collect Amortized cost mapping but subject to SPPI test No impact on initial AFS (bonds and t- bills) FVTOCI Hold to collect & sell FVTOCI mapping but subject to SPPI test
Assessment whether contractual cash flows are solely All of the Banks retail loans contain prepayment features. payments of principal and interest A prepayment feature is consistent with the SPPI criterion For the purposes of this assessment, ‘principal’ is defined if the prepayment amount substantially represents unpaid as the fair value of the financial asset on initial recognition. amounts of principal and interest on the principal amount ‘Interest’ is defined as consideration for the time value of outstanding, which may include reasonable compensation money, for the credit risk associated with the principal for early termination of the contract. amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk Impact assessment and administrative costs), as well as a profit margin. The Bank has estimated that, the adoption of IFRS 9 at In assessing whether the contractual cash flows are 1 January 2018, will not bring changes to its current solely payments of principal and interest, the Bank will measurement of the financial assets under IAS 39. The consider the contractual terms of the instrument. This will classification of its financial assets held as at 1 January include assessing whether the financial asset contains a 2018 will change as follows. contractual term that could change the timing or amount • Loans and advances to banks and to customers that of contractual cash flows such that it would not meet this are classified as loans and receivables and measured at condition. In making the assessment, the Bank considers: amortized cost under IAS 39 will be measured at amortized cost under IFRS 9. • contingent events that would change the amount and • Debt investment securities that are classified as available- timing of cash flows; for-sales under IAS 39 will be measured at FVTOCI, under • leverage features; IFRS 9, as these assets meet the SPPI conditions and the • prepayment and extension terms; Bank’s current business model is to hold these assets for • terms that limit the Bank’s claim to cash flows from the purpose of collecting contractual cash flows as well as specified assets – e.g. non-recourse asset arrangements; sell them. and Impairment – Financial assets, loan commitments and • features that modify consideration for the time value of financial guarantee contracts money – e.g. periodic reset of interest rates. IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (‘ECL’) model. This Interest rates on retail loans made by the Bank are based will require considerable judgment over how changes in on standard fixed rates that are set at the discretion of the economic factors affect ECLs, which are determined on a Bank. In these cases, the Bank assess whether the SFR probability-weighted basis. set are in line with market rates and provide the Bank with sufficient returns to cover for the: In addition to loans and receivables, the new impairment • time value of money, model applies also to the following financial instruments • credit risk associated with the principal amount that are not measured at FVTPL: outstanding during a particular period of time, and • financial assets that are debt instruments; and • other basic lending risks and costs, as well as a profit • loan commitments and financial guarantee contracts margin. issued (previously, impairment was measured under IAS 37 Provisions, Contingent Liabilities and Contingent Assets).
77 TIRANA BANK ANNUAL REPORT 2017
IFRS 9 requires a loss allowance to be recognized at an The impairment requirements of IFRS 9 are complex amount equal to either 12-month ECLs or lifetime ECLs and require management judgments, estimates and depending on the assessment of the risk of default. Lifetime assumptions, particularly in the following areas, which are ECLs are the ECLs that result from all possible default discussed in detail below: events over the expected life of a financial instrument, • assessing whether the credit risk of an instrument has whereas 12-month ECLs are the portion of ECLs that result increased significantly since initial recognition; and from default events that are possible within the 12 months • incorporating forward-looking information into the after the reporting date. measurement of ECLs.
The Bank will recognize loss allowances at an amount Measurement of ECLs equal to lifetime ECLs, except in the following cases, for ECLs are a probability-weighted estimate of credit losses which the amount recognized will be 12-month ECLs: and will be measured as follows: • financial assets that are not credit-impaired at the • debt investment securities that are determined to have reporting date: the present value of all cash shortfalls – i.e. low credit risk at the reporting date. The Bank considers the difference between the cash flows due to the entity in a debt security to have low credit risk when its credit risk accordance with the contract and the cash flows that the rating is equivalent to the globally understood definition of Bank expects to receive; ‘investment-grade’; and • financial assets that are credit-impaired at the reporting • loans and debt investment securities for which credit risk date: the difference between the gross carrying amount has not increased significantly since initial recognition. and the present value of estimated future cash flows;
78 • undrawn loan commitments: the present value of the difference between the contractual cash flows that are due to the Bank if the commitment is drawn down and the cash flows that the Bank expects to receive; and • financial guarantee contracts: the present value of the expected payments to reimburse the holder less any amounts that the Bank expects to recover. Financial assets that are credit-impaired are defined by IFRS 9 in a similar way to financial assets that are impaired under IAS 39.
Definition of default Under IFRS 9, the Bank will consider a financial asset to be in default when: • the borrower is unlikely to pay its credit obligations to the Bank in full, without recourse by the Bank to actions such as realizing security (if any is held); or • the borrower is more than 90 days past due on any material credit obligation to the Bank. This definition is largely consistent with the definition used for regulatory purposes for loans classified as substandard, doubtful or lost. The identification of the below characteristics results to default. a) Days past due (DPD). Exposures more than 90 days past due at the reporting date (using the pulling effect of 20% - at debtor level). b) Unlikeliness to Pay (UTP) c) Credit impaired asset as defined in IFRS 9 requirements d) Forborne Non Performing Exposures (FNPEs) e) Forborne Performing Exposures (FPEs) during the probation period (24 months after cure period) for which either additional forbearance measures are extended or they have more than 90 days past due Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances.
