BRANCHES

2 12 ANNUAL REPORT

CREDIT DIVISION

INTERNAL AUDIT CORPORATE DIVISION TABLE OF CONTENTS

1. message from CEO e. Treasury 2. piraeus Bank Group f. Technology Developments 3. Tirana Bank Overview g. Risk a. general Information h. Compliance b. branch Network: Map and Addresses i. funds Transfer c. main Highlights (Timeline) 7. corporate Social Responsibility 4. economic Outlook a. Environment a. international Economy b. Society b. albanian Economy c. Culture c. albanian Banking Sector 8. human Resources 5. Tirana Bank Main Results – 2012 9. financial Statements (Tables and Graphs) a. main Financial and Business Results a. contents of the Financial Statements b. Table of Financial Statements b. independent Auditor’s Report 6. Tirana Bank during 2012 – Products, Performance & Others c. income Statement a. retail Banking d. balance Sheet b. SMEs Banking e. sTatement of Changes in Equity c. corporate Banking f. cash Flow Statement d. Branches g. notes to the Financial Statements

annual report 2012 page 2 01 Message from CEO

In this period of challenge and uncertainty, role towards the society, economy, customers, Dear Stakeholders, Tirana Bank aimed to predominantly standby employees, and the shareholders of the Bank, and support its clients. Accordingly, it is fulfilled if we conduct our business with induced readiness of its staff towards the new transparency and integrity. Hence, adding challenges through guidance, empowerment value to the greater society and its well being and appropriate supervision. At the same time through contributing to a sound financial the core objective of protecting the interests of system, a healthy and growing economy and its shareholders was streamlined towards: a human oriented community.

2012 was another puzzling year for the • Managing and preserving the quality of its Looking ahead we are focusing on maintaining world economies hence, a period of ambiguity and asset portfolio our competitiveness ensuring that our change. Unavoidably, globalization has reflected • Retaining its liquidity position and its self organization is well equipped and ready to the economic uncertainty to the local economy as funded character reveal yet exploit any opportunity on the way well, leading to a decelerating domestic demand, • Maintaining at all times its capital adequacy forward. We need to continue reinforcing on the quest of consumers for a secure financial an effective corporate culture capitalizing direction. In these difficult times, we have a primary on change and adaptability. Nothing can be duty to protect our clients, both households achieved unless our people are competent The Albanian economy aims for financial stability and businesses. Even more for the latter the to face the challenges of new era with skill while being at the same time vulnerable to external safeguarding of the corporate and small/medium optimism, determination and passion on the and regional developments. Reformulation of companies becomes a must, as they constitute outlook for a promising future through growth. fiscal and monetary policies as well as structural indisputably the backbone of the economy. It Sincerely, changes necessary to face the challenges was essential to identify and capitalize on the on a macro and microeconomic level, define determined business managers and through an ever changing economic environment. Yet better communication and consultation to help Savvas Thalassinos the economic characteristics remain those of our customers overcome financial difficulties. In Managing Director and CEO decelerating consumption and subdue investments this regard we endeavored to offer effective accompanied by a more conservative financial and long-term solutions to our clients. banking activity. Especially in the area of crediting, the banking sector through the redrafting of new Now more than ever, in Tirana Bank we are strategies and policies reflected its sensitivity to committed to the principles of our corporate the quality and performance of its loan portfolio. responsibility. We strongly believe that our

annual report 2012 page 3 02 Piraeus Bank Group

Significant2012 Year Brief history During 2012, Piraeus Bank realized Piraeus Bank was founded in 1916 and “Piraeus Bank AD Beograd”) and the Egyptian two significant strategic moves that operated through a period of private-ownership market by acquiring Egyptian Commercial Bank upgraded the Bank’s position and and management, while in 1975 it passed to state- (renamed “Piraeus Bank Egypt”). In 2007, Piraeus presence in banking in Greece: in July ownership until 1991. Since its privatization in Group expanded its international presence in the Bank acquired the “healthy” part of December 1991, Piraeus Bank Group has presented Ukraine by acquiring the International Commerce ATEbank and in December it acquired significant growth in size and activities. Bank (renamed into Piraeus Bank ICB) and in 2008, Geniki Bank in Cyprus, with Piraeus Bank (Cyprus) Ltd. Along with its organic growth, Piraeus Bank has made a series of strategic moves with the goal of During 2012, Piraeus Bank realized two significant establishing a strong presence in the domestic strategic moves that upgraded the Bank’s position market. Thus, in the period of 1997-1999, the Bank and presence in banking in Greece: in July the absorbed the activities of Chase Manhattan, Credit Bank acquired the “healthy” part of ATEbank and Lyonnais Hellas and National Westminster Bank in December it acquired Geniki Bank. Piraeus Plc in Greece. The Bank also acquired Macedonia Group’s pro-forma total assets amounted at the end Thrace Bank and Xiosbank which were absorbed in of December 2012 to EUR 79.1 billion (*), gross 2000. In 2002, Piraeus Bank acquired the Hellenic loans EUR 50.6 billion, customer deposits EUR 37.0 Industrial Development Bank (ETBAbank) which billion, while the group’s branch network comprised was absorbed in late 2003. of 1,338 units and employed 18,597 people.

In 2005, Piraeus Bank Group, implementing its strategy for expansion in Southeastern Europe and the Eastern Mediterranean Basin, acquired the Bulgarian Eurobank (renamed “Piraeus Bank Bulgaria”) strengthening its presence in Bulgaria (*) Including EUR 7.3 billion capital commitment, which started in 1993, while it entered into the EUR 0.6 billion commitment for ATEbank and EUR 0.8 billion of the additional funding gap of ATEbank Serbian market by acquiring Atlas Bank (renamed (all amounts provided by HFSF),

annual report 2012 page 4 Country Bank Assets (€ mn)

Romania Piraeus Bank Romania 3.402 In 2013, Piraeus Bank continued to play 2000 as the first complete electronic Bulgaria Piraeus Bank Bulgaria 1.653 an important role in the restructuring of banking service in Greece, offering a full Albania Tirana Bank 713 the Greek banking system and acquired set of services. Winbank has received Serbia Piraeus Bank Beograd 719 the banking operations of 3 Cypriot a series of significant awards, both Ukraine Piraeus Bank ICB 328 Banks in Greece (Bank of Cyprus, domestic and international, reflecting Cyprus Piraeus Bank Cyprus 1.278 Cyprus Popular Bank and Hellenic the high level of its services. Egypt Piraeus Bank Egypt 935 Bank) and Millennium Bank. Today, the London Piraeus Bank 194 Group employs approximately 25,000 International Operations Frankfurt Piraeus Bank-ATEbank 141 people, while the entire branch network Piraeus Bank Group’s international Total 9.363 numbers 1,750 units, with a presence presence is mainly focused in in 10 countries including Greece and Southeastern Europe and Eastern data as of 31.12.2012 servicing approximately 6 million Mediterranean, but also in London and customers. Frankfurt.

BUSINESS ACTIVITY Domestic Operations STRATEGY Today, Piraeus Bank leads a group The main midterm objectives of Piraeus of companies covering all financial Group’s policy are: to safeguard and banking activities in the Greek liquidity, capital adequacy and asset LONDON market (universal bank). Piraeus Bank quality, achieve high efficiency by FRANKFURT possesses particular know-how in containing operating costs, and the areas of small and medium-sized to smoothly integrate the recently UKRAINE enterprises (SMEs), agricultural and acquired banking activities in Greece, retail banking, leasing, capital markets thus achieving significant synergies. and investment banking. Piraeus Bank will continue to focus ROMANIA on SMEs, the agricultural sector and SERBIA These services are offered through the retail banking segments, where it holds BULGARIA Bank’s nation-wide network of c. 1,300 strong expertise. ALBANIA branches and c. 2,400 ATMs and also through winbank, the electronic banking platform. The latter was launched in

CYPRUS annual report 2012 page 5 03 Tirana Bank Overview 2004 Tirana Bank network has 22 branches with the opening of seven other branches, becoming the Bank with the second largest branch network.

Tirana Bank has a network of 56 >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Branches, covering the whole 1999 2000 2001 2002 2003 Launch of VISA Tirana Bank Rapid growth Year of network Two more country. >> Executive Committee purchasing opens its new achieved, expansion. Tirana Bank 1. Savvas Thalassinos - Managing Director & CEO service. First branches in with assets’ First VISA agencies are 2. Jani Gjika - Head of Corporate Division positive Gjirokastra and figures tripling Credit Card is opened. 3. Manjola Capo - Head of Credit Division financial Korça. compared with issued. 4. Sotiris Kousouris - Head of Operation Division results are 1997. 5. Bedri Çollaku - Deputy Managing Director achieved. 6. Athanasios Paloudis - Head of Branch Network & SME

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

6

1997 1998 4 1 5 Year of official Tirana Bank opens its 2 3 1996 establishment. new branches in Fier Tirana Bank is licensed, and Durrës. becoming the first private Bank in the country.

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

annual report 2012 page 6 TIRANA BANK BRANCHES OVER THE YEARS 2005 2000 2004 2007 2012

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> 2006 2008 2010 2012 Year of strong growth both The branch network Record profitability excluding Significant investment in Corporate and Retail, growth continues as foreign exchange gains. Expansion in technological The branch network coupled with the launch the number reaches of branch network reaching 56 advancements is further expanded of new products. The 45. High profits are branches. Self-funding status due to to support the service network reaches recorded during high deposits increase. Significant infrastructure of the to reach the number 36 branches, 43 ATM’s 2008. Bank has 500 penetration into the public and bank, for example: of 34 branches, and the Bank has 377 employees. institutional sector. Successful Implementation, in close covering most of employees. protection of balance sheet. cooperation with Piraeus the country. Huge Bank, of the new,

centralized, system for organizational >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> payments - PPS. reshuffle takes Enhancement of internet place and more banking platform aggressive retail by introducing new functionalities and activity starts. mobile applications 2007 2009 2011 for Android and IOS Branch network Complete Bank Maintains a solid network of 56 phones. reaches 39 branches reorganization with a branches with motivated staff with more branches in client and business focus. and exceptional care towards Branch Network: the opening process. Three new branches are customers; despite the first Map and Addresses

45% growth rate of Net opened and twenty-two are crisis’ signs appear in the local profit, Loan portfolio renovated. Profitability of market, which certainly brings >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> grows by 55.9% (y-o-y) EUR 13.2 million despite a shift of priorities. The focus total assets grow by crisis. NPL portfolio and was to strengthen the capital 35%. deposits fully protected. and follow correct and effective annual report 2012 management of liquidity. page 7 04 Economic Outlook

a. Global Prospects standards and sluggish aggregate demand. The growth of financing, with a relatively During 2012, real GDP growth declined in most rate in 2012 was 1.6% compared to 3.1% in 2011. low concentration at the advanced economies and emerging markets. In The Albanian economy showed signs of weakness end of 2012. The Albanian advanced economies, the slowdown primarily during the past year, reflecting an overall uncertainty banking sector is relatively reflected a decline in consumer expenditure and fixed in the internal and external environment. Nonetheless, hedged against direct risk investment growth, particularly in Europe, as well as a against the backdrop of unfavorable developments, from adverse exchange- deceleration in international trade compared with 2011. the main indicators of domestic and external balances rate and interest-rate In emerging markets, growth in domestic demand remained within healthy parameters. Inflation remained fluctuations; however, its weakened, although the contribution from government within its target in 2012. Consumer prices rose 2.4% sensitivity has increased. spending was generally positive. Unemployment annually, while annual inflation rate averaged 2%. At The sector’s foreign levels declined slightly in some economies compared the end of 2012, budget deficit amounted to about ALL exchange open positions are with 2011, but increased in others, particularly in the 45.3 billion, accounting for about 3.4% of GDP. Labor standing within the historical Euro area. The rate of unemployment continued to market conditions remained largely unchanged. The rates, and the levels of interest sensitive remain elevated in many advanced economies. During unemployment rate continues to stand at 13.3%. The assets and liabilities are comparable to each 2012, the U.S. Federal Reserve, the Bank of England year 2012 saw a stable ALL in nominal effective terms. other. At the end of 2012, the foreign exchange open and the Bank of Japan kept interest rates unchanged, In 2012, the ALL appreciated 0.9% against the euro, position of the banking sector accounted for 3.98% of while the European Central Bank reduced its interest compared to its depreciation by 1.8% in 2011. The ALL its regulatory capital. This figure is significantly lower rate. In addition, the People’s Bank of China lowered weakened its position against the U.S. dollar by 7.4%, than the 30% maximum limit, showing low exposure to its one-year benchmark lending rate during the year. reflecting to a considerable degree the performance of direct foreign exchange risk. Banking sector exposure The price of crude oil generally declined during 2012. the U.S. dollar in the international market. to interest rate fluctuations remained limited. The The U.S. dollar weakened against both the Euro and size of exposure measured as a difference between the British pound, while it strengthened against the c. Banking Sector interest sensitive assets and liabilities to total assets Japanese yen. The banking sector remains the main segment of was not considerable. financial intermediation in Albania. Liquidity in the b. Albanian Economy system was at satisfactory levels, contributing in Sources: Bank of Albania, IMF, INSTAT, European The Albanian economy saw relatively weak growth in establishing an appropriate environment for using Commission, Economic and Financial Affairs 2012 due to heightened uncertainties, tight lending the money market. Deposits remain the main source Directorate-General and GS Economic Research.

annual report 2012 page 8 05 Tirana Bank Main Results (2012) Profit before Taxes (Value in million ALL)

20 1 707.9

Main Highlights of Financial Indicators and Results Loan portfolio at the end of 2012 amounted to ALL 1 55,865 million, a decrease of 4% compared to 2011. • During 2012, the bank recorded a loss of ALL 197.5 Non performing loans totaled ALL 18.20 million. 2012 million Total deposits at the end of the year were ALL • Net interest income decreased by 18% (YoY) 72,869 million, an increase of 4% compared to -196.9 Loans to Deposit Ratio (Value in %) • Total operating expenses decreased by 4% (YoY) 2011. This increase comes entirely from individuals • Total assets increased by 4% (YoY) as a result of an increased level of confidence on • Loan/deposit ratio was reduced by almost 7% (YoY) banks. Deposits of companies and businesses 84 • NPL to total loans ratio was approximately 32.4% decreased, reflecting their demand for liquidity. • The ratio of liquid assets over short-term liabilities Equity amounted to ALL 16,618 million, which is at the 2011 was estimated at 32.8% same level as in 2011. Total regulatory capital is ALL 76 • Total deposits increased by 4% 10,409 million with a capital adequacy rate of 16.6%. 2012

Loans (in thousands ALL) Employees Total assets (in thousands ALL) Loans (in thousands ALL) Employees 60,404,366 501 460 478 469 466 97,485,381 438 90,558,535 93,623,945 54,503,195 57,163,534 54,785,214 501 84,641,423 478 60,404,366 50,659,319 377 460 469 466 81,425,293 57,163,534 349 438 40,89854,83,5035 ,195 54,785,214 67,103,490 50,659,319 377 258 349 49,817,567 40,898,835 25,701,296 40,250,568 258 31,736,550 15,826,357 25,701,296 8,910,091 15,826,357 8,910,091

2004 2005 2006 2007 2008 2009 2010 2011 2012 2004 2005 2006 2007 2008 2009 2010 2011 2012 2004 2005 2006 2007 2008 2009 2010 2011 2012 2004 2005 2006 2007 2008 2009 2010 2011 2012 2004 2005 2006 2007 2008 2009 2010 2011 2012

annual report 2012 page 9 Main Indicators (thousand ALL) 2012 2011 Change % Total Assets 97,485,381 93,623,945 4,1 Total Operating Income Loans and Advances (Net) 50,659,319 54,785,214 (6,9) Profit and Loss Analysis Operating Expenses Customer Deposits 72,869,393 69,902,068 4,2 (Value in million ALL) Net interest income was decreased by 18%, mainly Paid in Capital 10,954,079 10,954,079 - due to the decrease in income from loans. This reflects Number of Branches 56 56 - mainly the loss of income from non performing loans. Employees 466 469 (0,6) Operating expenses decreased by 4% compared to 2011, reflecting the operational efficiency of the bank. Income and Expenses (thousand ALL) 2012 2011 Change % Provision expenses were ALL 1,615 million, a 44% Net Interest Income 2,858,485 3,486,114 (18,0) Net Commission Income 227,261 270,632 (16,0) increase compared to 2011, as a result of the raise of Operational Expenses 1,870,420 1,956,902 (4,4) non performing loans. Provisions 1,615,188 1,121,272 44,0 Profit before Taxes (196,984) 707,976 (127,8) Profit after Taxes (197,530) 764,784 (125,8)

Main Ratios (%) 2012 2011 ROA (after tax) (0.21) 0,83 ROE (after tax) (1.80) 5,10 Cost / Income 56,87 51,7 3786.1 1956.9 1870.4 3288.6 Loans / Deposits 76,66 84,0 Net Interest Margin 3.00 3,79 2011 2012

Customer deposits (in thousands ALL) 72,869,393 Profit and loss before tax (in thousands ALL) Branch Network 56 56 56 69,902,068 1,668,024 68,580,659 1,567,290 47 55,721,495 45 51,941,132 36 38 51,190,651 1,153,449 34 42,573,707 1,005,422 34,143,065 844,630 707,976 22 27,733,073 588,076 292,695 -196,984

