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BUILDING TEAM SPIRIT TOGETHER ANNUAL REPORT ANNUAL REPORT 2018. 1 CONTENTS

01 SOCIETE GENERALE GROUP ������������������������������ 4 09 CORPORATE SOCIAL RESPONSIBILITY ���������������������� 32

02 WORD OF MANAGEMENT ������������������������������� 8 10 RISK MANAGEMENT ���������������������������������� 34

03 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE �������������� 12 11 LIQUIDITY AND INTEREST RATE MANAGEMENT ���������������� 40

04 MACROECONOMIC OVERVIEW IN 2018 ��������������������� 14 12 CAPITAL MANAGEMENT AND CAPITAL ADEQUACY RATIO ���������� 44

05 RETAIL BANKING DIVISION ������������������������������ 16 13 FINANCIAL INDICATORS ������������������������������� 48

06 CORPORATE BANKING �������������������������������� 22 14 EXPECTED FUTURE DEVELOPMENT ������������������������ 52

07 FINANCIAL MARKET SERVICES ��������������������������� 24

08 HUMAN RESOURCES ��������������������������������� 28

2 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE 01 01 SOCIETE GENERALE GROUP

Societe Generale is one of the leading financial regional bank on a human scale coupled with those of services groups in Europe. Based on a diversified a nationwide banking group. The Boursorama Group universal banking model, the Group combines offers a complete range of online banking products financial solidity and a strategy of sustainable and services. Established in 1995 and present in growth. Ambition of the Group is to be the leading three European countries, Boursorama is a pioneer relationship-focused bank, a reference in its markets, and French leader in its three businesses: online close to its clients and chosen for the quality and banking, brokerage and financial information. commitment of its teams. With 31 million customers in 67 countries, Societe Generale operates through International retail banking three main business activities: Our international retail banking and consumer credit French networks network serves over 18 million individual clients across 38 countries. In each of these countries, we Retail banking in France consists of three implement our diversified and well-balanced banking complementary brands: Societe Generale, a leading model, while adapting it to the specificities of local national bank; Crédit du Nord, a group of regional markets. banks; and Boursorama, a major online bank. These brands serve a diverse clientele, which comprises Financial Services over 12 million customers. The Group’s goal for French retail banking is to be the leading bank in Our Financial Services offering, which complements terms of customer satisfaction and protection. Across the International Retail Banking network, is built on France, the eight regional banks of the Crédit du Nord our expertise in three businesses: Insurance, Vehicle Group operate with a high level of independence Leasing and Fleet Management, and Equipment and and have a perfect knowledge of the local economic Vendor Finance. fabric. Customers enjoy all the advantages of a

4 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 5 01 01

Global Banking and Investor Solutions Financing the economy by linking and engineering expertise and strong franchises, GBIS Relying on its internationally recognized expertise (GBIS) issuers and investors offers tailor made solutions to corporates, financial in structured finance (acquisitions, exports, natural institutions and the public sector. resources, infrastructure and assets, media and Global Banking and Investor Solutions (GBIS) plays A pillar of our universal banking model, Global telecom, real estate and lodging, etc.), GBIS can offer Investment banking, financing and market services: a key role as an intermediary between issuers and Banking and Investor Solutions (GBIS) is present in a truly global set of financing solutions to its clients. three complementary activities GBIS assists investors, delivering worldwide expertise in three 36 countries in the main financial markets in the In addition, GBIS offers global access to market via corporates, financial institutions, public sector main areas: investment banking, global financing and Group’s regions of operation, with extensive European solutions in equities, fixed income and currencies, institutions and family offices, meeting their needs global markets. coverage and representative offices in Central and commodities and alternative investments. GBIS in terms of investments, strategic advisory services, Eastern Europe, the Middle East, Africa, the Americas develops advisory, investment and risk management capital raising and capital structure optimization. and the Asia-Pacific region. With recognized advisory solutions for the specific needs of each investor.

6 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 7 02 02 WORD OF MANAGEMENT

It’s been five years since we resolutely caught up a series of mentorships, workshops and educations with trends that were changed daily by the so- we trained also our clients to use and explore the called Fourth Industrial Revolution. At that time, we possibilities of our online channels. could not even imagine that at the end of 2018, we Societe Generale Bank Serbia among the first on the would deliver biometric logging to m-banking by domestic market recognized the need to redefine fingerprinting or face recognition. It is not easy to its business model and joined different platforms predict what will happen to the digital banking world in search of sustainable, more efficient and more in 2019, but I am convinced that Societe Generale Societe Generale Bank competitive business models. February 2019, or three Serbia has the capacity and knowledge to provide the years after we took the first step towards a start-up Serbia among the first on the best user experience. domestic market recognized community and started a strategic partnership with In the world full of novelties, digitization is the only the Centre for Technological Entrepreneurship and the need to redefine its “novelty” that has come to stay and constantly Innovation (ICT Hub), is now completely different - in business model and joined changes its shape, the dynamics of development and addition to biometric logging, a number of novelties different platforms in search changes that it brings into the everyday life of not in e-commerce services, cash- in machines and of sustainable, more efficient only users of banking services, but the entire online quarterly improvement of our online channels, we are world. The shape of all that we see today in the world preparing several functionalities that will significantly and more competitive of digital globalization we have been spotted with improve the user experience of clients through mobile business models the first traces of the major economic recession that application and digital branch. struck (and divided) the world one decade ago. Goran Pitic This is a time of great challenges for both the banking President of Societe Generale Serbia Management Board* However, the post-crisis period was also marked by industry as a whole and our bank. We will continue the strong development of new technologies that by our successful journey if we respond to all of these 2016 almost had the effect of traditional trade on the challenges professionally as before, improving our world’s GDP. operational efficiency, as well as the quality of our products and services. When I go back to 2016 within our organization, the clear vision which we parallelly applied Our obligation to clients is great user experience in understanding the trends in digital flows, and continuous investment in modern business and implementing new solutions, strengthening internal digital solutions that can make using of daily banking capacities and expanding innovation culture within services easier for them. the Bank itself is obvious. At the same time, through * In the mandate until June 19, 2019, the connection Events after the balance sheet date, note 40.

8 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 9 02 02 WORD OF MANAGEMENT

2018 brought a number of business, strategic, As a bank that is recognized on the Serbian market As a bank that is organizational and structural challenges for for the expertise and competence of our bankers, we recognized on the Serbian Societe Generale Serbia. Thanks to the dedication have additionally reorganized work processes in the market for the expertise and expertise of our teams, and the quality of frame of the new branch concept in order to enable the relationship with our clients, we managed to account officers, while working with clients, to actively and competence of strengthen our internal infrastructure, implement new engage in searching for the best solutions for their our bankers, we have solutions to optimize and modernize work processes needs. and, finally, present a completely new, modernized additionally reorganized At the same time, by introducing a number of business concept that meets the requirements of a work processes in the new technical solutions and through further modern user of banking services. frame of the new branch implementation of digital services, we adjusted our concept in order to enable The business results of Societe Generale Serbia for online channels to an outstanding user experience 2018 demonstrate that we have achieved one of the and optimized work processes to deliver the service in account officers, while highest growth rates on the domestic banking market. the shortest time possible. working with clients, We reached about 35 percent higher profit after tax Our priority in the next year remains an efficient, to actively engage in compared to the previous year, we strengthened our comprehensive and digitally oriented business, with a market share, confirmed our position among leaders searching for the best simultaneous adjustment of the activity in the branch in retail loans and further strengthened the presence network according to the expectations of our clients. solutions for their needs in corporate business. We will continue to provide high quality of service and Maria Rousseva We retained our rank as the third largest lender to strive to be the best one-to-one relationship bank for President of the Executive Board companies and realized a significant improvement in our customers. efficiency and profitability. of Societe Generale Serbia However, what we believe makes a difference on the market for Societe Generale Serbia are not only the financial results, but also the overall relationship with our clients that we nurture and develop to by offering them as appropriate as possible products and services in order to justify their trust.