Credit risk grades The Bank allocates each business exposure to a credit risk grade based on requirements set forth by Credit Risk Management regulation by using qualitative and quantitative factors that are indicative of the risk of default. In addition to the risk classes introduced for regulatory purposes, the Bank identifies and monitors separately standard loans in past due from standard loans not in past due. Each business exposure is allocated to a credit risk grade on initial recognition based on available information about the borrower. Exposures are subject to ongoing monitoring, which may result in an exposure being moved to a different credit risk grade. Determining whether credit risk has increased significantly Under IFRS 9, when determining whether the credit risk (i.e. risk of default) on a financial instrument has increased significantly since initial recognition, the Bank will consider reasonable and supportable information that is relevant and available without undue cost or effort, including both quantitative and qualitative information and analysis based on the Bank’s historical experience, expert credit assessment and forward-looking information. The Bank considers both quantitative and qualitative criteria in order to assess whether significant increase in credit risk has occurred.
The quantitative element is calculated based on the change in lifetime PDs by comparing: • the remaining lifetime PD as at the reporting date; with • the remaining lifetime PD that was estimated based on facts and circumstances at the time of initial recognition of the exposure The bank defines criteria for the relative quantitative increases in PD that are indicative of a significant increase in credit risk. The Bank has set three kind of indicators, a) primary, b) secondary and c) backstop to demonstrate the priority of indicators used to assess whether significant increase in credit risk has occurred. Despite their priority, all criteria have the same weight in the assessment process for significant increase in credit risk.
79 TIRANA BANK ANNUAL REPORT 2017
Primary or secondary indicators may to pay under the original contractual vary per each portfolio, while backstop terms and the debtor is expected to be indicator is present on the following able to meet the revised terms. conditions: The revised terms usually include • Instruments which are more than 30 extending the maturity, changing days past due the timing of interest payments and All loans showing significant increase amending the terms of loan covenants. in credit risk are classified in Stage 2. Both retail and business loans are The Bank will monitor the effectiveness subject to the forbearance policy. of the criteria used to identify significant increases in credit risk by Generally, forbearance is a qualitative regular reviews to confirm that: indicator of default and credit • the criteria are capable of identifying impairment and expectations of significant increases in credit risk forbearance are relevant to assessing before an exposure is in default; whether there is a significant increase • the average time between the in credit. identification of a significant increase Following forbearance, a customer in credit risk and default appears needs to demonstrate consistently reasonable; and good payment behavior over twenty- • exposures are not generally four months before the exposure transferred directly from 12-month is measured at an amount equal to ECL measurement to credit-impaired. 12-month ECLs.
Modified financial assets Inputs into measurement of ECLs The contractual terms of a loan may The key inputs into the measurement be modified for a number of reasons, of ECLs are likely to be the term including changing market conditions, structures of the following variables: customer retention and other factors – PD; not related to a current or potential – loss given default (LGD); and credit deterioration of the customer. – exposure at default (EAD). An existing loan whose terms have These parameters are derived from been modified may be derecognised internally developed statistical models and the renegotiated loan recognized and other historical data that leverage as a new loan at fair value. regulatory models. They are adjusted Under IFRS 9, when the terms of to reflect forward-looking information a financial asset are modified and as described below. the modification does not result in Credit risk grades will be a primary derecognition, the Bank will consider input into the determination of the term whether the asset’s credit risk has structure of PD for exposures. The increased significantly by analyzing Bank will employ statistical models quantitative and qualitative factors to analyse the data collected and affecting risk of default. generate estimates of the remaining The Bank renegotiates loans to lifetime PD of exposures and how customers in financial difficulties these are expected to change as a (referred to as ‘forbearance activities’) result of the passage of time. to maximize collection opportunities This analysis will include the and minimize the risk of default. Under identification and calibration of the Bank’s forbearance policy, loan relationships between changes in forbearance is granted on a selective default rates and changes in key basis if the debtor is currently in macro-economic factors, as well as default on its debt or if there is a high in-depth analysis of the impact of risk of default, there is evidence that certain other factors (e.g. forbearance the debtor made all reasonable efforts experience) on the risk of default. For
80 most exposures, key macro- economic indicators are likely to include GDP growth, interest rates and unemployment. The Bank’s approach to incorporating forward- looking information into this assessment is discussed below. LGD is the magnitude of the likely loss if there is a default. The Bank will estimate LGD parameters based on the history of recovery rates of claims against defaulted counterparties. The LGD models will consider the structure, collateral, seniority of the claim and recovery costs of any collateral that is integral to the financial asset. For loans secured by retail property, loan-to-value (LTV) ratios are likely to be a key parameter in determining LGD.
EAD represents the expected exposure in the event of a default. The Bank will derive the EAD from the current exposure to the counterparty and potential changes to the current amount allowed under the contract, including amortization, and prepayments. The EAD of a financial asset will be the gross carrying amount at default. For lending commitments and financial guarantees, the EAD will consider the amount drawn, as well as potential future amounts that may be drawn or repaid under the contract, which will be estimated based on historical observations and forward-looking forecasts.
The Bank will measure ECLs considering the risk of default over the maximum contractual period (including any borrower’s extension options) over which it is exposed to credit risk, even if, for risk management purposes, the Bank considers a longer period. The maximum contractual period extends to the date at which the Bank has the right to require repayment of an advance or terminate a loan commitment or guarantee. For retail overdrafts and credit card facilities and certain corporate revolving facilities that include both a loan and an undrawn commitment component, the Bank may measure ECLs over a period longer than the maximum contractual period if the Bank’s contractual ability to demand repayment and cancel the undrawn commitment does not limit the Bank’s exposure to credit losses to the contractual notice period. These facilities do not have a fixed term or repayment structure and are managed on a collective basis. The Bank can cancel them with immediate effect but this contractual right is not enforced in the normal day-to-day management, but only when the Bank becomes aware of an increase in credit risk at the facility level. This period will be however estimated taking into account the credit risk management actions that the Bank expects to take and that serve to mitigate ECLs. These include a reduction in limits and cancellation of the facility.