2004 2005 2006 2007 2008 2009 2010 2011 2012 2004 2005 2006 2007 2008 2009 2010 2011 2012 2004 2005 2006 2007 2008 2009 2010 2011 2012

annual report 2012 page 10 06 Tirana Bank during 2012

Products, Performance & Others

6.A Retail Banking be re-evaluated during 2013, aiming to implement Growth remains the key objective of the business and efficient and effective processes that will enhance therefore, Tirana Bank focuses on the number of active customer experience. customers holding a current and/or savings account. During 2013, Tirana Bank commits to constantly Meanwhile, portfolio quality, increase of liquidity and improve all products and services, targeting all margins as well as efficient cost management, are segments with equal respect and devotion. also priorities for the bank. Tirana Bank continues to exhibit a customer-centric approach by introducing value added products and 6.B SMEs Banking services in order to meet customers’ needs. During 2012 Tirana Bank continued its market Retail Deposits marked an increase of 7% following at penetration by supporting small and medium the same pace the growth of the market. The amalgam enterprises. With the establishment and functioning of of new deposit products, such as “4 Seasons”, and five business centers and through the reorganization the existing ones that are constantly updated with of its structures and procedures, Tirana Bank enhancing features, respond directly to increasingly accomplished to geographically cover the whole country changing customer demands and preferences. and to become a lending partner for entrepreneurs and Retail lending products were also updated to small and medium enterprises. remain in alignment with changes in client behavior, By identifying the specifics of the customers, the focus market developments and regulation. Especially, is on fulfilling the needs of the clients by providing the Housing Loan, considered as one of the core customized and suitable solutions. retail lending products, was heavily promoted with Assuring portfolio quality, the bank has provided attractive and competitive features. Retail lending support to a broad range of businesses in all the products and application to disbursement stages will sectors of economy. annual report 2012 page 11 Through continuous training of its staff, Tirana Bank utilizing the liquidity of the banking system. Tirana 6.C Corporate Banking constantly aims to improve the quality of service Bank serves as a mediator in primary market auctions 2012 was a challenging year for the banking industry offered to its clients, with a view to build long term of Albanian government securities for “non-bank” and for all parts of Corporate Banking. The moderate relationships, based on trust and mutual benefit. investors and also offers custody services for the growth of the economy, the increase of non performing The expansion of its customer base was achieved by traded securities. Numerous clients depend nowadays loans and the lack of liquidity in the market, resulted offering a wide range of products and dedicated services, on Tirana Bank for these core client services. in a fierce competition between banks for new finance. focusing with equal importance both on the human side However, Tirana Bank was able to take positive steps of the business as well as on the business itself. to reinforce its competitive position across its products Centralization of procedures and services is on the top of 6.F IT and Infrastructure Developments and operations. priorities for 2013 with an aim to efficiency, effectiveness Technology plays a crucial role in our response in During 2012, Tirana Bank has followed a prudent 82 and enhanced control. Within this framework, Branch optimizing operational efficiency, managing risk and lending strategy in providing new financing due to atm-s Network staff will concentrate on servicing the ‘client’ and serving the bank’s clients. Therefore, the alignment the uncertainty on local and international economic on identifying market opportunities. of technology with Tirana Bank’s business goals environment. On the other hand, main focus of the enables and contributes to organization’s key strategic bank during 2012 continued to be the administration 56 objectives. of existing portfolio. branches 6.E Treasury Within this context, total outstanding loans experienced The aim of treasury is the active management of Technology is one of the main areas of interest and a slight decrease equal to 1.6% as a result of bank’s assets and liabilities. It is focused on achieving investment where several several projects have been amortization. acceptable yields following a prudent strategy in order completed with main focus on: By the end of 2012, the competition between banks to mitigate all the related risks and to price effectively · migrating of IT Services to Private Cloud over valuable clients resulted in a reduction of spreads the products of the bank. Understanding the · increasing Systems availability by especially in euro financings. Tirana importance of the foreign exchange activity, · innovative software solutions Bank is positioning itself strategically Tirana Bank offers customized solutions · enriching functionality of legacy and electronic to allow it to take advantage of to the customers maintaining long channels any possible opportunities, always term relationships with them; a key · reducing administration/operational costs having at the top of its hierarchy the factor in establishing our bank as · enhancing security and reducing operational improvement of loan portfolio quality. an active and meaningful partner. risk At the end of 2012, the nominal These projects include capital expenditure in state value of securities portfolio of the art hardware and software systems, system 6.D Branch Network from the Albanian government centralization and virtualization, implementing new Tirana Bank maintains a network reached ALL 16.4 billion applications, introducing new transactions and of 56 branches, 82 ATMs and equivalent. It enabled functionality to winbank platform, enhancing the MIS 280 employees, covering the investment of excess reporting function, introducing data warehouse and geographically the whole country. liquidity in local currency, business intelligence. In that respect, Tirana Bank, is a key player and maintains a leading role in the banking sector and the Albanian economy. annual report 2012 page 12 6.G Risk Management completion of Automation of Reporting, which general elevation of standards, and it will continue Risk is an inherent part of Tirana Bank’s business allows the expansion on under-observation areas to work towards meaningful changes that improve activities. The bank’s risk management framework and the application of contemporary techniques on our financial system. and governance structure are intended to provide quantifying and mitigating risks. comprehensive controls and ongoing management Tirana Bank is working constructively with of the major risks inherent in its business activities. regulators to contribute to an effective and realistic Effective risk management is of primary importance 6.H Compliance implementation of new legislation and regulations, to the success of the bank. Accordingly, we have Tirana Bank has demonstrated the ability to respond such as the AML legislation and the Regulation adopted comprehensive risk management processes immediately and adapt efficiently all the changes For the fifth consecutive year, Tirana of Bank of Albania on “Corporate Governance”. through which we monitor, evaluate and manage the of the regulatory framework. As an institution that Compliance Department remains focused on the Bank was credited by Deutsche Bank risks we assume in conducting our activities interacts with many entities, it benefits from the analysis and implementation of the reforms and how with “Euro 2012 STP Award for the they might affect the banking system, Tirana Bank Risk Management Department quality of payments”. and the clients. runs stress tests on a regular basis, as part of the routine risk management processes and 6.K Funds Transfer conducts tailored stress tests on During 2012 Tirana Bank has successfully an ad hoc basis, in response to implemented, in close cooperation with Piraeus market developments. Moreover, Group, the new system for payments, PPS, which as part of the systemic banks, represents a significant enhancement in payments the Bottom-Up Stress Test took processing by saving time and cost, increasing place (under the request and efficiency and minimizing operational risk. supervision of Bank of Albania), the results showed a sound and For the fifth consecutive year, Tirana Bank was liquid situation of the bank. credited by Deutsche Bank with “Euro 2012 STP Award for the quality of payments”. This award, Tirana Bank maintains a which is given for having a performance of 95% comprehensive control framework exceptional quality of payments, awarded by a designed to provide a well- prestigious financial institution such as Deutsche controlled environment to minimize Bank, confirms our commitment to professionally and liquidity, market and operational effectively meet the requirements of our customers. risks. Bank’s risk policies are in part designed to comply with the risk measurement rules and have evolved based on the changing needs of the bank and regulatory guidance. A significant part of this process was the annual report 2012 page 13 07 Corporate Social Responsibility

Tirana Bank’s commitment to corporate social Environmental Activities: environmental impact of the use of resources in which were placed in Abdyl Frashëri responsibility remains solid and concrete. This is at the Tirana Bank is utilizing its knowledge and capital its own operations, such as paper recycling. Square and along Odhise Paskali core of its values and it is central to how how business is to assist the communities it serves to respond · Tirana Bank supported Përmet Municipality Boulevard. conducted. Our responsibility to social and environmental to their environmental sustainability challenge. new project in keeping the city clean. It · Tirana Bank embraced Bilisht care does not fluctuate with the changing economic In addition, the bank is also managing the enabled the production of trash bins Commune initiative in planting trees in conditions; rather it drives us to think creatively about it. this region. Tirana Bank is dedicated to being a significant part of sustainable, successful solutions, supporting those Cultural Activities: areas where we can make a positive impact. The During 2012 Tirana Bank continued its following highlights of our social, environmental, support of cultural events such as: educational and cultural projects show the dedication • Classical music concert on fulfilling our corporate social responsibility: “Ndërmendje” held in Shkodra • Wines Party 2012 organized in Social Activities Pogradec The employees of Tirana Bank have constantly supported the Albanian Red Cross in the annual Educational Activities: initiative of voluntary blood donation. Over 200 Technology is crucial in increasing employees, demonstrated their willingness to donate efficiency and providing better service blood at Tirana Bank offices. Tirana Bank has extended to the community. Therefore, Tirana the voluntary blood donation in its 56 branches across Bank assisted the Educational the country, and has appealed to all the friends, family Directorate of Pogradec in its new members of employees, and also to its clients to be project “the digitalization of teaching a part of this mission. Moreover, the Certificate of classes”. In this framework, Tirana Appreciation was awarded to Tirana Bank by Partners Bank has sponsored the purchase Albania with the motivation “for the valuable and of a digital interactive table (Smart humanitarian act of voluntary blood donation from its Board) which will help in updating the employees, in continuous support of the Blood Bank teaching methods. and Blood Transfusion Centre”.

annual report 2012 page 14 08 Human Resources

During 2012, the reorganization process followed procedures and ethics that govern the with the creation of Business Centers and the bank. centralization of loan administration process in the Headquarters. People mapping process was initiated in mid 2012. Its objective is to invest in valued New human resource policies have been people and reinforce their commitment to the designed and introduced to Tirana Bank bank and the group. In this framework, more staff aiming to improve productivity, increase than 50 vacant positions were covered during efficiency and reduce operational risks. The the year by promoting the internal staff. new policies include: Several trainings, in financial and business • Staff Benefits Policies – intending to development, were offered to the staff of guarantee fairness in the distribution of Tirana Bank. E-learning “Management resources, based on the job responsibility Academy” was a new training initiative and eligibility as indicated by hierarchical undertaken in collaboration with Piraeus level; Bank Group. It gave the opportunity to 15 • Promotions Policy – seeking a systematic participants to enhance their managerial and human resources development planning leadership competence, for a successful and transparent communication of career development. A total of 18,000 advancement; training hours were offered to Tirana Bank • Disciplinary Policy – aiming the systematic employees, mainly in banking and financial operation in compliance with the rules, training, managerial skills and development.

annual report 2012 page 15 Financial Statement Tirana Bank sh.a. - Financial Statements as of and for the year ended 09 31 December 2012

TABLE OF CONTENT 2.15 PROVISIONS 2.16 INCOME TAX GENERAL INFORMATION 2.17 COMPARATIVES AUDITOR’S REPORT 3. FINANCIAL RISK MANAGEMENT STATEMENT OF COMPREHENSIVE INCOME 3.1 CREDIT RISK STATEMENT OF FINANCIAL POSITION 3.1.1 CREDIT RISK MEASUREMENT STATEMENT OF CHANGES IN EQUITY 3.1.2 RISK LIMIT CONTROL AND MITIGATION POLICIES STATEMENT OF CASH FLOWS 3.1.3 IMPAIRMENT AND PROVISIONING POLICIES 3.1.4 MAXIMUM EXPOSURE TO CREDIT RISK BEFORE COLLATERAL 1. CORPORATE INFORMATION HELD 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OR OTHER CREDIT ENHANCEMENTS 2.1 BASES OF PREPARATION 3.1.5 LOANS AND ADVANCES 2.2 FOREIGN CURRENCY TRANSLATION 3.1.6 LOANS AND ADVANCES RENEGOTIATED 2.3 FINANCIAL INSTRUMENTS – INITIAL RECOGNITION AND SUBSEQUENT MEASUREMENT 3.1.7 REPOSSESSED COLLATERAL 2.4 REPURCHASE AND REVERSE PURCHASE AGREEMENTS 3.1.8 CASH AND BALANCES WITH CENTRAL BANK 2.5 DETERMINATION OF FAIR VALUE 3.1.9 DEBT SECURITIES, TREASURY BILLS AND OTHER ELIGIBLE 2.6 IMPAIRMENT OF FINANCIAL ASSETS BILLS 2.7 LEASING 3.1.10 CONCENTRATION OF RISKS OF FINANCIAL ASSETS WITH 2.8 REVENUE RECOGNITION CREDIT RISK EXPOSURE 2.9 CASH AND CASH EQUIVALENTS 3.2 MARKET RISK 2.10 PROPERTY AND EQUIPMENT 3.2.1 FOREIGN EXCHANGE RISK 2.11 INTANGIBLE ASSETS 3.2.2 INTEREST RATE RISK 2.12 IMPAIRMENT OF NON FINANCIAL ASSETS 3.3 LIQUIDITY RISK 2.13 FINANCIAL GUARANTEE CONTRACTS 3.3.1 LIQUIDITY RISK MANAGEMENT PROCESS 2.14 PENSIONS AND OTHER POST EMPLOYMENT BENEFITS 3.3.2 OFF- BALANCE SHEET ITEMS

annual report 2012 page 16 3.4 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES GENERAL INFORMATION 3.5 CAPITAL MANAGEMENT 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS Board of Directors during 2012 5. INTEREST AND SIMILAR INCOME 6. INTEREST AND SIMILAR EXPENSE Ilias Milis (Chairman) 7. NET FEES AND COMMISSION INCOME 8. OTHER GAINS Georgios Papaioannou 9. OTHER OPERATING INCOME Bedri Collaku 10. PERSONNEL EXPENSES Georgios Mantakas 11. OTHER OPERATING EXPENSES Georgios Poulopoulos 12. INCOME TAX EXPENSE Georgios Charalampakis 13. CASH AND BALANCES WITH CENTRAL BANK Vasileios Koutentakis 14. LOANS AND ADVANCES TO BANKS 15. LOANS AND ADVANCES TO CUSTOMERS 16. FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS Registered office 17. FINANCIAL ASSETS AVAILABLE FOR SALE 18. FINANCIAL ASSETS HELD TO MATURITY Rr. Ibrahim Rugova, PO BOX 2400/1 19. INTANGIBLE ASSETS Tirana, Albania 20. PROPERTY AND EQUIPMENT 21. OTHER ASSETS 22. DUE TO BANKS Auditor 23. DUE TO CUSTOMERS 24. OTHER LIABILITIES PricewaterhouseCoopers Audit sh.p.k 25. PROVISIONS Blvd. Deshmoret e Kombit 26. PAID – IN CAPITAL AND SHARE PREMIUM Twin Towers, Tower 1, 10th floor 27. OTHER RESERVES Tirana, Albania 28. DIVIDEND PER SHARE Telephone +355 42 242254/280423 29. CASH AND CASH EQUIVALENTS Facsimile +355 42 241639 30. RELATED PARTIES 31. PRESENTATION OF FINANCIAL INSTRUMENTS BY MEASUREMENT CATEGORY 32. EVENTS AFTER THE REPORTING DATE

annual report 2012 page 17 STATEMENT OF COMPREHENSIVE INCOME STATEMENT OF FINANCIAL POSITION for the year ended 31 December 2012 As at 31 December 2012

Notes 2012 2011 AK TIVE Notes 2012 2011 ASSETS Interest and similar income 5 5,627,640 6,268,489 Cash and balances with the Central Bank 13 13,866,273 8,611,453 Interest and similar expense 6 (2,769,155) (2,782,375) Loans and advances to banks 14 13,171,181 12,262,981 Net interest income 2,858,485 3,486,114 Loans and advances to customers 15 50,659,319 54,785,214 Financial assets designated at fair value through profit or loss 16 - 4,489,432 Provisions for impairment of loans and advances 15 (1,615,188) (1,121,272) Financial assets available for sale 17 12,211,401 5,493,816 Net interest income after provision for loan Financial assets held to maturity 18 4,718,685 5,600,728 1,243,297 2,364,842 impairment Corporate income tax receivable 259,726 113,786 Fee and commission income 247,245 287,831 Intangible assets 19 401,822 363,453 Fee and commission expense 7 (19,984) (17,199) Property and equipment 20 1,065,802 1,303,404 Net fee and commission income 7 227,261 270,632 Deferred tax assets 12 25,726 32,009

Other assets 21 1,105,446 567,669 Foreign exchange translation gains less losses 8 239,959 62,081 TOTAL ASSETS 97,485,381 93,623,945 Other gains/(losses) 8 (38,201) (57,873)

Other operating income 9 1,120 25,196 LIABILITIES AND EQUITY Personnel expenses 10 (515,199) (576,866) Due to banks 22 7,513,888 6,777,366 Other operating expenses 11 (986,537) (992,476) Due to customers 23 72,869,393 69,902,068 Depreciation and amortization 19, 20 (368,684) (387,560) Other liabilities 24 399,560 171,150 Provisions 25 84,027 8,950 Profit before income tax (196,984) 707,976 TOTAL LIABILITIES 80,866,868 76,859,534

Income tax expense 12 (546) 56,808 Equity Paid-in capital 26 10,954,079 10,954,079 Profit for the year (197,530) 764,784 Share premium 26 1,735,494 1,735,494 Other reserves 27 1,493,916 1,442,284 Retained earnings 2,435,024 2,632,554 TOTAL EQUITY 16,618,513 16,764,411 Other comprehensive income: Available-for-sale investments: TOTAL LIABILITIES AND EQUITY 97,485,381 93,623,945 - Gains less losses arising during the year 57,369 43,301 - Income tax recorded directly in other comprehensive income (5,737) (4,330) Other comprehensive income/(loss) for the year 51,632 38,971 Total comprehensive income for the year (145,898) 803,755

The accompanying notes on pages 44 to 129 form an integral part of these financial statements. The accompanying notes on pages 44 to 129 form an integral part of these financial statements.