10 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 11 03 03 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE

At the times when most modern practices become doing business in Serbia, from traditional banking, 1977 2013 2016 2018 obsolete as soon as they become mainstream, it we passed the way to improvement of the market is important to differentiate short-term trends from position of one of the leading banks, which is In 2013 we took a part We made an arrangement long-term directions of development that ensure increasingly focusing towards developing a culture of of the credit portfolio with the company Vip the growth on the market. We are a bank that innovation. With the full commitment of all employees of clients of KBC Bank, Mobile, established a understands that it is necessary not only to respond of Societe Generale Bank, we provide quality service which is the first strategic partnership with to the new demands of the customers, but also to and a diverse offer of products to our clients, natural financial transaction the Center for Technological anticipate future trends and be as innovative as persons and legal entities - large private and state We are the first foreign of this type in the We have organized Entrepreneurship (ICT possible. Our imperative is to meet the customers’ companies, national and multinational companies, bank in the domestic Serbian market the first Fintech Hub), and our employees needs where it suits them - in one of our 96 branches financial institutions, and sector of small and market that opened a Hackathon in Serbia themselves get the chance across Serbia, at our contemporary e-banking medium-sized enterprises, microenterprises and representative office in with partners to present their ideas for platform, or via mobile applications. For 41 years of entrepreneurs. 1977. technological innovation. 1864

2001 2015 2017 The first retail The first rewarding branches were opened competition in 2001. Generator was lauched in 2017, aim to promote We launched the first entrepreneurship, in online branch digitalization Serbia in 2015. and business

We are constantly looking for innovative ways to, with a different approach to our clients' needs, develop products and services that will facilitate daily banking activities

12 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 13 04 04 MACROECONOMIC OVERVIEW IN 2018

Serbia’s GDP increase for the fourth straight year in 2018, Locally, low interest rates continue to prevail and up by an estimated 4.3%, an average growth of 2.5% for employment figures are improving, as are overall salaries, the four year time span. That growth was achieved even further spurring on borrowing and in return spending. though there was a stringent IMF program which required The unemployment rate has dropped from nearly 25.5% a significant cut in government spending in order to bring in 2012 to 11.3% in 2018Q3. In 2018, average nominal debt under control, which was approaching 80% of GDP. As net wages increased by 6.5% compared to the average of November, debt was around 56% of BDP and expected nominal net wages in 2017, while average real net wages to fall significantly more in the coming period. increased by 4.5%.

As a result of the much better debt figures, the Looking back historically, interest rates on RSD loans government has been able to raise public sector wages have never been lower and should not rise much in the and pensions, without endangering public finances foreseeable future, especially as inflation remains well while increasing economic growth in coming years as below the NBS’s target inflation rate of 3.0%. At the both spending and borrowing rise. Coinciding with this, same time, interest rates on Euro loans cannot expect to low inflation has allowed the National Bank of Serbia to rise much due to very low inflation, economic growth and keep interest rates at quite low levels, further stimulating political uncertainties. investment, which will lead to greater long-term economic Another issue which the Serbian economy will have to growth, which we forecast to be around 4.0% to 4.5% in contend with this year will be low growth among major coming years. Western European trading partners, especially Italy and Unlike in 2017, when the economy underperformed due Germany. The bright side could be neighboring countries, to a large drop in electricity in the first half of the year both EU members and those aspiring to be so, are and due to the prolonged drought hurting agricultural expected to grow once again, which should lead to higher production, in 2018, nearly all economic sectors performed Serbian exports regionally. well. The area which statistically was not up to par was As in 2017, last year there was an increase in Current the strong rise in imports, which was a mostly a result Account Deficit, mostly arising from the rise in exports. of higher oil and gas prices compared to 2017. For this However, record FDI in the final month of the year came year, we expect energy prices to stabilize, however, global in at EUR 900M, a month record. Therefore, in 2018, FDI geopolitical tensions could still create obstacles. came in at 140% of the CAD, one of the major reasons we continue seeing the dinar stability in higher long-term growth.

14 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 15 05 05 RETAIL BANKING DIVISION

In 2018, the retail banking division remained focused value for the clients and maximally eases the daily on the needs of its clients and the development of banking activities. long-term relationships. Constant growth in retail loans is one of the key indicators of support that a New Branch Concept bank with affiliates provides to its clients, natural persons. Thus, in the last year, 2018, the loans Thinking about how to properly fit the needs of a growth was 4.2% compared to 2017, to RSD 110 modern financial services user – the one motivated billion (EUR 935 million), taking the market share of by digital society to seek (and receive) products and 11.32%. When it comes to the customer base, it is services ‘online’, with a smart phone and high-speed increased by 5.6%, and in 2018 the bank was among internet, and who at the same time wants full support the leaders in the housing loans market. Societe from its bankers in branches, the Bank offered a Generale Serbia has also been involved in the loan unified solution - a new concept of business, whose program for professional military personnel, and last main goal is an extraordinary user experience. year with the Ministry of Defence and the National Mortgage Insurance Corporation, a contract was The new concept does not only bring a modern signed for granting subsidized housing loans. ambiance of branches. It’s about one step closer to customers and all potential customers who want the When talking about cash loans Societe Generale service fast, easily, and without waiting in lines. Our Banka a.d. Belgrade strengthened its position of one ultimate goal is satisfaction of customers whom we of the leaders in the local market. The total amount of serve where they need it - online or in new branches. deposits in the Retail Banking Division reached RSD New organization of work and functional space design 71.4 billion (EUR 604 million), an increase of 6.7% enables customers to have easier access to digital compared to 2017. services through the existence of Zone 24/7 where the withdrawal or payment of money in dinars and As customer satisfaction and extraordinary user euros is available at any time, and at the same time, experience are in the focus of the retail business, we an environment in which the customer can have a continued to introduce a great number of changes in new mobile banking application installed and talk a system that nurtures the innovation-based culture about its functionalities. The new ambience does not of the whole group, such as Societe Generale, it have a counter, offers comfort of a living room and means continuous work on an offer that has usable service that saves time and money. The Bank entered the project of transforming the branch network at

16 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 17 05 05 the beginning of 2018, with first such branch in Novi Small businesses banking Sad, and after very positive reactions of customers, another was opened in September in the center The Small Enterprises and Entrepreneurs Sector also of Belgrade. The goal of the new concept is that in 2018 continued its client base growing trend. The customers use digital content when and where they loan portfolio grew by 19%, while deposits increased want, and when they visit their personal bankers, by 16% compared to 2017. A unique approach to they have enough time to devote themselves to the these clients contributed to this, in which the bank essence of such a meeting - financial consulting. is led by the activity of a particular company or entrepreneur, that is, through a segmental offer, it adapts to specific needs in the fields of production, Innovations in digital banking transport, trade and professional services. A network Societe Generale Bank invests great efforts in of 96 branches of Societe Generale Bank Srbija a.d. digitalisation of business and strives to improve both Beograd has personal bankers, specialized in dealing offer and services to customers on online channels with small businesses and entrepreneurs. on quarterly basis. Digital tools are used to save In November 2018, Societe Generale Bank Serbia time to customers and employees, which additionally signed a guarantee agreement with the European improves mutual experience. Investment Fund (EIF) in the total amount of EUR 75 Some of the additional innovations introduced to the million for the granting of loans to small and medium- Bank’s operations in 2018 are: sized enterprises, necessary for investments and working capital.  PIN by SMS - automated process of obtaining a PIN code for credit/debit cards - within which the By signing the contract, Societe Generale Bank Serbia Our common goal is to enable clients from the small for entrepreneurs and small and medium-sized client himself generates a PIN code by sending an has joined the COSME program of the European and medium-sized segment to finance their needs enterprises that are registered in Serbia and want to SMS Commission, and within its offer for small and favourably for further business development, with digitally transform their business. medium-sized enterprises (SMEs), approves loans longer repayment periods and with minimal collateral.  The three winners will win consulting support Withdrawal of euros at ATMs - reduced for financing working capital, as well as for the We are pleased to join the COSME program as an in the digital transformation of business using operational work in branches and increased procurement of equipment, machines and vehicles. important additional form of support for business digital technologies. The digital transformation customer satisfaction. Since implementation of improvement, as part of our overall offer for small and The maximum loan amount granted to the clients of will include a complete analysis of the current this functionality on all ATMs (June-December), of medium-sized businesses. Societe Generale Bank Serbia, small and medium all withdrawals of euros, 38% was done at ATMs state of business and recommendations with the enterprises and entrepreneurs is 150,000 euros COSME (Program for the Competitiveness of action plan, implementation of one of the proposed  Introduction of Cash in machines for legal entities (17.7 million dinars). Enterprises and SMEs) is the European Union recommendations worth up to 5,000 euros, as well as - reduction of operational work for the branches, Enterprise Competitiveness Program for small and marketing make over and media campaign. The loan repayment period for permanent working shortened time of daily takings deposit and medium-sized enterprises with a budget of EUR 2.3 capital is 36 months, and the only form of collateral increased customer satisfaction billion in the period 2014-2020. is the bill of exchange. Investment loans for the Private Banking