Where modeling of a parameter is carried out on a collective basis, the financial instruments will be grouped on the basis of shared risk characteristics that include: – instrument type; and – credit risk grading.
The groupings will be subject to regular review to ensure that exposures within a particular group remain appropriately homogeneous. For investments in debt securities in respect of which the Bank has limited historical data, external benchmark information published by recognised external credit rating agencies such as Moody’s will be used to supplement the internally available data.
81 TIRANA BANK ANNUAL REPORT 2017
Forward-looking information Changes in accounting policies resulting from the adoption Under IFRS 9, the Bank will incorporate forward-looking of IFRS 9 will generally be applied retrospectively, except information into both its assessment of whether the credit as described below. risk of an instrument has increased significantly since – The Bank will take advantage of the exemption initial recognition and its measurement of ECLs. The Bank allowing it not to restate comparative information for prior will formulate a ‘base case’ view of the future direction of periods with respect to classification and measurement relevant economic variables and a representative range of (including impairment) changes. other possible forecast scenarios based on advice from Differences in the carrying amounts of financial assets and the Bank Risk Committee and economic experts and financial liabilities resulting from the adoption of IFRS 9 will consideration of a variety of external actual and forecast be recognised in retained earnings and reserves as at 1 information. January 2018. This process will involve developing two or more additional The determination of the business model within which a economic scenarios and considering the relative financial asset is held has been made on the basis of the probabilities of each outcome. External information facts and circumstances that exist at the date of initial may include economic data and forecasts published application. by governmental bodies and monetary authorities in • IFRS 15 “Revenue from Contracts with Customers” and the countries where the Bank operates, supranational further amendments (effective for annual periods beginning organizations such as the Organisation for Economic on or after 1 January 2018), Co-operation and Development and the International Monetary Fund, and selected private sector and academic • IFRS 16 “Leases” (effective for annual periods beginning forecasters. on or after 1 January 2019), The base case will represent a most-likely outcome and be aligned with information used by the Bank for other • IFRS 17 “Insurance Contracts” (effective for annual purposes, such as strategic planning and budgeting. The periods beginning on or after 1 January 2021), other scenarios will represent more optimistic and more pessimistic outcomes. The Bank will also periodically carry • Amendments to IFRS 2 “Share-based Payment” - out stress-testing of more extreme shocks to calibrate its Classification and Measurement of Share-based Payment determination of these other representative scenarios. Transactions (effective for annual periods beginning on or The Bank has identified and documented key drivers of after 1 January 2018), credit risk and credit losses for each portfolio of financial instruments and, using an analysis of historical data, • Amendments to IFRS 4 “Insurance Contracts” - Applying has estimated relationships between macro-economic IFRS 9 “Financial Instruments” with IFRS 4 “Insurance variables and credit risk and credit losses. These key drivers Contracts” (effective for annual periods beginning on or include CPI, unemployment rates and GDP forecasts. after 1 January 2018 or when IFRS 9 “Financial Instruments” Predicted relationships between the key indicators and is applied first time), default and loss rates on various portfolios of financial assets have been developed based on analyzing historical • Amendments to IFRS 9 “Financial Instruments” - data over the past 5 years. Prepayment Features with Negative Compensation (effective for annual periods beginning on or after 1 January Impact assessment 2019), The most significant impact on the Bank’s financial statements from the implementation of IFRS 9 results from • Amendments to IFRS 10 “Consolidated Financial the new impairment requirements. Statements” and IAS 28 “Investments in Associates and The Bank has estimated that, on the adoption of IFRS Joint Ventures” - Sale or Contribution of Assets between 9 at January 1, 2018, the loss allowances (before tax) an Investor and its Associate or Joint Venture and further is expected to increase but not exceed the provisions amendments (effective date deferred indefinitely until recognized for regulatory purposes. the research project on the equity method has been Transition concluded),
82 • Amendments to IAS 28 “Investments in Associates and Joint Ventures” - Long-term Interests in Associates and Joint Ventures (effective for annual periods beginning on or after 1 January 2019),
• Amendments to IAS 40 “Investment Property” - Transfers of Investment Property (effective for annual periods beginning on or after 1 January 2018),
• Amendments to IFRS 1 and IAS 28 due to “Improvements to IFRSs (cycle 2014-2016)” resulting from the annual improvement project of IFRS (IFRS 1, IFRS 12 and IAS 28) primarily with a view to removing inconsistencies and clarifying wording (amendments to IFRS 1 and IAS 28 are to be applied for annual periods beginning on or after 1 January 2018),
• Amendments to various standards due to “Improvements to IFRSs (cycle 2015-2017)” resulting from the annual improvement project of IFRS (IFRS 3, IFRS 11, IAS 12 and IAS 23) primarily with a view to removing inconsistencies and clarifying wording (effective for annual periods beginning on or after 1 January 2019),
• IFRIC 22 “Foreign Currency Transactions and Advance Consideration” (effective for annual periods beginning on or after 1 January 2018),
• IFRIC 23 “Uncertainty over Income Tax Treatments” (effective for annual periods beginning on or after 1 January 2019).
The Bank has elected not to adopt these standards, revisions and interpretations in advance of their effective dates. Except for the impact of IFRS 9, which will be finalised during 2018, the Bank anticipates that the adoption of the other standards, revisions and interpretations will have no material impact on the financial statements of the Bank in the period of initial application.