The financial statements were approved by the Board of Directors on 29 April 2013 and The financial statements were approved by the Board of Directors on 29 April 2013 and signed on their behalf by: signed on their behalf by:

Savvas Thalassinos Aleko Polo Savvas Thalassinos Aleko Polo Managing Director Financial Control Department Managing Director Financial Control Department

annual report 2012 page 18 STATEMENT OF CASH FLOWS For the year ended 31 December 2012

Notes 2012 2011 Cash flow from OPERATING ACTIVITIES Profit before tax (196,984) 707,976 STATEMENT OF CHANGES IN EQUITY Adjustments for: For the year ended 31 December 2012 Depreciation and amortisation 19, 20 368,684 387,560 Changes in loan impairment 15 1,540,111 1,121,272 Net changes in fair value of financial assets (33,669) (26,410) Retained Net interest income 5, 6 (2,858,485) (3,486,114) Paid-in Capital Share Premium Other Reserves Total Equity Earnings Other non-cash items 9, 16 75,077 (22,104) (1,105,266) (1,317,820) Increase in compulsory reserve with the Central Bank (417,117) (6,817) Decrease/(increase) in loans and advances to customers 2,900,657 4,715,716 At 1 January 2011 7,219,972 1,735,737 3,058,577 1,183,565 11,707,268 Increase in other assets (541,294) (313,763) Profit for the year - - 764,784 - 764,784 Decrease in due to banks 752,780 (679,739) Increase in due to customers 3,157,771 330,663 Other comprehensive income for the year - - - 38,971 38,971 (Decrease)/increase in other liabilities 228,410 (71,470) Total comprehensive income for the year - - 764,784 38,971 803,755 Interest received 5,310,066 6,124,596 Capitalisation of retained earnings into paid-in capital and Interest paid (2,975,859) (2,720,456) 971,302 (243) (971,059) - - share premium (Note 25) Income tax paid (142,424) (39,803) Net cash generated from operating activities 7,167,724 6,021,107 Capital Increase 2,762,805 2,762,805 Cash flow from INVESTING ACTIVITIES Transfer from retained earnings to other reserves (219,748) 219,748 - Purchase of property & equipment 20 (53,241) (69,018) At 31 December 2011 10,954,079 1,735,494 2,632,554 1,442,284 16,764,411 Purchase of intangible assets 19 (134,710) (116,187) Proceeds from sale of property & equipment 18,500 -

Proceeds from maturing financial assets designated at fair value through profit and loss 16 4,489,432 13,376,734 At 1 January 2012 10,954,079 1,735,494 2,632,554 1,442,284 16,764,411 Purchase of financial assets available for sale (11,624,035) (5,440,359) Profit for the year - - (197,530) - (197,530) Proceeds from available for sale financial assets 16 5,005,449 - Proceeds from matured financial assets held-to-maturity 18 881,333 3,693,200 Transfer from AFS Securities - - - 51,632 51,632 Purchase of financial assets designated at fair value through profit and loss 16 - (4,480,643) Other comprehensive loss for the year - - - - - Purchase of financial assets held-to-maturity 18 (710) (4,190,595) Total comprehensive income for the year - - (197,530) 51,632 (145,898) Net cash from/(used in) investing activities (1,417,982) 2,773,132 Cash flow from FINANCING ACTIVITIES At 31 December 2012 10,954,079 1,735,494 2,435,024 1,493,916 16,618,513 Increase of share capital - 2,762,805 Net cash (used in)/from financing activities - 2,762,805 Net increase/(decrease) increase in cash and cash equivalents 5,749,742 11,557,044 Cash and cash equivalents at 1 January 29 14,459,920 2,902,876 Cash and cash equivalents at 31 December 29 20,209,662 14,459,920

The accompanying notes on pages 44 to 129 form an integral part of these financial statements. The accompanying notes on pages 44 to 129 form an integral part of these financial statements.

The financial statements were approved by the Board of Directors on 29 April 2013 and The financial statements were approved by the Board of Directors on 29 April 2013 and signed on their behalf by: signed on their behalf by:

Savvas Thalassinos Aleko Polo Savvas Thalassinos Aleko Polo Managing Director Financial Control Department Managing Director Financial Control Department

annual report 2012 page 19 1. corporate information for-sale financial investments and financial assets designated at fair value through profit or Tirana Bank sh.a. is a banking institution operating in accordance with the provisions of Law loss that have been measured at fair value. The financial statements are presented in Albanian 9901, dated 14 April 2008 “On Entrepreneurs and Commercial Companies”, and Law 9662, Lek and all values are rounded to the nearest thousand (LEK ‘000) except when otherwise dated 18 December 2006 “On Banks in the Republic of Albania” as amended, Law 10481 dated indicated. 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 The Bank’s financial statements have been prepared on a going concern basis, which assumes operation acknowledged or delegated by law to banks. Tirana Bank sh.a. is incorporated and that the Bank will continue in operational existence for the foreseeable future. domiciled in Albania and operates in Albania. Tirana Bank sh.a. is an 96.71% owned subsidiary of Piraeus Bank S.A. a) impact of the economic crisis and situation in Greece

The Bank has 56 branches (2011: 56) within the Republic of Albania and has no overseas Since late 2009, fears of a European sovereign debt crisis developed among investors as a operations. result of the rising government debt levels, together with a wave of downgrading of government debt in some European states. Concerns intensified in early 2010 making it difficult for Greece The financial statements for the year ended 31 December 2012 were authorized for issue by the to re-finance its government debt without external assistance. Board of Directors on 30 April 2013. Approval of the financial statements by the Shareholders will take place in the Annual General Meeting of the Shareholders.

Principal activity 2. Summary of significant accounting policies (continued) The Bank’s principal business activity is commercial and retail banking operations within the 2.1 Basis of preparation (continued) Republic of Albania. The Bank has been operating under a full banking licence issued by the the Central Bank of the Republic of Albania (“Bank of Albania” or “BoA”) since 1996. On the Greek debt front, a new funding program was agreed with the European Commission, the ECB and the Eurozone member-states, in the Eurogroup meeting held on 21 February Summary of significant accounting policies 2012. The new program aims to bring the country’s public debt-to-GDP ratio to 116.5% by 2020, below the 120.0% target envisioned in the European Council session held on 26 and 27 The principal accounting policies applied in the preparation of these financial statements are October 2011 via Private Sector’s Involvement (PSI) in the reduction of Greek debt. set out below. These policies have been consistently applied to all years presented, unless otherwise stated. Private Greek Government Bonds’ holders (GGB) (individuals and legal entities) participating in the programme received new GGBs with a face value equal to 31.5% of the nominal value Basis of preparation of the exchanged bonds, and notes (annual and biannual) issued by the European Financial Stability Facility (EFSF), with a face value equal to 15% of the nominal value of the exchanged The financial statements have been prepared on a historical cost basis, except for available- bonds.

annual report 2012 page 20 The new funding program is expected to have a significant beneficial effect on the country’s its forthcoming share capital increase. solvency outlook. This is due, not only to the reduction of public debt, but also to the expected This level of equity places Piraeus Bank in the 30th place among banks in the European decline of interest expenditure from 2012 onwards. The funding program constitutes a credible Union. At the same time, the Bank succeeded in safeguarding its private management and opportunity for the Greek economy to remove uncertainty surrounding it since the middle of transformed itself into a financially robust banking institution, able to cope with the headwinds 2010, regarding both sustainability of fiscal position as well as preservation of the country’s of the economic environment and to actively support all sound business and private initiatives, Eurozone participation. thus helping to strengthen the country’s competitiveness”.

In addition, the Eurogroup confirmed that the necessary elements have been put in place for Group pre-tax and provisions profitability amounted to Eur 170 million in Q1 2013. The total Member States to carry out the relevant national procedures to allow for the support by EFSF, impairment losses on loans and advances reached Eur 506 million, contributing to a pre-tax including the necessary financing for recapitalisation of Greek banks following their participation loss of Eur 336 million. The attributable net result from continuing operations amounted to in the recent sovereign debt restructuring (PSI). Greek banks’ participation in the PSI had a Eur 203 million, positively affected by the change in the corporate tax rate beginning as of significant negative impact on their equity and capital adequacy. 01.01.2013.During Q1 2013, Piraeus Group’s deposits continued to increase, which contributed to a significant reduction in the Euro system funding which amounted to Eur 21 million versus In the context of the recapitalization process of the Greek banks, Bank of Greece (BoG) Eur 32 million as at 31 December 2012, while the loan to deposit ratio showed an additional requested and received (at end January 2012) their detailed Strategic-Business Plans for the improvement to 114% compared to 121%at the end of 2012. It should be noted that the Group period 2012-2015. The banks’ capital needs will be based on these plans, including the PSI regained meaningful access to the repo interbank market outside from the European Central impact and the results of BlackRock Solutions diagnostic exercise - commissioned by Bank of Bank with a balance of Eur 5.9 million at the end of March 2013. Greece - on the domestic loan portfolios of the Greek banking groups. The Group’s Core Tier I –EBA ratio, pro-forma for the recapitalization plan, stands at the very high level of 14.8%,that safeguards the balance sheet and allows the efficient financing of the In February 2012, the Greek parliament adopted the necessary legal framework to enable economy”. the necessary financing for the recapitalization of Greek banks. The Greek banking sector recapitalization should be consummated by the end of September 2012, in order for the Greek Effective financial intermediation is crucial to contribute to a strong recovery. The program’s bank banking groups to comply with a 9% Core Tier 1 ratio by September 2012 and 10% by June recapitalization framework is set to deliver a fully recapitalized system by mid-2013, and banks 2013. should be in a position to support a gradual recovery in credit as deposits and wholesale market access returns. The reduced sovereign-bank link—banks now have little Greek government debt on their balance sheets—will also help to facilitate a return to market access. b) position of the Group

Piraeus Bank, having contributed to the restructuring of the Greek banking system, has c) Position of the Bank successfully become the largest bank in Greece with market share of 30% and total equity of Eur 1.3 billion on 31.03.13, which will reach Eur 9.7 billion (pro-forma) upon the completion of In the current environment the focus of the Bank has been on liquidity and capital adequacy. As

annual report 2012 page 21 disclosed in Notes 22 and 23, the Bank’s main source of funding is locally collected deposits Statement of compliance from corporate and retail customers. The financial statements of Tirana Bank sh.a. have been prepared in accordance with In 2012, due to banks increased by around 10% while due to customers increased by 4%. International Financial Reporting Standards (IFRSs) and IFRIC interpretations). The Bank’s capital adequacy ratio (as prescribed by BoA) as at 31 December 2012 amounts to 16.59% and is higher than the specifically-set regulatory minimum of 15%. Additionally, the The accounting policies adopted are consistent with those of the previous financial year. Bank’s liquidity ratio as of 31 December 2012 was 31 % (2011; 30.58%), which is in compliance with the article 71 of the Bank of Albania regulation on liquidity, dated 14 October 2009. (а) New and amended standards adopted by the Bank

Following the global situation at the year-end and as of 14 May 2013, the date of approval of There are no IFRSs or IFRIC interpretations that are effective for the first time for the financial these financial statements, the Bank’s exposure to the persons related to the year beginning on or after 1 January 2012 that have a material impact on the Bank.

Bank is in compliance with the regulatory requirements and did not exceed the amount (b) Certain new standards and interpretations have been issued that are mandatory for the prescribed by the Law. annual periods beginning on or after 1 January 2013 or later, and which the Bank has not early adopted. Consequently, the going concern assumption has been applied in the preparation of the financial statements. IFRS 9, Financial Instruments: Classification and Measurement. IFRS 9, issued in November 2009, replaces those parts of IAS 39 relating to the classification and measurement of financial Management prepared these financial statements on a going concern basis, which assumes that assets. IFRS 9 was further amended in October 2010 to address the classification and the Bank will continue to operate in the foreseeable future. In order to assess the reasonability of measurement of financial liabilities and in December 2011 to (i) change its effective date to this assumption, management reviews the forecasts of the future cash inflows and the support annual periods beginning on or after 1 January 2015 and (ii) add transition disclosures. Key provided by shareholders. features of the standard are as follows: • Financial assets are required to be classified into two measurement categories: those to Based on the current financial plans, the actual situation of the Bank and the support of the be measured subsequently at fair value, and those to be measured subsequently at amortised Parent Bank, management is satisfied that the Bank will be able to continue to operate as a cost. The decision is to be made at initial recognition. The classification depends on the going concern in the foreseeable future and, therefore, this principle is applied in the preparation entity’s business model for managing its financial instruments and the contractual cash flow of these financial statements. characteristics of the instrument. • An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entity’s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset’s contractual cash flows represent payments of principal and interest only (that is, it has only “basic loan features”). All other debt instruments

annual report 2012 page 22 are to be measured at fair value through profit or loss. other comprehensive income into two groups, based on whether or not they may be reclassified • All equity instruments are to be measured subsequently at fair value. Equity instruments to profit or loss in the future. The suggested title used by IAS 1 has changed to ‘statement of that are held for trading will be measured at fair value through profit or loss. For all other equity profit or loss and other comprehensive income’. The BankBank expects the amended standard investments, an irrevocable election can be made at initial recognition, to recognise unrealised to change presentation of its financial statements, but have no impact on measurement of and realised fair value gains and losses through other comprehensive income rather than profit transactions and balances. or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-by- Disclosures—Offsetting Financial Assets and Financial Liabilities - Amendments to IFRS 7 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2013). The amendment requires disclosures that will enable users of an entity’s financial statements to 2 Summary of significant accounting policies (continued) evaluate the effect or potential effect of netting arrangements, including rights of set-off. 2.1 Basis of preparation (continued) (b) Certain new standards and interpretations have been issued that are mandatory for the Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32 (issued in annual periods beginning on or after 1 January 2013 or later, and which the Bank has not early December 2011 and effective for annual periods beginning on or after 1 January 2014). The adopted (continued). amendment added application guidance to IAS 32 to address inconsistencies identified in applying some of the offsetting criteria. This includes clarifying the meaning of ‘currently has a instrument basis. Dividends are to be presented in profit or loss, as long as they represent a legally enforceable right of set-off’ and that some gross settlement systems may be considered return on investment. equivalent to net settlement. • Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be Improvements to International Financial Reporting Standards (issued in May 2012 and effective required to present the effects of changes in own credit risk of financial liabilities designated at for annual periods beginning 1 January 2013). The improvements consist of changes to five fair value through profit or loss in other comprehensive income. standards. IFRS 1 was amended to (i) clarify that an entity that resumes preparing its IFRS While adoption of IFRS 9 is mandatory from 1 January 2015, earlier adoption is permitted. financial statements may either repeatedly apply IFRS 1 or apply all IFRSs retrospectively as if it had never stopped applying them, and (ii) to add an exemption from applying IAS 23 IFRS 13, Fair value measurement (issued in May 2011 and effective for annual periods beginning “Borrowing costs”, retrospectively by first-time adopters. IAS 1 was amended to clarify that on or after 1 January 2013), aims to improve consistency and reduce complexity by providing explanatory notes are not required to support the third balance sheet presented at the beginning a revised definition of fair value, and a single source of fair value measurement and disclosure of the preceding period when it is provided requirements for use across IFRSs.

Amendments to IAS 1, Presentation of Financial Statements (issued June 2011, effective for 2 Summary of significant accounting policies (continued) annual periods beginning on or after 1 July 2012), changes the disclosure of items presented in 2.1 Basis of preparation (continued) other comprehensive income. The amendments require entities to separate items presented in (b) Certain new standards and interpretations have been issued that are mandatory for the

annual report 2012 page 23 annual periods beginning on or after 1 January 2013 or later, and which the Bank has not early 2.2 foreign currency translation adopted (continued). The financial statements are presented in Albanian Lek, which is the Bank’s functional and presentation currency. because it was materially impacted by a retrospective restatement, changes in accounting policies or reclassifications for presentation purposes, while explanatory notes will be required Transactions and balances when an entity voluntarily decides to provide additional comparative statements. Transactions in foreign currencies are initially recorded in the functional currency at the rate of exchange ruling at the date of the transaction. IAS 16 was amended to clarify that servicing equipment that is used for more than one period is classified as property, plant and equipment rather than inventory. IAS 32 was amended to Monetary assets and liabilities denominated in foreign currencies are retranslated at the clarify that certain tax consequences of distributions to owners should be accounted for in functional currency rate of exchange ruling at the reporting date. All differences are taken to the income statement as was always required by IAS 12. IAS 34 was amended to bring its “Foreign exchange translation (losses)/gains” in profit or loss. Non-monetary items that are requirements in line with IFRS 8. IAS 34 will require disclosure of a measure of total assets measured in terms of historical cost in a foreign currency are translated using the exchange and liabilities for an operating segment only if such information is regularly provided to chief rates as at the dates of the initial transactions. Non-monetary items measured at fair value in operating decision maker and there has been a material change in those measures since the a foreign currency are translated using the exchange rates at the date when the fair value was last annual financial statements. determined. Other revised standards and interpretations which are not relevant to the Bank: 2 Summary of significant accounting policies (continued) IFRS 10, Consolidated Financial Statements The applicable rates of exchange (Lek to foreign currency unit) for the principal currencies as IFRS 11, Joint Arrangements at 31 December 2012 and 2011 were as follows: IFRS 12, Disclosure of Interest in Other Entities 2012 2011 IAS 27, Separate Financial Statements USD 105,85 107,54 IAS 28, Investments in Associates and Joint Ventures EUR 139,59 138,93 IFRS 1 “First-time adoption of International Financial Reporting Standards - Government Loans“ IFRS 10, IFRS 12 and IAS 27 - Investment entities 2.3 financial instruments – initial recognition and subsequent measurement Amended IAS 19, Employee Benefits IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine a) Date of recognition

Unless otherwise described above, the new standards and interpretations are not expected to Purchases or sales of financial assets that require delivery of assets within the time frame affect significantly the Bank’s financial statements. generally established by regulation or convention in the marketplace are recognised on the trade date, i.e. the date that the Bank commits to purchase or sell the asset.

annual report 2012 page 24 b) Initial recognition of financial instruments 2 Summary of significant accounting policies (continued) 2.3 financial instruments – initial recognition and subsequent measurement (continued) The classification of financial instruments at initial recognition depends on the purpose for which the financial instruments were acquired and their characteristics. All financial instruments are d) Loans and receivables measured initially at their fair value plus, in case of financial assets and liabilities not at fair value through profit and loss, transaction costs. Fair value at initial recognition is best evidenced by Loans and receivables include “Due from banks” and “Loans and advances to customers”, the transaction price. A gain or loss on initial recognition is only recorded if there is a difference which are financial assets with fixed or determinable payments and fixed maturities that are between fair value and transaction price which can be evidenced by other observable current not quoted in an active market. They are not entered into with the intention of immediate or market transactions in the same instrument or by a valuation technique whose inputs include short-term resale and are not classified as “Financial assets held for trading”, designated as only data from observable markets. “Financial investment available-for-sale’ or “Financial assets designated at fair value through profit or loss”. After initial measurement, amounts due from banks and loans and advances The Bank classifies its financial assets in the following categories: held-to-maturity to customers are subsequently measured at amortised cost using the effective interest rate financial investments, loans and receivables and financial assets designated at fairvalue method, less allowance for impairment. Amortised cost is calculated by taking into account any through profit or loss. The Bank did not classify any financial assets as available-for-sale during discount or premium on acquisition and fees and costs that are an integral part of the effective reporting period. interest rate. The amortisation is included in “Interest and similar income” in profit or loss. The losses arising from impairment are recognised in profit or loss in “Impairment losses on loans c) Financial assets held to maturity and advances’.