 purchase of equipment are approved with repayment Societe Generale Banka Srbija a.d. Beograd further Logging on m-banking with a fingerprint (Anroid The French Societe Generale Bank occupies a leading deadlines of 30 to 60 months, exclusively with the bill affirms its commitment and conviction that small + IOS), as well as by face recognition on IOS position in the Private Banking segment in Europe of exchange or pledge on the subject of financing. businesses have great potential and importance phones with numerous awards for the best bank in this field for the national economy by support through the from prestigious European institutions, organizations second cycle of the competition “Generator”, intended

18 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 19 05 05

and media that follow the Private Banking sector. In our country, Societe Generale is also recognized as a bank that high-expecting clients choose as their partner in terms of offer, products and services that support their lifestyle, as well as in terms of professional support they receive from their bankers.

In May, the Societe Generale Bank’s Private Banking in Serbia has launched an exclusive package of accounts and services Eminent that provides clients with first-class, customized services, investment and financial consulting with numerous benefits offered by Visa Infinite debit card.

Users of the Eminent Private Banking Package can also expect support in the domain of investment consulting. Licensed investment consultants, in cooperation with other members of the Private Banking team, with the support of the experts of the Societe Generale Group, recommend to each client individually the way in which they can invest their funds on the domestic or foreign market in accordance with their profile, financial plans and other factors. The Eminent package also offers a variety of other services for quick and easy management of funds, and a range of benefits within Digital Banking services through M-banking or E-banking platforms.

20 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 21 06 06 CORPORATE BANKING

SGS corporate in 2018 is more efficient, diversified managed to further penetrate this market niche for this segment, was confirmed by Euromoney: SGS Strategic actions and more than ever focused on customer experience. more than 10%. During whole year with different received Euromoney 2018 Award for the best cash actions, we have succeeded to further improve and management bank. SGS will continue to innovate and to better We maintained market share as third biggest lender diversify our deposit base. understand and anticipate clients. We believe our to companies and achieved strong improvement of These achievements, and the work that preceded future is all about clients and their experience and profitability. The steps that we took in previous years, MID corporate continued strong development of them, were a critical factor in delivering a strong our goal is to adjust our products and services to that were built on simplifying and standardizing our core client base which consequently led to increase of financial performance in 2018. while insuring internal efficiency. We keep working end-to-end processes; further development of matrix loan portfolio for close to 22%. Achieved results were on our strategic goal to be the best one-to-one organization that supports client-led approach and significantly higher than projected, despite strong relationship bank. cautious risk approach that contributed to significant competition and permanent pressure on margins. decrease of NPL’s. As started in 2017, we insisted Factoring market in 2018 was characterized by new on better knowledge of our clients through improving entrants in the market and overall turnover growth. efficiency and effectiveness of our KYC processes. SGS maintained leading position by further exploiting Supply Chain Platform and double-digit increase of Business performance international factoring, mostly with France, Italy and Germany. 2018 was an important year for SGS Corporate. Although high repayments in Mid-market and SGS in 2018 was among the leading banks in foreign significant decrease of NPL’s for more than 60% in currency trading, keeping the stable market share Large corporate, we have succeeded to maintain over 10% and doubling its contribution to overall market share through strong production throughout corporate profitability. Dedicated approach to ensuring whole year. Breakthrough made by structured finance/ high quality of service resulted with strengthened real estate deals was strong pillar of profitability and relationship with clients through treasury products, stabile loan outstanding until the year end. moreover interest rate swaps and other hedging instruments. We continued to expand our presence not only through increased lending but also through diversified The strength of SGS cash management, as one of client base, high quality services and digitalization our main businesses, was confirmed in 2018 as of our business. In addition, we leveraged on our important generator of profitability and relationship expertise regarding international clients we have with clients. Market awareness of our quality in

22 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 23 07 07 FINANCIAL MARKET SERVICES

Financial Market activities Bank has been actively involved in the government debt securities market, through buying government Long-term cooperation and strong partnership with bonds denominated in RSD and in EUR on the primary its clients, beneficiaries of products and services market. Beside participation in the primary market of in the financial markets are proof that the Bank government debt securities, Societe Generale Banka continuously and carefully monitors and understands Srbija actively participates also and is one of the their requirements and effectively provides answers leading players in the secondary market, with share of and offers adequate innovative solutions. 13.96 %.

Bank managed to keep its position in the foreign The Bank was very successful and contracted exchange market in terms of total volume of numerous interest rate swap transactions in 2018. transactions with corporate clients. According to the official statistics of National Bank of Serbia, Investment services and activities the Societe Generale Banka Srbija reached a market share of 10.44 % and was ranked 4th in Investment Services Unit, as a separate organizational trading with Corporate clients, while in the activities unit of the Bank with the permission of the Securities with International Corporate clients and financial Exchange Commission has been providing clients institutions Bank reached a market share of 10.71 % services related to financial instruments and capital and was ranked 3rd by transaction volume. Another markets for 14 years now. very important segment is trading with domestic banks where the Bank reached a market share of Thanks to continuously improving in services offered, 12.07 % in 2018 and positioned itself on the 2nd as well as monitoring of trends in developed markets position. Despite the large and strong competition and the introduction of new products, the Unit can Societe Generale Banka Srbija managed to keep high offer a truly wide range of services (Brokerage positions in the all mentioned segments of activities in services in trading with financial instruments on the foreign exchange market. Belgrade Stock Exchange as well as OTC market trading; intermediary services in trading with financial On the interbank deposits market Bank has been very instruments on foreign markets; Corporate agent active with the actual market share of about 10.63 % services; Investment advisory services, as well as in 2018. other services for public and non-public companies, such as the listing, delisting, organizing public offers, shares squeeze outs, etc.).

24 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 25 07

In 2018, the largest market share and greatest experience and expertise of the unit’s employees growth in turnover on the stock exchange was continue to make a difference resulting in long-term realized in the trading of government debt securities, clients’ trust. The world-renowned financial magazine, which continue to be the primary focus of both Global Investor Magazine, has declared in 2018 domestic and foreign investors. By providing again Societe Generale as the best bank in Serbia brokerage services in trading with this financial in providing custody services, which is a proof of instrument on the Belgrade Stock Exchange, the continuity in providing high-quality services. Investment Services Unit has positioned itself on the 2nd position, with an annual turnover of over 19 Societe Generale is the Custody Bank for seven billion RSD. Further, transactions that the Investment voluntary pension funds, for which continues to Services Unit realized on the primary market of successfully provide all custody services and daily government debt securities had turnover of 19.6 valuation and calculation of Funds assets. As of the billion RSD. end of 2018, the total Funds’ Asset under Custody at Societe Generale Srbija was 40.2 billion RSD. In In providing brokerage services in shares trading on providing custody services to the voluntary pension the Belgrade Stock Exchange, Investment Services funds, the Bank is absolute market leader with a Unit has completed over 534 transactions, with an 100% market share. annual turnover of 768 million RSD. During the year Unit was successful also in the segment of Corporate Other Bank clients that use custody services are, Agent services. mostly, from the segment of domestic and foreign professional investors. Compared to 2017, the Trust, security and innovation are a hallmark in this value of the Asset under Custody belonging to segment of Bank services, which has been both custody clients increased by 6%. Custody servicing recognized and appreciated by clients. abroad is performing through Global Custodian of Societe Generale Group (Societe Generale Securities Custody services Services). Fulfilled custody clients’ expectations and met high Societe Generale Banka Srbija a.d. Beograd is standards remain in focus of the Bank, through licensed by the Republic of Serbia Securities fostering professional business relationship, trust, Commission to provide Custody Services. The constructive exchange of information, responsibility quality of services provided to clients, along with the and commitment.