83 TIRANA BANK ANNUAL REPORT 2017 6. Interest income
2017 2016 Interest income from accounts with banks 36,087 14,941 Interest income from financial assets available for sale 577,564 654,250 Interest on loans and advances to customers - - Interesa mbi huatë dhe paradhënie klientëve 1,270,736 1,546,596 Total 1,884,387 2,215,787
7. Interest expense
2017 2016 Interest on due to banks 14,053 9,514 Interest on due to customers 184,801 355,222 Total 198,854 364,736
8. Net fees and commission income 2017 2016 FX transactions 27 25 Letters of Credit 6,930 7,874 Money Transfer 72,202 66,404 Commission Visa Card 75,526 83,222 Import-Export 12,618 13,326 Other fees received 256,444 247,968 Total fees and commission income 423,747 418,819
Credit Cards (5,183) (3,919) Correspondent Banks (15,044) (12,732) Total fees and commission expense (20,227) (16,651) Net fee and commission income 403,520 402,168
84 Interest income 9. Personnel expenses
2017 2016 Wages & salaries 545,658 452,665 Contributions to state pension funds 68,218 62,794 Other staff costs 18,660 19,378 Total 632,536 534,837
10 . Other operating expenses Interest expense 2017 2016 Fees for deposits insurance (ASD) 169,665 169,277 Rental charges payable under operating leases 216,813 218,223 Telecommunication expenses 116,340 111,184 Advertising and marketing 36,546 44,376 Security and maintenance expenses 116,665 98,143 Subscriptions - 77,212 Utility expenses 40,462 42,400 Stationeries and consumables 13,570 19,130 Travel expense 16,945 11,101 Other insurance expenses 21,401 22,063 Fees and other similar expenses 39,288 10,709 Other 152,269 118,472 Total 939,964 942,290
11 . Income tax expense The components of income tax expense for the years ended 31 December 2017 and 2016 are:
2017 2016 Current tax Current tax expense - - Deferred tax Relating to origination and reversal of temporary differences (9,493) 3,393 Income tax benefit/(expense) reported in profit or loss (9,493) 3,393
85 TIRANA BANK ANNUAL REPORT 2017
Reconciliation between the tax expense and the accounting profit multiplied by Albania’s domestic tax rate for the years ended 31 December 2017 and 2016 is as follows:
2017 2016
Accounting profit/(loss) before tax 78,872 (523,798) Theoretical tax charge (credit) at statutory rate (2017: 15%; 2016: 15%) 11,831 (78,570) Tax effect of permanent differences: 154,139 316,939 -Income which is exempt from taxation (21,127) (1,913) -Non-deductible expenses 175,266 318,852 Unrecognised tax loss carry forwards (165,970) (238,369)
Current tax expense -
Deferred tax Repossessed collaterals revaluation (4,783) 17,838 Other deferred tax items (4,710) (14,445) Deferred tax income charged in profit and loss (9,493) 3,393 Available for sale securities 17,697 (17,424) Deferred tax expense charged in other comprehensive income 17,697 (17,424)
The Bank has unrecognised potential deferred tax assets in respect of unused tax loss carry forwards of Lek 211,303 thousand (2016: Lek 448,357 thousand). The tax loss carry forwards expire as follows:
2017 2016 Tax loss carry-forwards expiring by the end of:
- 31 December 2016 - - - 31 December 2017 - - - 31 December 2018 44,018 209,988 Total tax loss carry forwards 44,018 209,988
The effective income tax rate for 2017 is nil (2016: nil). According to Albanian Tax legislation the Tax authorities have right to examine tax returns for the 5 years following submission of the return.
Corporate income tax receivable
2017 2016
1 January 300,914 300,914 Prepayments during the year - - Income tax expense - -
Other payment (25,096) 31 December 275,818 300,914
86 The deferred tax included in the balance sheet and changes recorded in the income tax expense are as follows:
2017 2016 Financial Financial Deferred tax Deferred tax Income assets Deferred tax Deferred tax Income assets
available for available for sale sale Assets Liabilities Statement Reserve Assets Liabilities Statement Reserve
(Dr)/Cr (Dr)/Cr (Dr)/Cr (Dr)/Cr
28,830 - (4,783) - 33,616 17,838 - Available for sale - (55,736) - 17,697 - (73,436) (17,424) securities Other deferred tax 59,910 - (4,710) 64,620 (14,445) - - items Total 88,740 (55,736) (9,493) 17,697 98,236 (73,436) 3,393 (17,424) Deferred tax 33,004 24,800 assets, net
87 TIRANA BANK ANNUAL REPORT 2017
12 . Cash and balances with Central Bank
2017 2016 Cash in hand Notes and coins in LEK 730,107 582,595 Notes and coins in foreign currency 962,348 961,948 Total 1,692,455 1,544,543
Balances with the Central Bank Current account in LEK - - in foreign currency 248 211 248 211 Compulsory reserves in LEK 2,548,021 2,787,597 in foreign currency 2,671,800 2,793,213 5,219,821 5,580,810
Accrued interest 2,204 2,442
Total balances with Central Bank 5,222,273 5,583,463 Total cash and balances with Central Bank 6,914,728 7,128,006
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).