Financial assets held to maturity are those investments which carry fixed or determinable e) Financial assets designated at fair value through profit or loss payments and have fixed maturities and which the Bank has the intention and ability to hold to maturity. If the Bank were to sell other than an insignificant amount of held to maturity This category includes treasury bills issued by the Albanian Government. investments, the entire category would be reclassified to available for sale. Financial assets designated at fair value through profit or loss is financial assets which are Financial assets held to maturity are subsequently measured at amortised cost using the managed and their performance is evaluated on a fair value basis, in accordance with the effective interest rate method, less allowance for impairment. Amortised cost is calculated by Bank’s risk management strategy. Financial assets designated at fair value through profit or taking into account any discount or premium on acquisition and fees that are an integral part of loss is carried at fair value. Interest earned on financial assets designated at fair value through the effective interest rate. The amortisation is included in “Interest and similar income” in profit profit or loss calculated using the effective interest method is presented in the statement of or loss. The losses arising from impairment of such investments are recognised in profit or loss comprehensive income as interest income. All other elements of the changes in the fair value as “Impairment losses on financial investments”, if any. and gains or losses on derecognising are recorded in profit or loss as other gains the period in which they arise.

annual report 2012 page 25 f)Available for sale financial assets 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. This classification includes investment securities which the Bank intends to hold for an indefinite period of time and which may be sold in response to needs for liquidity or changes in interest g) Financial liabilities rates, exchange rates or equity prices. After initial measurement, debt issued and other borrowings are subsequently measured at Investment securities available for sale are carried at fair value. Interest income on available- amortized cost using the effective interest rate method. There is no financial liability measured for-sale debt securities is calculated using the effective interest method and recognised in at fair value through profit and loss. Any differences between proceeds net of transactions profit or loss for the year. Dividends on available-for-sale equity instruments are recognised costs and the redemption value is recognised in “Interest and similar expenses” in profit or loss. in profit or loss for the year when the Bank’s right to receive payment is established and it is Amortized cost is calculated by taking into account any discount or premium on the issue and probable that the dividends will be collected. All other elements of changes in the fair value are costs that are an integral part of the effective interest rate. recognised in other comprehensive income until the investment is derecognised or impaired, at which time the cumulative gain or loss is reclassified from other comprehensive income to h) Offsetting financial instruments profit or loss for the year. Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. 2 Summary of significant accounting policies (continued) 2.3 financial instruments – initial recognition and subsequent measurement (continued) i) Derecognition f) Available for sale financial assets (continued) Financial assets are derecognised when the contractual rights to receive the cash flows from these assets have ceased to exist or the assets have been transferred and substantially all the Impairment losses are recognised in profit or loss for the year when incurred as a result of one risks and rewards of ownership of the assets are also transferred (that is, if substantially all the or more events (“loss events”) that occurred after the initial recognition of investment securities risks and rewards have not been transferred, the Bank tests control to ensure that continuing available for sale. A significant or prolonged decline in the fair value of an equity security below involvement on the basis of any retained powers of control does not prevent derecognising). its cost is an indicator that it is impaired. The cumulative impairment loss – measured as the Financial liabilities are derecognised when they have been redeemed or otherwise extinguished. 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

annual report 2012 page 26 2 Summary of significant accounting policies (continued) 2.4 Repurchase and reverse repurchase agreements 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. Securities sold under agreements to repurchase at a specified future date (“repos”) are not derecognised from the balance sheet. The corresponding cash received, including accrued A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is interest, is recognised in the statement of financial position as a “Due to Banks”, reflecting its objective evidence of impairment as a result of one or more events that has occurred after the economic substance as a loan to the Bank. The difference between the sale and repurchase initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an prices is treated as interest expense and is accrued over the life of the agreement using the impact on the estimated future cash flows of the financial asset or the group of financial assets effective interest rate method. Conversely, securities purchased under agreements to resell that can be reliably estimated. Evidence of impairment may include indications that the borrower at a specified future date (‘reverse repos’) are recorded as due from other banks orloans or a group of borrowers is experiencing significant financial difficulty, default or delinquency in and advances to customers, as appropriate. The corresponding cash paid, including accrued interest or principal payments, the probability that they will enter bankruptcy or other financial interest, is recognised in the statement of financial position as “Due from Banks”. The difference reorganisation and where observable data indicate that there is a measurable decrease in the between the purchase and resale prices is treated as interest income and is accrued over the estimated future cash flows, such as changes in arrears or economic conditions that correlate life of the agreement using the effective interest rate method. with defaults.

2.5 Determination of fair value 2 Summary of significant accounting policies (continued) For financial instruments that are traded in active markets, the determination of fair values 2.6 Impairment of financial assets (continued) of financial assets and financial liabilities is based on quoted market prices or dealerprice quotations. A financial instrument is regarded as quoted in an active market if quoted prices a) Due from banks and loans and advances to customers are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market For amounts due from banks and loans and advances to customers carried at amortised cost, transactions on an arm’s length basis. If the above criteria are not met, the market is regarded the Bank first assesses whether objective evidence of impairment exists for financial assets that as being inactive. Indicators that a market is inactive are when there is a wide bid-offer spread are individually significant, or collectively for financial assets that are not individually significant. or significant increase in the bid-offer spread or there are few recent transactions. 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 For all other financial instruments not listed in an active market, the fair value is determined assets with similar credit risk characteristics and collectively assesses them for impairment. by using appropriate valuation techniques. Valuation techniques include net present value Assets that are individually assessed for impairment and for which an impairment loss is, or techniques, comparison to similar instruments for which market observable prices exist and continues to be recognised are not included in a collective assessment of impairment. other relevant valuation models. If there is objective evidence that an impairment loss has been incurred, the amount of the loss 2.6 Impairment of financial assets is measured as the difference between the assets’ carrying amount and the present value of

annual report 2012 page 27 estimated future cash flows (excluding future expected credit losses that have not yet been 2 Summary of significant accounting policies (continued) incurred). The carrying amount of the asset is reduced through the use of an allowance account 2.6 Impairment of financial assets (continued) 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 b) Financial assets held to maturity 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 For held-to-maturity investments the Bank assesses individually whether there is objective the impairment was recognised, the previously recognised impairment loss is increased or evidence of impairment. If there is objective evidence that an impairment loss has been reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery incurred, the amount of the loss is measured as the difference between the asset’s carrying is credited to the “Provisions for impairment of loans and advances”. 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. 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 If, in a subsequent year, the amount of the estimated impairment loss decreases because of any impairment loss is the current effective interest rate. The calculation of the present value an event occurring after the impairment was recognised, any amounts formerly charged are of the estimated future cash flows of a collateralised financial asset reflects the cash flows that credited to the “Impairment losses on financial investments”. may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. c) Assets classified as available for sale

For the purpose of a collective evaluation of impairment, financial assets are grouped on the The Bank assesses at each reporting date whether there is objective evidence that a basis of the Bank’s internal credit grading system that considers credit risk characteristics such financial asset or a group of financial assets is impaired. In the case of debt investments as asset type, industry, collateral type, past-due status and other relevant factors. Future cash classified as available for sale, a significant or prolonged decline in the fair valueofthe flows on a group of financial assets that are collectively evaluated for impairment are estimated security below its cost is considered in determining whether the assets are impaired. If any on the basis of historical loss experience for assets with credit risk characteristics similar to such evidence exists for available-for-sale financial assets, the cumulative loss – measured those in the group. Historical loss experience is adjusted on the basis of current observable as the difference between the acquisition cost and the current fair value, less any impairment data to reflect the effects of current conditions that did not affect the years on which the historical loss on that financial asset previously recognised in profit or loss – is removed from other loss experience is based and to remove the effects of conditions in the historical period that comprehensive income and recognised in profit or loss. If, in a subsequent period, the fair do not exist currently. Estimates of changes in future cash flows reflect, and are directionally value of a debt instrument classified as available for sale increases and the increase can be consistent with, changes in related observable data from year to year (such as changes in objectively related to an event occurring after the impairment loss was recognised in profit or unemployment rates, property prices, payment status, or other factors that are indicative of loss, the impairment loss is reversed through profit or loss. 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.

annual report 2012 page 28 d) Renegotiated loans Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Bank will obtain ownership Where possible, the Bank seeks to restructure loans rather than to take possession of by the end of the lease term. Any operating lease rentals payable are accounted for on a collateral. This may involve extending the payment arrangements and the agreement of new straight-line basis over the lease term and included in “Other operating expenses”. When an loan conditions. Once the terms have been renegotiated, the loan is no longer considered past operating lease is terminated before the lease period has expired, any payment required to due. Management continuously reviews renegotiated loans to ensure that all criteria are met be made to the lessor by way of penalty is recognized as an expense in the period in which and that future payments are likely to occur. The loans continue to be subject to an individual termination takes place. or collective impairment assessment, calculated using the loan’s original effective interest rate. (ii) Bank as a Lessor 2.7 Leasing Where the Bank is a lessor in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the Bank to the leasee, the total lease payments are The determination of whether an arrangement is, or contains a lease is based on the substance recognised in profit or loss for the year (rental income – note 2.9) on a straight-line basis over of the arrangement and requires an assessment of whether the fulfilment of the arrangement the period of the lease. is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. 2.8 Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to 2 Summary of significant accounting policies (continued) the Bank and the revenue can be reliably measured. The following specific recognition criteria 2.7 leasing (continued) must also be met before revenue is recognised.

(i) Bank as a Lessee a) Interest and similar income and expense Finance leases, which transfer to the Bank substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at commencement of the lease term at the fair Interest and similar income includes coupons earned on fixed income investments, accrued value of the leased property or, if lower, at the present value of the minimum lease payments and discount and premium on treasury bills and interest income on loans and advances. For all included in “Property and equipment” with the corresponding liability to the lessor included in financial instruments measured at amortised cost and interest bearing financial instruments “Other liabilities”. Lease payments are apportioned between the finance charges and reduction classified as available-for-sale financial investments, interest income or expense is recorded of the lease liability so as to achieve a constant rate of interest on the remaining balance of the at the effective interest rate, which is the rate that exactly discounts estimated future cash liability. Finance charges are charged directly against income in “Interest and similar expense”. payments or receipts through the expected life of the financial instrument or a shorter period, The Bank did not have significant financial lease agreements during the reporting period. where appropriate, to the net carrying amount of the financial asset or financial liability.

annual report 2012 page 29 2 Summary of significant accounting policies (continued) corresponding criteria. 2.8 Revenue recognition (continued) c) Rental income a) Interest and similar income and expense (continued) Rental income (note 2.8) is accounted for on a straight-line basis over the lease terms on The calculation takes into account all contractual terms of the financial instrument (for example, ongoing leases and is recorded in profit or loss in “Other operating income”. The Bank did not prepayment options) and includes any fees or incremental costs that are directly attributable to have significant investment property as at year end and during the reporting period. the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its 2.9 Cash and cash equivalents estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income Cash and cash equivalents comprise cash balances and call deposits with an original maturity or expense. Once the recorded value of a financial asset or a group of similar financial assets of three months or less. For the purpose of the Cash Flow Statement, cash and cash equivalents has been reduced due to an impairment loss, interest income continues to be recognised using consist of cash on hand, current accounts with Central Bank and amounts due from other the original effective interest rate applied to the new carrying amount. 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 b) Fee and commission income as a component of cash and cash equivalents for the purpose of the statement of cash flows. The Bank earns fee and commission income from a diverse range of services it provides to its Cash and cash equivalents are carried at amortised cost. Further details of what cash and cash customers. Fee income can be divided into the following two categories: equivalents comprises can be found in note 29.

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. 2 Summary of significant accounting policies (continued) These fees include commission income and asset management, custody and other management 2.10 Property and equipment 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 Property and equipment is stated at cost excluding the costs of day-to-day servicing, less adjustment to the effective interest rate on the loan. accumulated depreciation and accumulated impairment in value.

Depreciation is calculated using the straight-line method to write down the cost of property and Fee income from providing transaction services equipment to their residual values over their estimated useful lives. Land is not depreciated. Fees arising from negotiating or participating in the negotiation of a transaction for a third party The estimated useful lives are as follows: – 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 • Own Buildings: up to 20 years components of fees that are linked to a certain performance are recognised after fulfilling the • Furniture and other equipment: 5 years

annual report 2012 page 30 • Vehicles: 5 years impairment testing for an asset is required, the Bank makes an estimate of the asset’s • Computer hardware: 4 years recoverable amount. Where the carrying amount of an asset (or cash-generating unit) exceeds • Leasehold improvements: the shorter of useful life and lease term its recoverable amount, the asset (or cash-generating unit) is considered impaired and is written down to its recoverable amount. The assets’ residual value and useful lives are reviewed, and adjusted if appropriate, at each reporting date. 2 Summary of significant accounting policies (continued) An item of property and equipment is derecognised upon disposal or when no future economic 2.12 Impairment of non-financial assets (continued) 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 For assets excluding goodwill, an assessment is made at each reporting date as to whether of the asset) is recognised in “Other operating income” or “Other operating expenses” in profit there is any indication that previously recognised impairment losses may no longer exist or may or loss in the year the asset is derecognised. have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used 2.11 intangible assets to determine the asset’s recoverable amount since the last impairment loss was recognised. If that is the case, the carrying amount of the asset is increased to its recoverable amount. Intangible assets acquired by the Bank are stated at cost less accumulated amortization and impairment losses, if any. 2.13 financial guarantee contracts

Intangible assets are entirely comprised of acquired computer software which are capitalised on the Financial guarantee contracts are contracts that require the issuer to make specified payments basis of the costs incurred to acquire and bring to use the specific software and are amortized using to reimburse the holder for a loss it incurs because a specified debtor fails to make payments the straight-line method over a useful life of four years. Amortization is charged to profit or loss from when due, in accordance with the terms of a debt instrument. the moment the assets are available for use. Costs associated with maintaining computer software programmes are recognised as an expense as incurred. Expenditure which enhances or extends Such financial guarantees are given to banks, financial institutions and other bodies on behalf the performance of computer software programmes beyond their original specifications or software of customers to secure loans, overdrafts and other banking facilities. upgrade expenses are recognised as capital improvement and they are added to the original cost of the software, as long as they can be measured reliably. Financial guarantees are initially recognized in the financial statements at fair value on the date 2.12 Impairment of non-financial assets the guarantee was given. Subsequent to initial recognition, the bank’s liabilities under such guarantees are measured at the higher of the initial measurement, less amortization calculated The Bank assesses at each reporting date or more frequently if events or changes in to recognize in profit or loss the fee income earned on a straight line basis over the life of the circumstances indicate that the carrying value may be impaired, whether there is an indication guarantee and the best estimate of the expenditure required to settle any financial obligation that a non-financial asset may be impaired. If any such indication exists, or when annual arising at the reporting date. These estimates are determined based on experience of similar

annual report 2012 page 31 transactions and history of past losses, supplemented by the judgment of Management. Any class of obligations may be small. increase in the liability relating to guarantees is taken to profit or loss under other operating expenses. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time Financial guarantees and commitments to provide a loan are initially recognised at their fair value of money and the risks specific to the obligation. The increase in the provision due to value, which is normally evidenced by the amount of fees received. This amount is amortised passage of time is recognized as interest expense. on a straight line basis over the life of the commitment. 2.16 income tax 2.14 Pensions and other post employment benefits Income taxes have been provided for in the financial statements in accordance with Albanian The Bank contributes to its employees post retirement plans as prescribed by the domestic legislation enacted or substantively enacted by the reporting date. The income tax charge social security legislation. Bank’s pension obligations, relate only to defined contribution plans. comprises current tax and deferred tax and is recognised in the statement of comprehensive Defined contribution plans, based on salaries, are made to the state administered institution income except if it is recognised in other comprehensive income because it relates to transactions (i.e. Social Security Institute) responsible for the payment of pensions. Once the contributions that are also recognised, in the same or a different period, in other comprehensive income. have been paid, the Bank has no further payment obligations. The contributions constitute net periodic costs for the year in which they are due and as such they are included in “Personnel Current tax expenses” in the statement of comprehensive income. Current tax assets and liabilities for the current and prior years are measured at the amount 2.15 Provisions 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 Provisions are recognised when the Bank has a present obligation (legal or constructive) as reporting date. a result of a past event, and it is it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Deferred tax

Deferred tax is provided on temporary differences at the reporting date between the tax bases 2 Summary of significant accounting policies (continued) of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax 2.15 Provisions (continued) 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 Where there are a number of similar obligations, the likelihood that an outflow will be required is not a business combination and, at the time of the transaction, affects neither the accounting in settlement is determined by considering the class of obligations as a whole. A provision is profit nor taxable profit or loss/ recognized even if the likelihood of an outflow with respect to any item included in the same

annual report 2012 page 32 Deferred tax assets are recognised for all deductible temporary differences, carry forward of Dividends for the year that are approved after the reporting date are disclosed as an event after unused tax credits and unused tax losses, to the extent that it is probable that taxable profit the reporting date. 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 2.17 Comparatives 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, The comparative information is presented consistently applying the Bank’s accounting policies. 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 3. financial risk management 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. The Bank’s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the financial business, and the operational risks are an inevitable 2 Summary of significant accounting policies (continued) consequence of being in business. The Bank’s aim is therefore to achieve an appropriate 2.16 income tax (continued) balance between risk and return and minimise potential adverse effects on the Bank’s financial performance. 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 The Bank’s risk management policies are designed to identify and analyse these risks, to set asset to be recovered. appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up-to-date information systems. The Bank regularly reviews its risk management Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in policies and systems to reflect changes in markets, products and emerging best practice. 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. Risk management is carried out by a risk department in the Bank under policies approved by the Board of Directors. The Board provides written principles for overall risk management, Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to as well as written policies covering specific areas, such as, credit risk, foreign exchange risk, set off current tax assets against current tax liabilities and the deferred taxes relate to the same interest rate risk and liquidity risk. taxable entity and the same taxation authority. In addition, internal audit is responsible for the independent review of risk management and the Dividends on ordinary shares are recognised as a liability and deducted from equity when they control environment. 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.

annual report 2012 page 33 3 Financial risk management (continued) and procedures.