26 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE GODIŠNJIANNUAL IZVEŠTAJ REPORT – 2018. 2017  2727 08 08 HUMAN RESOURCES

For Societe Generale Bank Serbia, the year 2018 was visits and stories of successful leaders from our very successful in the field of human resources. region, we wanted to show our managers that the fundamentals of human management are the same, 144 colleagues chose our Bank as their new regardless of the area in which they work. employer. We have been particularly working on improving the knowledge and competences we have Reminding of the importance of the Group Conduct in the small business and information technologies, Culture Policy was a great opportunity for our and the new employees have helped us expand our managers to gather their teams and discuss the experience and expertise in these domains. The policy of the Bank through an interactive workshop. Bank closed 2018 with 1339 employees and thus This useful experience has solved the dilemmas of maintained its continuity compared to the previous employees on how to behave in different situations, years. bearing in mind the importance of complying to regulations and codes of conduct. Strengthening Leadership Client in the Focus of the Company We continued with the “Fundamentals of Management” program and organized a new By strengthening leadership capabilities we never certification method with the key participation of the forget that our client is in our focus and that we have management team. Having in mind the successful set ourselves the goal of being the number one bank results and the satisfaction of our employees with in client relations. We, as a human resources team, the project, we have begun a continuation through see our role in actively promoting this approach the program “Managers of the Managers”. The goal among employees and in fostering these values in our of this program is to strengthen already experienced own work. Together with colleagues from other parts managers in their role and to enable them to share of the Bank, we started working on user experience. their knowledge in the best way and establish a In cooperation with the company clientology, we healthy culture of feedback with their employees. The have defined the strategy and methodology for program includes an interactive exchange between understanding how best to recognize the needs mentors and their “learners” that will contribute to the of clients, and then apply them to our work and flexibility that the present manager should possess our products. In order to truly devote ourselves to and as a true leader leads the team through changes the client, most of the workshops were interactive and transformations in the banking sector. Through exchange and listening to our users.

28 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 29 08 08

We have been meeting not only in the premises of our program of practice in our Bank and to get career- bank, where we tried to be good hosts for our clients, orientation. The basic competencies we have been but we have been also giving visits to clients in order developing during the program are sales, project to help us respond to the needs of their everyday life. management, and other general financial knowledge. After the practice, the best of them were given The Universal Banker principle is a step further in opportunity to start their first employment. The fact our aspirations to open up to our clients and to adapt that this year we received over 250 applications from our way of working to them. Our employees have candidates of the final years of studies speaks of the become bankers who at any moment can jump in success of the first two generations of the program. and solve all the concerns of users in one place, universally covering more fields of expertise. This As a responsible company we are aware of all the principle has increased their polyvalency, as well as risks that come with the new technologies. That’s the competence of our people in the labour market. why we especially take care that our employees have Following this practice, we have enabled our universal appropriate training on general security, as well as bankers to work in the New Concept of a branch that on data and information security. With the new Client was intended to enable our colleagues to have for the Bank, working with small businesses is the transforms the conservative banking environment into Knowledge procedure, we started trainings that were treatments under favorable conditions in the best competence we want to develop. That’s why we an open space that invites clients to socializing and aimed at teaching our employees to ask the right health care institutions in the country. have enabled the best individuals to expand their providing banking services in an informal atmosphere. questions and to provide the best service to clients knowledge and expertise, learn about small business With this concept, we meet the client’s needs, new on the basis of the information received, at the same The additional pension insurance is also continued, and to apply for this position. We have additionally trends and lifestyle where an increasing number of time protecting personal data and ensuring that the the Bank’s participation in the voluntary pension fund emphasized and developed important data users turn to digital channels, and in our Bank there data remain within the system. for employees. management competencies through the participation is an conversational partner with whom the user can In order to make the necessary documentation always of our key data experts in the Data science academy. advise on financial possibilities. This year, the Bank also opened door to the students of the Faculty of Economics in Belgrade, so a group accessible to employees, we developed processes of As one of our main values is innovation, we continued Cash management is an important topic for us, so of students had the opportunity to, through our four- automatic delivery of certificates of annual income, with workshops of creative thinking at the regional in accordance with the strategy, we have developed hour program in the Bank, in an interactive way get to as well as confirmation of the quarterly average of the level, in Nis and Zrenjanin, as well as with the numerous services such as cash express, cash in know our business and organization. Bearing in mind salary, directly to the employee’s email. “Innovation Curriculum” program. We encouraged machines, etc. Our goal is to make transactional that our Bank cooperates with the University of Texas, For the youngest members of our Societe Generale our employees to participate in innovation and, in banking available and fast, and that internal resources we hosted thirty PhD students from this university team, same as every year, we have prepared New partnership with ICT Hub, organized an Innovation have more opportunities to devote to the clients. Cash and presented them our Bank, which enabled them Year gifts. This practice makes the holidays of our Academy that includes training and conferences management training has helped our employees to to gain insight into the banking business sector in children beautiful, and it is especially important for that further enhance the innovative spirit. Within the confidently perform all the cash-related business, and Serbia. our employees because of the New Year’s spirit the academy, the Corporate Innovation Conference was have protected our clients from potential risks. During this year we participated in several student Bank promotes. held, as well as the Block chain meet up. This is conferences aimed at career orientation of the young supported by many initiatives that took place at the The trainings that we prepared for our employees this Employer Branding and informal education on finance and banking. Bank’s level that have influenced the opening of new year were aimed to strengthen expertise in specific business lines and enabled more efficient processes. As a company that helps employment of the young, areas, but also to provide their personal development. this year we continued with the third generation of Employee care and development In particular, we put the accent to small business, and We also continue to nurture our talents by opening up the “Tour de SoGe” program. The best students of accordingly, we started the Small Business Academy their space for participation in various projects and This year again we have provided Private Health the final years at our universities have been given program, which included the best individuals from development programs such as the IBFS Cup, the Insurance Program for our employees. This benefit a chance to present their ideas through a one-year the network. As a strategically important segment leadership program VELA, the Recharge program.