88 Loans and advances to banks
Cash and balances with Central Bank Current accounts Nostro and sight accounts with banks 9,101,484 5,738,168 Cash in transit to correspondent banks 132,950 - Total current accounts 9,234,434 5,738,168
Placements Placements– Resident - 200,000 Placements – non resident 17,301,830 8,487,353 Accrued Interest 7,988 4,673 Total placements 17,309,818 8,692,026
Financial assets under REPO - 7,978,116
Total loans and advances to banks 26,544,252 22,408,310
The interest rates on compulsory reserves during 2017 and 2016 fluctuated as follows:
2017 Currency Minimum Maximum Method of calculation LEK 0,875% 0,875% 70% of the yield on REPO with Central Bank USD 0% 0% - EUR -0,40% -0,40% -
2016 Currency Minimum Maximum Method of calculation LEK 0,875% 1,1225% 70% of the yield on REPO with Central Bank USD 0% 0% - EUR -0,40% -0,40% -
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 LT/ST 2017 2016
Nostro and sight accounts with banks Raiffeisen Bank International AG BBB+ 1,905,547 63,285 Deutche Bank AG AA- 7,223,308 5,226,078 Deutsche Bank Trust Bank Americas A+ 72,178 420,220 Piraeus Bank SA CCC+ 33,401 27,011 Banco Popolare BBB- - 1,574
Total 9,234,434 5,738,168
89 TIRANA BANK ANNUAL REPORT 2017
S&P 31 December 2017 LT/ST Currency Original Currency In Lek ‘000
Piraeus Bank CCC+ EUR 72,000,000 9,598,990
BBVA BBB+ EUR 45,500,000 6,049,225
BBVA BBB+ GBP 3,100,000 464,845
San Paolo di Torino BBB USD 10,700,000 1,188,770
Accrued Interest 7,988
Total 17,309,818 S&P Në monedhë 31 December 2016 LT/ST Monedha origjinale Në Lekë ‘000
Piraeus Bank CCC+ EUR 41,000,000 5,544,430
BBVA BBB+ EUR 18,500,000 2,501,755
BBVA BBB GBP 2,800,000 441,168
San Paolo di Torino B+ ALL 200,000,000 200,000
Accrued Interest 4,673
Total 8,692,026
90 13 . Loans and advances to customers
The table below shows the industry analysis of gross loans 2017 2016 (without taking into consideration the “Loan commissions deferred” and “Accrued interest”) granted to corporate and Corporate lending 2,143,580 2,015,884 SMEs clients. SME lending 16,769,334 20,337,725 Total corporate and SME 2017 2016 lending 18,912,914 22,353,609
Consumer lending 1,718,225 1,504,799 Manufacturing 4,833,733 4,485,055
Mortgage 6,188,792 6,227,023 Electricity 907,735 1,128,148 Overdrafts 243,382 277,141 Trade 6,169,832 7,829,705 Credit cards 212,295 202,108
Loan commissions deferred (86,015) (150,591) Construction 2,965,201 4,236,413
Accrued interest 182,192 257,623 Other industries 4,036,413 4,674,288
Gross loans and advances 27,371,785 30,671,712 Total gross loans 18,912,914 22,353,609 Less: Allowance for impairment losses (3,334,554) (5,398,062) The interest rates for loans and overdrafts are floating as follows: Total 24,037,231 25,273,650
Currency Interest Rate Additional Penalty Current 12,441,512 11,984,716 Interest Rate Non-current 11,595,719 13,288,934 2017
LEK 12 months TRIBOR 5.0% -10 % + (1.6-8)% USD 12 months LIBOR 5.0% + (6.0)% EUR 12 months EURIBOR 5.0% + (3.7-5)%
2016 LEK 12 months TRIBOR 3.0% + (1.5 - 8)% USD 12 months LIBOR 3.0% + (2.5 – 7.0)% EUR 12 months EURIBOR 3.0% + (2.5 - 9)%
91 TIRANA BANK ANNUAL REPORT 2017
The movement in allowances (impairment) for losses on loans and advances to customers is as follows:
2017 2016
At 1 January 5,398,062 8,207,043
Write off (2,225,842) (3,522,568)
Charge for the year 130,578 758,768
Exchange rate effect (72,831) (72,018)
Other movements (payment from WO) 104,587 26,837
At 31 December 3,334,554 5,398,062
Individual impairments 2,736,323 4,196,332
Collective impairments 598,231 1,201,730
3,334,554 5,398,062
The movement in allowances for losses by classes of loans during 2017 is as follows:
Corporate and Credit cards Consumer Mortgages Total SME and overdrafts
At 1 January 2017 4,658,899 189,263 484,287 65,613 5,398,062
Write Offs (2,015,494) (54,861) (142,380) (13,107) (2,225,842)
Charge for the year 285,201 (26,832) (152,938) 25,147 130,578
Exchange rate effect (65,202) (689) (6,940) - (72,831)
Other (payment from WO) 80,012 6,854 17,719 104,585
At 31 December 2017 2,943,416 113,735 199,748 77,653 3,334,552
The movement in allowances for losses by classes of loans during 2016 is as follows:
Corporate and Credit cards Consumer Mortgages Total SME and overdrafts
At 1 January 2016 6,979,190 385,703 738,108 104,042 8,207,043
Write Offs (3,035,055) (180,220) (237,093) (70,200) (3,522,568)
Charge for the year 752,741 (14,537) (11,207) 31,771 758,768
Exchange rate effect (62,921) (2,556) (6,541) - (72,018)
Other (payment from WO) 24,945 872 1020 - 26,837
At 31 December 2016 4,658,900 189,262 484,287 65,613 5,398,062
92 14 . Financial assets available for sale
2017 2016
Visa shares - 195,211
Government bonds 10,805,926 16,207,807
Government treasury bills 4,537,172 5,044,534
Total 15,343,098 21,447,552
Shares in Visa Inc 2017 2016
At 1 January 195,211 190,417
(Losses)/gains from change in fair value - 4,794
Shitje (195,211)
At 31 December - 195,211
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. No impairment is recognised on financial assets available for sale at December 31, 2017 (2016: Nil).