The most important types of risk are credit risk, liquidity risk, market risk and other operational 3.1.1 Credit risk measurement risk. Market risk includes currency risk, interest rate and other price risk. The procedures described below relate to credit risk measurements for operational purpose 3.1 credit risk as well as for reporting under Bank of Albania regulation. Impairment losses on loans and advances for financial reporting are determined based on the procedures described in Note The Bank takes on exposure to credit risk, which is the risk that counterparty will cause a financial 3.1.3. loss for the Bank by failing to fulfil obligations to the Bank. Credit risk is the most important risk for the Bank’s business; management therefore carefully manages its exposure to credit risk. a) Loans and advances Credit exposures arise principally in lending activities that lead to loans and advances, and investment activities that bring debt securities and other bills into the Bank’s asset portfolio. In measuring credit risk of loan and advances to customers and to banks at a counterparty level, There is also credit risk in off-balance sheet financial instruments. The credit risk management the Bank reflects three components (i) the ‘probability of default’ by the client or counterparty and control are centralised in credit risk management team of risk department at both local and on its contractual obligations; (ii) current exposures to the counterparty and its likely future group (Piraeus Bank SA) level and reported to the Board of Directors. development, from which the Bank derives the

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

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

The Audit Committee and Internal Auditing Department follow up the compliance with policies

annual report 2012 page 34 3 financial risk Management (continued) Financial Assets are classified into Group B if they are towards: 3.1 credit Risk (continued) 3.11 Credit Risk Measurement (continued) • Bank of Albania and Albanian Government; • debtors which are not likely to default and who repay their obligations within the maturity, or ‘exposure at default’; and (iii) the likely recovery ratio on the defaulted obligations (the ‘loss with a delay of 30 days; and given default’). • exposures secured by pledging collateral graded as first class collateral. • Financial Assets are classified into Group C if they are towards debtors: i. The Bank assesses the probability of default of individual counterparties using internal • whose cash flows are assessed as adequate to duly fulfil its due obligations, regardless its rating tools tailored to the various categories of counterparty. They have been developed present financial position is assessed as weak, without signs of further deterioration in the internally and combine statistical analysis with credit officer judgment and are validated, future; and where appropriate, by comparison with externally available data. Clients of the Bank are • who settle their liabilities with delay of up to 30 days, occasionally with delay between 31 segmented into five rating classes. The Bank’s rating scale, which is shown below, reflects and 90 days. 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 3 financial risk Management (continued) regularly validates the performance of the rating and their predictive power with regard to 3.1 credit Risk (continued) default events. 3.1.1 credit Risk Measurement (continued)

Bank’s internal ratings scale Financial Assets are classified into Group D if they are towards debtors:

Bank’s rating Description of the grade • for which it is assessed, that cash flows will not be sufficient for regular repayment of matured A Investment Grade liabilities; B Standard • that settle their liabilities with delay of up to 90 days, occasionally with delay between 91 to C Special Monitoring 180 days; D Substandard E Doubtful and Loss • that are clearly undercapitalized; • that do not have sufficient long term capital resources for financing long term investments; Criterion for classification of Financial Assets into groups A, B, C, D and E are as follows: and • from whom bank does not receive currently satisfactory information or adequate Financial Assets are classified into Group A if they are toward debtors that have been evaluated documentation concerning repayment of liabilities. in investment grade ratings by external raters, e.g. Moody’s, S&P, Fitch, regardless of the internal MRA rating. The bank has no such customers as at 31 December 2012 and 2011. annual report 2012 page 35 Financial Assets are classified into Group E if they are towards debtors: 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 • for which exists a strong likelihood of loss of part of financial asset; asset in the balance sheet. • that settle their liabilities with delay of more than 90 to 180 days, occasionally with delay between 181 to 360 days; 3.1.2 risk limit control and mitigation policies • which are insolvent; • for which a motion for commencement of process of liquidation or declaration of bankruptcy The Bank manages, limits and controls concentrations of credit risk wherever they are identified − in began and was filed at the provisional court; particular, to individual counterparties and groups, and to industries and countries. • that are in the process of reform or in the process of liquidation; • that declared bankruptcy; The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk • from whom no repayment is expected; and accepted in relation to one borrower, or group of borrowers, and to geographical and industry • with questionable legal grounds. 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 ii. Exposure at default is based on the amounts the Bank expects to be owed at the time of industry sector are approved by the Board of Directors. 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 Exposure to credit risk is also managed through regular analysis of the ability of borrowers and of default, should it occur. potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. 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 Some other specific control and mitigation measures are outlined below. and typically varies by type of counterparty, type and seniority of claim and availability of collateral or other credit mitigation. a) Collateral b) Debt securities and other bills 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. 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 The Bank implements guidelines on the acceptability of specific classes of collateral or credit securities and bills are viewed as a way to gain a better credit quality mapping and maintain a risk mitigation. The principal collateral types for loans and advances are: readily available source to meet the funding requirement at the same time. • Cash, bank’s and first class companies’ guarantees; Investment is allowed only in liquid securities that have high credit rating. Given their high credit • Mortgages over residential properties;

annual report 2012 page 36 • Charges over business assets such as premises, inventory and accounts receivable; and However, the likely amount of loss is less than the total unused commitments, as most • Charges over financial instruments such as debt securities and equities. 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 Loans to corporate entities and individuals are generally secured; over drafts and credit cards commitments generally have a greater degree of credit risk than shorter-term commitments. issued to individuals are secured mostly by cash deposits and collateral in cases of 3.1.3 Impairment and provisioning policies

3 financial risk Management (continued) The internal rating systems described in Note 3.1.1 focus more on credit-quality mapping from 3.1 credit Risk (continued) the inception of the lending and investment activities. 3.1.2 risk limit control and mitigation policies (continued) In contrast, impairment provisions are recognised for financial reporting purposes only for credit customers at the full amount of principal, interest and other charges. In addition, in order losses that have been incurred at the reporting date based on objective evidence of impairment to minimise the credit loss the Bank will seek additional collateral from the counterparty as soon (see Note 2.1(f)). as impairment indicators are noticed for the relevant individual loans and advances. Debt securities, treasury and other eligible bills are generally unsecured. 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 b) Credit-related contingencies 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 The primary purpose of these instruments is to ensure that funds are available to a customer Bank’s internal rating categories: 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.

annual report 2012 page 37 3 financial risk Management (continued) enforceability) and the anticipated receipts for that individual account. 3.1 credit Risk (continued) Collectively assessed impairment allowances are provided for: (i) portfolios of homogenous 3.1.3 Impairment and provisioning policies (continued) 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. Bank’s rating 2012 2011 3.1.4 Maximum exposure to credit risk before collateral held or other credit enhancements Impair- Impair- Loans and Loans and ment ment advances advances provision provision Maximum exposure (%) (%) level (%) level (%) 2012 2011 Investment Credit risk exposures relating to on-balance sheet assets are as follows: Grade Cash and balances with Central Bank 12,309,366 7,414,588 Standard 46,30 4,49 55.43 3.68 Loans and advances to banks 13,171,181 12,262,981 Special moni- 21,10 9,90 32.70 7.12 toring Loans and advances to customers: Sub-standard 16,36 11,66 4.37 7.28 Loans to individuals Doubtful and − Consumer/Overdrafts 2,280,510 2,790,072 16,24 20,24 7.50 9.17 Loss − Credit cards 214,628 181,876 Total 100.00 9.29 100.00 5.41 − Mortgages 8,851,304 9,265,482 11,346,442 12,237,430 The internal rating tool assists management to determine whether objective evidence of Loans to corporate entities: impairment exists under IAS 39, based on the following criteria set out by the Bank: − Large corporate customers 1,726,523 1,349,632 • Delinquency in contractual payments of principal or interest; − Small and medium size enterprises (SMEs) 37,586,354 41,198,152 • Cash flow difficulties experienced by the borrower (e.g. equity ratio, net income percentage 39,312,877 42,547,784 of sales); Total loans and advances to customers 50,659,319 54,785,214 • Breach of loan covenants or conditions; Financial assets designated at fair value through profit or loss - 4,489,432 • Initiation of bankruptcy proceedings; Financial assets available for sale 12,211,401 5,493,816 • Deterioration of the borrower’s competitive position; and Financial assets held to maturity 4,718,685 5,600,728 • Deterioration in the value of collateral. Other financial assets 186,744 123,674

The Bank’s policy requires the review of individual financial assets that are individually Credit risk exposures relating to off-balance sheet items are as follows: significant at least annually or more regularly when individual circumstances require. Impairment Letters of Guarantees 1,203,542 1,038,110 allowances on individually assessed accounts are determined by an evaluation of the incurred Letters of Credit 39,014 40,737 Loans Commitment 4,387,254 2,020,961 loss at balance-sheet date on a case-by-case basis, and are applied to all individually significant At 31 December 98,886,506 93,270,238 accounts. The assessment encompasses collateral held (including re-confirmation of its annual report 2012 page 38 The above table represents a worst case scenario of credit risk exposure to the Bank at 3.1.5 Loans and advances 31 December 2012 and 2011, without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures set out above are based Loans and advances are summarised as follows: on net carrying amounts as reported in the balance sheet. 31 December 2012 31 December 2011

As shown above, 51% of the total maximum exposure is derived from loans and advances Loans and Loans and Loans and Loans and advances to advances to advances to advances to customers (2011: 59%); 17% represents investments in debt securities (2011: 17%), 12% customers banks customers banks represents cash and balances with Central Bank (2011: 8%) and 13% represents loans and advances to banks (2011: 13%). Neither past due nor impaired 25,856,069 13,171,181 30,941,125 12,262,981 Past due but not impaired 6,333,059 - 8,732,908 - Management is confident in its ability to continue to control and sustain minimal exposure of Individually impaired 23,676,147 - 18,777,025 - credit risk to the Bank resulting from both its loan and advances portfolio and debt securities Gross 55,865,275 13,171,181 58,451,058 12,262,981 based on the following: Less: allowance for impairment (5,205,956) - (3,665,844) -

Net 50,659,319 13,171,181 54,785,214 12,262,981 • 67% of the loans and advances portfolio is categorised in the top two grades of the internal rating system (2011: 87%); Further information of the impairment allowance for loans and advances to banks and to • Loans to SMEs, which represents the biggest group in the portfolio, are backed by collateral; customers is provided in Notes 14 and 15. • 46% of the loans and advances portfolio are considered to be neither past due nor impaired (2011:53%); During the year ended 31 December 2012, the Bank’s gross loans and advances to customers decreased by 5% (2011, increased by 6%). When entering into new markets or new industries, in order to minimise the potential increase of credit risk exposure, the Bank focused more on the 3 financial risk Management (continued) business with large corporate enterprises or banks with good credit rating or retail customers 3.1 credit Risk (continued) providing sufficient collateral. 3.1.4 Maximum exposure to credit risk before collateral held or other credit enhancements (continued)

The Bank has introduced a more stringent selection process upon granting loans and advances; and All investments in debt securities and other bills are in securities issued by the Albanian Government.

annual report 2012 page 39 3 financial risk Management (continued) Loans and advances in the Sub-standard and Doubtful grades were considered not to be 3.1 credit Risk (continued) impaired after taking into consideration the recoverability from collateral for retail customers’ 3.1.5 Loans and advances (continued) mortgage and consumer loans.

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 3 financial risk Management (continued) can be assessed by reference to the internal rating system adopted by the Bank. 3.1 credit Risk (continued) 31 December 2012 3.1.5 Loans and advances (continued) Loans and advances to Loans and advances to customers banks a) Loans and advances past due but not impaired Total Loans and advances to Individual (retail customers) Corporate entities customers Gross amount of loans and advances that are past due but not impaired: Consumer/ Credit Large corporate Overdrafts cards Mortgages customers SMEs (i) Loans and advances to customers Grades:

Investment Grade - -, - - - - - 31 December 2012 Standard 1,860,660 116,873 5,792,740 1,775,549 16,310,248 25,856,069 13,171,181 Individual (retail customers) Special monitoring ------Consumer/ Sub-standard ------Overdrafts Mortgages Visa Card Total Doubtful ------Past due 1 up to 90 days 360,543 1,446,096 34,707 1,841,346 Total 1,860,660 116,873 5,792,740 1,775,549 16,310,248 25,856,069 13,171,181 Past due 91-180 days 62,845 381,310 5,243 449,398 Past due 181-360 days - 390,329 390,329 31 December 2011 Past due > 360 days - 833,481 833,481 Loans and advances to Total 423,388 3,051,216 39,950 3,514,554 Loans and advances to customers banks Fair value of collateral 304,739 2,745,737 - 3,050,476 Total Loans and advances Individual (retail customers) Corporate entities to customers 31 December 2012 Corporate entities Consumer/ Large corporate Overdrafts Credit cards Mortgages customers SMEs SMEs Large Corporate Total Grades: Investment Grade ------Past due 1 up to 90 days 2,182,195 - 2,182,195 Standard 2,267,892 102,337 6,883,688 1,379,412 20,307,796 30,941,125 12,262,981 Past due 91-180 days 213,516 - 213,516 Special monitoring ------Past due 181-360 days 159,426 - 159,426 Sub-standard ------Past due > 360 days 263,368 - 263,368 Doubtful ------Total 2,818,505 - 2,818,505 Total 2,267,892 102,337 6,883,688 1,379,412 20,307,796 30,941,125 12,262,981 Fair value of collateral 2,818,505 - 2,818,505 annual report 2012 page 40 Total loans and advances past due but not impaired at 31 6,333,059 b) Loans and advances individually impaired December 2012 (i) Loans and advances to customers 31 December 2011 Individual (retail customers) The breakdown of the gross amount of individually impaired loans and advances by class, Overdrafts Mortgages Visa Card Total along with the fair value of related collateral held by the Bank as security, are as follows: Past due 1 up to 90 days 216,633 1,209,347 33,612 1,459,592

Past due 91-180 days 191,020 784,043 8,757 983,820 Corporate entities Consumer and Visa Past due 181-360 days - 217,314 217,314 Cards Large SMEs Corporate Total Past due > 360 days - 646,571 646,571 31 December 2012 Total 407,653 2,857,275 42,369 3,307,297 Individually impaired loans 517,253 23,158,894 - 23,676,147 Fair value of collateral 301,877 2,551,378 2,853,255 Fair value of collateral - 23,158,894 - 23,676,147 31 December 2011 Corporate entities Large SMEs Corporate Total 31 December 2011 Past due 1 up to 90 days 2,461,874 - 2,461,874 Individually impaired loans 410,967 18,366,058 - 18,366,058 Past due 91-180 days 2,185,703 - 2,185,703 Fair value of collateral - 18,366,058 - 18,366,058 Past due 181-360 days 626,304 - 626,304 Past due > 360 days 151,730 - 151,730 The disclosed fair value of collateral is determined by local certified valuers and represents Total 5,425,611 - 5,425,611 value realisable by the legal owners of the assets. Management considers the loans covered Fair value of collateral 4,695,234 - 4,695,234 by collateral on corporate loans as impaired because experience shows that a significant Total loans and advances past due but not impaired at 31 8,732,908 proportion of the collateral on corporate loans cannot be enforced due to administrative and legal December 2010 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 3 financial risk Management (continued) that management will not be able to enforce its rights and repossess collateral on defaulted 3.1 credit Risk (continued) loans. Despite difficulties in enforcing repossession of collateral, the Bank’s management will 3.1.5 Loans and advances (continued) vigorously pursue the outstanding debts with all possible means at their disposal. (ii) Loans and advances to banks (ii) Financial effect of collateral on provision There are no loans and advances to banks as at 31 December 2012, which are past due but The financial effect of collateral is presented by disclosing impact of collateral and other credit not impaired (2011: Nil). enhancements on impairment provisions recognised at the end of the reporting period. Without

holding collateral and other credit enhancements, the impairment provisions would have the effect presented by the following amounts: annual report 2012 page 41 3 financial risk Management (continued) 3.1.6 Loans and advances renegotiated 3.1 credit Risk (continued) 3.1.5 Loans and advances (continued) Restructuring activities include extended payment arrangements, modification and deferral of payments. Following restructuring, a previously overdue customer account is reset to a normal In 2012 status and managed together with other similar accounts. Restructuring policies and practices Categories Actual allowance Collateral effect Variance are based on indicators or criteria which, in the judgment of bank management, indicate that *Significant loans individually impaired 4,168,961 12,773,501 (8,604,540) payment will most likely continue. These policies are kept under continuous review. During *Significant loans not impaired individually 543,395 543,395 - year 2012 there were 75 loans renegotiated for a total of LEK 2,274,094 thousand (during 2011 Business loans less than Euro 50,000 44,511 44,511 - there were 263 loans renegotiated for a total of LEK 4,484,464 thousand) as detailed in the Consumer loans 161,175 161,175 - following table. Housing 168,205 168,205 -

Real Estate 119,709 119,709 - 2012 2011 Visa cards - - - Outstanding Number of Outstanding Number of Total 5,205,955 13,810,495 (8,604,540) balance loans balance loans In 2011 Categories Actual allowance Collateral effect Variance Consumer 23,086 15 153,886 76

*Significant loans individually impaired 2,111,806 3,035,961 (924,154) Mortgage 106,798 25 610,838 126 SME 401,636 22 887,400 47 *Significant loans not impaired individually 708,190 708,190 - Corporate 1,742,574 13 2,832,340 14 Business loans less than Euro 50,000 111,424 111,424 -

Consumer loans 241,680 241,680 - Total 2,274,094 75 4,484,464 263 Housing 323,653 323,653 - Real Estate 151,528 151,528 - 3 financial risk Management (continued) Visa cards 17,542 17,542 - Total 3,665,823 4,589,977 (924,154) 3.1 credit Risk (continued) 3.1.7 repossessed collateral (iii) Loans and advances to banks Collateral obtained due to legal process include land, building and business premises which There are no individually impaired loans and advances to banks as at 31 December 2012 and are not used by the Bank for its core operations. Collateral obtained due to legal process are to 2011. be sold as soon as practicable with the proceeds used to reduce the outstanding indebtedness. During 2012, the Bank obtained assets by taking possession of collateral for the amount of LEK 538,148 (2011: 216,571).

annual report 2012 page 42 3.1.8 cash and balances with Central Bank acceptable parameters, while optimising the return on risk. The Market Risk issues are followed up in regular basis by “Asset & Liabilities Management As at 31 December 2012 and 2011 the amounts due from Central Bank and corresponding Committee” (ALCO). banks were neither past due nor impaired.

3.1.9 Debt securities, treasury bills and other eligible bills 3 financial risk management (continued)

Held to maturity and fair value through profit and loss are made up of T-bills and bonds. The 3.2.1 foreign exchange risk 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 The Bank is exposed to currency risk through transactions in foreign currencies. The Bank ratings to Albania. As at 31 December 2012 and 2011 these investments were neither past due ensures that the net exposure is kept to an acceptable level by buying or selling foreign currency nor impaired. at spot when necessary to address short-term imbalances. The Management sets limits on the level of exposure by currencies, which are monitored daily. 3.1.10 Concentration of risks of financial assets with credit risk exposure a) Geographical sectors

Loans and advances to banks are held with banks in OECD countries. All other financial assets are held in Albania except for the VISA share holdings, which are held with VISA Corporation. b) Industry sectors

The analysis of the Bank’s main credit exposure on loans and advances to customers by industry is presented in Note 15.

