2019 Annual Report

2019 Annual Report Bank of ANNUAL REPORT 2019 TABLE OF CONTENTS Annual Report 2019 Table Of Contents FINANCIAL REPORT Management overview 9 1. MANAGEMENT BOARD’S FOREWORD 9 2. CHAIRMAN OF THE SUPERVISORY BOARD FOREWORD 11 Intesa Sanpaolo Bank at a glance 12 Milestones in the Bank’s corporate history 14 3. BODIES OF CORPORATE GOVERNANCE 15 4. ECONOMIC AND BANKING ENVIRONMENT 16 5. AN OVERVIEW OF THE BANK’S OPERATIONS IN 2019 17 5.1 LENDING OPERATIONS 17 5.2 DEPOSITS 18 5.3 OTHER SERVICES 18 5.3.1 Card business and digital banking 18 5.3.2 Marketing and sale of mutual investment funds 18 5.3.3 Leasing 19 5.3.4 Open-ended mutual pension funds by Intesa Sanpaolo Bank 19 5.3.5 Depositary banking 20 6. THE BANK’S ORGANIC GROWTH AND DEVELOPMENT 21 6.1 CAPITAL INVESTMENTS 21 6.2 INFORMATION TECHNOLOGY AND TECHNOLOGICAL DEVELOPMENT 21 7. ACTIVITIES IN THE FIELD OF SUSTAINABLE DEVELOPMENT 22 7.1 RESPONSIBILITY TOWARDS EMPLOYEES 22 7.1.1 Basic data and HR guidelines in 2019 22 7.1.2 Employee relations 23 7.2 RESPONSIBILITY TOWARDS CUSTOMERS 24 7.3 CORPORATE SOCIAL RESPONSIBILITY 24 8. TERRITORIAL CHART OF COMMERCIAL UNITS 25 9. INTERNAL ORGANISATION CHART 26 10. THE CORPORATE GOVERNANCE STATEMENT OF BANKA INTESA SANPAOLO D.D. 27 11. REPORT OF THE SUPERVISORY BOARD 31 Independent auditors’ report on financial statements 35 Statement of management’s responsibilities 41 Financial statements 42 1. INCOME STATEMENT 42 2. STATEMENT OF OTHER COMPREHENSIVE INCOME 43 3. STATEMENT OF FINANCIAL POSITION 44 4. STATEMENT OF CHANGES IN EQUITY 45 5. STATEMENT OF CASH FLOWS 46 Notes to financial statements 47 1. GENERAL INFORMATION 47 TABLE OF CONTENTS Annual Report 2019 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 47 2.1 BASIS OF PREPARATION 47 2.2 FOREIGN CURRENCY TRANSLATION 50 2.3 RELATED PARTIES 50 2.4 FINANCIAL ASSETS AND LIABILITIES 50 2.4.1 Treatment of financial assets and liabilities in financial statements 50 2.4.2 Classification 50 2.4.3 De-recognition of financial instruments 51 2.4.4 Modifications of financial assets and financial liabilities 52 2.4.5 Offsetting 52 2.4.6 Fair value measurement principles 52 2.4.7 Impairment of financial assets 53 2.5 DERIVATIVE FINANCIAL INSTRUMENTS 54 2.5.1 Hedge accounting 55 2.6 LOANS AND ADVANCES 56 2.7 SECURITIES 56 2.8 INTEREST 56 2.9 FEE AND COMMISSION INCOME 57 2.10 NET GAINS OR LOSSES ON FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING 57 2.11 INTANGIBLE ASSETS 57 2.12 PROPERTY, PLANT AND EQUIPMENT 58 2.13 NON-CURRENT ASSETS AND DISPOSAL GROUPS CLASSIFIED AS HELD FOR SALE 58 2.14 IMPAIRMENT OF NON-FINANCIAL ASSETS 59 2.15 DEPOSITS AND RECEIVED LOANS 59 2.16 ACCOUNTING FOR LEASES 59 2.17 CASH AND CASH EQUIVALENTS 60 2.18 PROVISIONS 60 2.19 FINANCIAL GUARANTEES 60 2.20 INCOME TAX 61 2.21 EMPLOYEE BENEFITS 61 2.22 SHARE CAPITAL 61 2.23 FIDUCIARY ACTIVITIES 61 2.24 COMPARATIVE INFORMATION 61 2.25 ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES 61 3. RISK MANAGEMENT ORGANISATION 63 3.1 CORPORATE RISK MANAGEMENT AND ORGANIZATIONAL STRUCTURE 64 3.1.1 Corporate risk management 64 3.1.2. The organisational structure of Risk Division 65 3.2 CAPITAL ADEQUACY AND OWN FUNDS (CAPITAL) MANAGEMENT 66 3.2.1 Compliance with the regulatory capital requirement 66 3.2.2 Risk Appetite Framework Limits 68 3.3 CREDIT RISK 68 3.4 ANALYSIS OF PAST DUE FINANCIAL INSTRUMENTS, COMPARATIVE INFORMATION UNDER IAS 39 77 3.5 LIQUIDITY RISK 79 3.6 BANKING BOOK EQUITY RISK 83 3.7 MARKET RISK 83 3.7.1 Derivative instruments 83 3.7.2 Currency Risk 83 3.7.3 Interest rate risk 85 3.8 OPERATIONAL RISK 91 3.9 FAIR VALUE OF ASSETS AND LIABILITIES THAT ARE NOT MEASURED AT FAIR VALUE 92 4. NET INTEREST INCOME 96 5. DIVIDEND INCOME 96 TABLE OF CONTENTS Annual Report 2019 6. NET FEE AND COMMISSION INCOME 97 7. NET GAINS OR LOSSES ON DERECOGNITION OF FINANCIAL ASSETS AND LIABILITIES NOT MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS 97 8. NET GAINS OR LOSSES ON FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING 98 9. NET GAINS OR LOSSES ON NON-TRADING FINANCIAL ASSETS MANDATORILY AT FAIR VALUE THROUGH PROFIT OR LOSS 98 10. NET GAINS OR LOSSES FROM HEDGE ACCOUNTING 98 11. NET GAINS AND LOSSES ON DERECOGNITION OF NON-FINANCIAL ASSETS 98 12. OTHER OPERATING INCOME/EXPENSES 99 13. ADMINISTRATIVE EXPENSES 99 14. DEPRECIATION AND AMORTISATION 100 15. PROVISIONS 100 16. IMPAIRMENTS 100 17. PROFIT OR LOSS FROM NON-CURRENT ASSETS AND DISPOSAL GROUPS CLASSIFIED AS HELD FOR SALE, NOT QUALIFYING AS DISCONTINUED OPERATIONS 100 18. TAX EXPENSE 101 19. EARNINGS PER SHARE 102 20. CASH, CASH BALANCES AT CENTRAL BANKS AND OTHER DEMAND DEPOSITS AT BANKS 102 21. DERIVATIVE FINANCIAL INSTRUMENTS 103 22. NON-TRADING FINANCIAL ASSETS MANDATORILY AT FAIR VALUE THROUGH PROFIT OR LOSS 104 23. FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME 104 24. DEBT SECURITIES 105 25. LOANS TO BANKS 106 26. LOANS TO NON-BANK CUSTOMERS 106 27. ADVANCES 109 28. NON-CURRENT ASSETS HELD FOR SALE 110 29. PROPERTY, PLANT AND EQUIPMENT 110 30. INVESTMENT PROPERTY 111 31. INTANGIBLE ASSETS 111 32. OTHER ASSETS 112 33. DEPOSITS FROM BANKS AND CENTRAL BANKS 112 34. DEPOSITS FROM NON-BANK CUSTOMERS 112 35. LOANS FROM BANKS AND CENTRAL BANKS 113 36. LOANS FROM NON-BANK CUSTOMERS 113 37. OTHER FINANCIAL LIABILITIES 113 38. PROVISIONS FOR LIABILITIES AND CHARGES 113 39. RETIREMENT BENEFIT OBLIGATIONS 114 40. DEFERRED INCOME TAXES 115 41. OTHER LIABILITIES 116 42. SHARE CAPITAL 116 43. ACCUMULATED OTHER COMPREHENSIVE INCOME 116 44. RESERVES FROM PROFIT AND RETAINED EARNINGS 117 45. DIVIDENDS PER SHARE 118 46. CASH AND CASH EQUIVALENTS 118 47. CONTINGENT LIABILITIES AND COMMITMENTS 118 48. RELATED PARTY TRANSACTIONS 120 Financial Report 2019 TABLE OF CONTENTS Annual Report 2019 - Financial statements Management overview 1. MANAGEMENT BOARD’S FOREWORD Last year’s spring was characterised by numerous new beginnings, as is only appropriate for that time of year. The growth strategy we adopted in 2018 began to take shape in the first months of the previous year, when our renovated branch, operating in line with the new service model of the Intesa Sanpaolo group, was ceremoniously opened in Koper. The opening, which was accompanied by a photography exhibition with the symbolic title, Transformations, was followed by the openings in Ljubljana and Maribor. But the highlight of the year was the grand opening of our new business centre in the Rotonda building behind Bežigrad, where the entire management board of the bank has been relocated, along with colleagues from business and several key support organisational units. With this move, our bank, known for its rich and indelible tradition in the Coastal-Karst Region, has seized new business opportunities. Retaining deep connections with the home region, where the head office of the bank remains, we arrived in the capital so that we could be closer to the many successful businesses and inhabitants in other Slovenian regions. Along with strengthening our physical presence in the all-Slovenian area, and making some organisational changes within our sales networks, we are also steadily conquering the digital dimension. Managing vast amounts of data and various digital distribution channels allows us to become even closer to our clients and to better understand their needs. There is a short step from here to business excellence – but progress can stall if a company does not have highly qualified and professionally trained people, who can use technology and new knowledge to create better value for our clients. That is why we paid special attention last year to human resource development and the recruitment of new employees to join our team. We developed a special Onboarding programme for our new recruits, which can help them gradually learn about the Group to which we belong, our bank, and their new work environment, where they will have an opportunity to help fulfil our common mission. In our business, where digitalisation has become a daily mantra, we continue to discover an increasing need for new knowledge, the characteristics of which are sometimes not yet completely formed. Preserving a reputation and image as one of the most advanced banks in Slovenia is no easy task. It is linked to significant investment, not only in technology, but also know-how, and the dedication and perseverance of our employees. But innovativeness and forward vision are part of our genetic code, which is why we made sure to confirm these statements in the previous year by introducing Apple Pay, a prestigious mobile payment service. We were once again the first Slovenian bank to do so. In the same period, we also renovated our website, while our completely new customer relationship management system and a new internet and mobile banking system are almost ready for launch. The individual pieces of this great jigsaw puzzle are starting to offer an image of an efficient and modern multi-channel distribution model that will allow us to provide a comprehensive and unique user experience in the coming years. Of course the economic situation at home and abroad and the events that have marked the Slovenian banking sector in the previous year have not allowed us to merely focus on making plans for the future. The improvements we made to the loan approval process have led to record results in the sales of consumer loans, which is why we are already intensively working on implementing a similar process for our other products and services for individuals and small companies.

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