Government bonds 2017 2016
At 1 January 16,207,807 13,681,390
Purchase 2,972,213 3,498,163
Matured (8,399,113) (1,135,552)
Gains from change in fair value 25,019 163,806
At 31 December 10,805,926 16,207,807
Government treasury bills 2017 2016
At 1 January 5,044,534 6,555,722
Purchase 4,526,791 5,074,642
Matured during the year (5,044,534) (6,555,723)
(Losses)/gains from change in fair value 10,381 (30,107)
At 31 December 4,537,172 5,044,534
93 TIRANA BANK ANNUAL REPORT 2017 15 . Investment properties Investment properties include repossessed collateral real estate assets acquired by the Bank in settlement of overdue loans. The Bank intends to hold the properties for capital appreciation. None of the properties is rented out on operating lease in 2017 and 2016. No maintenance and repair works were performed to investment properties in 2017 and 2016.
31 December 2017 31 December 2016
Investment Properties 117,464 109,864 Property and equipment Inventory Assets 2,921,930 2,746,982
Movement in investment properties for the years ended December 31, 2017 and 2016 is presented as follows: 31 December 2017 31 December 2016 Balance at beginning of year 109,864 2,314,308 Acquisitions through legal process for - 1,145,123 settlement of loans to customers Disposals - (407,699) Gain/(loss) on property revaluation 7,600 (194,886) Transfers to repossessed collaterals - (2,746,982) inventory at cost Balance at the end of the year 117,464 109,864
Unrealised gain/ (loss) on property 7,600 (194,886) revaluation included in profit or loss
15.1 FAIR VALUE MEASUREMENT OF THE BANK’S INVESTMENT PROPERTIES
The fair value of the Bank’s investment property as at 31 December 2017 and 31 December 2016 has been arrived at on the basis of a valuation carried out on the respective dates by several independent appraisers, including the bailiff offices, not related to the Bank. All appraisers are registered and certified in accordance with the Albanian Laws. They have appropriate qualifications and recent experience in the valuation of properties in the relevant locations. The fair value was determined based on the market comparable approach that reflects recent transaction prices for similar properties. There has been no change to the valuation technique during the year. In estimating the fair value of the properties, the highest and best use of the properties is their current use. There were no investment properties classified as Level 1 or Level 3, nor transfers between levels 1, 2 and 3 during the year.
94 Details of the Group’s investment properties and information about the fair value Investment properties hierarchy as at 31 December 2017 and 2016 are as follows: 31 December 2017 31 December 2016
Tirana 981,333 805,418
Durres 855,835 882,596
Elbasan 84,930 99,223
Kavaja 179,558 179,558
Other 937,738 890,051
Total 3,039,394 2,856,846 16 . Intangible assets
Cost: Software
At 1 January 2016 1,281,154
Additions 66,605
At 31 December 2016 1,347,759
At 1 January 2017 1,347,759
Additions 29,631
At 31 December 2017 1,377,390
Amortization:
At 1 January 2016 (946,684)
Amortization charge for the year (107,789)
At 31 December 2016 (1,054,473)
At 1 January 2017 (1,054,473)
Amortization charge for the year (80,882)
At 31 December 2017 (1,135,355)
Net book value
At 31 December 2016 293,286
At 31 December 2017 242,035
95 TIRANA BANK ANNUAL REPORT 2017 17 . Property and equipment
Furniture and Land and electronic Leasehold buildings Vehicles equipment improvement Total
Cost:
At 1 January 2016 709,450 96,922 1,494,487 905,052 3,205,911
Additions 34 482 49,787 1,705 52,008
Disposals - - (3,809) - (3,809)
At 31 December 2016 709,484 97,404 1,540,465 906,757 3,254,110
At 1 January 2017 709,484 97,404 1,540,465 906,757 3,254,110
Additions 4,034 510 35,403 17,362 57,309
Disposals - - (879) - (879)
At 31 December 2017 713,518 97,914 1,574,989 924,119 3,310,540
Depreciation:
At 1 January 2016 (305,642) (96,253) (1,429,203) (776,142) (2,607,240) Depreciation charge for the year (33,840) (833) (32,945) (37,565) (105,183)
Disposals - - 3,809 - 3,809
At 31 December 2016 (339,482) (97,086) (1,458,339) (813,709) (2,708,616)
At 1 January 2017 (339,482) (97,086) (1,458,339) (813,709) (2,708,616) Depreciation charge for the year (33,892) (670) (35,820) (34,357) (104,739)
Disposals - - 879 - 879
At 31 December 2017 (373,374) (97,756) (1,493,280) (848,066) 2,812,476
Net book value:
At 31 December 2016 370,002 318 82,126 93,050 545,496
At 31 December 2017 340,144 158 81,709 76,053 498,064
96 Other Due 18 . assets 19 . to banks
31 December 31 December 31 31 Current accounts 2017 2016 Other financial assets December December Residents 202,459 65,050 2017 2016 Non residents 502 295 Other Debtors 173,386 285,895 202,961 65,345 Claims Visa Card - - Borrowings Other Receivables from Customers 72,177 64,276 Total other financial assets 245,563 350,171 Residents 1,033,097 2,196,853 Non residents 15,952 23,950
1,049,049 2,220,803 Advance Payments 629 792 Accrued interest 272 15 Inventory 28,319 32,316 Total 1,252,282 2,286,163 Prepaid Expenses 166,856 73,848 Other Assets 415,908 628,767 Total other assets 857,275 1,085,894
Other assets include mainly suspense accounts amounting of Lek 361,432 thousand (2016: Lek 541,736 thousand)
20. Due to customers
31 December 2017 31 December 2016
Corporate customers
Current accounts 5,531,394 5,582,909
Term deposits 541,351 709,165
Other deposits 831,665 545,716
6,904,410 6,837,790
Retail customers
Current / Savings accounts 18,242,028 15,223,530
Term deposits 35,347,365 40,999,619
Other deposits 252,768 270,585
53,842,161 56,493,734
Accrued interest 117,271 148,520
Cheques payables and remittances 93,304 105,356
Total 60,957,146 63,585,400 97 TIRANA BANK ANNUAL REPORT 2017 21. Other liabilities
31 December 2017 31 December 2016 Accrued expenses include expenses Accrued expenses 187,831 168,698 on utilities, telephone expenses and Other liabilities 545,956 317,845 bonuses related to current year and will be paid the year after. Other financial liabilities 733,787 486,543
Other taxes payable 14,493 -
Social insurance payable 10,234 29,332
Total 758,514 515,875
22. Provisions
2017 2016 Balance include provision for legal At 1 January 441,978 383,392 cases related to liabilities raised by
Reversals (156,112) (9,712) tax authorities amounting of Lek 250 million (2016: Lek 337 million) and legal Charge of the year 26,825 68,298 cases with third parties amounting of Other (170) - Lek 63 million (2016: Lek 104 million)
Reclasification (68,297) -
At 31 December 312,521 441,978
98 Paid-in capital 23. and share premium
31 December 2017 31 December 2016 Paid in Capital-authorized, issued and fully paid 14,754,741 14,754,741
Share premium 1,735,494 1,735,494
Revaluation differences - -
Statutory Reserve 260,623 260,623
Legal Reserve 1,113,627 1,113,627
Other reserves 325,761 426,043
Total 18,190,246 18,290,528
The table below shows the shareholders structure of the Bank as 31 December 2017 and 2016.