3.2 Market risk

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

annual report 2012 page 43 3 financial risk Management (continued) The sensitivity presented in the table above calculates the increase/decrease of pre-tax profit 3.2 Market Risk (continued) if at the reporting date, Lek exchange rate had increased/decreased by 10% against the 3.2.1 foreign exchange risk (continued) respective foreign currencies with all other variables held constant.

Concentrations of currency risk – on and off-balance sheet financial instruments: 3 financial risk Management (continued) Other EUR USD LEK Total 3.2 Market Risk (continued) currencies At 31 December 2012 3.2.1 foreign exchange risk (continued) Assets Cash and balances with the Central Bank 9,035,939 578,583 69,174 4,182,577 13,866,273 Other EUR USD LEK Total Due from banks 10,653,521 2,118,736 398,924 - 13,171,181 At 31 December 2011 currencies Loans and advances to customers 32,208,990 1,509,998 28,063 16,912,268 50,659,319 Assets Financial assets designated at fair value through profit or Cash and balances with the Central Bank 4,159,581 815,017 89,077 3,547,778 8,611,453 loss - - - - - Due from banks 9,621,957 2,204,645 436,379 - 12,262,981 Investment securities available for sale - 78,555 - 12,132,846 12,211,401 Loans and advances to customers 39,449,081 1,535,319 31,995 13,768,819 54,785,214 Financial assets held to maturity 2,817,081 - - 1,901,604 4,718,685 Financial assets designated at fair value through profit or Other financial assets 92,734 24,854 - 69,156 186,744 loss - - - 4,489,432 4,489,432

Investment securities available for sale 53,457 5,440,359 5,493,816 Total financial assets 54,808,265 4,310,726 496,161 35,198,451 94,813,603 Financial assets held to maturity 2,800,864 - - 2,799,864 5,600,728

Other financial assets 57,384 2,042 - 64,248 123,674 Liabilities

Due to banks 3,643,303 10,897 23,131 3,836,557 7,513,888 TOTAL FINANCIAL ASSETS 56,088,867 4,610,480 557,451 30,110,500 91,367,298 Due to customers 33,702,174 4,060,787 466,532 34,639,900 72,869,393

Other financial liabilities 99,526 41,222 1,829 244,866 387,443 LIABILITIES AND EQUITY

Due to banks 4,305,306 1,066 27,200 2,443,794 6,777,366 Total financial liabilities 37,445,003 4,112,906 491,492 38,721,323 80,770,724 Due to customers 33,032,320 4,412,971 529,507 31,927,270 69,902,068

Other financial liabilities 89,487 12,567 146 50,945 153,145 Net on-balance sheet currency position 17,363,262 197,820 4,669 (3,522,872) 14,042,879

Off-balance sheet items 4,117,661 547,898 - 964,252 5,629,811 Total financial liabilities 37,427,113 4,426,604 556,853 34,422,009 76,832,579 Sensitivity if exchange rates increase by 5% 264,846 5,355 5,120 - 275,321 Sensitivity if exchange rates decrease by 5% (264,746) (5,355) (5,120) - (275,321) Net on balance sheet currency position 18,661,754 183,876 598 (4,311,509) 14,534,719 Off balance sheet items 2,245,085 50,287 - 804,436 3,099,808 The Bank manages its foreign currency exposure taking into consideration that its share capital Sensitivity if exchange rates increase by 5% 933,088 9,194 - - 414,327 and share premium is denominated in EUR. Sensitivity if exchange rates decrease by 5% (933,088) (9,194) - - (414,327)

annual report 2012 page 44 3.2.2 interest rate risk Non- Less than From 1 to 3 From 3 to 12 Over 1 interest Total The Bank’s operations are subject to the risk of interest rate fluctuations to the extent that one month months months year At 31 December 2012 bearing interest-earning assets (including investments) and interest-bearing liabilities mature or re- Assets price at different times or in differing amounts. In the case of floating rate assets and liabilities, Cash and balances with the Central the Bank is also exposed to basis risk, which is the difference in re-pricing characteristics of the Bank 12,309,365 - - - 1,556,908 13,866,273 various floating rate indices, such as the savings rate, LIBOR and different types of interest. Due from banks 13,171,181 - - - - 13,171,181 Risk management activities are aimed at optimising net interest income, given market interest Loans and advances to customers 18,141,911 19,088,341 13,368,324 60,743 - 50,659,319 Financial assets designated at fair rate levels consistent with the Bank’s business strategies. ------Asset-liability risk management activities are conducted in the context of the Bank’s sensitivity value through profit or loss Investment Securities Available for to interest rate changes. Sale 2,459,194 3,083,560 5,639,130 1,029,517 12,211,401 In decreasing interest rate environments, margins earned will narrow as liabilities interest rates Financial assets held to maturity - - - 4,718,685 - 4,718,685 will decrease with a lower percentage compared to assets interest rates. However the actual Other financial assets - - - - 186,744 186,744 effect will depend on various factors, including stability of the economy, environment and level Total financial assets 46,081,651 22,171,901 19,007,454 5,808,945 1,743,652 94,813,603 of the inflation.

Liabilities 3 financial risk Management (continued) Due to banks 5,261,047 - 2,252,841 - - 7,513,888 3.2 Market Risk (continued) Due to customers 21,967,270 10,075,579 40,207,848 611,402 7,294 72,869,393 Other financial liabilities - - - - 387,443 387,443 3.2.2 interest rate risk (continued)

Total financial liabilities 27,228,317 10,075,579 42,460,689 611,402 394,737 80,770,724 The Bank attempts to mitigate this interest rate risk by monitoring the reprising dates of its assets and liabilities. In addition, the Bank has contractual rights to revise the interest rates on Interest sensitivity gap 18,853,334 12,096,322 (23,453,235) 5,197,543 1,348,915 14,046,009 the major part of its loan portfolio on a quarterly basis. The following table presents the interest rate reprising dates for the Bank’s assets and liabilities. Variable-rate assets and liabilities have been reported according to their next rate change date. Fixed-rate assets and liabilities have been reported according to their scheduled principal repayment dates:

annual report 2012 page 45 3 financial risk Management (continued) The interest rate sensitivity analysis has been determined based on the exposure to interest 3.2 Market Risk (continued) rate risk at the reporting date. At 31 December 2012, if interest rates had been 100 basis 3.2.2 interest rate risk (continued) points higher/lower with all other variables were held constant, the Bank’s pre-tax profit for the twelve month period ended 31 December 2012 would respectively decrease/increase by The following table includes figures of comparative period: approximately LEK 37,692 thousand (2011: LEK 133,770 thousand).

Less than Non- From 1 to From 3 to Over Interest rate sensitivity analysis by currency is presented below. one interest Total 3 months 12 months 1 year At 31 December 2011 month bearing Other Assets EUR USD LEK Total currencies Cash and balances with the Central Bank 7,414,588 - - - 1,196,865 8,611,453 At 31 December 2012 Due from banks 12,228,075 - 34,906 - - 12,262,981 Total interest bearing financial assets 45,679,592 3,704,289 426,987 34,341,645 84,152,513 Loans and advances to customers 18,644,377 24,603,476 10,877,935 659,426 - 54,785,214 Total interest bearing financial liabilities 37,345,477 4,071,684 489,663 38,476,457 80,383,281 Financial assets designated at fair value Interest sensitivity gap 8,334,115 (367,395) (62,676) (4,134,812) 3,769,232 through profit or loss 1,135,402 3,156,947 197,083 - - 4,489,432 Sensitivity if interest rates increase by 100 bp 83,341 (3,674) (627) (41,348) 37,692 Investment Securities Available for Sale 5,030,731 463,085 - 5,493,816 Sensitivity if interest rates decrease by 100 bp (83,341) 3,674 627 41,348 (37,692) Financial assets held to maturity - 189,964 707,640 4,703,124 - 5,600,728 Other financial assets - - - - 123,674 123,674

Total financial assets 39,422,442 27,950,387 16,848,295 5,825,635 1,320,539 91,367,298 3 financial risk Management (continued) 3.2 Market Risk (continued) Liabilities 3.2.2 interest rate risk (continued) Due to banks 3,126,211 840,492 - 2,810,663 - 6,777,366

Other EUR USD LEK Total Due to customers 22,914,640 11,328,892 34,131,551 1,517,346 9,639 69,902,068 currencies Other financial liabilities - - - - 153,145 153,145 At 31 December 2011

Total interest bearing financial assets 52,328,947 4,090,003 515,049 33,112,760 90,046,759 Total financial liabilities 26,040,851 12,169,384 34,131,551 4,328,009 162,784 76,832,579 Total interest bearing financial liabilities 37,335,246 4,411,836 556,707 34,366,006 76,669,795

Interest sensitivity gap 14,993,701 (321,833) (41,658) (1,253,246) 13,376,964 Interest sensitivity gap 13,381,591 15,781,003 (17,283,256) 1,497,626 1,157,755 14,534,719 Sensitivity if interest rates increase by 100 bp 149,937 (3,218) (417) (12,532) 133,770 Sensitivity if interest rates decrease by 100 bp (149,937) 3,218 417 12,532 (133,770) 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.

annual report 2012 page 46 3.3 liquidity risk 3 financial risk Management (continued) 3.3 liquidity Risk (continued) Liquidity risk is the risk that the Bank is unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn. The The ALCO has the responsibility: to design the bank’s strategy on the assets and liabilities consequence may be the failure to meet obligations to repay depositors and fulfil commitments development, depending on the qualitative and quantitative data of the organization and to lend. development of the business environment; to ensure high competitiveness and effectiveness of the organization, maintaining assumed risk within the set limits; to manage the assets A Liquidity Risk Management Policy has been applied in all Bank units since the end of 2003. and liabilities by applying a pricing policy on products and services at the same time. This policy is adjusted to internationally applied practices and regulatory environments and adapted to the specific activities of Piraeus Bank. 3.3.1 liquidity risk management process Tirana Bank acknowledges that, in order to be able to meet liabilities promptly and without losses, it is The policy specifies the principal liquidity risk assessment definitions and methods, defines the essential to effectively manage Liquidity Risk. Liquidity Risk is the risk that a financial institution will not roles and responsibilities of the units and staff involved and sets out the guidelines for liquidity be able to meet its obligations as they become due, because of a lack of the required liquidity. crisis management. The policy is focused on the liquidity needs expected to emerge, in a week’s or month’s time, on the basis of hypothetical liquidity crisis scenarios. In general, liquidity management is a matter of balancing cash flows within forward rolling time bands, so that under normal conditions, the Bank is comfortably placed to meet all its payment Furthermore, the Policy defines a contingency funding plan to be used in the case of a liquidity obligations as they fall due. crisis. Such a crisis can take place either due to a Tirana Bank specific event or a general market event. Triggers and warning signals serve as indicators of when the contingency plan Liquidity Gap Analysis provides an overview of the expected cash flows, which arise from all should be put into operation. This contingency plan is mainly based on additional financing to balance sheet items. The cash flows are assigned and aggregated to time-bands according to be received from the Parent upon request. when they occur.

In addition, Tirana Bank calculates and monitors the Liquidity ratios, “Liquid Assets/ Total The table below analyzes assets and liabilities into relevant time periods based on the remaining Liabilities” and “Net Current Assets/Total Liabilities”, as they are defined in the Bank of Albania period at reporting date to the contractual maturity date. Assets and liabilities in foreign currency Directive, which refers to the control framework of banks’ liquidity adequacy, by the Bank of are converted into LEK using FX rates as at the year end. Albania (note 2.1.c). The assumptions made are that scheduled payments to the bank are honoured in full and on The levels of these particular ratios are daily communicated to the responsible business units, time and in addition, all contractual payments are discharged in full – e.g. that depositors will and comments, as well as respective assessments, are included in the reporting package to withdraw their money rather than roll it over on maturity. Those assets and liabilities lacking the members of ALCO. actual maturities (e.g. open accounts, sight deposits, or savings accounts) are assigned to the time band less than one month.

annual report 2012 page 47 3 financial risk Management (continued) which includes an amount of EUR 175 million that can be withdrawn by the Bank in the Money 3.3 liquidity Risk (continued) Market (with a maturity of 3 months if used). It has also negotiated a credit limit of EUR 10 million 3.3.1 liquidity risk management process (continued) that can be used for commercial lending with a maturity of up to 12 months, which can increase to 3 years if EUR 6 million out of the total EUR 10 million is used for mortgage lending. Less than From 1 to 3 From 3 to 12 From 1 to 5 Over 5 Years Total The liquidity gap of up to 3 month is high but it is improved when taking in consideration the fact At 31 December 2012 one month months months years that amounts due to banks are related to the loan from the Parent. Assets liquidity Cash and balances with the Central Bank 13,866,273 - - - - 13,866,273 Due from banks 13,171,181 - - - - 13,171,181 3 financial risk Management (continued) Loans and advances to customers 12,080,930 4,216,742 6,673,714 13,325,479 14,362,453 50,659,319 3.3 liquidity Risk (continued) Financial assets designated at fair value through profit or loss ------3.3.1 liquidity risk management process (continued) Investment Securities available for Sale 2,459,194 3,083,560 5,639,130 1,029,517 12,211,401 Financial assets held to maturity - - - 4,718,685 - 4,718,685 The following table includes figures of comparative period: Other financial assets 186,744 - - - - 186,744

Less than From 1 to 3 From 3 to 12 From 1 to 5 Over 5 years Total Total financial assets 41,767,452 7,300,302 12,312,844 19,073,681 14,362,453 94,813,603 At 31 December 2011 one month months months years Assets liquidity Liabilities liquidity Cash and balances with the Central Bank 8,611,453 - - - - 8,611,453 Due to banks 5,261,047 - 2,252,841 - - 7,513,888 Due from banks 12,228,075 - 34,906 - - 12,262,981 Due to customers 21,967,270 10,075,579 40,207,848 611,402 7,294 72,869,393 Loans and advances to customers 9,736,930 2,449,521 11,088,359 11,785,127 19,725,277 54,785,214 Other financial liabilities 387,443 - - - - 387,443 Financial assets designated at fair value

through profit or loss 1,135,402 3,156,947 197,083 4,489,432 Total financial liabilities 27,615,760 10,075,579 42,460,689 611,402 7,294 80,770,724 Investment Securities available for Sale 5,030,731 463,085 5,493,816

Financial assets held to maturity - 189,964 707,640 4,703,124 - 5,600,728 Net liquidity gap 14,151,692 (2,775,277) (30,147,845) 18,462,279 14,355,159 14,046,009 Other financial assets 123,674 - - - - 123,674 Total financial assets 31,835,534 5,796,432 17,058,719 16,951,336 19,725,277 91,367,298 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 which Liabilities liquidity is measured by the Bank and is far less than the shown negative gap on tenors less than Due to banks 3,966,703 - - 2,810,663 - 6,777,366 one month. Any issue arising from liquidity mismatch is managed through inter-bank activity Due to customers 22,924,279 11,328,892 34,131,551 1,517,346 - 69,902,068 Other financial liabilities 153,145 - - - - 153,145 (borrowing, lending) within the pre-approved credit lines. Total financial liabilities 27,044,127 11,328,892 34,131,551 4,328,009 - 76,832,579 Net liquidity gap 4,791,407 (5,532,460) (17,072,832) 12,623,327 19,725,277 14,534,719 The Bank does not have a letter of support from Piraeus Bank SA. However, it has a credit line annual report 2012 page 48 The table below presents the cash flows payable by the Bank under non-derivative financial 3 financial risk Management (continued) liabilities by remaining contractual maturities at the reporting date. The amounts disclosed in 3.3 liquidity Risk (continued) the table are the contractual undiscounted cash flows, whereas the Bank manages the inherent 3.3.1 liquidity risk management process (continued) liquidity risk based on expected discounted cash inflows. Off-balance sheet items Less than one From 1 to 3 From 3 to From 1 to 5 Over 5 Total At 31 December 2012 month months 12 months years Years Less than From 1 to 3 From 3 to 12 From 1 to 5 Due to banks 5,267,193 - - 2,442,721 - 7,709,914 Over 5 Years At 31 December 2012 one month months months years Total Due to customers 21,996,639 10,203,207 40,820,241 672,422 7,294 73,699,803 Other financial liabilities 559,081 - - - - 559,081 Loan commitments 3,374,985 195,306 732,998 14,768 69,197 4,387,255

Letters of Guarantees 42,683 190,242 970,616 - - 1,203,542

Letters of Credit Total financial liabilities 27,822,913 10,203,207 40,820,241 3,115,143 7,294 81,968,798 - - 39,014 - - 39,014 3,417,668 385,548 1,742,628 14,768 69,197 5,629,811 Operating lease commitments - - 203,035 710,992 200,319 1,114,346 Less than one From 1 to 3 From 3 to From 1 to 5 Over 5 Total At 31 December 2011 month months 12 months years Years Total 3,417,668 385,548 1,945,663 725,760 269,516 6,744,157 Due to banks 3,970,000 - - 3,190,708 - 7,160,708 Due to customers 22,928,180 11,369,312 34,797,872 1,576,250 - 70,671,614 At 31 December 2011 Other financial liabilities 153,145 - - - - 153,145 Loan commitments 299,442 222,425 1,206,486 191,611 100,997 2,020,961 Letters of Guarantees 232,681 68,302 737,127 - - 1,038,110

Letters of Credit 7,559 33,178 - - - 40,737 Total financial liabilities 27,051,325 11,369,312 34,797,872 4,766,958 - 77,985,467 539,682 323,905 1,943,613 191,611 100,997 3,099,808 Operating lease commitments 17,233 51,700 137,866 813,584 253,473 1,273,866 Total 556,915 375,605 2,081,479 1,005,195 354,470 4,373,664

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

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

The Tirana Bank branch network includes 45 (2011: 45) rented buildings which are rented under operating leases. The Bank’s policy is to enter into long term contracts, which vary from annual report 2012 page 49 10 years to 20 years. The contracts are renewed following a negotiation between both parties significantly differ from the market interest rate as at 31 December. in order to agree new terms of the contract. b) Loans and advances to customers

3 financial risk Management (continued) Loans and advances are net of allowances for impairment. The Bank’s loan portfolio has an 3.4 Fair value of financial assets and liabilities estimated fair value which is smaller than its book value due to the higher market interest rates prevailing at the end of 2012 as a result of the actual market conditions. The majority of the loan Financial instruments not measured at fair value portfolio is subject to re-pricing within a year. 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. The fair value of loans and advances to customers is their expected cash flow discounted at current market rates. Current market rates are interest rates we would charge at the moment Carrying value Fair value (year end). 2012 2011 2012 2011 Financial assets c) Financial assets held to maturity Loans and advances to banks 13,171,181 12,262,981 13,171,181 12,262,981 Loans and advances to customers 50,659,319 54,785,214 43,977,752 50,772,947 Business 39,312,877 42,547,806 36,318,388 41,412,526 The fair value of held to maturity investments is determined by using quoted prices for similar Consumer 2,795,620 2,971,926 2,087,591 2,445,976 instruments as the discounting rate of future cash flows at the reporting date. Such investments Mortgage 8,550,822 9,265,482 5,571,773 6,914,445 are short term, and again the carrying interest rate does not significantly differ from the market interest rate as at 31 December 2012. Held to maturity Financial Investment 4,718,685 5,600,728 4,718,685 5,242,843 Financial liabilities Due to customers 60,709,992 55,445,680 60,748,023 59,933,860 Due to banks 7,513,888 6,777,366 7,513,888 6,777,366 3 financial risk Management (continued)

3.4 Fair value of financial assets and liabilities (continued) a) Loans and advances to banks d) Due to other banks and customers, other deposits and other borrowings. Loans and advances to other banks include inter-bank placements. The fair value of fixed rate The estimated fair value of deposits with no stated maturity, which includes non-interest-bearing placements and overnight deposits is their carrying amount. The estimated fair value of fixed deposits, is the amount repayable on demand. interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and remaining maturity. With respect to deposits The estimated fair value of fixed interest-bearing deposits and other borrowings not quoted in Credit Institutions, these are short-term deposits, for which the carrying interest rate does not annual report 2012 page 50 in an active market is based on discounted cash flows using interest rates for new debts with 3 financial risk Management (continued) similar remaining maturity. The carrying value differs from the fair value because the carrying 3.5 capital management interest rates are higher than the market interest rate as at 31 December 2012, because at year end the banks are granting higher interest rates in the competition to attract deposits. The Bank’s objectives when managing capital, which is a broader concept than the ‘equity’ on the face of balance sheets, are: Due to banks mainly refers to loans taken from the parent with a maturity of one month from the date of the balances sheet and therefore their fair value is consider to be approximate to the carrying value. to comply with the capital requirements set by the Bank of Albania; To safeguard the Bank’s ability to continue as a going concern so that it can continue to provide Financial instruments measured at fair value returns for shareholders and benefits for other stakeholders; and Fair value hierarchy To maintain a strong capital base to support the development of its business. The following two hierarchies have been used by the Bank in determining the fair values of its financial assets designated at fair value through profit or loss and available for sale as at 31 Capital adequacy and the use of regulatory capital are monitored daily by the Bank’s management, December 2012 and 2011: employing techniques based on the guidelines developed by the Basel Committee and the European Community Directives, as implemented by Bank of Albania, for supervisory purposes. • Level 1 The required information is filed with Bank of Albania on a quarterly basis. Quoted prices (unadjusted) in active markets for identical assets or liabilities are used to determine the fair value of financial assets. This level includes equity securities on exchange Bank of Albania requires generally each bank or banking Group to: (a) hold the minimum level markets. of the regulatory capital of 1 billion LEK and (b) maintain a ratio of total regulatory capital to the risk-weighted asset (the ‘Basel ratio’) at or above the Bank of Albania required minimum of 12% • Level 2 (2011: 12%). Bank of Albania has requested specifically that Tirana Bank maintains a minimum Inputs other than quoted prices included within Level 1 that are observable for the asset or capital adequacy ratio of 15%, amidst the uncertainties of the financial crisis in Greece and its liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). potential effect in Albania. The table below summarises the carrying amounts and fair values of those financial assets that are measured at fair value as at 31 December 2012 and 2011. The Bank’s regulatory capital as managed by its Risk Department is divided into two tiers: Tier 1 capital: share capital (net of any book values of the treasury shares), retained earnings 2012 2011 and reserves created by appropriations of retained earnings ; and Level 1 Level 2 Level 1 Level 2 Financial assets Financial assets designated at fair value through Tier 2 capital: qualifying subordinated loan capital, collective impairment allowances and - - - 4,489,432 profit or loss unrealised gains arising on the fair valuation of equity and debt instruments held as available Financial assets available for sale 12,211,401 - 5,493,816 - for sale.

annual report 2012 page 51 The risk-weighted assets are measured by means of a hierarchy of four risk weights classified 3 financial risk management (continued) according to the nature of − and reflecting an estimate of credit, market and other risks associated 3.5 capital management (continued) with − each asset and counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for off-balance sheet exposure, with some adjustments to reflect 2012 2011 the more contingent nature of the potential losses. Tier 1 capital Share capital 12,984,103 12,984,103 Statutory reserve 1,374,250 1,374,250 The table below summarises the composition of regulatory capital and the ratios of the Bank for Revaluation differences for statutory reporting 649,078 584,619 the years ended 31 December 2012 and 2011. During those two years, the Bank complied with all of the externally imposed capital requirements to which they are subject. Total qualifying Tier 1 capital 15,007,431 14,942,972

Deductions represent investments in group’s financial institutions in excess of 10% of regulatory Tier 2 capital capital and intangible assets. The intangible assets are also deductible amount from Tier I and Subordinated liability - - Tier II capital. Revaluation reserve - -

Total qualifying Tier 2 capital - -

Deductions from regulatory capital (4,597,963) (2,331,672)

Total regulatory capital 10,409,468 12,611,300

Risk-weighted assets: On-balance sheet 62,201,615 70,666,608 Off-balance sheet 555,463 515,409

Total risk-weighted assets 62,757,078 71,182,017

CAR ratio 16,59% 17,72%

The capital adequacy ratio is calculated based on the Bank of Albania’s financial information, shown above.

annual report 2012 page 52 4. critical accounting estimates and judgments (b) Recent volatility in global financial markets

The Bank makes estimates and assumptions that affect the reported amounts of assets and The recent global and regional economic crisis has resulted in, among other things, a severe liabilities within the next financial year. Estimates and judgments are continually evaluated and effects on the Albanian economy, a lower level of capital market funding, lower liquidity levels based on historical experience and other factors, including expectations of future events that across the banking sector, and, at times, higher interbank lending rates and very high volatility are believed to be reasonable under the circumstances. in stock markets. Indeed the full extent of the impact of the ongoing financial crisis is proving to be impossible to anticipate or completely guard against. a) Impairment losses on loans and advances Borrowers of the Bank may be affected by the lower liquidity situation which could in turn impact The Bank reviews its loan portfolios to assess impairment at least on a quarterly basis. In their ability to repay the amounts owed. Deteriorating operating conditions for borrowers may determining whether an impairment loss should be recorded in profit or loss, the Bank makes also have an impact on management’s cash flow forecasts and assessment of the impairment judgments as to whether there is any observable data indicating that there is a measurable of financial and non-financial assets. To the extent that information is available, management decrease in the estimated future cash flows from a portfolio of loans before the decrease can have properly reflected revised estimates of expected future cash flows in their impairment be identified with an individual loan in that portfolio. This evidence may include observable assessments. 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 The amount of provision for impaired loans is based on management’s appraisals of these Bank. Management uses estimates based on historical loss experience for assets with credit assets at the reporting date after taking into consideration the cash flows that may result from risk characteristics and objective evidence of impairment similar to those in the portfolio when foreclosure less costs for obtaining and selling the collateral. scheduling its future cash flows. The market in Albania for many types of collateral, especially real estate, has been affected by the recent volatility in global financial markets resulting in there being a low level of liquidity for 4 critical accounting estimates and judgments (continued) certain types of assets. As a result, the actual realisable value on foreclosure may differ from the value ascribed in estimating allowances for impairment. 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 A detailed analysis of the financial crisis, particularly in Greece and its effect on the Piraeus actual loss experience. To the extent that the net present value of estimated cash flows differs Group and Tirana Bank itself is disclosed in note 2.1 (a). by -/+5%, the provision would be estimated LEK 273,997 thousand higher or LEK 247,902 thousand lower (2011: LEK 372,644 thousand higher or LEK 313,387 thousand).

annual report 2012 page 53 5. interest and similar income 7. net fees and commission income

2012 2011 2012 2011

Due from banks including Central Bank 276,048 189,676 FX transactions 3,579 3,848

Financial assets designated at fair value through profit or loss 705,502 909,778 Letters of Credit 26,996 29,000

Held to maturity - financial investments 492,904 469,309 Money Transfer 73,057 93,111 Import-Export 22,835 120,752 Interest on loans and advances to customers 3,958,375 4,538,374 Other fees received 120,778 41,120 Interests on overdrafts 194,811 161,352 Total fees and commission income 247,245 287,831 5,627,640 6,268,489

Credit Cards (8,185) (8,095) Loan commissions recognized in profit or loss are calculated using effective interest rate method. Correspondent Banks (11,799) (9,104) Interest income accrued on impaired financial assets during 2012 is LEK 26,738 thousand Total fees and commission expense (19,984) (17,199) (2011: LEK 63,033 thousand). Net fee and commission income 227,261 270,632

6. interest and similar expense 8. other gains

2012 2011 2012 2011

Due to banks 261,709 249,403 Foreign exchange transaction gains less losses 239,959 62,081 Due to customers 2,507,446 2,532,972 Fair value gain/(loss) on financial assets designated at fair value (38,201) (57,873) 2,769,155 2,782,375 through profit or loss

201,758 4,208

annual report 2012 page 54 9. other operating income 11. other operating expenses

2012 2011 2012 2011

Rental income 1,120 1,377 Rental charges payable under operating leases 224,806 215,174

Other operating income - 23,819 Fees for deposits insurance (ASD) 194,688 175,735

1,120 25,196 Telecommunication expenses 115,606 127,025 Advertising and marketing 50,146 49,304 The Bank has entered into leasing agreements as a lessor for premises owned. These are Security and maintenance expenses 107,257 115,874 annual contracts which are renewable upon consent by both parties. There are no contingent Subscriptions 74,918 71,907 rents related to these operating lease agreements. The minimum non-cancellable lease Utility expenses 53,938 57,304 payments are as follows. Stationeries and consumables 39,687 53,456 Travel expense 14,023 15,405

Other insurance expenses 15,866 9,503 2012 2011 Not later than one year 1,120 1,377 Fees and other similar expenses 8,400 10,095 Later than one year and not later than five years - - Other 87,202 91,694

Later than five years - - 986,537 992,476 During its operating activities, the Bank enters into operating lease agreements as a leasee for the premises it uses for its branches. The operating lease agreements are denominated in EUR 10. personnel expenses and USD. The minimum lease payments under non-cancellable operating leases are disclosed in note 3.3.2. 2012 2011

Wages & salaries 441,158 505,669

Contributions to state pension funds 56,497 56,762

Social security’s costs 6,403 6,438

Other staff costs 11,141 7,997

515,199 576,866

annual report 2012 page 55 12. income tax expense The deferred tax included in the balance sheet and changes recorded in the income tax expense are as follows: The components of income tax expense for the years ended 31 December 2012 and 2011 are: 2012 2011

2012 2011 Financial Deferred Deferred Financial Deferred tax Deferred tax Income assets tax tax assets Income Current tax available available for sale for sale Current income tax - 31,238 Assets Liabilities Statement Reserve assets liabilities statement reserve Deferred tax

Relating to origination and reversal of temporary differences (546) (88,046) (Dr)/Cr (Dr)/Cr (Dr)/Cr (Dr)/Cr Income tax expense reported in profit or loss (546) (56,808) Initial valuation and histori- - 6,160 1,162 - - 7,322 1,542 - cal cost of PPE Fair value through profit and - - 3,407 - - 3,407 3,259 (2,823) loss 12. income tax expense (continued) Available for sale securities - 11,688 63 (5,675) - 6,013 (77) 1,640 Start up costs and capital- - 34,335 (5,723) - - 28,612 (6,572) - ised expenses Adjustment for depreciation Reconciliation between the tax expense and the accounting profit multiplied by Albania’s 61,299 - 3,420 - 57,878 - 2,275 - domestic tax rate for the years ended 31 December 2012 and 2011 is as follows: of fixed assets Loan commission deferred 16,610 - (2,875) - 19,485 - (3,600) - Loan provisions calculated 2012 2011 under Central Bank’s rules ------91,220 - and IFRS

Other liabilities ------1,770 - Accounting profit before tax (196,984) 707,976 Total 77,909 52,183 (546) (5,675) 77,363 45,354 89,817 (1,183) At Albanian statutory income tax rate of 10% - 70,798 Deferred tax assets, net 25,726 32,009

Non-taxable items - (13,115)

Effect of translation of equity (546) (875)

Income tax expense reported in profit or loss (546) 56,808

The effective income tax rate for 2012 is nil (2011: 8,02 %). According to Albanian Tax legislation the Tax authorities have right to examine tax returns for the 5 years following submission of the return.

annual report 2012 page 56 13. cash and balances with Central Bank 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 2012 2011 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 in hand Notes and coins in LEK 718,236 638,684 Cash and balances with Central Bank, excluding cash in hand, is included in the analysis of the Notes and coins in foreign currency 838,671 558,181 maximum exposure to credit risk (Note 3.1.4). 1,556,907 1,196,865 Balances with the Central Bank The interest rates on compulsory reserves during 2012 and 2011 fluctuated as follows: Current account in LEK 232,507 - in foreign currency 576 923 13. cash and balances with Central Bank (continued) 233,083 923 Compulsory reserves 2012 in LEK 3,214,526 2,892,094 Currency Minimum Maximum Method of calculation

in foreign currency 3,598,966 3,504,281

6,813,492 6,396,375 LEK 2.80% 2.80% 70% of the yield on repurchase agreements

USD 0% 0% 70% of the Fed’s funds rate

Accrued interest 14,300 17,000 EUR 0% 0% 70% of the ECB intervention rate

Total balances with Central Bank 7,060,875 6,414,298 2011

Currency Minimum Maximum Method of calculation Cash in transit to correspondent banks 362,934 405,596

Nostro and sight accounts with banks 4,885,557 594,694 LEK 2.97% 2.97% 70% of the yield on repurchase agreements Accrued interest - - USD 0% 0% 70% of the Fed’s funds rate Total nostro and sight accounts with banks 5,248,491 1,000,290 EUR 0% 0% 70% of the ECB intervention rate

Current accounts with the Central Bank are non-interest bearing. The interest rates for nostros 13,866,273 8,611,453 and sight accounts are floating. Nostro and sight accounts are detailed in the following table. Current 13,866,273 8,611,453 Non-current - -

annual report 2012 page 57 S&P Loans and advances to banks are detailed in the following table. LT/ST 2012 2011

Nostro and sight accounts with banks S&P Deutche Bank AG A+/A- 4,761,829 246,385 31 December 2012 Currency In original currency In LEK ‘000 LT/ST Deutsche Bank Trust Bank Americas A/A-1 39,389 284,648 Piraeus Bank SA CCC/C EUR 56,000,000 7,817,040 Piraeus Bank SA CCC/C 62,460 43,201 Piraeus Bank SA CCC/C USD 1,500,000 158,775 National Westminster Bank plc A+/A-1 2,953 4,718 Piraeus Bank SA CCC/C GBP 2,310,000 395,426 Raiffeisen Bank International AG A/A-1 6,214 3,172 San Paolo di Torino BBB+/A-2 EUR 20,000,000 2,791,800

Banca Popolare di Vicenza BBB+/A-2 9,955 6,932 Raiffeisen Austria A/A-1 EUR 18,500,000 1,958,225

Standard Chartered Bank Frankfurt A+/A-1 1,640 1,460 Total 13,121,266

Standard Chartered Bank New York A+/A-1 - 2,031

Banco Popolare 1,117 2,147 31 December 2011 Currency In original currency In LEK ‘000

Total 4,885,557 594,694 Piraeus Bank SA CCC/C EUR 20,000,000 2,778,600 Piraeus Bank SA CCC/C USD 9,000,000 967,860 San Paolo di Torino BBB+/A-2 EUR 15,000,000 2,083,950 14. loans and advances to banks San Paolo Albania BBB+/A-2 USD 3,000,000 322,620 Raiffeisen Austria A/A-1 EUR 15,000,000 2,083,950

2012 2011 Raiffeisen Albania A/A-1 EUR 8,000,000 1,111,440

Deutsche Bank A+/A-1 EUR 10,000,000 1,389,300 Term placements with banks: Deutsche Bank A+/A-1 USD 2,000,000 215,080

Resident - 2,272,000 Deutsche Bank A+/A-1 GBP 2,630,000 436,370

Non resident 13,121,266 9,989,842 Veneto Bank BBB-/A-3 EUR 1,000,000 138,930 13,121,266 12,261,842 Credins USD 3,000,000 322,620

Standard Chartered Bank Frankfurt A+/A-1 EUR 250,000 34,732 Accrued interest 49,915 1,139 Banka Popullore A/A-1 USD 3,500,000 376,390

Total 12,261,842 13,171,181 12,262,981

Current 13,171,181 12,262,981

Non-current - -

The interest rates for due from banks are fixed.

annual report 2012 page 58 15. loans and advances to customers 15. loans and advances to customers (continued) 2012 2011 The interest rates for loans and overdrafts are floating as follows: Corporate lending 1,755,919 1,382,107

SME lending 41,602,425 43,739,972 Currency Interest Rate Additional Penalty Interest Rate

Total corporate and SME lending 43,358,344 45,122,079 2012 LEK 12 months BLR + (2-10,2)% 3,0% Consumer lending 2,426,654 2,747,813 USD 12 months USD + (4-7.0)% 3,0% Mortgage 8,842,636 9,738,784 EUR 12 months EUR+ (3-7,5)% 3,0% Overdrafts 300,976 271,989

Credit cards 215,686 200,428 2011 Loan commissions deferred (256,603) (292,743) LEK 12 months BLR + (2-10,2)% 3,0% Accrued interest 977,582 662,708 USD 12 months USD + (4-7.0)% 3,0% Gross loans and advances 55,865,275 58,451,058 EUR 12 months EUR+ (3-7,5)% 3,0%