30 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 31 09 09

selection of 40 entrepreneurial innovations that are The Fluo Generator followed in May 2018, which CORPORATE SOCIAL innovative, feasible and sustainable. continued the mission of the first competition, supporting the ideas of those who create the future. Generator is actually a long-term platform as a place In the final, 10 best student entrepreneurial initiatives RESPONSIBILITY where the initiatives and events that contribute to the competed, the winning team travelled to Paris and development of innovation and entrepreneurship are discovered the world of innovations, while many promoted. The “Connect” slogan is an invitation for all partners of the competition gratified other participants those who wish to enter into entrepreneurial waters with valuable prizes. or expand the existing business to follow Societe Generale’s activities in Serbia, whether they want to This year’s Generator competition began in November Societe Generale Serbia, as a part of a major banking Same as different industries merge in business, so connect with a bank or some of the partners, to be 2018. This year’s Generator 2.0 contest is intended group, integrates corporate social responsibility the concepts of social responsibility will develop in participants in one of the events such as Hackathones for entrepreneurs and small and medium sized in all its business activities using high standards this direction. Since 2016, Societe Generale Serbia and other gatherings having innovation in focus, or a enterprises that are registered in Serbia and want to for its employee policy, working with clients, local has been included in the Responsible Business part of events and conferences that promote digital digitally transform their business. community and environment. Index list – the first national corporate social business and entrepreneurship. The three winners will win consulting support responsibility assessment platform that enables an Under the slogan “Do you have a million worth in the digital transformation of business using As a member and one of the founders of the UN objective comparison of the effects and impacts that innovation?” the first Generator Competition, held digital technologies. The digital transformation Global Compact Agreement in Serbia, as well as a the company generates to the society through its in 2017, had entrepreneurial innovations in its will include a complete analysis of the current member and one of the founders of the Responsible operations. Business Forum (RBF) Serbia, the Bank mobilized the focus. Nearly 800 applications were received for the state of business and recommendations with the most important initiatives in the country that brings With the wish to give additional contribution to competition, and the winner received a million dinars action plan, implementation of one of the proposed together socially responsible companies. empowering technological entrepreneurship in Serbia, for further development of innovation, while the best recommendations worth up to 5,000 euros, as well as the Bank has initiated cooperation with the ICT idea in the opinion of the audience won 500,000 marketing make over and media campaign. Societe Generale Serbia grounds its corporate social Hub Centre for Technological Entrepreneurship and dinars. responsibility on support to entrepreneurship and Innovation, which created a long-term partnership innovation, for creation of better environment and with benefits for all involved parties. giving back to the community in which we operate, supporting culture and young talents, supporting Together we organized various events, such as vulnerable groups of citizens (through social inclusion three FinTech Hackathones and the Open Innovation and professional integration through the education of Challenge, which rewarded teams with the best ideas socially vulnerable groups and volunteer actions) applicable in the development of the banking future. Also, the cooperation opened the bank’s door to The Strategic Guideline for Corporate Social new partners from the start-up ecosystem that are Responsibility in Societe Generale Serbia are strongly developing innovative products and services for users based on corporate values and are applied in in an increasingly advanced digital environment. accordance with the following priorities: In the year 2017, when Societe Generale Serbia  Integration of the social responsibility principles celebrated 40 years of business in Serbia, the need into business activities has emerged to strategically unify all that the bank  Responsible management and human resource has done in the field of innovation in the last couple management policy of years. Thus, the Generator platform was created,  Reduction of negative effects to the environment which was launched through a competition for the

32 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 33 10 10 RISK MANAGEMENT

Risk Management Policy Organization of Risk Management strategy is further implemented through individual risk At the level of individual customers the Bank adheres Process management policies in the segments of work with to rules not to approve loans or other placements In its operations the Bank pays special attention to individuals, entrepreneurs and small business entities unless having enough information to be able develop a risk management system which guarantees Risk management is organized in accordance with the and legal entities. In this way, the Bank ensures that to adequately assess the financial position and stable growth of portfolio, profitability and long-term provisions of the Law on Banks, the relevant decisions the implementation of business policy takes place creditworthiness of borrowers as well as all risks business success. In order to establish an effective of the National Bank of Serbia which define the field within acceptable limits from the point of view of associated with a specific transaction with the client. system of risk management the Bank continuously of risk management and capital adequacy of banks, credit risk, which should be reflected in the overall The Bank also does not engage itself in approving identifies, assesses, measures, evaluates, prevents, as well as the best banking practice and international quality of the loan portfolio. loans and similar exposures whose characteristics controls and internally communicates its risk standards. deviate from the Bank’s credit risk management Key principle in risk management process is exposure. policies. An important role in this process plays the independence of the risk management function in The Risk management system is implemented management of the Bank. In this sense, the Board relation to functions that assume risks. Therefore a At the level of the total portfolio the Bank manages through appropriate policies, methodologies and of Directors is in charge of establishing the risk central role in the process of risk management is the credit risk by matching loan maturities with the procedures of the Bank. With this in mind, the Bank management strategy, capital management strategy played by a separate and independent organizational purpose of the loan, type of loan or client as well as is devoted to constantly upgrade its risk management of the Bank, as well as risk management policies for unit of the Bank that specializes in risk management - by using appropriate instruments of collateral. processes in order to tackle the challenges on the individual risks. The Executive Board is responsible Risk Division. market and provide compliance with changes in local for implementing strategies and policies for risk By analyzing the individual debtors of the Bank and legislation and demands of Societe Generale Group. their business activities as well as macroeconomic management, as well as for the strategy for managing Credit Risk capital. The Executive Board is in charge of adopting trends Risk Division provides guidance to Key goals in risk management are related to management of the Bank to direct the business procedures for the identification, measurement, Credit risk is the risk that the Bank will incur a loss protection and optimization of the structure of capital, activities towards customers, markets and products assessment and risk management. It also reports to because its borrowers will not be able to fully or as well as increase of its economic value. whose risk profile is acceptable to the Bank. the Board of Directors on the adequacy of the risk partially fulfill its obligations according to contractually In its operations the Bank is primarily exposed to management process. defined deadlines. Credit risk mainly originates from the following risks: credit risk, exposure to a single loans disbursed to clients of the Bank and similar Collateral Policy In order to create an adequate framework for risk entity or group of related entities (concentration exposures. management, the Bank defines and updates the risk risk), liquidity risk, interest rate risk, market risks and The Bank seeks to secure all its placements with management strategy. Main aspects of the strategy operational risk. appropriate collateral. By using collaterals the Bank are Risk Appetite Framework and Risk Appetite Credit Risk Management reduces exposure to credit risk. The Bank pays Statement. These documents define the level of special attention to marketability and adequate The Bank manages its credit risk exposure on the the risk that the Bank is willing to accept in order appraisal of the collateral value as well as constant level of individual counterparties as well as on the to reach its long-term strategic business goals. The analysis of the collateral instruments. level of its portfolio.

34 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 35 10 10

Impairment and Provisioning Policy After first time implementation of IFRS 9 standard on January 1st, 2018, the Bank continued with the Under impaired loans the Bank includes all exposures improvements of impairment calculation methodology for which it was determined that in total or partially for non-performing exposures as well as estimation of cannot be collected due to significant deterioration in credit losses for sound portfolio. the financial condition of the debtor. The mentioned improvements led to decrease of With its procedures, the Bank has provided adequate non-performing loans during 2018. Participation of identification and measurement of the amount of non-performing loans in total portfolio of the Bank impairment of receivables that are accounting- as of end of 2018 was at the level of 5.65%1, which wise covered through the allowance for impairment is lower compared to the average indicator on the of balance sheet assets and off-balance sheet banking sector of 6.1%2. provisions. Conservative policy of credit risk management Allowance for impairment of balance sheet assets provides a sound basis for further development of the and off-balance sheet provisions are determined business model and obtaining positive results in the based on available historical data on losses arising future. This is further supported by the appropriate from placements with similar characteristics in terms capital base with the capital adequacy ratio at the end of credit risk, as well as on the basis of individual of 2018 of 18.66% which is well above the minimum assessments of debt collection from defaulted clients. regulatory requirements.

Credit Risk Management Achievements On annual level the Bank carries out internal capital adequacy process (ICAAP) which in course of In macroeconomic environment characterized by 2018 has confirmed good level of capital adequacy modest economic growth, the Bank has continued and resilience to various risks even in stressed with significant improvements in its risk management circumstances. processes, in order to prevent potential negative In 2019 the Bank will continue to improve its Risk consequences for its business. Bank adopted Appetite Framework and Risk Appetite Statement to operational plan for management of bad assets and guarantee the stability of the Bank and its successful continued with the improvements in collection of performance. non-performing loans by active implementation of the strategy for sale of problematic exposures as well as Detailed overview and analysis of the process of realization of collateral instruments, which affected credit risk management is given in the notes to significant decrease in the level of non-performing financial statements for 2018. exposures. Continuation of the accounting write- off process established by the NBS decision from 2017 additionally reduced problematic receivables throughout 2018. 1 NPL ratio of 5.65% is related to total portfolio including exposures to financial sector and government sector. 2 Source of data Report of the National Bank of Serbia “Macroeconomic Developments in Serbia”, January 2019, page 28. Gross NPL ratio is related to November 2018 data.