Number of shares Share in % Number of shares Share in % Shareholder’s name in 2017 31 December 2017 in 2016 31 December 2016
Piraeus Bank S.A Greece 496,098 98,83 496,098 98,83 Mr. Tzivelis Ioannis 5,877 1.17 5,877 1,17 Total 501,975 100,00 501,975 100,00
On 31 December 2017 and 2016, the authorised and issued share capital of the Bank was comprised of 501,975 shares with the nominal value of EUR 216.24 all fully paid. 24. Other reserves 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.
99 TIRANA BANK ANNUAL REPORT 2017 25. Dividend per share
The General Assembly of Shareholders has decided that no dividends should be distributed from the retained earnings as at December 31, 2017. No decision is taken on retained earnings as at December 31, 2017.
Cash and 26. cash equivalents
For the purpose of Cash Flow Statement, cash and cash equivalent comprises as follows:
Notes 31 December 2017 31 December 2016
Cash in hand 8 1,692,454 1,544,543
Current accounts with Central Bank 8 248 211
Nostro and sight accounts with banks 8 9,234,434 5,738,168
Repo deals 8 - 7,978,116
Due from banks 8 17,309,818 8,692,026
Total 28,236,954 23,953,064
27. 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).
31 December 2017 31 December 2016
Piraeus Bank SA Greece Sight deposits 33,401 17,029 Placements 9,607,219 5,549,188 Financial assets under Repo - 7,978,116 Due to banks (502) (295) Borrowings (15,954) (23,950) Total 9,624,164 13,520,088
100 31 December 2017 31 December 2016 Tirana Leasing (subsidiary of Piraeus Bank SA) Loans given - - Due to Tirana Leasing (433,351) (450,504) Total (433,351) (450,504)
31 December 2017 31 December 2016 Piraeus Real Estate Tirana shpk Cash and Loans given - - Due to (2,448) (3,491) cash equivalents Total (2,448) (3,491)
31 December 2017 31 December 2016 Cielo Consultancy shpk Loans given - - Due to (51,852) (79,966) Total (51,852) (79,966)
31 December 2017 31 December 2016 Edificio Enterprise shpk Loans given - - Due to (4) (9) Total (4) (9)
31 December 2017 31 December 2016 Tierra Projects shpk Loans given - - Due to (9) (15) Total (9) (15)
31 December 2017 31 December 2016 Bank Directors Loans given 26,055 22,489 Due to (10,735) (9,269) Total 15,320 13,220
2017 2016
Income and expenses
Piraeus Bank S.A. Greece Interest income 33,587 22,294 Interest expenses (293) (680) Fees and commission income 16 - Fees and commission expenses (19) (65) 33,291 21,549
Tirana Leasing Interest income - - - -
101 TIRANA BANK ANNUAL REPORT 2017
Presentation of financial instruments 28. by measurement category
The following table provides a reconciliation of classes of financial assets with the measurement categories as of 31 December 2017:
Loans and 2017 Available for sale Held to maturity Total receivables
Cash and balances with Central Bank 6,914,728 - - 6,914,728
Loans and advances to banks 26,544,252 - - 26,544,252
Held to maturity financial assets - - - -
Financial assets available for sale - 15,343,098 - 15,343,098
Loans and advances to customers 24,037,231 - - 24,037,231
Total financial assets 72,839,309
Other assets 313,860
Total Assets 73,153,169
Loans and Available for sale Held to maturity Total 2016 receivables
Cash and balances with Central Bank 7,128,006 - - 7,128,006
Loans and advances to banks 22,408,310 - - 22,408,310
Held to maturity financial assets - - - -
Financial assets available for sale - 21,447,552 - 21,447,552
Loans and advances to customers 25,273,650 - - 25,273,650
Total financial assets 76,257,518
Other assets 350,171
Total Assets 76,607,689
As of 31 December 2017 and 2016, 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 are measured at amortised cost.
As of 31 December 2017 and 31 December 2016 all of the Bank’s financial liabilities were carried at amortised cost.