Less: Allowance for impairment losses (5,205,956) (3,665,844) The movement in allowances (impairment) for losses on loans and advances to customers is 50,659,319 54,785,214 as follows: Current 22,880,603 23,999,177 Non-current 27,778,716 30,786,037 2012 2011

At 1 January 3,665,844 2,544,572 The table below shows the industry analysis of gross loans (without taking into consideration the Charge for the year 1,540,112 1,121,272 “Loan commissions deferred” and “Accrued interest”) granted to corporate and SMEs clients. At 31 December 5,205,956 3,665,844

2012 2011 Individual impairments 4,168,961 2,111,806

Collective impairments 1,036,995 1,554,038 Manufacturing 9,698,065 9,954,525 5,205,956 3,665,844 Electricity 3,298,492 2,906,091

Trade 9,858,163 9,990,490 Gross Amounts of Loans, individually determined to be impaired, 23,267,644 18,458,041 before deducing any individually assessed impairment allowances Construction 9,081,368 13,141,230

Other industries 11,422,256 9,129,743

Total gross loans 43,358,344 45,122,079

annual report 2012 page 59 The movement in allowances for losses by classes of loans during 2012 is as follows: 16. financial assets designated at fair value through profit or loss

Credit 2012 2011 Corporate SME Consumer Mortgages cards and Total overdrafts

At 1 January 4,489,432 13,376,734 At 1 January 2012 38,401 2,893,019 241,680 475,180 17,564 3,665,844 Purchased during the year - 4,480,643

Charge for the year 10,238 1,815,210 (80,505) (187,267) (17,564) 1,540,112 Fair value gains - 8,789

At 31 December 2012 48,639 4,708,229 161,175 287,913 - 5,205,956 Sold during the year - -

Matured during the year (4,489,432) (13,376,734)

At 31 December - 4,489,432 15. loans and advances to customers (continued) Current - 4,489,432 Non-current - - The movement in allowances for losses by classes of loans during 2011 is as follows: Financial assets designated at fair value through profit or loss are carried at fair value which Credit cards also reflects any credit risk and related write-downs. As financial assets designated at fair value Corporate SME Consumer Mortgages and over- Total drafts through profit or loss are carried at their fair values based on observable market data, being

At 1 January 2011 24,962 1,948,640 124,856 433,454 12,660 2,544,572 the last auction for the trading of similar securities held by Bank of Albania, the Bank does not

Charge for the year 13,439 944,379 116,824 41,726 4,904 1,121,272 analyse or monitor impairment indicators. There are no any past due amounts related to these

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

The charge for impairment during 2011 differs from the amount presented in profit or loss All financial assets designated at fair value through profit or loss consists of treasury bills issued for the year due to ALL 86,934 thousand of recovery from amounts previously written off as by the Government of Albania. Treasury bills as of 31 December 2012 relate to zero coupon uncollectable. The amount of the recovery was credited directly to the provisions line in profit or treasury bills of the Albanian Government. These treasury bills have 12 months maturity and loss for the year. It relates to loans and advances to customers (“SME” category). bear fixed annual interest rates ranging, during 2012, between 8.65% and 9.45%.

annual report 2012 page 60 31 December 2012 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 Change in fair Maturity Nominal value Accrued interest Discount Fair value value against revenue and marketing expenditure targets.

Government bonds 2012 2011

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

1 to 3 Months 3,178,260 180,383 (208,971) 7,276 3,156,948 At 1 January 409,629 -

3 to 6 Months 200,000 9,906 (13,762) 940 197,084 Purchase 1,000,000 400,000

Up 12 Months - - - - - Sold - -

4,515,298 261,192 (295,847) 8,789 4,489,432 (Losses)/gains from change in fair value 34,022 9,629

At 31 December 1,443,651 409,629 All financial assets designated at fair value through profit or loss are issued by the Government of Albania. Albanian Government Securities are rated “B+” if in foreign currency and “B+” if in local currency by “Standard and Poor’s”. Government treasury bills 2012 2011

At 1 January 5,030,730 - 17. financial assets available for sale Purchase 10,624,035 5,005,449 Sold 5,005,449 -

2012 2011 (Losses)/gains from change in fair value 39,879 25,281

At 31 December 10,689,195 5,030,730 Visa shares 78,555 53,457 35,836

Government bonds 1,443,651 409,629 -

Government treasury bills 10,689,195 5,030,730 -

12,211,401 5,493,816 35,836

Shares in Visa Inc 2012 2011

At 1 January 53,457 35,836

(Losses)/gains from change in fair value 25,098 17,621

At 31 December 78,555 53,457

annual report 2012 page 61 18. financial assets held to maturity 18. financial assets held to maturity (continued)

2012 2011 31 December 2010

Un-amortised Maturity Cost Accrued Interest Book Value Security Investments discount Cost 4,638,400 5,499,850

Accrued interest 88,276 111,638 Up 12 Months 881,333 18,315 - 899,648 Un-amortised discount (7,991) (10,760) 12-24 Months 4,222,000 72,255 (13,544) 4,280,711 4,718,685 5,600,728 5,103,333 90,570 (13,544) 5,180,359 Current 510,977 - Non-current 4,207,708 5,180,359 The movements in the Albanian Government Bonds are as follows:

The amount of Lek 4,718,685 thousand as at 31 December 2012 is made up of Lek 1,901,604 Government bonds 2012 2011 thousand, investments in Albanian Government’s Bonds denominated in Albanian Lek and Lek

2,817,081 thousand of investments in Albanian Government’s Bonds denominated in Euro. At 1 January 5,600,728 5,103,333

Purchases during the year 710 4,190,595

Albanian Government Securities in foreign currency are rated “BB/B” and “BB+/B” in local currency Matured during the year (881,333) (3,693,200) by “Standard’s and Poor’s”. There are no past due amounts as at 31 December 2012. At 31 December 4,718,685 5,600,728

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

31 December 2012

Un-amortised Maturity Cost Accrued Interest Book Value discount

Up 12 Months 500,000 10,977 - 510,977

12-24 Months 4,138,400 77,299 (7,991) 4,207,708

4,638,400 88,276 (7,991) 4,718,685

annual report 2012 page 62 19. intangible assets 20. property and equipment

Software Furniture Land and and elec- Leasehold Cost: Vehicles Total buildings tronic improvement At 1 January 2011 746,056 equipment

Additions 116,187 Cost: At 31 December 2011 862,243 At 1 January 2011 699,780 156,867 1,489,293 1,076,241 3,422,181 Additions 9,670 5,693 42,999 10,656 69,018 At 1 January 2012 862,243 Disposals - (8,488) (19,812) - (28,300) Additions 134,710 At 31 December 2011 709,450 154,072 1,512,480 1,086,897 3,462,899 At 31 December 2012 996,953

Amortization: At 1 January 2012 709,450 154,072 1,512,480 1,086,897 3,462,899 At 1 January 2011 411,295 Additions - 6,894 38,787 7,560 53,241 Amortization charge for the year 87,495 Disposals - (8,529) (19,906) - (28,435)

At 31 December 2011 498,790 At 31 December 2012 709,450 152,437 1,531,361 1,094,457 3,487,705

At 1 January 2012 498,790 Depreciation: Amortization charge for the year 96,341 At 1 January 2011 136,671 83,202 1,104,289 550,666 1,874,828 At 31 December 2012 595,131 Depreciation charge for the year 33,610 25,342 143,044 98,069 300,065

Disposals - (6,987) (8,411) - (15,398) Net book value At 31 December 2011 170,281 101,557 1,238,922 648,735 2,159,495 At 31 December 2011 363,453 At 31 December 2012 401,822 At 1 January 2012 170,281 101,557 1,238,922 648,735 2,159,495 Depreciation charge for the year 33,840 21,489 127,079 89,935 272,343 Disposals - (518) (9,417) - (9,935)

At 31 December 2012 204,121 122,528 1,356,584 738,670 2,421,903

Net book value: At 31 December 2011 539,169 52,515 273,558 438,162 1,303,404 At 31 December 2012 505,329 29,909 174,777 355,787 1,065,802

annual report 2012 page 63 21. other assets 22. Due to banks

2012 2011 2012 2011

Other financial assets Current accounts

Other Debtors 154,169 117,669 Residents 6,882 150,603

Claims Visa Card 852 3,402 Non residents 12,294 35,707

Other Accrued Interest - 184 19,176 186,310

Other Receivables from Customers 31,723 2,419 Borrowings

Total other financial assets 186,744 123,674 Residents 3,880,865 2,348,694

Non residents 3,582,838 4,195,095 Advance Payments 905 345 7,463,703 6,543,789 Inventory 62,344 94,186 Accrued interest 31,009 47,267 Foreclosed collaterals 754,719 268,829 7,513,888 6,777,366 Prepaid Expenses 60,610 48,714 Current 7,513,888 3,966,703 Other Assets 40,124 31,921 Non-current - 2,810,663 Total other assets 1,105,446 567,669

1,105,446 567,669 Borrowings from non residents, mainly relate to borrowings from European Bank for Development Current Non-current - - and Piraeus Bank S.A. Greece (the Parent), to fulfil the needs of the Bank for liquidity in Euro. The accrued interest from Borrowings with non-resident banks for 2012 are 19,846 thousand LEK (2011: 32,688 thousand LEK). Balances due to banks bear floating rates.

annual report 2012 page 64 23. Due to customers 24. other liabilities

2012 2011 2012 2011

Corporate customers Dividend payable 90 92

Current accounts 3,198,390 3,770,861 Payables on foreign exchange transactions 21,662 21,403

Term deposits 2,801,223 3,661,454 Accrued expenses 104,596 93,665

Other deposits 722,895 665,173 Other liabilities 261,095 37,985

6,722,508 8,097,488 Other financial liabilities 387,443 153,145

Retail customers Other taxes payable 3,369 8,481

Current / Savings accounts 7,105,673 6,920,238 Social insurance payable 8,748 9,524

Term deposits 56,908,769 51,784,226

Other deposits 1,324,849 2,099,731 399,560 171,150

65,339,291 60,804,195 399,560 171,150 Current

Accrued interest 800,300 990,746 Non-current - -

Cheques payables and remittances 7,294 9,639

24. Other liabilities (continued)

72,869,393 69,902,068

Current 72,250,697 68,384,722 Accrued expenses include expenses on utilities, telephone expenses and bonuses related to Non-current 618,696 1,517,346 current year and will be paid the year after.

Included in the customer accounts were deposits of LEK 916,802 thousand (2011: LEK 1,017,876 thousand) held as collateral for irrevocable commitments under documentary business. The 25. Provisions fair value of those deposits approximates the carrying amount. 2012 2011 The deposits to customers are with fixed rates. At 1 January 8,950 43,956

Charges to Profit or loss 75,077 (35,006)

At 31 December 84,027 8,950

annual report 2012 page 65 According to Albanian Tax Legislation, tax authorities have the right to examine tax returns for 26. paid-in capital and share premium (continued) five years following their submission. The table below shows the shareholders structure of the Bank as 31 December 2012 and 2011. There is a claim against tax authorities. The claim is based on the last tax inspection report Number of shares Share in % Number of shares Share in % issued during 2012 by tax authorities. Inspection was performed for the financial years ended Shareholder’s name 2012 31 December 2012 2011 31 December 2011 2009-2011. The report has assessed additional obligation of the Bank in respect to treatment of impairment provisions for tax deductibility purposes and the need to withhold tax on sale Piraeus Bank S.A Greece 380,486 98,48 380,486 98,48 transactions between shareholders. Dafnila S.a - - - - Mr. Tzivelis Ioannis 5,877 1,52 5,877 1,52 The total amount of the additional liability is LEK 219,156 thousand. The Bank has paid the total Total 386,363 100,00 386,363 100,00 obligation of Lek 157,982 thousand. An additional provision has been recorded at the amount of Lek 61,173 thousand. The Bank has won the case on the withholding tax in the appeal of the On 31 December 2012, the authorised and issued share capital of the Bank comprised of tax authorities. The Bank is following the impairment provision case in the court. 386,363 shares with the nominal value of EUR 216,24 (2011: 386,363 shares with the nominal value of EUR 216,24) all fully paid. The remaining provision of Lek 13,904 thousand has been recorded regarding the potential losses from the fraud case evidenced in one of the branches during 2012. The movement in share capital and share premium is as follows:

Number of Paid-in capital Share premium shares 26. paid-in capital and share premium

At 1 January 2011 293,876 7,219,972 1,735,737

2012 2011 Increase from Shareholder’s contribution 92,490 2,762,805 - Increase from retained earnings - 971,302 (243) Paid in Capital-authorized, issued and fully paid 10,954,079 10,954,079 At 31 December 2011 386,363 10,954,079 1,735,494

Share premium 1,735,494 1,735,494 Increase from Shareholder’s contribution - - - Increase from retained earnings - - - At 31 December 2012 386,363 10,954,079 1,735,494

annual report 2012 page 66 27. other reserves 28. Dividend per share

Other reserves are comprised as follows: The General Assembly of Shareholders has decided that no dividends should be distributed from the profit of the year 2012 and that it would be used for the increase of the Share Capital 2012 2011 of the Bank. No decision is made on 2012 profits. Legal and Legal and Total other Total other statutory AFS reserves statutory re- AFS reserves reserves reserves reserves serves As at 1 January 1,389,948 52,336 1,442,284 1,170,200 13,365 1,183,565 29. cash and cash equivalents Revaluation of investment securities avail- - 57,307 57,307 - 43,301 43,656 able for sale For the purpose of Cash Flow Statement, cash and cash equivalent comprises as follows: Deferred tax on revaluation of securities - (5,675) (5,675) - (4,330) (4,685) available for sale

Notes 2012 2011 Transfer from Retained Earnings 2012 - - 219,748 - 219,748 -

Cash in hand 13 1,556,907 1,196,865

As at 31 December 1,389,948 103,968 1,493,916 1,389,948 52,336 1,442,284 Current accounts with Central Bank 13 233,083 923

Cash in transit with banks 13 362,934 405,596

Nostro and sight accounts with banks 13 4,885,557 594,694 27. other reserves (continued) Due from banks 14 13,171,181 12,261,842 20,209,662 14,459,920 Legal reserves have been established according to the Bank of Albania regulation “On the minimum initial capital for allowed activities of banks and branches of foreign licensed banks”, no.51, dated 22 April 1999. Banks and branches of foreign banks shall create reserves at 1,25% up to 2% of total risk weighted assets by deducting 1/5 of the profit after taxes before paying dividends. The statutory reserve has been established according to article no. 39 of the bank’s statute, which requires establishing of reserves by taking 5% of the bank’s net income after deducting the losses of the previous years. This procedure it’s not obligatory if the reserves exceed 1/10th of the bank’s share capital.

The legal and statutory reserves are not distributable.

annual report 2012 page 67 30. related parties For Borrowings, the interest rates vary for year 2012 from 2,10% to 3% (2011 from 0,50% to 1,10%). 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 2012 2011 deposits, inter-bank placements and borrowings, and (b) Tirana Leasing (subsidiary of the Income and expenses parent) for lending and deposits. Piraeus Bank S.A. Greece The immediate and ultimate parent of the Bank is Piraeus Bank SA (Greece). Interest income 173,736 9,059 Interest expenses (25,064) (8,223)

Assets 2012 2011 Fees and commission income 5 5

Piraeus Bank SA Greece Fees and commission expenses (1,137) (59)

Sight deposits 62,460 14,306 147,540 782

Placements 8,371,241 3,105,746 Tirana Leasing

Due to banks (944) (34,723) Interest income 5,380 2,001

Borrowings (1,350,576) (830,158) Other expenses - -

7,082,181 2,255,171 5,380 2,001

30. related parties (continued) Key management compensation

Liabilities 2012 2011 2012 2011

Tirana Leasing (subsidiary of Piraeus Bank SA) Short-term benefits

Loans given (Tirana Leasing) 65,494 180,248 Salaries 43,421 29,846

Due to Tirana Leasing (6,360) (3,977) Bonuses 2,641 5,954

59,134 176,271 46,062 35,800

Bank Directors Loans given 33,413 31,064 Only short term employee benefits (i.e. salaries and bonuses) are included in key management Deposits (3,077) (15,439) compensation. The post employment benefits, share-based payments and long term benefits 30,336 15,625 are not applicable as no such benefits are granted.

The interest rate applied for Placements with Piraeus Bank for year 2012 vary from 0.4% to Presentation of financial instruments by measurement category 3.95% (2011 from 0.57% to 3,60%). annual report 2012 page 68 The following table provides a reconciliation of classes of financial assets with the measurement As of 31 December 2012 and 2011, the trading securities are measured at fair value, with the categories as of 31 December 2012: changes in fair value taken to the profit and loss account for the period, the available for sale securities are measured at fair value with the changes in fair value taken to the statement of

Designated comprehensive income for the period. Loans and receivables and held-to-maturity financial Loans and at fair value Available for Held to 2012 Total assets are measured at amortised cost. receivables through profit sale maturity and loss

Cash and balances with Central Bank 13,866,273 - - - 13,866,273 Loans and advances to banks 13,171,181 - - - 13,171,181 31. presentation of financial instruments by measurement category Financial assets designated at fair value - - - - - (continued) Held to maturity financial assets - - - 4,718,685 4,718,685 Financial assets available for sale - 12,211,401 12,211,401 As of 31 December 2012 and 31 December 2011 all of the Bank’s financial liabilities were Loans and advances to customers 50,659,319 - - - 50,659,319 carried at amortised cost. Other financial assets 186,744 - - - 186,744 Total financial assets 77,883,517 - 12,211,401 4,718,685 94,813,603 Other assets 2,664,660 Total Assets 97,478,263 32. eVents after the reporting date

Designated Loans and at fair value Available for Held to There are no other events after the reporting date that would require either adjustments or 2011 Total receivables through profit sale maturity and loss additional disclosures in the financial statements.

Cash and balances with Central Bank 8,611,453 - - - 8,611,453

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

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

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

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

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

Other financial assets 123,674 - - - 123,674 Total financial assets 75,783,344 4,489,432 5,493,816 5,600,728 91,367,320 Other assets 2,256,625 Total Assets 93,623,945

annual report 2012 page 69 BRANCHES

2 12 ANNUAL REPORT

CREDIT DIVISION

INTERNAL AUDIT CORPORATE DIVISION