36 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 37 10 10

Operational Risk Operational risk is inherent to all products, activities, Internal Audit In accordance with the Law on Banks, the Bank has procedures and systems of the Bank. Dealing with established an independent organizational unit – Operational risk is a risk of negative effect on operational risk is an integral part of management Through performance of planned audit missions and Compliance unit in charge of identifying, monitoring financial result and capital of the Bank due to positions at all levels. It is based on part of internal special engagements / investigations, Internal Audit and managing compliance risk. failures (intentional or non-intentional) in the work of control system, which notably includes the Managerial assesses adequacy and reliability of Bank’s internal employees, inappropriate procedures and processes, Supervision carried out at all levels and the periodic control system and compliance of its business In order to perform tasks within its scope, Compliance inadequate management of IT and other systems in controls performed through audits. This system operations. The Internal Audit communicates the unit monitors compliance of Bank’s internal acts with the Bank, as well as unforeseeable external events, in implies that operational risk shall be considered a risk results of its work to the Bank’s management, thus the regulations, in particular those relating to the particular including events that are unlikely to occur category in its own right and thus subject to special ensuring that risks are appropriately identified and protection of client’s interests, adequate informing but that might entail great losses, risks of internal and detection and assessment, monitoring and control controlled. The Internal Audit regularly prepares and notification of clients, protection of personal data external frauds and risks related to models. With the methods, all contributing to the development of reports on its activities and submits them to the Board and banking secrecy, identification and assessment of exception of strategic risk, operational risk includes appropriate risk mitigation measures, and possibility of Directors and the Audit Committee. clients, customer complaints management, sales and legal risk, compliance risk and reputation risk, in to determine the Bank’s overall risk profile. To be marketing relations, market integrity, market abuse accordance with SG Group standards. effective, management of operational risk needs Compliance risk and insider dealing, respect of code of conduct, risk the settlement of an adapted governance, leaded of conflict of interest, risk of bribery and corruption, For the purpose of successful operational risk particularly through Operational Risk Committee and Compliance risk arises as a result of Bank’s failure use of internal whistleblowing rights and other management, Societe Generale Banka Srbija a.d. the mentioned implemented internal controls, as well to harmonize its activities with the laws, by-laws, regulatory areas in accordance with the adopted Beograd has implemented permanent system of as appropriate organisation structure, cornerstone bank’s internal acts, as well as with professional compliance program. identification, measurement, follow up and control/ being Permanent Control and Operational Risk unit standards, good business practices and business mitigation of operational risk. The unit conducts control in a manner that ensures ethics of the bank. that proposes policies, methodologies, plans and identification and management of existing and Operational risk management encompasses: procedures for operational risk management, and the The compliance function enables identification, potential compliance risks which are duly reported to deployment of appropriate tools (loss collection, RCSA  assessment and monitoring of the risk of non- the competent authorities of the Bank. Activities aiming to identify, monitor and measure etc). compliance of the bank’s operations that includes the operational risk: It strives to promote the highest compliance standards following three risk categories: - Internal loss collection For the purpose of calculation of capital requirement and raises employees’ awareness on the need to for operational risk the Bank uses Basic Indicator - Key Risk Indicators  Risk of regulatory sanctions operate in accordance with regulations, internal acts Approach in line with Decision on Capital Adequacy and good business practices. - Risk Control and Self Assessment  by Banks. Internal capital requirement for operational Risk of financial loss - Scenario Analysis risk is quantified using the special approach based on  Reputation risk - Operational risk assessment at expected losses and scenario analyses. implementation/modification of new products and outsourcing of certain activities Business Continuity Plan - Business Impact Analyses in case of interruption of activities To ensure continuity of its operation, the Bank adopted Business Continuity Plan, which ensures  Preventive activities: smooth and continuous functioning of all important - Managerial Supervision as a base for internal systems and processes of the bank, as well as control system limitation of losses in emergency situations. - Business Continuity planning which provides protection in case of interruption in business activities and extreme risks.

38 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 39 11 11 LIQUIDITY AND INTEREST RATE MANAGEMENT

Liquidity management represents a continuous (ALCO), which is primarily responsible for monitoring process of reviewing the need for liquidity in regular the Bank's exposure to the risks arising from the business situations ("business as usual"), but also structure of assets and liabilities of balance sheet management planning in unforeseen circumstances, and off-balance sheet items, as well as to propose, by providing an adequate level of liquid assets consider and adopt measures in order to mitigate based on an analysis of needs for liquidity, as well structural risks. as reviewing changes in the structure of the balance Within the liquidity management process, the Bank: sheet and off-balance sheet.

  The level of liquidity is expressed, inter alia, by the Liquidity is the ability of the bank to provide sufficient It continuously monitors and analyses all the Places short-term interbank deposits within Daily liquidity indicator which represents the ratio liquid assets to unconditionally satisfy all due liabilities factors that influence the Bank's liquidity position, defined limits,   of the sum of liquid assets of the first and second arising from balance sheet liabilities (withdrawal of Provides diversified sources of funding, It also has at its disposal frame credit lines class (cash, funds on accounts with other banks deposits and other sources of financing), balance  Provides optimum current daily liquidity by that can be used at any moment for liquidity with adequate credit rating, deposits with the sheet assets (financing of new placements), as well providing funds in sufficient amount and currency maintenance purposes, and National Bank of Serbia, receivables in the process as on off-balance sheet positions. structure (at the level of each currency) for the  It maintains the required level of obligatory dinar of execution, irrevocable credit lines approved to smooth settlement of liabilities, which includes and foreign currency reserves, in accordance with The assets and liability management department the Bank, financial instruments listed on the stock estimating the expected cash flows for a period of the regulations of the National Bank of Serbia. within the Finance sector is responsible for managing exchange and other Bank receivables that are due in 30 days, the liquidity of the bank. Daily and short-term liquidity The Bank manages liquidity in a way that ensures the up to one month) and sum of the liabilities without the  Reviews and monitors the long-term liquidity management for up to 90 days is delegated to the stability, diversification and flexibility of the funding agreed maturity date in the appropriate percentage position based on the projections of liquidity gaps, Dealer Department. Operational liquidity is managed sources. In the process of diversifying the sources of and liabilities with the agreed maturity within the i.e. monitoring the compliance of cash inflows with the aim of providing sufficient liquid assets in funding, in 2018, the Bank successfully worked to following month. each currency and performing unconditional and and outflows on the basis of balance sheet and preserve the stability of the deposit base of both retail The Bank is required to manage liquidity in a way to timely payment of all due liabilities, both in regular off-balance sheet items in the long run, and corporate, with further diversification in terms ensure that the liquidity indicator is: business conditions and in stressful circumstances.  Provides a liquidity reserve based on an analysis of maturity structure and cost reduction. The Bank The Assets and Liability Management Department is of the compliance of maturity of the balance also achieves diversification of funding sources by  At least 1.0 when calculated as the average of responsible for assessing the liquidity position over sheet positions and in such a way as to ensure contracting loan arrangements with the International liquidity indicators for all working days of the a longer period that arises from the overall balance the marketability of the receivables and assets in Financial Institutions and credit lines with the parent month sheet structure of the Bank. The Assets and Liabilities a short term if needed, bank, as well as using all available capacities of the  It shall not be less than 0.9 for more than 3 Management Department reports on a regular basis  Maintains a portfolio of liquid securities of the interbank money market. consecutive working days to the Assets and Liabilities Management Committee highest credit rating (securities issued by the NBS  At least 0.8 when calculated for one business day or the state of Serbia),