102 Commitments 29. and contingencies
Contingencies and commitments include guarantees extended to customers and received from Piraeus Bank. The balances as at December 31, 2017 and 2016 are composed of the following:
31 December 2017 31 December 2016
Granted
Loan commitments 4,794,011 7,931,132 Letters of Guarantees 329,461 370,609
Letters of Credit 21,242 -
Received
Guarantees received 2,643,806 4,473,125
LITIGATION
Litigation is a common occurrence in the banking industry due to the nature of the business undertaken. The Bank has formal controls and policies for managing legal claims. Once professional advice has been obtained and the amount of loss reasonably estimated, the Bank makes adjustments to account for any adverse effects which the claims may have on its financial standing.
LEASE COMMITMENTS
The Bank leases office premises in Tirana, Tiranë, Durrës, Korçë, Vlorë, Lezhë, Elbasan, Gjirokastër, Fushë Krujë, Shkodër, Lushnjë, Pogradec, Berat, Sarandë, Fier etc. These leases are cancellable with three months’ notice. Lease commitments are classified as follows:
31 December 2017 31 December 2016
Up to 1 year 125,327 140,556
From 1 to 5 years 261,927 301,862
More than 5 year 40,573 7,415
Total 427,827 449,833
30. 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.
103 TIRANA BANK ANNUAL REPORT 2017 9 TIRANA BANK COMMITTEES
CREDIT COMMITTEES CLASSIFICATION & PROVISIONING COMMITTEE A) Corporate Credit Committee 1. CEO as Chairman 1. CEO as Chairman 2. Head of Credit Division 2. Credit Division Head 3. Acting Chief Business Officer 3. Chief Retail Officer 4. Acting Head of Corporate Division 4. Chief Business Office 5. Manager of Risk Department 5. Recovery Division Head 6. Manager of Business Department, Credit Division 6. Risk Department Manager 7. Business Development Advisor (with non-voting rights) B) SME Credit Committee 1. CEO as Chairman ASSET-LIABILITY COMMITTEE (ALCO) 2. Head of Credit Division 3. Acting Chief Business Officer 4. SME Manager 1. CEO - Chairman 5. Manager of Risk Department 2. Chief Financial Officer 6. Manager of Business Department, Credit Division 3. Chief Operations Officer 4. Chief Retail Officer RECOVERY BANKING COMMITTEES 5. Chief Business Officer 6. Treasury & Financial Markets Head 7. Credit Division Head A) Recovery Banking Committee (RBU) 8. Risk Department Manager 1. CEO as Chairman 9. Business Development Advisor 2. Head of Credit Division (with non-voting rights) 3. Head of RBU 4. Chief Financial Officer 5. Risk Department Manager DISCIPLINARY COMMITTEE 6. Legal Department Manager 7. Manager Business Department, Credit Division 1. CEO as Chairman 2. Chief Operations Officer B. Recovery Banking Sub Committee 3. Head of respective Division/Department 1. Head of Credit Division as Chairman the employee belongs to 2. Head of RBU 4. Legal Department Manager 3. Manager, Retail Department, Credit Division 5. Human Resources Manager 4. Retail Recovery Department Acting Manager
104 INTERNAL OPERATIONAL RISK PROCUREMENT COMMITTEE COMMITTEE 1. Head of Risk Department 1. CEO as Chairman 2. Business Development Advisor 2. Chief Operations Officer 3. Head of Legal Department 3. Chief Retail Officer 4. Head of Financial Control Department 4. Risk Department Manager 5. Supporting Services Manager 5. Internal Audit Manager 6. Compliance Department Manager FRAUD RISK MANAGEMENT 7. Business Development Advisor COMMITTEE (with non-voting rights)
1. CEO as Chairman SPONSORSHIP COMMITTEE 2. Risk Department Manager – Vice Chairman 3. Compliance Department Manager 1. CEO as Chairman – Permanent Member 2. Chief Financial Officer 4. Human Resources Department Manager 3. Chief Operations Officer – Permanent Member 4. Chief Retail Officer 5. Head of Operational & Market Risk Unit 5. Marketing & PR Department Manager – Secretary of the Committee 6. Business Development Advisor with non-voting rights Invited members: - Internal Audit IT STEERRING COMMITTEE - COO - Legal - Head of Information Security Unit 1. CEO as Chairman - Head of the respective Unit 2. International Banking, PB Group 3. Group Information Systems – Core Banking, PB Group ESMS STEERING COMMITTEE 4. Group IT Operations, PB Group 5. International Organosis, PB Group 1. Country ESMS Officer as Chairman 6. Chief Financial Officer 2. Chief Operations Officer 7. Chief Operations Officer 3. Chief Business Officer 8. Risk Manager 4. Credit Division Head 9. Information and Organization Manager 5. Recovery Division Head
105 TIRANA BANK ANNUAL REPORT 2017
AUDIT COMMITTEE
The Audit Committee assists the Board of Directors in exercising its internal control duties. The members of the Audit Committee are appointed by General Meeting of shareholders. The main competencies of the Audit Committee, as well as its mode of operation are regulated by the provisions of Law no 9662/18.12.2006 “On banks in Republic of Albania”.
BOARD RISK MANAGEMENT COMMITTEE
The Board Risk Management Committee is appointed by the BOD of the Bank and consists of members with adequate knowledge and experience in the risk management field. The Committee consist of an odd number of members (at least three members) with voting rights and the Executive Secretary with no voting right. The head of the Risk Management Department is appointed as Executive Secretary of the Board Risk Management Committee, who is responsible for collecting material and information that is useful or necessary for the work of the Committee. He also prepares the issues to be discussed in the Committee.
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