40 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 41 11 11

The daily indicator of the level of liquidity during 2018 Bank also assesses the cash flows and the adequacy was always within the prescribed limit (not less than of liquidity reserves in the event of occurrence of 1) and it is presented in the following table: unforeseen, unfavorable events, i.e. develops a scenario analysis and performs stress testing in Pokazatelj nivoa likvidnosti 2018 2017 accordance with the Liquidity Continuity Management Average during the period 1.67 1.59 Plan as well as the Recovery Plan. Highest 2.26 1.94 Lowest 1.42 1.35 On 31st of December 1.51 1.58 Interest Rates Risk Interest rate risk is defined as the risk of possible In addition to the above mentioned, the Bank negative effects on the financial result and capital calculates and monitors the narrow liquidity ratio of the Bank due to unfavorable trends in the interest prescribed by the National Bank of Serbia, which was rates market. The main types of interest rate risk are: also in compliance with the defined limits in 2018. the risk of maturity time mismatch (for items of assets The Bank also calculates the Liquidity Coverage Ratio and liabilities related to a fixed, invariable interest (LCR), which aims to strengthen resilience of the rate) and re-determination of prices (for items related banks to short-term shocks, or liquidity disturbances to variable interest rate), yield curve risk, base risk on the market. The Liquidity Coverage Ratio (LCR) is and embedded options risk, i.e. optionality risk. a measure of the bank’s ability to provide sufficient The process of managing the interest rate change risk liquid assets in order to fulfil all outstanding liabilities is done through monitoring, identifying, measuring under the assumed conditions of stress. The Liquidity and mitigating the effects that adverse interest rate Coverage Ratio (LCR) during 2018 was above the movements can have to the financial result and prescribed limit of 100%. capital of the bank. Measurement of the impact of Long-term or structural liquidity is monitored by the interest rate risk to the Bank’s financial result can analizing the structure of balance sheet and off- be made by calculating changes in the net interest balance sheet items, as well as by projecting cash margin in certain scenarios of future trends of market flows and liquidity gaps, especially for each of the interest rates (NIM sensitivity analysis), while the significant currencies. The projection of liquidity gaps measurement of the impact of the interest rate risk is carried out on the basis of agreed maturity dates to the Bank’s capital is monitored by monitoring the and depreciation plans, but taking into account both change in the economic value of capital in the event behavioral assumptions and modelling of cash flows of a change of interest rates (EVE sensitivity analysis). for items with no agreed maturity (current accounts, A In order to adequately manage the interest rate risk, Vista savings and the like). the Bank has established limits that are monitored on For the purpose of comprehensive monitoring of a regular basis. Compliance with the limits is regularly liquidity risk exposure, the Bank has established an reported to the relevant boards (Assets and Liabilities early warning indicators system for the purpose of Management Board of the Bank). timely identification of a potential liquidity crisis. The

42 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 43 12 12 CAPITAL MANAGEMENT AND CAPITAL ADEQUACY RATIO

The main strategic goal of the Bank in terms of The central role in the capital management process capital management is the effort to use available is the management of the Bank - the Assembly, capital resources economically and in accordance Board of Directors and the Executive Board. It is the with the defined business development prospects responsibility of the Bank’s Assembly to decide on of the Bank. The Bank’s capital management policy all capital increases, as well as the adoption of the priority is to cover the potential losses of the Bank, the Bank’s business policy and strategy, which defines resulting negative effects arising from risk exposure, the input data for the Bank’s capital planning for the in relation to yield performance. In the process of next business year. capital management, the focus is on continuous monitoring of capital adequacy. The Bank’s capital It is within the competence of the Bank’s Board of level that is considered as adequate is the level of Directors to establish a strategy for risk management capital that ensures the implementation of the Bank’s and risk supervision that the bank takes over as part strategy and business policy, and at the same time of its business activities, which affect the level of the provides cover for all risks that the bank is exposed to Bank’s capital adequacy, as well as the strategy for in its operations. managing the Bank’s capital.

Capital management is based on: Within the function of the Bank’s strategic risk management, the Executive Board of the Bank  The process of the risk identification, proposes the business policy and strategy of measurement and assessment the Bank, capital management strategy and risk

 Ensuring an adequate level of capital in management strategy and policies to the Board of accordance with the risks that the Bank is Directors, implement all these policies and strategies, exposed to in its operations and adopt procedures to identify, measure, and assess the risks to which the Bank is exposed in its  Adequate incorporation of capital management operations, which affect the adequacy of the Bank’s into the bank’s management and decision-making capital and hence the future business decision. System

 Regular analyzes, monitoring and verification of Within the process of capital management, the the capital management process of the bank. competence of the Executive Board of the Bank is to

44 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 45 12 12

incorporate the planning of capital into all business balance sheet assets and off-balance sheet items of In 2018 the level of capital and the indicator of adequacy had the following trend: decisions and procedures related to business the Bank as deductible item. planning, timely inform the Board of Directors of the In 000 RSD MAR 2018 JUN 2018 SEP 2018 DEC 2018 Tier 2 capital consists of subordinated liabilities that needs for capital and enable adequate reporting Total capital 37,866,686 37,544,257 38,373,127 44,211,714 are included in the supplementary capital of the of the bank’s external supervisory authorities on Tier 1 capital 33,954,006 33,936,276 35,052,756 34,694,654 Bank in accordance with the valid Decision on capital the level of capital adequacy. Considering that the Cpmmon equity Tier 1 capital 33,954,006 33,936,276 35,052,756 34,694,654 adequacy. In accordance with the valid Decision on Bank’s capital management is in high correlation Share capital 23,724,274 23,724,274 23,724,274 23,724,274 capital adequacy, the Bank is obliged to calculate the Retained earnings 9,893,347 9,893,347 11,078,074 11,078,074 with the risk profile of the Bank, in addition to the following indicators: Revalorization reserves 1,146,420 1,171,256 1,097,130 926,803 Bank’s organizational parts belonging to the standard Intangible assets -764,315 -805,383 -800,562 -987,784 management hierarchy, the Bank has established a  the Bank’s basic Common Equity Tier 1 capital Deffered taxes number of committees in charge of monitoring the adequacy ratio which is equal to the ratio of the Other CET 1 regulatory adjustements -45,720 -47,218 -46,160 -46,712 exposure to existing risks, as well as planning and CET1 capital and the risk-weighted assets of the Addiotional Tier 1 capital 0 0 0 0 anticipating the potential exposure to new types of bank and cannot be below 4.5% Tier 2 capital 3,912,680 3,607,980 3,320,370 9,517,060 risks. Subordinated liabilities 3,912,680 3,607,980 3,320,370 9,517,060  the Bank’s Tier 1 capital adequacy ratio that is Total risk weighted assets 201,449,681 213,095,755 221,304,574 236,960,182 equal to the ratio of the Tier 1 capital and risk- Total risk weighted assets for credit risk 173,199,098 183,613,025 192,465,816 205,525,320 Capital of the Bank in 2018 weighted assets of the bank and cannot be below Total risk weighted assets for market risk 3,851,546 5,083,518 4,459,545 5,364,013 6% The total capital of the Bank consists of Common Total risk weighted assets for operational risk 24,314,663 24,314,663 24,314,663 25,943,474 Equity Tier 1 capital, additional Tier 1 capital and Tier  The Bank’s total capital adequacy ratio, which Total risk weighted assets for CVA risk 84,375 84,550 64,550 127,375 2 capital. is equal to the ratio of the total capital and risk Total capital adequacy ratio 8% 18.80% 17.62% 17.34% 18.66% weighted assets of the bank, and cannot be below Tier 1 capital adequacy ratio 6% 16.85% 15.93% 15.84% 14.64% The Tier 1 capital of Bank consists of: share 8%. CET 1 capital adequacy ratio 4.5% 16.85% 15.93% 15.84% 14.64% capital based on ordinary shares, share premium, revalorization reserves, profit reserves, regulatory The Bank’s risk assets represent the sum of the During 2018, the Bank maintained the level of capital adequacy in regulatory frameworks. adjustments of the Bank’s basic share capital total amount of risk-weighted exposure to loan risk, During 2018, there was no need for recapitalization in the form of a new issue of shares. elements value, intangible investments, deferred tax counterparty risk, and price risk for trading book assets that are dependent on the future profitability activities, foreign exchange risk, and risk of adjusting of the Bank, other than those arising from temporary loan exposure for all business activities of the bank differences, decreased for deferred tax liabilities and and for operational risk. required reserves from profit for assessed losses on

46 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 47 13 13 FINANCIAL INDICATORS

1. Income statement

RSD 000 2018 2017 VAR 18/17 NET BANKING INCOME 15,248,906 13,397,996 13.8% Interest income 14,466,618 13,202,035 9.6% Interest expenses (2,623,576) (2,524,833) 3.9% Net interest income 11,843,042 10,677,202 10.9% Fees and commissions income 5,589,275 4,725,435 18.3% Fees and commissions expense (2,516,899) (2,199,244) 14.4% Net fees and commissions income 3,072,376 2,526,191 21.6% Net gains (losses) on change in fair value of financial instruments 268,369 (710,172) Net (losses)/gains on derecognition of the financial instruments recognized (7,326) 48,417 at fair value Net banking income of the bank reached RSD At the end of 2018, total operating expenses Net exchange rate gains (losses) and gains (losses) from agreed currency 15.2 billion (EUR 128.9 million), which is 13.8% amounted to RSD 7.2 billion (EUR 60.7 million), (308,754) 605,387 clause more than in the previous year. Despite the low which is above the level of 2017 by 5.3%, primarily Other operating incomes 48,604 72,449 -32.9% interest rate environment, net interest income has due to the increase of information system investment Other incomes 332,595 178,522 86.3% increased, largely due to increase in interest income expenses (25.6%) and deposits insurance costs OPERATING EXPENSES (7,185,051) (6,821,585) 5.3% (9.6%), due to ongoing organic growth in retail and (10.6%) which follows the deposits increase, while Salaries, wages and other personal expenses (3,493,469) (3,373,381) 3.6% corporate placements, as well as positive effect the costs of salaries, wages and other personal Depreciation expenses (518,608) (492,751) 5.2% from the takeover of the retail loan portfolio at the expenses are kept at a stable level with slight Other expenses (3,172,974) (2,955,453) 7.4% end of 2017. On the other hand, interest expenses increase of 3.6%. GROSS OPERATING INCOME 8,063,855 6,576,411 22.6% remained under control and had a slight increase Net gain from reduction in impairment of financial assets not measured at fair 212,741 2,291,557 In 2018, the bank made income of RSD 8.2 billion value through income statement of 3.9% despite the increase on the deposit level of (EUR 69 million), which is 35.2 % more compared Net gains (loss) from derecognition of the financial instruments measured at 8.3%. Also, there was a significant increase in net 983,749 (2,144,723) to 2017 level, primarily due to excellent commercial amortised cost income from fees and commissions by 21.6%, which performance followed by cost controlling, as well PROFIT / LOSS BEFORE TAXES 9,260,345 6,723,245 37.7% comes from a significant increase in net income as significant positive effect of the net cost of the Income tax (1,094,597) (482,507) on the basis of buying and selling foreign currency risk arising from the improved quality of the loans Loss from deferred taxes (9,894) (210,001) (22%), an increase in the net income of card business portfolio and the activities of solving the portfolio with PROFIT / LOSS AFTER TAXES 8,155,854 6,030,737 35.2% fees (41%) and net income of payments based on problematic loans. payment transactions (10%).

48 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 49 13 13

2. Balance sheet The balance sum increased for 9.8% to RSD 316 In the corporate sector, the level of placements at billion (EUR 2.7 billion) in 2018 from RSD 288 billion the end of 2018 amounted to RSD 115 billion (EUR Assets in RSD 000 31.12.2018. 31.12.2017. VAR 18/17 (RSD 2.4 billion) at the end of 2017. 974 million), which is 16.4% more than in 2017, due Cash and assets with the central bank 29,741,936 30,596,131 -2.8% to the continuation of dynamic growth in the segment At the end of 2018, the amount of loans to Receivables under derivatives 137,598 68,929 of medium-sized enterprises (+22%), while the level customers reached RSD 225.6 billion (EUR 1.9 Securities 46,457,254 38,900,806 19.4% of loans in the segment of large business entities billion), which is an increase of 10.1% compared to Loans and receivables from banks and other financial organizations 8,250,178 7,677,050 7.5% remained stable, however with a change in the loans the previous year. As in previous years, the retail Loans and receivables from customers 225,649,641 204,950,242 10.1% structure where the healthy loan portfolio increased Retail 110,479,921 105,990,373 4.2% business segment has recorded portfolio growth by 10.6% and problematic loans significantly Corporate 115,169,720 98,959,869 16.4% by 4.2% in 2018 to RSD 110 billion (EUR 935 decreased. Investments in associated companies and joint ventures 149,650 149,649 0.0% million), which is the result of growth in the segment Investments into subsidiaries 314,098 314,098 0.0% for cash and mortgage loans and in the small Total deposits at the end of 2018 reached the level Intangible investments 987,784 774,907 27.5% business segment during the year, thus consolidating of RSD 179.1 billion or EUR 1.5 billion (+8.3% Property, plant and equipment 2,880,004 2,940,065 -2.0% the position of the second largest bank in retail compared to 2017). The retail deposits at the end Investments immovable 38,705 43,000 -10.0% banking in Serbia. of 2018 reached the level of RSD 71.4 billion (EUR Current tax assets Deferred tax assets 604 billion, +6.7% compared to 2017). The growth Other assets 1,480,486 1,572,925 -5.9% of corporate deposits continued in 2018, reaching Total Assets 316,087,334 287,987,802 9.8% RSD 107.7 billion (EUR 912 million), which is +9.3% Liabilities 31.12.2018. 31.12.2017. VAR 18/17 compared to 2017. Liabilities under derivatives 117,356 42,272 177.6% Deposits and other liabilities to banks, other financial organizations and central 70,704,135 66,422,674 6.4% bank Deposits and other financial liabilities to other customers 179,130,096 165,425,303 8.3% Retail 71,385,950 66,875,805 6.7% Corporate 107,744,146 98,549,498 9.3% Subordinated liabilities 15,389,344 8,889,583 73.1% Provisions 376,261 1,002,530 -62.5% Current tax liabilities 617,885 259,187 Deferred tax liabilities 79,345 39,357 Other liabilities 5,434,527 5,502,307 -1.2% Total Liabilities 271,848,949 247,583,213 9.8%

Capital Capital 31.12.2018. 31.12.2017. VAR 18/17 Share capital 23,724,274 23,724,274 0.0% Profit 8,435,243 6,030,737 39.9% Loss Reserves 12,078,868 10,649,578 13.4% Total Capital 44,238,385 40,404,589 9.5% Total Liabilities 316,087,334 287,987,802 9.8%

50 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 51 14 14 EXPECTED FUTURE DEVELOPMENT

After the growth of the economy of 4.3% in 2018,  Further growth of the number of clients, with a with the positive contribution of all production and focus on improving understanding of their needs service sectors, in 2019, as in the coming years, a and fostering long-term cooperation with them continuation of faster economic growth is expected, with the support of further growth of private and  Further growth of retail and small business public investments as well as recovery of spending, placements with the focus on digital with the implementation of public sector reform communication channels in order to increase and with continuation of the process of harmonizing efficiency and customer satisfaction the regulatory framework with EU standards and  With proactive approach and focus on better frameworks, as well as more favourable trends in understanding of client needs, growth of the labour market (reducing unemployment and placements in the corporate banking segment wage growth). Bearing in mind such macroeconomic environment, the Bank expects further growth of  Continuation of the focus on maintaining a stable client base and placements to clients, both in the level of expenditures and directing expenditures retail sector and business sector, and its goals for towards projects/activities that will lead to future development are defined as follows: improvement of operational efficiency

 Adequate management of limited resources in the long run (sources of funding, risk of weighted credit assets, and equity)

 Responsible risk management

 Human resources development, as well as talent management

52 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 53 Annual report of Societe Generale banka Srbija a.d. Beograd for the year that ended on December 31, 2018 is approved by the management of the Bank on June 21st, 2019.

Vladimir Pejčić Branimir Spasić Sonja Miladinovski Maria Rousseva Accounting Department Executive Director of Finance Executive Board Member President of the Manager Executive Board

54 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE