ADDIKO BANK A.D. BEOGRAD Financial Statements 31 December

ADDIKO BANK A.D. BEOGRAD

Financial Statements 31 December 2020 Independent Auditors’ Report

ADDIKO BANK A.D. BEOGRAD

CONTENTS Page

Independent Auditors’ Report 1 – 3

Financial Statements:

Statement of Financial Position 4

Income Statement 5

Statement of Other Comprehensive Income 6

Statement of Changes in Equity 7

Statement of Cash Flows 8

Notes to the Financial Statements 9 – 123

Appendix: Annual Report

Deloitte d.o.o. Beograd Terazije 8 11000 Belgrade Republic of Serbia

Tax Identification Number: 100048772 Registration Number: 07770413 ADDIKO BANK A.D. BEOGRAD Tel: +381 (0)11 3812 100 Fax: +381 (0)11 3812 112

www.deloitte.com/rs

INDEPENDENT AUDITOR’S REPORT

To the Shareholders of ADDIKO BANKA A.D. BEOGRAD CONTENTS Page Opinion Independent Auditors’ Report 1 – 3 We have audited the financial statements of ADDIKO banka a.d. Beograd (hereinafter: the “Bank”), which Financial Statements: comprise the statement of financial position as at December 31, 2020, and the income statement, statement of other comprehensive income, statement of changes in equity and statement of cash flows for the year then Statement of Financial Position 4 ended, and notes to the financial statements, including a summary of significant accounting policies. Income Statement 5 In our opinion, the accompanying financial statements present fairly, in all material respects the financial Statement of Other Comprehensive Income 6 position of the Bank as at December 31, 2020 and of its financial performance and its cash flows for the year then ended in accordance with the International Financial Reporting Standards. Statement of Changes in Equity 7

Statement of Cash Flows 8 Basis for Opinion

Notes to the Financial Statements 9 – 123 We conducted our audit in accordance with the standards on auditing applicable in the Republic of Serbia. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Appendix: Annual Report Financial Statements section of our report. We are independent of the Bank in accordance with the International

Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in the Republic of Serbia, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Other Information

Management is responsible for the other information. The other information comprises the information included in the Bank’s Annual Business Report other than the financial statements and the auditor’s report thereon. Our opinion on the financial statements does not cover the other information.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. With regard to the Annual Business Report, we have performed procedures prescribed by the Law on Accounting of the Republic of Serbia. Those procedures include verifying whether the Annual Business Report is formally prepared in accordance with the Law on Accounting of the Republic of Serbia.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/rs/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

INDEPENDENT AUDITOR’S REPORT

To te Sreolders o ADDIO ANA AD EORAD ontinued

Oter Inortion ontinued

Based on the procedures performed to the etent e are able to assess this e report that

. The information presented in the Bank’s Annual Business Report for is consistent in all material respects ith the accompanin financial statements for the ear ended ecember .

. he accompanin Annual Business Report for is prepared in accordance ith the a on Accountin of the Republic of erbia.

Based on our knolede and understandin of the Bank and its enironment acuired durin our audit e hae not determined that there is an material misstatement in the Annual Business Report.

Responsibilities o neent nd Tose red it oernne or te innil Stteents

anaement is responsible for the preparation and fair presentation of the financial statements in accordance ith the nternational inancial Reportin tandards and for such internal control as manaement determines is necessar to enable the preparation of financial statements that are free from material misstatement hether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Bank’s ability to continue as a oin concern disclosin as applicable matters related to oin concern and usin the oin concern basis of accountin unless manaement either intends to liuidate the Bank or to cease operations or has no realistic alternatie but to do so.

Those charged with governance are responsible for overseeing the Bank’s financial reporting process.

Auditor’s Responsibilities or te Audit o te innil Stteents

Our obecties are to obtain reasonable assurance about hether the financial statements as a hole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a hih leel of assurance but is not a uarantee that an audit conducted in accordance ith standards of auditin applicable in Republic of erbia ill alas detect a material misstatement hen it eists. isstatements can arise from fraud or error and are considered material if indiiduall or in the areate the could reasonabl be epected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance ith tandards of Auditin applicable in erbia e eercise professional udment and maintain professional skepticism throuhout the audit. e also

 dentif and assess the risks of material misstatement of the financial statements hether due to fraud or error desin and perform audit procedures responsie to those risks and obtain audit eidence that is sufficient and appropriate to proide a basis for our opinion. he risk of not detectin a material misstatement resultin from fraud is hiher than for one resultin from error as fraud ma inole collusion forer intentional omissions misrepresentations or the oerride of internal control.

 Obtain an understandin of internal control releant to the audit in order to desin audit procedures that are appropriate in the circumstances but not for the purpose of epressin an opinion on the effectiveness of the Bank’s internal control.

INDEPENDENT AUDITOR’S REPORT INDEPENDENT AUDITOR’S REPORT

To te Sreolders o ADDIO ANA AD EORAD ontinued To the Shareholders of ADDIO ANA AD EORAD ontinued

Oter Inortion ontinued Auditor’s Responsibilities for the Audit of the Financial Statements ontinued

Based on the procedures performed to the etent e are able to assess this e report that  valuate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. . The information presented in the Bank’s Annual Business Report for is consistent in all material respects ith the accompanin financial statements for the ear ended ecember .  Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty eists related to events or . he accompanin Annual Business Report for is prepared in accordance ith the a on conditions that may cast significant doubt on the Bank’s ability to continue as a going concern. If we Accountin of the Republic of erbia. conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadeuate, to modify our Based on our knolede and understandin of the Bank and its enironment acuired durin our audit e hae opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. not determined that there is an material misstatement in the Annual Business Report. owever, future events or conditions may cause the Bank to cease to continue as a going concern.

Responsibilities o neent nd Tose red it oernne or te innil Stteents  valuate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a anaement is responsible for the preparation and fair presentation of the financial statements in accordance manner that achieves fair presentation. ith the nternational inancial Reportin tandards and for such internal control as manaement determines is necessar to enable the preparation of financial statements that are free from material misstatement e communicate with those charged with governance regarding, among other matters, the planned scope and hether due to fraud or error. timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. In preparing the financial statements, management is responsible for assessing the Bank’s ability to continue as a oin concern disclosin as applicable matters related to oin concern and usin the oin concern basis of accountin unless manaement either intends to liuidate the Bank or to cease operations or has no realistic Belgrade, arch , alternatie but to do so.

Those charged with governance are responsible for overseeing the Bank’s financial reporting process.

Auditor’s Responsibilities or te Audit o te innil Stteents

Our obecties are to obtain reasonable assurance about hether the financial statements as a hole are free livera Andriasević from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our ertified Auditor opinion. Reasonable assurance is a hih leel of assurance but is not a uarantee that an audit conducted in and on behalf of eloitte d.o.o., Beograd accordance ith standards of auditin applicable in Republic of erbia ill alas detect a material misstatement hen it eists. isstatements can arise from fraud or error and are considered material if indiiduall or in the areate the could reasonabl be epected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance ith tandards of Auditin applicable in erbia e eercise professional udment and maintain professional skepticism throuhout the audit. e also

2 3

1. GENERAL INFORMATION ABOUT THE BANK

Based on the license issued by the National Bank of Yugoslavia no. O 38 dated 27 February 1991 and the Decision on the Establish- ment of Depozitno-kreditna banka d.d. Beograd no. 1/5 dated 14 May 1991, Depozitno-kreditna banka a.d. Beograd, Novi Beograd, Goce Delčeva 44, was registered with the District Commercial Court of Belgrade, under Decision no. Fi-5709/91 dated 22 May 1991 (registry card no. 1-18332-00).

For harmonization of the Bank’s bylaws and enactments with the Law on Banks and Other Financial Organizations (Official Gazette of FRY No. 32/93) the founders of Depozitno-kreditna banka a.d. Beograd executed the Articles of Association of Depozitno - kreditna banka a.d. Beograd no. 563 dated 20 April 1995.

Under the Decision of the Commercial Court in Belgrade No. XII-Fi. 10865/02 dated 27 September 2002, based on the share sale and purchase transaction performed with the existing shareholders of Depozitno-kreditna banka a.d. Beograd, the majority ownership of Hypo Alpe-Adria-Bank AG Klagenfurt over the Bank was registered, while the Bank’s name was changed to Hypo Alpe- Adria-Bank a.d. Beograd and the change registered under the same Court’s Decision no IX Fi. 12210/02 dated 28 October 2002.

Upon takeover of shares of Hypo Alpe-Adria-Bank a.d. Beograd by Hypo Alpe-Adria-Bank International AG Klagenfurt approved under the Decision of the Securities Commission No. 4/0-32-3303/4-10 dated 14 July 2010, and the realisation of the procedure of enforced (squeeze-out) sale of shares, fully in line with the Law, Hypo Alpe-Adria-Bank a.d. Beograd had two shareholders: Hypo Alpe-Adria-Bank International AG Klagenfurt and Industrija kotrljajućih ležaja a.d. Beograd (subsequently: Industrija kotrljajućih ležaja a.d. Beograd – in bankruptcy).

At its session held on 24 March 2011, the Shareholder Assembly of Hypo Alpe-Adria-Bank a.d. Beograd enacted the Decision on Amendments and Supplements to the Articles of Association of Hypo Alpe-Adria-Bank a.d. Beograd No. 08461/11, whereby the Bank changed its organisational form and became a closed shareholding company. This change of legal form was registered with the Serbian Business Registers Agency under Decision No. BD 39396/11 dated 5 April 2011.

Pursuant to the National Bank of Serbia’s Decision no. 10407 dated 22 November 2013 on the issue of prior approval to the acquirer Hypo SEE Holding AG for the acquisition of direct ownership, vesting it with 99.999% of voting rights in Hypo Alpe Adria-Bank a.d. Beograd, on 27 March 2014, in the Central Securities Depository and Clearing House, the shares of the issuer Hypo Alpe-Adria- Bank a.d. Beograd were transferred from the account of Hypo Alpe-Adria-Bank International AG Klagenfurt to the account of the acquirer Hypo SEE Holding AG Klagenfurt, corporate ID No. FN 350921, Alpen-Adria-Platz 1, Klagenfurt.

On 30 October 2014 Hypo SEE Holding AG changed its name to Hypo Group Alpe Adria AG. The sole (100%) owner of Hypo Group Alpe Adria AG Klagenfurt became Al Lake Luxembourg S.A.R.L. registered with the Commercial Entity Register of Luxembourg under No. B191802, at the address of 47 Grand Rue, L-1661 Luxembourg.

Al Lake Luxembourg S.A.R.L. was, at the acquisition date, owned by Al Lake Management S.A.R.L., Luxembourg. Owners of Al Lake Management S.A.R.L., Luxembourg were funds managed by Advent International Corporation domiciled in the United States of America-Boston and by the European Bank for Reconstruction and Development (EBRD).

On 8 July 2016, under Decision of the Commercial Court in Vienna no. FN 350921k, Hypo Group Alpe Adria AG (HGAA) changed its legal name to Addiko Bank AG (ABH), headquartered at the address of Wipplingerstrasse 34/4 Vienna, Austria.

On 8 July 2016, under Decision of the Serbian Business Registers Agency no. BD 55080/2016, Hypo Alpe-Adria-Bank a.d. Beograd changed its legal name to Addiko Bank a.d. Beograd (the Bank).

Since 12 July 2019, Addiko Bank AG has been listed in the Vienna Stock Exchange. The ownership structure is presented solely at https://www.addiko.com/shareholder-structure/.

Addiko Bank AG publishes its consolidated financial statements on web page www.addiko.com.

Throughout 2020, the Bank operated via its Head Office and 36 branch offices. 1. GENERAL INFORMATION ABOUT THE BANK (Continued)

The Bank performs the following activities:

1. Deposit activities,

2. Credit (lending activities)

3. Foreign exchange operations and exchange transactions,

4. Payment transactions,

5. Issuing payment cards,

6. Activities involving securities in accordance with the effective regulations,

7. Issuance of guarantees, acceptances and other types of sureties (guarantee operations),

8. Purchase, sale and collection of receivables (factoring and forfeiting)

9. Insurance agency activities upon obtaining approval of the National Bank of Serbia,

10. Technical and financial control of construction and reconstruction of facilities relating project financing,

11. Valuation of real estate by certified appraisers for the purposes of the Bank and its clients related to the loans extended, and

12. Provision of services to other members of the Group and other entities in the areas related to the Bank’s business activities.

The Bank’s organisational units are not legal entities and have no independent transaction accounts but operate via the Bank’s unique account. They are entitled to the execution of contracts within their scope of operations and within authorisations granted to them by the Bank’s relevant bylaws.

As at 31 December 2020, the Bank had 532 employees (as at 31 December 2019, the Bank had 558 employees).

The Bank’s activity code is 6419 – other monetary intermediation.

The Bank’s corporate ID number is 07726716.

The Bank’s tax ID number is 100228215.

Boards and management of the Bank

From 1st of January to 31st of December 2020

Board of Directors Markus Krause, Chairman of the Board of Directors Henning Giesecke, Deputy Chairman of the Board of Directors Željko Djukanović, Member of the Board of Directors Marija Desivojević Cvetković, Member of the Board of Directors Dragan Lončar, appointed under the Decesion of the Bank’s Assembly dated 30 December 2020, while Dragan Djuričin was relieved of duty as Member of the Board of Directors.

Executive Board Vojislav Lazarević, Chairman of the Executive Board Mirko Španović, Deputy Chairman of the Executive Board Vladimir Stanisavljević, Member of the Executive Board Nebojša Pantelić – relieved of duty as Member of the Executive Board under the Deciosn of the Executive Board, due to expiration of his term of office on 14 September2020.

Audit Commitee Henning Giesecke, Chairman of the Audit Committee Markus Krause, Deputy of Cchairman of the Audit Committee Marlene Schellander Pinter, Member of the Audit Committee Dragan Lončar, appointed by the Decision of Board of Directors effective as of 30 December 2020, while Dragan Djuričin was relieved of duty as Member of the Audit Committee. 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS AND ACCOUNTING METHOD

2.1 Basis of Preparation and Presentation of the Financial Statements

The Bank’s stand-alone financial statements (hereinafter: the “financial statements”) for 2020 have been prepared in accordance with the International Financial Reporting Standards (IFRS) and regulations of the National Bank of Serbia governing financial reporting of banks.

Legal entities and entrepreneurs incorporated in Serbia are required to maintain their books of account, to recognise and value assets and liabilities, income and expenses, and to present, submit and disclose financial statements in conformity with the Law on Accounting (hereinafter referred to as the Law, Official Gazette of the Republic of Serbia Nos. 62/2013, 30/2018 and 73/2019). As a large legal entity, in accordance with the Law on Accounting, the Bank is required to apply the International Financial Re- porting Standards (IFRS), which as per the aforementioned law comprise the following: the Framework for the Preparation and Presentation of Financial Statements (the Framework), International Accounting Standards (IAS), International Financial Reporting Standards (IFRS), as well as the related interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and additional amendments to the standards and related interpretations issued by the International Accounting Standards Board (IASB), the translations of which to the Serbian language were approved and published by the competent Ministry of Finance. In addition, in accordance with the Amendments and Supplements to the Law on Banks (Official Gazette of the Republic of Serbia No. 14/2015), upon preparation of the annual financial statements, banks in the Republic of Serbia are obligated to apply the International Financial Reporting Standards, subsequent revisions and amendments thereto and related interpretations as from their issue date by the relevant international authority (IASB).

The accompanying financial statements are presented in the format prescribed under the Decision on the Forms and Contents of the Items in the Forms of the Financial Statements of Banks (RS Official Gazette no. 101/2017, 38/2018 and 103/2018).

These financial statements were prepared according to the historical cost principle, except for the measurement of the following significant balance sheet items:

• Financial assets measured at fair value through other comprehensive income - debt securities,

• Financial assets measured at fair value through profit or loss - derivatives.

Historical cost is based on the fair value of contributions initially paid in exchange for goods and services.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between the market participants at the measurement date under current market conditions regardless of whether that price is directly observable or estimated using other valuation techniques. Upon estimating the fair value of assets or liabilities, the Bank takes into account characteristics of assets or liabilities that other market participants would also consider upon determining the price of assets or liabilities at the measurement date. Fair value for measurement and/or disclosure purposes in the accompanying financial statements was determined in the aforesaid manner, except for leasing transactions, which were measured according to IFRS 16, and measurements that have some similarities to fair value but are not fair value, such as the net realisable value in IAS 2 or value in use in IAS 36.

In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

• Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

• Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

• Level 3 inputs are unobservable inputs for the asset or liability.

In the preparation of the accompanying financial statements, the Bank adhered to the accounting policies described in Note 3.

The Bank’s financial statements are stated in thousands of dinars. The dinar (RSD) is the official currency of the Republic of Serbia. 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS AND ACCOUNTING METHOD (Continued)

2.1 Basis of Preparation and Presentation of the Financial Statements (Continued)

Going Concern

The Bank’s financial statements have been prepared on a going concern basis, assuming that the Bank will continue to operate in the foreseeable future.

2.2. New Standards and Interpretations Effective for the Current Reporting Period

The following new amendments to existing standards issued by the International Accounting Standards Board (IASB) became effective in the current reporting period:

• Conceptual Framework for Financial Reporting The IASB issued the revised Conceptual Framework for Financial Reporting on 29 March 2018. The Conceptual Framework sets out a comprehensive set of concepts for financial reporting, standard setting, guidance for preparers in developing consistent accounting policies and assistance to others in their efforts to understand and interpret the standards. IASB also issued a separate accompanying document, Amendments to References to the Conceptual Framework in IFRS Standards, which sets out the amendments to affected standards in order to update references to the revised Conceptual Framework. Its objective is to support transition to the revised Conceptual Framework for companies that develop accounting policies using the Conceptual Framework when no IFRS Standard applies to a particular transaction. For preparers who develop accounting policies based on the Conceptual Framework, it is effective for annual periods beginning on or after 1 January 2020.

• IFRS 3: Business Combinations (Amendments) The IASB issued amendments in Definition of a Business (Amendments to IFRS 3) aimed at resolving the difficulties that arise when an entity determines whether it has acquired a business or a group of assets. The Amendments are effective for business combinations for which the acquisition date is in the first annual reporting period beginning on or after 1 January 2020 and to asset acquisitions that occur on or after the beginning of that period, with earlier application permitted.

• IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors: Defi- nition of ‘material’ (Amendments) The Amendments are effective for annual periods beginning on or after 1 January 2020 with earlier application permitted. The Amendments clarify the definition of material and how it should be applied. The new definition states that, ’Informa- tion is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity’. In addition, the explanations accompanying the definition have been improved. The Amendments also ensure that the definition of material is consistent across all IFRS Standards.

• Interest Rate Benchmark Reform - IFRS 9, IAS 39 and IFRS 7 (Amendments) In September 2019, the IASB issued amendments to IFRS 9, IAS 39 and IFRS 7, which concludes phase one of its work to respond to the effects of Interbank Offered Rates (IBOR) reform on financial reporting. The amendments published, deal with issues affecting financial reporting in the period before the replacement of an existing interest rate benchmark with an alternative interest rate and address the implications for specific hedge accounting requirements in IFRS 9 Financial Instruments and IAS 39 Financial Instruments: Recognition and Measurement, which require forward-looking analysis. The amendments provide temporary reliefs, applicable to all hedging relationships that are directly affected by the interest rate benchmark reform, which enable hedge accounting to continue during the period of uncertainty before the replacement of an existing interest rate benchmark with an alternative nearly risk-free interest rate. There are also amendments to IFRS 7 Financial Instruments: Disclosures regarding additional disclosures around uncertainty arising from the interest rate benchmark reform. The amendments are effective for annual periods beginning on or after 1 January 2020 and must be applied retrospectively. Phase two (ED) focuses on issues that could affect financial reporting when an existing interest rate benchmark is replaced with a risk-free interest rate (an RFR).

The adoption of the aforesaid new and amended standards did not result in significant changes of financial statements of the Bank. 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS AND ACCOUNTING METHOD (Continued)

2.3. New Standards and Amendments to the Existing Standards in Issue not yet effective

At the date of approval of these financial statements, the following new standards, amendments to the existing standards and new interpretations were in issue but not yet effective:

• Amendment in IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

The amendments address an acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28, in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognized when a transaction involves a business (whether it is housed in a subsidiary or not). A partial gain or loss is recognized when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. In December 2015 the IASB postponed the effective date of this amendment indefinitely pending the outcome of its research project on the equity method of accounting.

• IAS 1 Presentation of Financial Statements: Classification of Liabilities as Current or Non-current (Amendments)

The amendments are effective for annual reporting periods beginning on or after 1 January 2022 with earlier application permitted. However, the IASB has proposed deferral of the effective date by 1 January 2023. The amendments aim to promote consistency in applying the requirements by helping companies determine whether, in the statement of financial position, debt and other liabilities with an uncertain settlement date should be classified as current or non-current. The amendments affect the presentation of liabilities in the statement of financial position and do not change existing requirements around measurement or timing of recognition of any asset, liability, income or expenses, nor the information that entities disclose about those items. Also, the amendments clarify the classification requirements for debt which may be settled by the company issuing own equity instruments.

• IFRS 3 Business Combinations; IAS 16 Property, Plant and Equipment; IAS 37 Provisions, Contingent Liabilities and Contingent Assets as well as Annual Improvements 2018-2020 (Amendments)

The amendments are effective for annual periods beginning on or after 1 January 2022 with earlier application permitted. The IASB has issued narrow-scope amendments to the IFRS Standards as follows:

 IFRS 3 Business Combinations (Amendments) update a reference in IFRS 3 to the Conceptual Framework for Financial Reporting without changing the accounting requirements for business combinations.

 IAS 16 Property, Plant and Equipment (Amendments) prohibit a company from deducting from the cost of property, plant and equipment amounts received from selling items produced while the company is preparing the asset for its intended use. Instead, a company will recognise such sales proceeds and related cost in profit or loss.

 IAS 37 Provisions, Contingent Liabilities and Contingent Assets (Amendments) specify which costs a company includes in determining the cost of fulfilling a contract for the purpose of assessing whether a contract is onerous.

 Annual Improvements 2018-2020 make minor amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 9 Financial Instruments, IAS 41 Agriculture and the Illustrative Examples accompanying IFRS 16 Leases.

• IFRS 16 Leases-Cοvid 19 Related Rent Concessions (Amendment)

The amendment applies, retrospectively, to annual reporting periods beginning on or after 1 June 2020. Earlier application is permitted, including in financial statements not yet authorized for issue at 28 May 2020. IASB amended the standard to provide relief to lessees from applying IFRS 16 guidance on lease modification accounting for rent concessions arising as a direct consequence of the covid-19 pandemic. The amendment provides a practical expedient for the lessee to account for any change in lease payments resulting from the covid-19 related rent concession the same way it would account for the change under IFRS 16, if the change was not a lease modification, only if all of the following conditions are met:

 The change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change.

 Any reduction in lease payments affects only payments originally due on or before 30 June 2021.

 There is no substantive change to other terms and conditions of the lease. 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS AND ACCOUNTING METHOD (Continued)

2.3. New Standards and Amendments to the Existing Standards in Issue not yet Effective (Continued)

• Interest Rate Benchmark Reform – Phase 2 – IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 (Amendments)

In August 2020, the IASB published Interest Rate Benchmark Reform – Phase 2, Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16, completing its work in response to IBOR reform. The amendments provide temporary reliefs which address the financial reporting effects when an interbank offered rate (IBOR) is replaced with an alternative nearly risk-free interest rate (RFR). In particular, the amendments provide for a practical expedient when accounting for changes in the basis for determining the contractual cash flows of financial assets and liabilities, to require the effective interest rate to be adjusted, equivalent to a movement in a market rate of interest. Also, the amendments introduce reliefs from discontinuing hedge relationships including a temporary relief from having to meet the separately identifiable requirement when an RFR instrument is designated as a hedge of a risk component. Furthermore, the amendments to IFRS 4 are designed to allow insurers who are still applying IAS 39 to obtain the same reliefs as those provided by the amendments made to IFRS 9. There are also amendments to IFRS 7 Financial Instruments: Disclosures to enable users of financial statements to understand the effect of interest rate benchmark reform on an entity’s financial instruments and risk management strategy. The amendments are effective for annual periods beginning on or after 1 January 2021 with earlier application permitted. While application is retrospective, an entity is not required to restate prior periods.

The management of the Bank has opted for not adopting the aforesaid new standards, amendments to the existing standards and new interpretations prior to their coming into effect. The management anticipates that the adoption of the new standards, amendments of the existing standards and new interpretations will not materially impact the financial statements of the Bank.

2.4. Comparative Information Comparative information in the accompanying financial statements comprise data from the Bank’s financial statements for 2019, audited by the auditing company Deloitte.

The accounting policies and estimates referring to the recognition and measurement of assets and liabilities, used in preparation of these financial statements are consistent with the accounting policies and estimates applied in the preparation of the Bank’s annual financial statements for 2020.

2.5. Statement of Compliance

The Bank’s accompanying financial statements have been prepared in accordance with the International Financial Reporting Stan- dards (IFRS) issued by the International Accounting Standards Board (IASB).

2.6. Use of Estimates

Preparation of the financial statements in accordance with IFRS requires the Bank’s management to make the best possible estimates and reasonable assumptions that affect the application of the accounting policies and the reported amounts of assets and liabilities, as well as income and expenses. Actual amounts of the assets and liabilities may vary from these estimates.

2.7. Impact of the COVID-19 Pandemic

The declaration of the global pandemic of COVID-19 by the World Health Organisation in March 2020 was followed by not only an intense health crisis, but significant changes to the global economy and economies of individual countries as well. The imposed measures of isolation and social distancing resulted in a decrease of volume and, in certain cases, complete interruption of the economic activity of certain industries. In turn, this resulted in acceleration of mass digitalisation of financial institutions and a shift to a new operational model implying more remote network channels for rendering services to clients.

In view of the COVID-19 pandemic, the Bank undertook all measures necessary for protecting health and safety of its employees, clients and business partners. All business activities are carried out in line with measures aiming at preventing the virus spread and states of emergency declared in Group member-countries. Accordingly, all client services may be rendered both online and via an active branch network, providing for smooth communication with all Bank clients. 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS AND ACCOUNTING METHOD (Continued) 2.7.Impact of the COVID-19 Pandemic (Continued)

In the course of 2020, the Government of the Republic of Serbia and the National Bank of Serbia (NBS) introduced comprehensive measures of fiscal and monetary policy aiming at mitigating the negative effects. In order to support the Serbian financial sector and real economy, the NBS relieved its monetary policy and introduced additional measures, contributing to the preservation of price and financial stability, efficient functioning of the money market and preservation of credit activity, and consequently significantly alleviating negative effects of the pandemic to the real flows and creating preconditions for sooner recovery. From the pandemic breakout, the key policy rate was lowered four times by the total of 1.25 pp and at 2020 year-end, it stood at the lowest level of the inflation targeting regime of 1%. This resulted in more favourable conditions for corporate and retail lending in dinars by 0.8 pp on average relative to 2019 year-end, while additional narrowing of the NBS main interest rates corridor from ± 1.25 pp to ±0.9 pp increased the efficiency of the monetary policy transmission mechanism. The measures of direct repo operations, swap auctions and bilateral purchase of dinar t-bonds from banks also contributed to efficient functioning of the banking system by ensuring increased dinar and foreign exchange liquidity. The mitigation of the negative effects of the crisis was largely induced by the moratorium in repayment of loans for all clients who accepted the moratorium which lasted for 90 days in the first instance and 60 days in the second instance. In December 2020, a measure of relieves in repayment of liabilities implying the obligation of banks to reschedule and refinance loans with a 6-month grace period and consequently extend repayment terms with monthly liabilities of clients not exceeding the liabilities under initial repayment schedules was introduced. Within measures for preserving corporate liquidity, a guarantee scheme for liquidity and working capital loans was established, providing for the continuation and growth of the credit activity and implying approval of new loans or renewal of existing loans for micro clients, SMEs, entrepreneurs and registered farms.

The Bank considered the COVID-19 pandemic impact upon preparation of the financial statements as at 31 December 2020. The COVID-19 pandemic impact resulted in the implementation of additional judgements and inclusion of pandemic-specific assessments and assumptions.

Considerations of the Bank’s management regarding the COVID-19 pandemic impact, including assessments and assumptions, to certain financial statement items are provided below:

Loans and Receivables

The Bank offered a number of measures for supporting clients affected by the COVID-19 pandemic, such as the moratorium and liquidity and working capital loans with a guarantee scheme. The moratorium measures were compliant with the NBS decisions, implying a moratorium of 90 days, followed by a moratorium of 60 days with the resulting extension of terms of lending. Further- more, the NBS introduced conditions for the third moratoria which became effective in mid-December. The table below shows the usage percentages for all 3 moratoriums:

Moratorium 1 Moratorium 2 Moratorium 3 Corporate clients 27.88% 48.20% 0.34% Private individuals 74.76% 58.46% 0.99%

Moratorium 1 Moratorium 2 Moratorium 3 Number of Number of Number of clients in RSD ’000 client in RSD ’000 clients in RSD ’000 Corporate clients 1,034 22,332,594 962 19,426,216 13 17,288 Private individuals 43,642 29,042,205 35,732 25,296,441 604 670,660

The effects of the Decision on Temporary Measures for Preserving Financial System Stability, implying the moratorium of repayment of liabilities of clients (moratoria I and II), to the present value of cash flows of affected financial assets were recorded in financial statements at the amount of RSD 177,543 thousand, in line with the Group accounting policies and instructions of the parent bank.

The largest effect to the calculation of the ECL reflected through changes of stage for clients operating in industries most affected by the pandemic to Stage 2 and adjusted PD for macroeconomic expectations involving the COVID-19 pandemic impact. 2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS AND ACCOUNTING METHOD (Continued) 2.7. Impact of the COVID-19 Pandemic (Continued)

Non-Financial Assets

Responsible departments in the Bank monitored the development of the situation and evaluated effects of the pandemic on the value of non-financial assets, based on information considered as reasonable and acceptable as at 31 December 2020, they may be subject to changes which are not currently foreseeable, resulting from the movement of parameters used for the evaluations. Regardless of the aforesaid, the management of the Bank will continue monitoring potential effects which may occur in order to be able to undertake adequate steps for avoiding negative impact to the operation of the Bank.

2.8. Going Concern From the current standpoint, the COVID-19 pandemic did have a significant impact to the operation of the Bank. Moreover, as at the present reporting date, the Bank continues to settle its liabilities in line with their maturities, thus continuing to implement the going concern principle.

The main indicators of the Bank’s financial statements being compliant with the going concern principle are the following:

• Liquidity – the Bank monitors its liquidity position continually - on a daily basis. The COVID-19 pandemic and/or moratorium did not impact the Bank’s liquidity position. Throughout 2020, the liquidity ratios were significantly above the regulatory limits. Furthermore, all liquidity ratios of the Bank are above the regulatory limits, as shown in Note 4.

• Equity – the Bank’s equity position is stable, resulting also in high capital adequacy ratio, as shown in Note 4.

• Reserves and profit – the Bank’s equity represents 22.43% of the total assets, whereas the reserves and profit represent 2.18% of the total assets.

In view of the aforesaid, the financial statements have been prepared on a going concern basis, implying that the Bank will continue to operate for an unlimited period in the foreseeable future.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3.1. Recognition of Income and Expenses The Bank recognises income when it can be measured reliably, when it is probable that the future economic benefits will flow to the Bank and when special criteria for each of the Bank’s activities are met, as set out below.

3.2. Interest Income and Expenses The Bank earns interest income and incurs interest expenses through its operations with the National Bank of Serbia, domestic and foreign banks and legal entities (corporate clients) and private individuals (retail clients).

Interest income and expenses including default interest and other income and other expenses from interest bearing assets, i.e., liabilities, are recognized as per ‘matching principle’ (on an accrual basis) under obligatory terms defined by a contract concluded between the Bank and a client. Interest income and expenses are determined on an accrual basis using the effective interest rate, which is defined upon initial recognition of a financial asset/liability.

For all financial assets measured at amortised cost, financial assets measured at fair value through other comprehensive income, and financial assets not held for trading and measured at fair value through profit or loss, interest income and interest expenses are recorded using the effective interest method.

Amortised cost is the amount at which a financial asset or financial liability is measured at initial recognition, less the payment of the principle amount, plus/minus cumulative amortisation using the effective interest method and any difference between the initial amount and amount at maturity. For financial assets, the amount is adjusted for any loss. The gross carrying amount of the financial assets is the amortised value of the financial assets prior to adjustment for any losses. For purchased or originated credit impaired (POCI) financial assets, the credit-adjusted effective interest rate is used to reduce the estimated future cash flows, including expected credit losses on the amortised cost of debt instruments at initial recognition. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.2. Interest Income and Expenses (Continued) The effective interest rate is the rate the precisely discounts the estimated future cash inflows and outflows over the expected lifetime of the financial asset, or a shorter period as appropriate, to the gross carrying amount of the financial asset, unless the instrument is a POCI asset or a financial liability at amortised cost. The calculation includes transaction costs and fees paid, which are an integral part of the effective interest rate (unless the financial asset is measured at fair value through profit or loss), premiums or rebates. Expected credit losses are disregarded.

For financial assets which are subsequently credit-impaired, interest income is recognised using the effective interest rate on the amortised cost of the asset (the net carrying value). If, in the following reporting period, the credit risk of an impaired financial asset improves so that the financial asset is no longer credit-impaired, interest income is recognised by applying the effective interest rate to the gross carrying amount of the financial asset (except for POCI assets, whereby the interest income is not based on the gross value, even if the asset’s credit risk improves).

Interest income on assets held for trading, and the interest components of derivatives are shown within the line item of ‘interest income’. Changes in the fair value only arising from assets and liabilities held for trading are shown within the ‘net gains/losses from changes in the fair value of financial instruments’.

Negative interest from financial assets and financial liabilities is shown in the line item of ‘net interest income’. The Bank earned negative interest of 0.1% on deposits received and it did not pay negative interest on deposits placed.

In line with IFRS 16, interest expenses are calculated based on the effective interest method and decreased during lease term. Interest expenses are shown within the item ‘interest expenses’.

The Bank realises income/(expenses) from fees for servicing the approved loans/(received borrowings).

Such fee income is deferred by applying the effective interest rate throughout the loan period and it is recognized within the interest income.

3.3. Fee and Commission Income and Expenses Fee and commission income and expenses (except those which are an integral part of the effective interest rate applicable to a financial asset or liability) are included in the effective interest rate and are calculated in line with IFRS 15 – “Revenue from Contracts with Customers” - and are recorded under the item ‘net fee and commissions income’.

Fees for rendered services during a specified time period are calculated for the said period. These fees include loan fees which are not an integral part of the effective interest rate of a financial instrument, guarantee fees, asset management commissions, cus- tody and other fees and commissions relating to management and consultant services, and fees for insurance brokerage activities in FX transactions. In contrast, fees earned from providing transaction services to third parties, such as organising acquisitions of shares or other securities or purchases/sales of entities, are recognised upon completion of each such transaction.

3.4. Dividend Income Dividend income is recognised when the Bank’s entitlement to receive dividend is established. Dividends are recognised in profit and loss only in the following instances:

- if the Bank’s right to the payment of dividend has been established,

- if it is likely that the Bank will achieve economic benefits connected with dividend, and

- if the amount of dividend can be measured reliably.

3.5. Foreign Currency Translation Items included in the Bank’s financial statements are measured using the currency of the primary economic environment in which the Bank operates (functional currency). As stated in Note 2.1, the Bank’s financial statements are expressed in thousands of dinars (RSD). Dinar is the Bank’s functional and presentation currency.

Transactions denominated in foreign currencies are translated into dinars at the official middle exchange rates determined at the interbank foreign exchange market and effective at the date of each transaction or the measurement date, if the items are remeasured. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.5. Foreign Currency Translation (Continued) Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into dinars at the official middle exchange rates determined at the interbank foreign exchange market prevailing as of that date (Note 36).

Foreign exchange positive or negative effects arising upon such transactions and the translation of monetary assets and liabilities denominated in foreign currencies at year-end are credited or charged to the income statement as foreign exchange gains or losses (Note 8).

Gains or losses realised/incurred upon translation of financial assets and liabilities with a currency clause index are recorded within the income statements as foreign exchange gains or losses and positive or negative currency clause effects (Note 8).

3.6. Financial Instruments

3.6.1 Classification and Measurement of Financial Assets and Financial Liabilities

Based on the entity’s business model and cash flow features, IFRS 9 defines three basic categories for the classification of financial assets at the date of initial recognition:

On initial recognition, a financial asset is classified based on one of the following measurement methods:

1) at amortised cost (AC),

2) at fair value through other comprehensive income (FVtOCI) or

3) at fair value through profit or loss (FVtPL).

A financial asset is measured at amortised cost if it is not designated as FVtPL and meets the following criteria:

• the objective of the business model is holding the assets for the purpose of collecting the contractual cash flows, and

• the contractual provisions of a financial assets give rise to the cash flows that are solely payments of principal and interest on outstanding principal on specified future dates.

A debt instrument is measured at FVtOCI only if it meets both of the following criteria and if it is not designated as FVtPL:

• the objective of the business model is holding the assets for the purpose of collecting the contractual cash flows and for sale, and

• the contractual provisions of a financial assets give rise to the cash flows that are solely payments of principal and interest on outstanding principal on specified future dates.

Debt instruments held for the purpose of collecting the contractual cash flows and sale consist of treasury bills and bonds of the Republic of Serbia.

Upon initial recognition of equity instruments not held for trading, the Bank may irrevocably elect to present subsequent adjustments of their fair value through other comprehensive income (OCI), at the level of a specific equity instrument.

Financial instruments are initially recognised at fair value increased by transaction costs that may be directly attributable to these assets (IFRS 9.5.1). Loans and receivables are recognised when cash is advanced to borrowers. The fair value of a financial instrument at initial recognition is most often the transaction price, i.e., the fair value of the consideration given or received (IFRS 9.B5.1.2A and IFRS 13). However, if the given or received consideration differs from that which is recognised as a financial instrument, the Bank will measure the instrument at fair value. For example, the fair value of non-interest bearing, long-term loans or receivables may be measured at the present value of all future cash proceeds discounted by applying the prevailing market interest rates applicable to similar instruments with similar borrower credit capabilities. Each subsequent borrowed amount is an expense or decrease of income, unless qualifying for recognition as another type of asset.

For equity investments that are not held for trading, the Bank may irrevocably elect to classify the instruments at FVtOCI at initial recognition, with all subsequent changes in fair value being recognised in other comprehensive income (OCI). This classification may be applied to each separate investment. Throughout 2020, the Bank did not have such instruments in its portfolio. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.6. Financial Instruments (Continued)

3.6.1 Classification and Measurement of Financial Assets and Financial Liabilities (Continued)

The classification and measurement requirements for financial liabilities are only slightly changed compared to IAS 39. Changes to the fair value of liabilities resulting from changes in the liability’s own credit risk are recognised in the other comprehensive income, while the remaining amount of the change in the fair value will be shown through the profit or loss.

3.6.1.2 Business Model Assessment

All financial assets should be classified into one of the business models provided below. Also, at initial recognition, it must be determined whether or not SPPI contractual cash flows exist for each asset (SPPI test). Thereafter, the financial assets are classified into one of the following business model categories:

• Holding financial assets to collect contractual cash flows (“hold-to-collect” model);

• Holding financial assets to collect contractual cash flows and for sale (“hold-to-collect-and-sell” model);

• Other business models - financial assets held for trading or assets that do not meet one of the above said criteria.

In a rare case that an entity may change the model it applies to the management of certain financial assets, reclassification of all assets to which the adjustment applies would be required.

Contractual Cash Flow Characteristics

To assess whether contractual cash flows are solely payments of principal and interest (SPPI), the ‘principal’ is defined as the fair value of the financial asset at initial recognition. ‘Interest’ is defined as a charge for the time value of money (TVM), for credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g., liquidity risk and administrative costs), as well as a profit margin.

In assessing whether the contractual cash flows are solely payments of principal and interest (SPPI), the Bank considered the contractual terms of the instruments and analysed the existing portfolio based on an SPPI criteria checklist. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows so that it would not meet this condition, considering the following: contingent events that would change the amount and timing of cash flows, leverage features, prepayment and extension terms, terms that limit the Bank’s claim to cash flows from specified assets and features that modify consideration for the time value of money.

Special attention during the analysis was paid to the unilateral changes in margins and interest rates, prepayments clauses, other contingent payments, project financing and benchmark tests. Compliance with the SPPI test was assessed in the following manner:

• In assessing unilateral changes to margins and interest rates, the Bank concluded that the transfer of costs associated with the underlying loan contract, clauses drafted in order to maintain a stable profit margin, and adjustments to the interest rate reflected deterioration of the credit rating; however, these are not harmful in terms of SPPI tests.

• Clauses referring to early loan repayment are not harmful, as long as the prepaid amount reflects the unpaid principal, interest and compensation for the early repayment of the loan. Such consideration must be less than the loss incurred from the interest margin and loss incurred from interest.

• Other contingent payments are typically clauses referring to other business transactions. Consideration for failure to fulfil the obligations represents increased costs of risk monitoring or compensation for profit losses tied to a causal event.

• Project financing is assessed in terms of whether or not a correlation exists with the performance of the project in question. Should no such link exist but the borrower possesses sufficient capital for the project necessary to absorb losses before the said losses affect the borrower’s ability to repay the loan, the said project may pass the SPPI test.

• Loans with variable interest rates may include mismatch of interest features. In order to assess whether or not the time value of money (TVM) has been significantly modified, a quantitative benchmark test should be conducted. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.6. Financial Instruments (Continued)

3.6.1 Classification and Measurement of Financial Assets and Financial Liabilities (Continued)

3.6.1.2 Business Model Assessment (Continued)

When performing a benchmark test upon initial recognition, the contractual non-discounted cash flows of the financial instrument are compared to the cash flows per the benchmark which would have arisen if the TVM had not been modified. The effect of mod- ifying TVM is considered in each reporting period and cumulatively throughout the financial instrument’s lifetime. The benchmark test is based on a range of reasonable scenarios. An acceptable comparative financial instrument is one of equal credit quality and with the same contractual terms, except those for modification.

Should the entity come to the realisation that the contractual (non-discounted) cash flows may significantly vary (threshold of 10%) from the (non-discounted) cash flows per the benchmark test, the financial asset does not fulfil the criteria defined in IFRS 9, Article 4.1.2 (b) or 4.1.2A (b) and cannot be therefore measured at amortised cost or at fair value through other comprehensive income.

Upon transition to IFRS 9, there were no financial instruments with identified interest mismatch, which would lead to the measurement of the said financial instruments at fair value through profit or loss (FVtPL). Considering that the Bank’s internal policies on new product approval define the obligation of SPPI test compliance, a significant number of financial instruments with the aforementioned features is not expected.

Assets measured at fair value through profit or loss (FVtPL) are financial assets not measured at amortised cost nor are they debt instruments measured at FVtOCI, which in particularly include:

• other business models;

• financial assets for which contractual provisions do not meet the criteria resulting in cash flows, which represent solely the payments of principal and interest on outstanding principal at specified future dates;

• financial assets measured at fair value through profit or loss (FVtPL) upon initial recognition;

• equity instruments; and

• derivatives.

Financial assets measured at fair value through profit or loss upon initial recognition include the following sub-categories:

• financial assets held for trading;

• financial assets designated as measured through profit and loss upon initial recognition; and

• financial assets for which measurement at fair value through profit and loss is mandatory.

Financial assets held for trading consist of the following items:

• acquired or generated mainly for short-term sale or repurchase;

• upon initial recognition, a portion is the portfolio of set financial instruments which are managed jointly and for which there is evidence of recently acquired short-term gains; or

• in case of a derivative instrument (except a derivative instrument which is a financial surety contract or designated/actual risk hedging instrument).

At initial recognition, the Bank may irrevocably elect to measure financial assets at fair value through profit and loss (fair value option) if this removes or significantly reduces inconsistencies in measuring or recognising (sometimes referred to as an ‘accounting mismatch’) which would otherwise occur due to the measurement of assets and recognising gains and losses relative to such assets on various bases.

Financial assets for which measurement at fair value through profit and loss is mandatory consist of financial assets which do not meet the SPPI criterion.

Gains and losses arising from financial assets measured at fair value is recognised in the income statement except in the following cases:

• for investment in an equity instrument and if the option to present gains and losses arising from such an investment in other comprehensive income has been chosen; and

• for financial assets measured at fair value through other comprehensive income. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.6. Financial Instruments (Continued)

3.6.1 Classification and Measurement of Financial Assets and Financial Liabilities (Continued)

3.6.1.2 Business Model Assessment (Continued)

In case of a modification of the business model for managing financial assets, such financial assets will be reclassified. Reclassi- fication is conducted prospectively, from the reclassification date, i.e., as at the first date of the subsequent accounting period, without adjustments to the previously recognised profit/loss and interest.

Fair value of financial instruments traded on an active market at the reporting date are based on the quoted market bid (financial assets) or asking prices (financial liabilities). If a market for a financial asset is not active, the Bank determines the asset’s fair value using valuation techniques. These include comparison with most recent similar transactions performed at arms’ length, analysis of discounted cash flows and other valuation techniques used by the market participants. Assessment models reflect current market situation as at the valuation date and may not be indicative of market conditions prior or after valuation date. As at the reporting date, the Bank’s management revised the models in order to ensure that they adequately reflect the current market conditions, including relative market liquidity and interest margins.

3.6.1.3 Derecognition and Contract Modification

Financial assets are derecognised when:

The contractual rights to the cash flows from the asset have expired; or when the Bank has transferred its right to cash flows from assets or has assumed payment obligations of the cash flows in full without significant delays on behalf of a third party within ‘pass-through’ contracts; and/or when

(i) the Bank has transferred substantially all risks and benefits associated with the ownership over the asset,

(ii) the Bank has neither transferred nor retained substantially all risks and benefits associated with the ownership over the asset, but has transferred control over the asset.

Contractual adjustments arising from renegotiations with borrowers may result in two types of changes to the initial contractual cash flows.

If contractual cash flows of financial assets are renegotiated or substantially modified, this will result in derecognition (due to the expiration the contractual rights to the cash flows from the financial asset) of the financial asset, in line with IFRS 9. The new financial asset is recognised, under the modified conditions, while the difference between the amortised cost of the financial asset which is derecognised and fair value of the new asset is presented through profit and loss as a modification gain/loss.

If the modification is not substantial, changes to the contractual provisions do not result in derecognition of the financial asset.

The analysis of contracts and changes, which are an integral part of the modifications, has shown that the Bank did not have any financial effects of the modifications, either material or immaterial.

Insignificant Modifications Not Resulting in Derecognition of a FinancialAsset

If the agreed cash flows of a financial asset are modified in a way that does not result in derecognition of such financial asset, in line with IFRS 9, it is necessary to recalculate the gross carrying amount of the financial asset based on the modified contractual cash flows using the original effective interest rate for discounting. Gains or losses arising from the modification are recognised in the income statement.

Significant Modifications Resulting in Derecognition of a FinancialAsset

If the agreed cash flows of a financial asset are significantly modified, this results in the derecognition (due to the expiry of contractual rights to the cash flows) of the said financial asset in line with IFRS 9. A new financial asset with adjusted terms is recognised and the difference between the amortised cost of the financial asset which is derecognised and the fair value of the new financial asset are presented in the income statement. If the borrower is not in default, or if the significant modification does not result in the default status, then a new asset will be classified in Stage 1. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.6. Financial Instruments (Continued)

3.6.1 Classification and Measurement of Financial Assets and Financial Liabilities (Continued)

Significant Modifications Resulting in Derecognition of a FinancialAsset (Continued)

If the borrower is in default, or if the significant modification results in the default status, then the new asset will be treated as a purchased or originated credit impaired financial asset (POCI). In case of POCI financial assets, expected credit losses during the lifetime of a financial instrument are included in credit-adjusted effective interest rate at initial recognition.

The following criteria are recognised as significant modifications:

Quantitative - significant adjustments to the contractual cash flows when the present value of the cash flows according to the new terms is discounted by applying the original effective interest rate and varies from the discounted carrying value of the original financial instrument by at least 10%.

Qualitative, including the following:

• change of borrower,

• change of currency,

• change of financing purpose,

• SPPI critical features have been removed from or included in a new loan contract.

Thereafter, the amount of the change in the lifetime expected credit loss since the initial recognition of POCI financial assets should be recognised as a gain or loss from impairment in the income statement.

3.6.1.4 Impairment of Financial Instruments

The Bank’s assets exposed to credit risk, in keeping with the National Bank of Serbia’s Decision on the Classification of Bank Balance Sheet Assets and Off-balance Sheet Items (RS Official Gazette no. 94/2011, 57/2012, 123/2012, 43/2013, 113/2013, 135/2014, 25/2015, 38/2015, 61/2016, 69/2016, 91/2016, 101/2017, 114/2017, 103/2018 and 8/2019) consist of loans, interest, fees, deposits placed with other banks and advances and other balance sheet items per which the Bank is exposed to credit risk as well as the off-balance sheet exposure items: issued guarantees, other sureties, unsecured letters of credit and approved but undrawn loans as well as other off-balance sheet items which represent contingent liabilities of the Bank.

Allowance for impairment and provisions for impairment for expected credit losses are recognised for the following exposures:

- financial assets measured at amortised cost (AC), and

- financial assets measured at fair value through other comprehensive income (FVtOCI).

The Bank reports allowance for impairment of exposures at amortised cost in the profit and loss within the expenses of the period for which the expected loss is determined as well as on the balance sheet, recorded under allowance for impairment of balance sheet exposures. Amounts recognised as expected credit losses, arising from off-balance sheet liabilities, are recognised as expenses for the period in which the loss has been identified, and on the balance sheet under provisions. The manner of calculating impairment of financial assets is described within the IFRS 9 impairment methodology.

Allowance for impairment of financial assets measured at fair value through other comprehensive income is carried out by applying the expected credit loss model whereby allowance for impairment is recognised in the profit or loss, as well as in other comprehensive income, without decreasing the value of the asset itself within the balance sheet.

In applying the ECL model, which also takes into account information on future events, the Bank recognises expected losses as of each reporting date in order to reflect the credit risk adjustments of a given financial asset. Impairment of financial assets through the ECL model is based on historical, present and forecast future events and therefore takes into account various scenarios that envisage events which may result in future credit losses.

According to IFRS 9, lifetime expected credit losses are calculated as the expected present value of credit losses incurred should borrowers fail to fulfil their obligations within the specified timeframe over the entire lifetime of the financial instrument with parallel consideration of the probability of default (PD) as well as loss given default (LGD). 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.6. Financial Instruments (Continued)

3.6.1 Classification and Measurement of Financial Assets and Financial Liabilities (Continued)

3.6.1.5 Calculation of Expected Credit Losses

Expected loss is defined as the difference between the cash flows that are due to the Bank in accordance with the contractual terms of a financial instrument and the cash flows that the Bank expects to receive (considering probabilities of default and expected recoveries). Although this requirement is introduced by IFRS 9, the standard does not prescribe detailed methods and techniques to be applied.

When establishing cash flows the Bank expects to receive, the Bank applies the marginal loss approach, whereby the total expected loss is calculated as the sum of marginal losses incurred at any moment, starting from the reporting date. Marginal losses arise from individual parameters which are used to estimate exposures and losses in the event of default and conditional probability of default for each period. Lifetime expected credit losses are calculated separately for different scenarios taking into account current and forecast forward-looking information. The total expected credit losses under individual scenarios are eventually probability-weighted. The Bank considers three scenarios: the base line, optimistic and pessimistic scenarios and some less favourable scenarios are at times simulated in order to understand the dynamics and potential portfolio-specific risks.

3.6.1.6 Derivatives

This category includes two sub-categories of financial assets: financial assets held for trading and those designated at fair value through profit or loss.

Financial assets are classified as held for trading if they have been acquired for sale purposes or re-purchase within a short period, for the purpose of generating profit from short-term price fluctuations. These assets are recorded in the balance sheet at fair value. Financial assets held for trading also include financial derivatives.

All realised or unrealised gains and losses arising from changes in the market value of these assets, i.e. adjusted to fair value, are recorded on the income side, i.e. against the expense side.

The Bank is in possession financial derivatives that do not meet the criteria for hedge accounting. At year-end the Bank had receivables and liabilities per short-term foreign currency swaps (FX-swaps).

Derivatives, including FX forward contracts, FX swaps and other derived financial instruments, are initially recognised at fair value within the off-balance sheet items on the contract execution date and are subsequently remeasured at fair value.

Derivatives are initially recognised at the moment when derivative contract has been agreed with the counterparty (date of agreement). The notional amount of principal to which the respective derivative is agreed is recorded as an off-balance sheet item, while the initial positive or negative fair value of the derivative is carried within assets or liabilities. The initial recognition of fair value is executed only if the market price of the same or a similar derivative can be found in the organised derivatives market, and if it differs from the price at which that derivative has been agreed by the Bank.

Information on the fair value is acquired at the market and includes information on recent market transactions or it is determined by the method of discounted cash flows.

All derivatives are recognised as assets when the fair value change is positive, i.e., as liabilities when negative. The best source of estimation of the fair value of derivatives on initial recognition is transaction price (i.e. the fair value of consideration given or received).

3.6.2 Off-Setting of Financial Instruments

Financial assets and liabilities are offset, and the difference between their sums is recognised in the balance sheet, (statement of financial position) when there is a legally enforceable right to offset the recognised amounts, and when there is an intention to perform settlement on a net basis, or to simultaneously sell the asset and settle the liability. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.6. Financial Instruments (Continued)

3.6.3 Cash and Balances Held with the Central Bank Cash and cash balances held with the central bank include cash funds in the local (RSD) and foreign currencies, i.e., cash balances on gyro and current accounts, vault cash and other cash funds in the local (RSD) and foreign currencies, gold and other precious metals, liquid asset surpluses deposited with the National Bank of Serbia and foreign currency required reserve funds held on the special accounts with the National Bank of Serbia. Cash and cash balances held with the central Bank are carried at amortised cost in the statement of financial position. These funds are held for the settlement of current cash liabilities rather than investment or other purposes.

The breakdown of cash and cash balances held with the central bank is provided in Note 16.

3.6.4 Deposits and Other Financial Liabilities Due to Banks, Other Financial Institutions and the Central Bank and Deposits and Other Liabilities Due to Customers

Deposits and other financial liabilities due to banks, other financial institutions and the central bank and deposits and other financial liabilities due to other customers are initially recognised at fair value, decreased by incurred transaction costs, except for financial liabilities recognised at fair value through profit and loss. After initial recognition, the said financial liabilities are recognised at amortised cost, by applying the effective interest rate.

Within this item, the liabilities per borrowings are initially recognised at fair value decreased by incurred transaction costs and are subsequently recognised at amortised cost.

Borrowings are classified as current liabilities unless the Bank has the unconditional right to settle such liabilities within at least 12 months following the balance sheet date.

3.7. Reserves for Estimated Losses on Bank Balance Sheet Assets and Off-Balance Sheet Items The required reserve for estimated losses on balance sheet assets and off-balance sheet items is calculated in accordance with the relevant internal bylaws and the National Bank of Serbia’s Decision on the Classification of Bank Balance Sheet Assets and Off-balance Sheet Items (RS Official Gazette no 94/2011, 57/2012, 123/2012, 43/2013, 113/2013, 35/2014, 38/2015, 61/2016, 69/2016, 91/2016, 101/2017,114/2017, 103/2018 and 8/2019). The same is determined for reporting purposes to National Bank of Serbia.

In assessing credit risk in line with the Methodology, the Bank considers the borrower’s financial position in terms of: profit stability, maturity matching of certain asset and liability features, adequacy of cash flows, indebtedness, leverage, liquidity ratios, interest liability coverage and profitability.

In addition to the financial indicators, an important element of the assessment of the borrower’s risk category is timeliness in material liability settlement toward the Bank for the past 12 months and at the reporting date. Material liability amount equals to 1% of the individual receivable due from the borrower, however not below RSD 10,000 for corporate clients and RSD 1,000 for entrepreneurs, agricultural producers and private individuals, respectively.

The basic borrower classification is independent of the collateral obtained.

Due to collateral quality assessment, a receivable due from the borrower may be classified in a category different from the basic borrower classification. According to their quality, collaterals are divided into first-class and adequate collaterals.

First-class collaterals trigger category A classification of receivables, while adequate collaterals place receivables into a category more favourable (one up) than the category as per basic classification of borrowers.

The Bank classifies aggregate receivables due from a borrower into categories A, B, V, G and D based on the timeliness/delay in liability settlement criterion, as well as based on the assessment of the borrower’s creditworthiness and collateral quality.

In accordance with the classification of receivables and pursuant to the aforesaid NBS Decision, the amount of the required reserve for estimated losses under different categories is calculated by applying the following percentages: A (0%), B (2%), V (15%), G (30%) and D (100%).

The Bank is obligated to determine the amount of the required reserve for estimated losses, which is calculated as the sum of all the positive differences between the reserve for estimated losses computed in accordance with NBS Decision and the determined impairment allowances for balance sheet assets and provisions per off-balance sheet items at the individual borrower level. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.8. Intangible Assets, Property, Plant and Equipment and Investment Property a) ntangible Assets

Intangible assets consist of software, licenses and investments in progress. Intangible assets are stated at cost less accumulated amortisation and aggregate impairment losses, if any.

Separately acquired trademarks and licenses are stated at historical cost. Trademarks and licenses have finite useful lives and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate and write down the cost of trademarks and licenses over their estimated useful lives.

Intangible assets are regularly written down during the year (and these amounts are charged to operating expenses) through the calculation of amortisation over their estimated useful life – 7 years for the Bank’s core information system and 5 years for other software. The residual value and useful lives are reviewed, and adjusted when necessary, at each reporting date.

Expenditures relating to the development or maintenance of the software applications are recognised as expenses, as incurred.

Intangible assets also include investments in software which are not amortised since they are still not in use.

The types of cost that may be capitalised in accordance with IAS 38 are:

• salaries, wages and other employment related costs in the process of bringing the assets in the operating condition; • professional fees directly incurred in the process of bringing the assets in the operating condition; and • costs of testing the proper functioning of the assets.

The said costs represent an example of typical costs that may be capitalised but the range of costs to be capitalised can also include costs meeting the following criteria:

• they are directly attributable to the relevant asset; and • they are incurred with relation to the preparation of the asset for its intended use.

Capitalisation of costs which are included in the cost of software will no longer be applied once the relevant asset is in the appropriate condition to be used for intended purpose. This means that once the software achieves sufficient and intend level of functionally and it can readily be used, cost capitalisation will cease. b) Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and aggregate impairment losses, if any. Cost includes expenditures that are directly attributable to the acquired asset.

Subsequent costs are included in the asset’s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. The carrying value of the replaced asset is derecognised. All other repairs and maintenance costs are charged to the income statement of the financial period in which they are incurred.

Derecognition of property, plant and equipment occurs when they are sold or when the Bank no longer expects future economic benefit from their use. All gains and losses arising on derecognition of assets (calculated as the difference between the net sales proceeds and the carrying value of the asset) are recognised in profit and loss for the year of derecognition. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.8. Intangible Assets, Property, Plant and Equipment and Investment Property (Continued) Land is not depreciated. Depreciation of assets is calculated using the straight-line method to allocate the cost of assets to their residual values over their estimated useful lives, as follows:

Assets Depreciation rate (%) in 2020 Depreciation rate (%) in 2019 Buildings 1.87% - 2.24% 1.87% - 2.24% Computer equipment 25.00% 25.00% Furniture 11.00% 11.00% Vehicles 15.50% 15.50% Other equipment 10% - 33.33% 10% - 33.33%

When determining the basis for depreciation, the cost or revalued amount is not decreased by the amount of the residual value since after the expiry of the useful life of a fixed asset it is assessed as equal to zero.

Calculation of depreciation of property, plant and equipment commences at the beginning of the month following the month of the asset’s placement into use. Investments in progress are not depreciated. Depreciation charge is recognised within expenses for the period when incurred.

The residual values and useful lives of assets are reviewed, and adjusted if appropriate, at each reporting date. If higher than its estimated recoverable amount, an asset’s carrying amount is written down immediately to its recoverable value.

Gains and losses arising on disposal or sales of property and equipment are credited or charged to the income statement as a part of other operating income or other operating expenses.

Depreciation for tax purposes is calculated in accordance with the Corporate Income Tax Law of the Republic of Serbia and the Rules on the Manner of Classification of Fixed Assets into Groups and Manner of Determining Depreciation for Tax Purposes, resulting in deferred taxes (Note 15). c) Investment Property

Investment property is a type of property held to earn rentals or for capital appreciation or both.

Investment property is recognised at cost less accumulated depreciation.

Calculation of depreciation of investment property commences at the beginning of the month following the month of the asset’s placement into use. Depreciation charge is recognised within expenses for the period when incurred.

Investment property is depreciated at the rate of 2.5% p.a. using the straight-line depreciation method. The residual values and useful lives of assets are reviewed, and adjusted as appropriate, at each reporting date.

Subsequent costs are capitalised only when it is probable that future economic benefits associated with them willfl ow to the Bank and the cost can be measured reliably. All other repairs and maintenance costs are expensed when incurred. d) Impairment of Non-Financial Assets

Non-financial assets that have an indefinite useful life are not subject to amortisation and are tested for impairment on an annual basis.

Assets that are subject to depreciation/amortisation are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the amount by which the asset’s carrying amount exceeds its recoverable amount.

The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use.

For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows. Non-financial assets that have suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

Fair value measurement and impairment of the Bank’s intangible assets are disclosed in Note 21. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.9. Leases Since 1 January 2019, the Bank has applied IFRS 16 whereby it recorded assets and liabilities for long-term leases of business premises and automobiles in line with the standard. In accordance with IFRS 16, the lease expenses in respect of such leases are classified into the interest expenses and depreciation charge, as disclosed in Notes 5 and 13.

Pursuant to IFRS 16, a lease contract conveys to the lessee the right to use certain assets if the following two criteria are met:

• the lessee will realise actual economic benefits from the use of identified assets during the period of use (the lessee has the exclusive right to use the asset); and

• the lessee is entitled to making decisions on how the asset will be used during the period of use.

In 2020, the Bank rented business premises for performance of its business activity, automobiles, warehouse and spaces for ATMs.

In accordance with IFRS 16, the Bank recorded short-term leases and leases with low-value underlying assets within rental costs, as well as the costs relating to such leases and taxes payable in this respect, as disclosed in Note 14.

As the lessor, the Bank leases parts of its business premises, and thus earns rental income, as stated in Note 9.

3.10. Foreclosed Assets

According to the Bank’s policy, the Bank assesses whether an asset acquired in lieu of debt collection is suitable for the Bank’s internal business operations or it is to be sold. Assets determined as appropriate for the Bank’s own use are classified within the relevant asset line item and measured at the lower of the asset’s cost and the carrying value of the underlying receivable.

3.11. Non-Current Assets Held for Sale Non-current assets (or disposal groups) held for sale are classified as assets held for sale when their carrying amount is recovered predominantly through a sale transaction and the sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell if their carrying amount is to be recovered principally through a sale transaction rather than through continued use. This condition is considered fulfilled if the sale is highly probable and when such an asset (or a disposal group) is available for immediate sale in its current condition. Management must be committed to the action plan for the sale in order for the asset to fulfil the recognition criteria and the sale is expected to be completed within a year from the initial classification.

3.12. Provisions, Contingent Liabilities and Contingent Assets Provision is a liability uncertain in terms of both maturity and amount. Provisions are recognised:

• when the Bank has a present obligation (legal or constructive) as a result of a past event;

• when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and

• when a reliable estimate can be made of the amount of the obligation.

The amount recognized as provision represents the best estimate of the expense required to settle the present obligation at the reporting date.

Provisions are monitored per type and can be used only for the expenses for which they were initially recognized.

Provisions are not recognized for future operating losses. In instances of a number of similar liabilities, probability that their settlement will require an outflow of resources is determined at the level of the liability category as a whole. Provisions are recognized even if the probability for any of the liabilities within the same category is remote.

Contingent liabilities are not recognized in the financial statements. They are disclosed in notes to the financial statements (Note 35). 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.12. Provisions, Contingent Liabilities and Contingent Assets (Continued) Contingent liabilities are assessed on an ongoing basis to determine the probability of an outflow of economic resources. Where a probable resource outflow will be required in the future for items previously recognised as contingent liabilities, provisions are recognised in the financial statements for the period in which a change occurred to the probability of event occurrence.

Provisions for contingent liabilities are separately calculated for:

- approved yet undrawn loans, - payment and performance guarantees issued, - unsecured letters of credit, and - other forms of sureties where payments may be required. Credit risk exposure – exposure at default (EaD) for contingent liabilities is equal to the portion of the risk exposure that is expected to be used at the time of default.

The Bank does not recognise contingent assets in the financial statements. Contingent assets are disclosed in the notes to the financial statements when the inflow of economic benefit is probable.

3.13. Employee Benefits

(а) Employee Social Security Taxes and Contributions

In line with the regulatory requirements of the Republic of Serbia, the Bank is obligated to pay contributions to tax authorities and to various state social security funds. These obligations involve the payment of taxes and contributions on behalf of the employee, by the employer, in the amounts calculated by applying the specific, legally prescribed rates. The Bank is also legally obligated to withhold contributions from gross salaries to employees, and on behalf of its employees, to transfer the withheld portions directly to government funds. The Bank has no legal obligation to pay further benefits to its employees that are due from the Pension Insurance Fund of the Republic of Serbia.

(b) Other Employee Benefits – Retirement Benefits

In accordance with the Labour Law and the Rules of Procedure, the Bank is under obligation to pay its vesting employees retirement benefits in the amount of two average monthly salaries of the vesting employee as at the payment date, but not below two average monthly salaries paid by the Bank as at the payment date or the two average monthly salaries paid in the Republic of Serbia according to the most recent data published by the Republic of Serbia Statistical Office, whichever arrangement is most favourable for the retiree.

The entitlement to these benefits is usually conditioned by the employee remaining in the service up to the age limit for retirement and until completion of the minimum prescribed years of service. The expected costs of these benefits are accrued over the period of employment.

Provisions for retirement benefits are made based on the independent actuary’s report and stated at the present value of the expected future payments. Inputs for the calculation of these provisions are presented in Note 28.

Termination benefits are payable when employment is terminated before the regular retirement date, or whenever an employee accepts voluntary redundancy in exchange for those benefits. The Bank recognises termination benefits when it is explicitly committed to either: terminating the employment of current employees according to an adopted plan without the possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy aimed at decreasing the number of employees.

Benefits falling due more than 12 months after the balance sheet date are discounted to their present value.

The costs of the defined post-employment benefits to employees and/or retirement benefits upon fulfilling the legal retirement criteria are determined based on the actuarial assessment. An actuarial assessment includes an assessment of the discount rate, future salary trends, mortality rates and employee turnover rate. Due to the long-term nature of these plans, significant uncer- tainties influence these assessments. Additional information in this respect are disclosed in Note 28 to the financial statements. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.13. Employee Benefits (Continued) d) Profit Sharing and Bonuses

The Bank recognises a liability and an expense for bonuses and profit-sharing based on a formula that takes into consideration the profit attributable to its shareholders after certain adjustments. The Bank recognises a provision in instances of contractual or constructive obligations.

3.14. Equity

Equity consists of share capital (ordinary shares), share premium, reserves and retained earnings/accumulated losses.

Dividends on shares are recorded as liabilities in the period in which the relevant decision on their payment was rendered. Divi- dends approved for the year after the reporting date are disclosed in the note on the events after the reporting period.

3.14.1 Share Capital

Ordinary (common stock) shares are classified as equity.

Where the Bank purchases its own share capital, the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the equity owners until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received, less any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the equity owners. The Bank did not repurchase its own shares.

3.14.2 Other Forms of Issued Capital

The share premium is the difference between the par (nominal) value of shares and their selling price. The par value of shares is the product of the par value per share and the total share count. Reserves from profit arise as a result of allocation of portions of profit net of income taxes other than the profit paid in the form of dividend to shareholders or employee profit sharing.

3.15. Taxes and Contributions

Deferred Income Taxes

Deferred tax liabilities are recognised for all taxable temporary differences, except where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised except where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of deductible temporary differences associated with investments in subsidiaries, associates and joint ventures, when deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which temporary differences can be utilised. The currently effective tax rate as at the reporting date is 15%.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or a portion of the deferred tax assets to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow deferred tax assets to be utilised.

Deferred tax assets and liabilities are calculated at the tax rate expected to be effective in the year of realisation of tax benefits, i.e., settlement of deferred tax liabilities, based on the official tax rates and regulations enacted or substantively enacted on the reporting date. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.15. Taxes and Contributions (Continued) Current Income Taxes

The Bank is subject to income taxation in the Republic of Serbia. The Bank is under obligation to pay income tax in the form of monthly advance payments during the year, the amount of which is determined based on the income tax return submitted for the previous year. The final taxable income to which the prescribed corporate income tax rate of 15% is applied (2018: 15%), is arrived at through preparation of the Bank’s tax statement. In situations where the final tax liability differs from the initially recognised tax liability, this difference affects the tax liability in the period in which the difference was identified.

Current and deferred taxes are recognised as income or expenses and are included in the net profit/(loss) for the period.

Other Taxes

Indirect taxes and contributions include property taxes, value added tax, payroll contributions charged to the employer and various other taxes, contributions and duties payable under the republic and municipal tax regulations. These are included within other expenses (Note 14).

3.16. Internal Control System for Accounting Procedures Addiko Bank has an internal control system (ICS) in place for accounting procedures, which defines and allows for the realisation of processes throughout the organisation. The governing bodies in each of the organisational units are responsible for implementation of the Bank’s rules and procedures. Compliance with the Bank’s policies is monitored as part of both external and internal audits.

ICS, as part of the Bank’s risk management system, has the following general objectives:

• Protection and implementation of the business and risk strategies and Bank’s policies; • Effective and efficient use of all resources with a view to achieve the target commercial success; • Ensuring reliable financial reporting; and • Support to the compliance with all relevant legislation, rules and regulations.

The specific objective with regard to the Bank’s accounting procedures is that ICS ensures that all business transactions are recorded accurately, timely and in a uniform manner for accounting purposes. In addition, the system must ensure that no errors or intentional fraud affect adequate presentation of the Bank’s financial position and performance. This is the case whenever the data provided in the financial statements and notes to the financial statements are essentially inconsistent with correct figures, i.e., whenever, individually or in the aggregate, they can aﬀect decisions made by the users of the financial statements, as such a decision may incur serious damage, such as financial loss, the imposition of sanctions by the banking supervisor or reputational harm.

The internal control system itself is not a static system but is continuously being adapted to the changing environment. The implementation of the internal control system is fundamentally based on the integrity and the ethical behaviour of employees. The Executive Board and the management team actively and consciously embrace their role of leading by example.

4. RISK MANAGEMENT

4.1. Financial Risk Factors The risk management system aims to mitigate the risks the Bank is exposed to in its operations by observing and implementing the risk management principles and procedures, ensuring that all aspects of the Bank’s business are stable and minimally susceptible to negative internal and external factors and that the Bank’s risk profile meets the requirements of prudent banking business at all times.

The Bank bases its risk profile on the capital adequacy level that provides risk coverage required by the statutory regulations.

Moreover, the Bank monitors exposure to other risks arising from its operations and environment that are not required according to the statutory regulations on the capital adequacy ratios. 4. RISK MANAGEMENT (Continued)

4.1. Financial Risk Factors (Continued) The Bank’s risk management policies govern the management of all relevant risks (explained hereinafter) to which the Bank is exposed. The Bank’s risk management policies and procedures are in compliance with statutory regulations of the National Bank of Serbia (NBS), and policies, procedures and other relevant documents of Addiko Group.

The approach to the management of individual risks is defined under the effective regulations of the Republic of Serbia and the Bank’s internal regulations. The target level of capital adequacy is based on the principle that the Bank’s capital adequacy ratio should be in line with the scope, type and complexity of the Bank’s operations and, in addition to the risks contained within NBS regulations, provide a buffer for other risks arising from the Bank’s operations and environment and satisfy overall requirements of the supervisory annual assessment of minimum capital adequacy.

Risk management includes risk identification, risk measurement/assessment, undertaking of measures to mitigate risks and risk monitoring. Risk management is performed by:

1. The Bank’s bodies and other committees prescribed by the Law – the Board of Directors, Executive Board, Audit Committee, Assets & Liabilities Committee (ALCO) and Credit Committee;

2. Working groups and committees of the Bank’s Executive Board – Risk Control Advisory Body, Advisory Body for Monitoring Corpo- rate Clients and Operational Risk Advisory Body;

3. The Bank’s organisational units – Risk Control Department, Credit Risk Management Division, Data Governance Department, BSM & Treasury Department, Compliance Department and other units, as appropriate.

The Board of Directors defines the Risk Management Strategy and policies, which are executed by the Executive Board. The Ex- ecutive Board adopts procedures for risk identification, measurement, assessment and management, analyses efficiency of their application and reports to the Board of Directors about those activities.

The Risk Management Strategy is a reflection of the business strategy and it describes the planned structure of operations, strategic development and growth, taking into account processes, methodology and organisational structure relevant to managing risk factors. As such, the Risk Management Strategy is the link between the business strategy and the Bank’s risk positioning. The Strategy is the highest-level risk management tool and defines the framework for monitoring, controlling and mitigating risks to which the Bank is exposed in its operations while at the same time maintaining the internal capital adequacy liquidity position and overall profitability. Reliable and sustainable growth is thus achieved, while also maintaining the level of the Bank’s own resources which are sufficient to support its operations, based on the given level of risk and in line with regulatory requirements.

The implementation of the Bank’s overall Risk Management Strategy is ensured in the following manner:

• Defining the Bank’s aptitude for risk assumption and measurement of the total risk level, as well as individual risk types, in line with the Bank and Group Business Strategies;

• Appropriate identification and quantification of each risk individually, especially in terms of internal capital and liquidity requirements, defining the existing/targeted limits for the financial year and suitable management and coordination mech- anisms;

• Converting strategic objectives to detailed guidelines and rules regarding risk management, by means of comprehensive internal governance of every individual risk type, thus achieving efficiency in fulfilling the objectives at the level of an individual client/transaction;

• Establishing an organisational framework suitable for risk management purposes, and which clearly delineates lines of responsibility.

The Bank has established the Risk Appetite Framework (RAF), which is part of the process relevant to the development and implementation of the risk management business policy and strategy. Furthermore, the level of assumed risk versus the capacity to incur risk is also defined. The RAF defines risk levels the Bank is willing to undertake. The measures applied to define the RAF have been fine-tuned, taking into account the effective annual budget, the Risk Management Strategy, Capital Strategy and Recovery Plan, representing the framework for proper internal risk management and supervision.

Additionally, as part of strategic risk management, the Bank will implement one other crucial process - the internal capital adequacy assessment process (ICAAP), to determine capital levels adequate for the coverage of all materially significant risks to which it is exposed. The ICAAP is a tool used for assessing the adequacy of internal capital vs. the Bank’s risk profile and for implementing this strategy, suitable for the purpose of maintaining internal capital adequacy. 4. RISK MANAGEMENT (Continued)

4.1. Financial Risk Factors (Continued) The key risks to which the Bank is exposed arise from its very operations as well as market conditions, and the Bank faces those in the form of:

• credit risks,

• market risks,

• liquidity risk,

• operational risk (which includes legal risk) as well as other risks such as:

• compliance risk,

• strategic risk.

In 2020, there have been no significant changes to the objective, manner, process and methods of managing the above listed key risks to which the Bank is exposed.

Hereunder is a summary of the key risks which the Bank monitors and manages on an ongoing basis.

4.1.1 Credit Risk Credit risk is the risk of negative effects on the Bank’s financial result and equity arising from borrowers’ inability to settle the liabilities matured due to the Bank. The Bank’s credit risk depends on the creditworthiness (credit rating) of its borrowers, their regular and timely liability settlement and quality of collateral securitising the Bank’s receivables.

The segmentation of the Bank’s lending business is performed based on the type of client, as follows: ‘corporate’ (which includes three sub-segments: small, medium and large), private individuals, micro (small companies, entrepreneurs, agricultural producers) public sector and financial institutions.

In line with the relevant decision of the Bank’s Board of Directors, the Credit Committee is the decision-making body in charge of credit-related issues; this Committee renders decisions within limits defined per BoD decision on internal regulations of the Bank and carries out other activities, as stipulated by the Law and other regulations.

Once duly authorised by the BoD, the Executive Board of the Bank, defines the rules for assigning specific credit responsibilities to specific parties, under the competences of the Bank’s Credit Committee. The Bank’s Executive Board authorises the Executive Board member in charge of risk management to render decisions on assigning specific credit-related responsibilities to employees within the limits below the competences of the Credit Committee, taking into account employee know-how, experience and performance.

The process of credit risk identification, assessment, measurement and management is conducted continuously and includes the Bank’s total portfolio which is subject to credit risk.

Generally speaking, the process of credit risk management consists of three key components:

- directing and undertaking activities for the purpose of measuring, assuming, avoiding and dispersing risk,

- limiting risks, and

- risk supervising (measuring, monitoring and reporting).

In terms of measuring, directing and undertaking activities aiming to undertake, avoid and disperse risk, the Bank applies four approaches:

- Financial analysis of the client, analysis of the client’s history with the Bank and other financial institutions, analysis of the latest loan application, analysis of the client’s business model, business plans and projections and consequently the approval (undertaking) of associated credit risk;

- Regular presentations of the status of client’s operations to the competent underwriter of said credit risk, at least on an annual basis, throughout the lifetime of the contract concluded between the Bank and the client.

- Regular monitoring of the client’s activities, especially in the area of regular repayment of matured obligations, substantial change of the client’s financial condition and rating;

- As necessary, restructuring of the client’s obligations to the Bank and, consequently taking steps toward enforced collection, should restructuring fail. 4. RISK MANAGEMENT (Continued)

4.1. Financial Risk Factors (Continued)

4.1.1 Credit Risk (Continued) The role of the Risk Control Department is to strategically manage risks of the Bank and also to identify, measure, assess, monitor and report on credit risk, both at the portfolio- and Bank-level. Within this Department, the Credit Risk Control Team monitors, measures and reports on credit risk locally and at the Group level and also defines reports in line with the specific needs of the end-users of said reports. The Risk Control Department is responsible for portfolio-level exposure to credit risk for the purpose of establishing large exposure aggregates, determining and monitoring the quality of the loan portfolio (structure per risk category, loan size and industry) as well as monitoring development/trends against prior periods.

Credit risk reports for the purpose of reporting to the Executive Board, Board of Directors and Audit Committee are drafted on at least a quarterly basis, while Group reports are prepared in line with the Group’s specific requirements. The efficient management of credit risk, as well as timely and efficient decision-making process is ensured based on these reports.

The Risk Control Department also conducts the process of determining the impairment of balance sheet assets and provisions for losses on off-balance sheet items, i.e. calculation of expected credit losses (ECL), in line with IFRS 9, as per the methodology defined by the Bank.

The Credit Risk Management Division covers the activities of the Bank’s loan portfolio risk management primarily through the activities of the assessment of credit risks of performing clients, prevention of the occurrence of new NPLs, management of the existing NPLs of all Bank segments, as well as monitoring of the entire Bank portfolio and undertaking of corrective activities aimed at preserving defined Bank’s risk appetite.

The Underwriting Department within the Credit Risk Management Division actively participates in the preparation of loan applications and credit risk assessment per individual client, which includes an expert opinion or a ‘vote’ on each particular loan application, as well as in ongoing monitoring of client creditworthiness in accordance with NBS and Group requirements. Furthermore, it is engaged in the prevention, detection, investigation and recovery of credit frauds. The main objective is fraud prevention within the process of loan approval and continuous monitoring of the loan portfolio for fraud identification purposes.

The Distressed Asset Management Department within the Credit Risk Management Division performs the following activities:

- Prevention of new non-performing loans through continuous analysis and monitoring of the changes in the loan portfolio within the Division’s competence. Also, they conduct activities on implementing the early warning system re credit risk increase and implementation and improvement of the client credit risk monitoring process.

- Active participation in the loan restructuring process in order to allow client recovery, in the enforced collection process and in other measures contributing to potential NPL and NPL collection and minimising additional risk costs.

The Credit Portfolio Analytics and Steering Department within the Credit Risk Management Division is primarily responsible for managing the Bank’s loan portfolio risk based on regular monitoring of quantitative and qualitative indicators, and based on ana- lytical understanding of the said trends, it proposes adequate measures and corrective actions aiming at preserving defined Bank’s risk appetite. Moreover, its key role is ongoing improvement and optimisation of the credit process, credit methodologies and all other policies and internal documents within the competence of the Division which contribute to the preservation of the quality of the Bank’s loan portfolio. It is also engaged in the control of the implementation of internal regulations from the segment of lending business and credit process. The said department also performs monitoring of individual clients and business activities.

The Risk Control Advisory Body monitors and analyses Bank’s exposure to risks in relation to which it proposes measures for improvement of control, mitigation of individual risk types and rules for implementing these measures, as follows: credit risk, with focus on asset quality, loan portfolio in total and per segments; concentration risk (risk of Bank’s exposure to one person or a group of related persons); risk related to country of origin of the person to whom the Bank is exposed (country risk); ICAAP and capital adequacy of the Bank; regulatory business ratios, recovery plan ratios and RAF ratios; detailed overview of key indicators of the profile and quality of private individual portfolio; overview of the structure and status of Banks’s collaterals. 4. RISK MANAGEMENT (Continued)

4.1. Financial Risk Factors (Continued)

4.1.1 Credit Risk (Continued) The Advisory Body for Monitoring Corporate Clients is responsible for monitoring the portfolio of corporate clients. Matters dis- cussed by this Body are reports on the condition and movement in the standard clients’ portfolio, rendering decisions about WL classifications for clients who show early warning signs and rendering decisions on credit risk mitigation measures in connection with said clients. It convenes at least once monthly, and if required, more frequently.

4.1.1.1 Credit Risk Measurement and Impairment Policy

Client Credit Rating System The Bank performs credit risk assessment in compliance with uniform standards of Addiko Group, which is in line with both domestic statutory regulations and internal policies and procedures for client rating. The criteria for classification and rating of the Bank’s clients are fully in accordance with the effective National Bank of Serbia’s Decision on the Classification of Bank Balance Sheet Assets and Off-balance Sheet Items (RS Official Gazette no. 94/2011, 57/2012, 123/2012, 43/2013, 113/2013, 135/2014, 25/2015, 38/2015, 61/2016, 69/2016, 91/2016, 101/2017, 114/2017, 103/2018 and 8/2019).

The assessment includes qualitative and quantitative risk assessment, i.e. overall financial analysis, creditworthiness evaluation and client credit rating.

The quantitative analysis is based on an assessment of the client’s creditworthiness, which includes an analysis of the balance sheet structure, liquidity ratios, indebtedness, efficiency, profitability, cash flows, credit limits, and the assessment of client’s future business in the upcoming period (for the duration of the loan term). The qualitative indicators are based on the assessment of development of the industry and sector the client operates in, assessment of applied accounting policies and assessment of strategic and economic factors characteristic for the client within the relevant industry.

Client credit rating is assessed upon the completion of a financial analysis, and based on certain criteria applied in the analysis. In addition, regular monthly recalculation of the client’s internal credit rating is conducted based on the following information:

- days in arrears (days past due),

- external factors that may impact the deterioration of the client’s financial situation, and

- any other external or internal information indicating a material increase in credit risk.

Classification of credit assets into the Bank’s risk categories is conducted on the basis of internal credit ratings which are grouped and presented through the following 5 risk categories, for external reporting needs:

• 1A-1E: very low risk clients, with the best, excellent or very good credit ratings (best/excellent/very good creditworthiness);

• 2A-2E: clients with good or moderate credit ratings (good/good to moderate/moderate creditworthiness);

• 3A-3E: clients with medium to low credit ratings (acceptable/insufficient creditworthiness);

• 4A-4E (Watch List): clients with very low credit ratings or clients who are likely to default on their obligations. This category includes borrowers with past due receivables, unrecovered receivables or those who in the previous period have defaulted on their obligations or have experienced difficulties in repaying their debt in the previous period;

• 5A-5E (NPE-Default): clients who fulfil one or more of the aforementioned criteria, inter alia - if the past due interest or principle amount is materially significant and in arrears over 90 days, the Bank considers the creditworthiness of such clients as questionable, the loan restructuring process is applied which may lead to the restructuring of non-performing exposures (forborne exposures), realised credit losses or bankruptcy proceedings have been initiated.

Stages of Impairment and Significant Increase in Credit Risk The Bank establishes the criteria for the classification of balance sheet assets and off-balance sheet items per impairment levels as defined by the International Financial Reporting Standard 9 – ‘Financial Instruments’ (IFRS 9), including the criteria for receivables migration among impairment levels. In order to recognise, in line with the said standard, deterioration of credit quality, the Expected Credit Loss – ECL is calculated for three different stages. For this reason, 12-month ECLs are calculated for Stage 1 assets while lifetime ECLs, are calculated for Stage 2 and Stage 3 assets. 4 RISK MANAGEMENT (Continued)

4.1. Financial Risk Factors (Continued)

4.1.1 Credit Risk (Continued)

4.1.1.1 Credit Risk Measurement and Impairment Policy (Continued)

Stages of Impairment and Significant Increase in Credit Risk (Continued) Stage 1 commences at initial recognition of the financial asset, and at this time a 12-month ECL is recognised as a cost. For financial assets, interest income is calculated to the gross exposure. If there is no change in the credit quality of the financial instrument, the same treatment applies until final maturity.

Stage 2 - once significant deterioration of credit quality is established (increased credit risk), the financial asset is transferred to Stage 2 based on the previously defined criteria (as described in greater detail below). At this time, the lifetime ECL is calculated, resulting in a significant increase in allowance for impairment.

Detailed definition of Stage 2 in the regulatory process, i.e., determining significant deterioration in credit quality is executed based on the following criteria:

- the rate of credit risk increase measured through absolute and relative PD change;

- internal rating 4D or 4E;

- over 30 days past due in a materially significant amount;

- forborne status.

Stage 3 occurs at the moment the credit quality of the financial asset deteriorates to the point where objective evidence of impairment is recognised, i.e. default status. Inclusion in Stage 3 is dependent on the following:

- the client is over 90 days past due, in a materially significant amount;

- the client’s creditworthiness has been brought into question (significant doubt);

- restructuring due to deterioration in the customer’s financial situation (forbearance);

- partial or total write-off of receivables;

- sale of a portion of or full receivable due to deterioration in the customer’s financial situation; and

- insolvency/bankruptcy.

Lifetime ECLs are still recognised in this stage, while interest income is based on the net exposures (gross exposures less allowance for impairment).

The Bank applies the client-level assessment approach for these segments and has the same approach to corporate and retail clients (private individuals). If the liabilities of one type of client exposure are in default, then all other exposures i.e., the client’s overall exposure is classified as default.

Forward-Looking Information In line with IFRS 9, the Bank will categorise forward-looking information in its assessment on whether there has been a significant increase in the credit risk of a certain instrument since its initial recognition and take it into account when calculating ECL. The Bank has identified and documented key triggers of credit risk for each financial instrument portfolio, relying on the historical correlations between macroeconomic variables and credit risk. These key triggers include, among other factors, the following significant factors: unemployment rates, GDP growth rate, real estate prices and industrial manufacturing as well. All variables are included at the segment level, whenever reasonable and possible.

Forecasts of the movements of macroeconomic variables for the following years are created using internally and externally available data. Special attention is paid to checking and adjusting these data (if necessary) in order to ensure that these forecasts reflect the Bank’s expectations for the upcoming period. This also involves defining of future scenarios with their corresponding probabilities, and in particular, the baseline, optimistic and pessimistic scenarios and the respective probabilities. Forecast values are consistently applied to all other relevant internal processes. 4. RISK MANAGEMENT (Continued)

4.1. Financial Risk Factors (Continued)

4.1.1 Credit Risk (Continued)

4.1.1.1 Credit Risk Measurement and Impairment Policy (Continued)

Forward-Looking Information (Continued) The table below presents the values for each scenario for the selected forward-looking information on future events used in assessing ECL at year end.

Baseline scenario Optimistic scenario Pessimistic scenario Within 12 months Remaining 2-year (2020)* period* 3-year period* 3-year period*

Real GDP growth (%) -2.0 4.3 3.2 1.2 Unemployment rate growth

(average %) 9.0 8.8 8.2 9.6

Inflation rate (average %) 1.7 2.2 2.4 1.7

* average values for the period

The optimistic scenario reflects a combination of factors such as faster deployment of mass testing capacities, creation of a widely available vaccine, stronger growth of key Asian economies than currently projected, and consequently higher demand for Europe- an exports. Greater commitment by the European institutions to a common fund for recovery and mitigation of internal tensions between northern and southern Europe would further encourage recovery. The cyclical pattern can hardly be changed in the short term, but the mentioned positive outcomes could stimulate the level of growth by as much as 1% per year, which means returning on average about 2/3 of the loss from 2020 in the first year and exceeding pre-crisis levels by the end of simulation horizon by more than 4%.

The baseline scenario assumes that the economy will record a deep unprecedented recession in 2020 due to Covid-19, which will also hit Addiko Bank. It is clear that the second wave of the crisis brings new locking measures, which will turn into a relatively slow recovery. A relatively even return is expected in the second half of 2021, subject to the risk of significant negative impacts. Cumulative growth in the critical first three years is expected to remain positive. However, due to the lagging effects on employment and wage bargaining, spending could remain low, contributing to reduced business confidence and lower investment expectations, increasing uncertainty about the recovery phase. Global monetary conditions were already extremely loose before the Covid-19 crisis, which is even more pronounced now, so it can be expected that extremely low interest rates and the program of buying large assets of major central banks will continue at least until the middle of 2021.

The pessimistic scenario predicts that the waiting period for the mass vaccine will be longer than expected and the virus will mutate in the meantime, which would require the re-establishment of serious locking measures across Europe that could last longer, including Serbia. Less efficient and suboptimally coordinated monetary, fiscal and banking policies and measures will create pressure for recovery, thus increasing existing vulnerabilities. This would reduce the growth effect by half compared to the two optimistic scenarios, i.e., only 1/3 of the loss incurred in 2020 would recover in the first year of the simulation and barely reach pre-crisis levels by the end of the three-year period. However, the transition to more restrictive conditions that must be anticipat- ed in the design of the scenario entails great uncertainty. It is difficult to predict the reactions to the mentioned policies, as well as their efficiency. Above all, there is a lack of similar events in the past that could provide useful empirical guidance.

Apart from described scenarios, the Bank also applies other more pessimistic (negative) scenarios which enable the Bank to recon- sider the wider range of possible outcomes for its loan portfolio.

Calculation of Expected Credit Losses In order to assess impairment of financial assets that are measured at amortised cost or fair value through other comprehensive income, the Bank applies the ECL model.

Expected loss is defined as the difference between cash flows due to the Bank in accordance with the contractual terms of a- fi nancial instrument and the cash flows the Bank expects to receive (considering probabilities of default and expected recoveries). Although this requirement is introduced by IFRS 9, the standard does not prescribe detailed methods and techniques to be applied. 4. RISK MANAGEMENT (Continued)

4.1. Financial Risk Factors (Continued)

4.1.1 Credit Risk (Continued)

4.1.1.1 Credit Risk Measurement and Impairment Policy (Continued)

Calculation of Expected Credit Losses (Continued) When establishing cash flows the Bank expects to receive, it applies the marginal loss approach, whereby the total expected loss is computed as the sum of marginal losses incurred at any moment, starting from the reporting date. Marginal losses arise from individual inputs used to estimate exposures and losses in the event of default and conditional probability of default for each period. The lifetime expected credit losses (lifetime ECL) are calculated separately for different scenarios taking into account current and forecast forward-looking information. The total expected credit losses under individual scenarios are eventually probability-weighted. The Bank considers three scenarios: the base line, optimistic and pessimistic scenarios and some less favourable scenarios are at times simulated in order to understand the dynamics and potential portfolio-specific risks.

Probability of default (PD) estimates are estimates at a certain date, which will be calculated based on statistical rating models and assessed. The applied segmentation in further steps is derived from the applied rating model as per the IFRS 9 Impairment Methodology - Banks - Private Individuals-Collateralised, Private Individuals-Uncollateralised, Corporate Clients (Large, Medium, Small), Micro (entrepreneurs and agricultural producers segment), Countries, Local Administration, Project Financing, Banks and other. These statistical models take into consideration the internally available quantitative and qualitative data. Where it is available, market/external data may also be used as well (e.g. financial institutions and countries).

The Bank has opted for the indirect modelling approach. This means that the existing Basel II methodology was utilised as the starting point and adjusted in a manner fully harmonised with IFRS 9. This entails removal of any conservative elements from the model, inclusion of forward-looking information, as well as lifetime PD estimates.

Exposure at default (EAD) is an estimated exposure including the repayment of principal, interest, expected amounts to be drawn from lines of credit and letters of guarantee. EAD is the gross carrying value at the time of discounting to present value, as at the reporting date, using the effective interest rate. In situations when contracted maturities have not been defined, the quantitative and/or qualitative criteria will be applied to determine the structure of cash flows (e.g. frameworks). The applied credit conversion factor (CCF) for all relevant off-balance sheet exposures is 100%, except for performance bonds, revocable and irrevocable lines of credit, to which CCF ranging between 0% and 50% will be applied.

Loss given default (LGD) is an estimate of economic loss in the event of default. For corporate clients, a simplified approach has been selected for the LGD parameter. For private individuals and micro clients, the LGD parameter has been determined based on a statistical model using internal data. These values are adjusted internally and qualitative and/or qualitative verifications are carried out in order to ensure estimate adequacy.

For the purpose of determining PD and LGD parameters, statistical models have been applied, wherever possible and acceptable. These models are based on available historical and/or external market data. The methodologies are based on internally available credit risk modelling, adjusted in a manner that fully reflects IFRS 9 requirements.

Lifetime ECL is calculated separately for various scenarios, taking into account present and forecast information. Aggregation of the final ECL amount is conducted at the end of the process by applying the weighted average for each scenario individually. The Bank runs calculations for these three scenarios: base case, optimistic and pessimistic scenarios.

Determining estimated credit losses and credit exposure impairment calls for staging of all exposures subject to credit risk in line with IFRS 9, as well as separation of those which are individually significant from those which are not individually significant in case of impaired credit risk exposures. The most significant criterion for determining which method is to be applied for estimating individual risk provisions is whether the aggregate amount of a particular exposure is individually significant or not.

An individually significant exposure is the total gross exposure of a group of related parties at the Bank level in excess of EUR 150,000 without reduction for collateral value. 4 RISK MANAGEMENT (Continued)

4.1. Financial Risk Factors (Continued)

4.1.1 Credit Risk (Continued)

4.1.1.1 Credit Risk Measurement and Impairment Policy (Continued)

Calculation of Expected Credit Losses (Continued) The collective assessment method is applied to:

• Exposures which are in Stage 1 or Stage 2;

• Individually significant exposures which are in Stage 3ii but, based on the individual calculation, the amount of expected losses equals zero (e.g., expected collection of cash flows exceed receivables);

• Exposures which are insignificant (small values) in Stage 3.

The model applied to the collective assessment of impairment is based on the concept that allowance for impairment is calculated as a product of the exposure at default (EAD), probability of default (PD) and loss given default (LGD), whereby LGD is based on relevant characteristics such as time in default status, risk and product segments.

Individually determined allowance for impairment are those for which expected future cash flows are estimated and recognised for each individual exposure/client. This calculation takes into account repayments from:

- the client’s main operating activity (primary cash flows),

- realised collateral, ancillary assets and assets not connected with the borrower’s main activities (secondary cash flows).

Dependent on presumed loss scenario, expected recovery is estimated individually in terms of the amount and time required for recovery. Assumptions underlying each of the relevant scenarios, along with corresponding probabilities, are duly documented and reasonable on a case by case basis. For calculations referring to the recovery process through the sale of property-collateral, the Bank bases its assumptions on the market value of collateral. Impairment factors are measures on an individual basis and are dependent on the quality of collateral; this measurement is based on various factors such as marketability, location, time till realisation and the legal status of the subject property. The positive difference between exposures in default status and the present value of expected future cash flows represents the impairment amount of individually significant defaulting exposures.

The Bank’s Detection of Default Status and Default Status Exit Policy envisages the terms which must be fulfilled as well as the period in which the client may be relieved of default status. Most commonly, the period in which a client must not default in settling liabilities is over 90 days. Upon the expiry of this period, if the terms of reestablishment are met, the client is reassigned the initial rating (rating assigned according to most recent financial statements).

The Bank’s policy for credit risk provisioning defines the framework for this area, while the process and responsibilities of calculating impairment are defined by the Provisioning Procedure, in line with IFRS 9.

Macro models have been adjusted such that they are harmonised with validation results and new macroeconomic forecasts which are applied in order to reflect the latest available economic positions, through all segments. LGD values were also adjusted to validation results for unsecured private individual loans (PIOt segment) and micro clients (SCPI segment).

Validation The methodology and assumptions in computing the ECL are included in the internal validation process. This means that continual quality control is implemented on the models and methodologies and recommendations for their improvement are provided. The applied validation standards are formalised beforehand to secure the consistent assessment over time. Validation is usually conducted once per year.

The Bank differentiates between the initial and continual validations:

• Initial validation is conducted when a new model is developed, if there is a more significant change to the existing methodology and/or in the event of significant adjustments to values.

• Continual validations represent the regular review of existing methodologies. 4. RISK MANAGEMENT (Continued)

4.1. Financial Risk Factors (Continued)

4.1.1 Credit Risk (Continued)

4.1.1.1 Credit Risk Measurement and Impairment Policy (Continued)

Validation (Continued) In addition to the annual process, a monthly monitoring process has been established to ensure that the changes in portfolio development and the model are timely identified.

In line with the Bank policy for credit risk model validation, reports on current validation of credit risk models are submitted to the Executive Board for adoption minimum once a year.

Reports on regular current validation of credit risk models of the Bank for 2020 adopted by the Bank’s Executive Board show acceptable levels of quantitative and qualitative validations of models used, including standard recommendations with plans for further improvements. Validation results for the LGD parameter obtained in 2020 for the subsegment of private individuals and the SME subsegment showed that applied LGD values were adequate.

Write-off of Receivables

Receivables are written off under decisions of the Bank’s competent bodies in accordance with their scope of authority, if they are determined to be irrecoverable, as well as in accordance with National Bank of Serbia Decision on the Accounting Write-off of Bank Balance Sheet Assets (RS Official Gazette no. 77/2017) – hereinafter: the Write-off Decision. By transferring receivables from the balance sheet to the off-balance items, the Bank has not waived collection of receivables due from clients.

When the Bank no longer reasonably expects that a receivable will be recovered in full or partially, internal write-off ensues.

Write-off may be executed only against already recognised ECLs. The written-off amount may be full or partial write-off.

In addition to the overall derecognition criteria (see section Derecognition and Contract Modification), the below-mentioned criteria lead to the derecognition of financial assets:

• Unsecured financial assets if the borrower is subject to instigated bankruptcy proceedings;

• Unsecured financial assets if no payments have been made per said financial asset for a period of one year;

• Secured financial assets if no payments have been made in a specified period, dependent on the type of collateral;

A. Property as collateral, if no payments have been made in the past 5-year period B. Moveable assets, if no payments have been made in the past 2-year period C. Other, if no payments have been made for a period of one year;

• Financial assets that have undergone restructuring three or more times and the Bank has assessed that the borrower is unable to repay its obligations;

• Financial assets under which the right to settle receivables due from the borrower in a court or other procedures is terminated through approval of forced settlement.

According to the Write-off Decision, the Bank is obligated to transfer to off-balance items, all NPLs when the computed amount of impairment thereof credited to the account of impairment allowance equals 100% of the gross carrying value. In 2020, the Bank transferred uncollectable receivables fully (100%) impaired to the off-balance items. 4. RISK MANAGEMENT (Continued)

4.1. Financial Risk Factors (Continued)

4.1.1 Credit Risk (Continued)

4.1.1.1 Credit Risk Measurement and Impairment Policy (Continued)

Collaterals The Bank uses the following collaterals in its operations accepted when executing the loan contracts, aiming to protect the Bank from credit risk:

1) mortgages assigned over commercial and residential buildings and premises,

2) sureties of legal entities and private individuals,

3) pledge liens over movable property,

4) pledge liens over securities,

5) bank and corporate guarantees,

6) earmarked deposits.

Factors affecting collateral value appraisal:

a) asset holding period,

b) the most recent appraised value of collateral (as per internal or external appraisal),

c) net realisable value of collateral (net of taxes, fees and commissions).

To assess impairment for future cash flow from collateral realisation, the Bank assesses the value of collateral and time to collection. The haircut that the collateral value is reduced for represents the adjustment up to the amount recoverable in the process of collection from collateral foreclosure.

The appraised collateral value is taken as reduced by the haircut (reduction includes a decreased estimated value of the market- able price and the cost of selling the collateral) and to the level of exposure.

4.1.1.2 Credit Risk Measurement, Impairment and Provisioning Policy (Continued)

The Bank endeavours to reduce risk by obtaining collateral, wherever possible. Collateral value is usually determined upon establishment as well as annually, based on statistical data or once every three years through appraisal performed by an independent appraiser in instances of immovable assets (real estate) or movable assets, while some collateral types such as deposits or securities are revalued monthly.

Through voluntary sale, court and out-of-court enforcement as well as bankruptcy proceedings, the Bank sells collateral serving as security for NPLs. The method of sale depends on the client cooperation, client legal status and the collateral’s legal status.

Maximum exposure to credit risk without taking collateral into account:

(in RSD ‘000) 31 December 31 December 2020 2019 Total receivables

Cash and balances held with the Central Bank 11,732,681 7,884,752

Financial assets at fair value through profit and loss 1,964,611 2,295,910

Financial assets measured at fair value through OCI 10,638,217 11,372,087

Loans and receivables due from banks and other financial institutions 2,736,227 2,785,912

Loans and receivables due from customers 75,310,489 71,358,685

Other assets 544,472 554,264

TOTAL 102,926,025 96,251,610

Off-balance sheet items 25,326,583 25,540,611

TOTAL EXPOSURE 128,252,608 121,792,221 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued)

4.1.1.2 Credit Risk Measurement, Impairment and Provisioning Policy (Continued)

Breakdown of Bank’s financial assets as at 31 December 2020:

(in RSD ‘000)

31 December 2020 Performing exposures Non-performing exposures

Allowance Allowance for Allowance for Exposure - for im- Net exposure Exposure - Net exposure Exposure - Net exposure Total net impairment impairment Measured Total receivables Stage 1 pairment (Stage 1) Stage 2 (Stage 2) Stage 3 (Stage 3) Net expo- Net expo- exposure (Stage 2) (Stage 3) through (Stage 1) sure POCI 2 sure POCI 3 profit&loss Cash and balances held with the 11,732,681 (672) 11,732,009 ------11,732,681 11,732,009 Central Bank Financial assets at fair value ------1,964,611 1,964,611 1,964,611 through PL Financial assets measured at 10,638,217 (8,536) 10,629,681 ------10,638,217 10,629,681 fair value through OCI Loans and receivables due from banks and other financial 1,625,686 (4,840) 1,620,847 1,110,541 (47,176) 1,063,365 - 2,736,227 2,684,211 institutions Loans and receivables due from 63,988,329 (914,564) 63,073,765 8,756,214 (1,029,906) 7,726,308 2,162,236 (1,696,189) 466,047 251,113 152,597 - 75,310,489 71,669,830 customers Other assets 452,973 (7,936) 445,037 12,263 (707) 11,556 79,236 (77,916) 1,320 - - - 544,472 457,913 TOTAL 88,437,886 (936,548) 87,501,339 9,879,018 (1,077,789) 8,801,229 2,241,472 (1,774,105) 467,367 251,113 152,597 1,964,611 102,926,697 99,138,255 Off-balance sheet items 24,001,404 (73,617) 23,927,787 1,318,035 (19,043) 1,298,992 7,144 (2,818) 4,326 - - - 25,326,583 25,231,105

TOTAL EXPOSURE 112,439,290 (1,010,165) 111,429,126 11,197,053 (1,096,832) 10,100,221 2,248,616 (1,776,923) 471,693 251,113 152,597 1,964,611 128,253,280 124,369,360 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued)

4.1.1.2n Credit Risk Measurement, Impairment and Provisioning Policy (Continued)

Breakdown of Bank’s financial assets as at 31 December 2019:

(in RSD ‘000)

Performing Non-perform- 31 December 2019 exposures ing exposures

Allowance Allowance Allowance for Net expo- Net Exposure - Net exposure Exposure - for im- Exposure - for impair- Measured Total receiv- Total net impairment sure (Stage exposure Net ex- Net ex- Stage 1 (Stage 1) Stage 2 pairment Stage 3 ment (Stage through ables exposure (Stage 1) 2) (Stage 3) posure posure (Stage 2) 3) prof- POCI 2 POCI 3 it&loss Cash and balances held with 7,884,752 (15) 7,884,737 ------7,884,752 7,884,737 the Central Bank Financial assets at fair value ------2,295,910 2,295,910 2,295,910 through PL Financial assets measured 11,372,087 - 11,372,087 ------11,372,087 11,372,087 at fair value through OCI Loans and receivables due from banks and other 2,785,912 (8,973) 2,776,939 ------2,785,912 2,776,939 financial institutions Loans and receivables due 62,709,448 (767,415) 61,942,033 5,307,177 (948,926) 4,358,251 2,903,006 (2,055,405) 847,601 296,953 142,101 - 71,358,685 67,586,939 from customers Other assets 466,774 (3,841) 462,933 11,705 (1,403) 10,302 75,785 (72,516) 3,269 - - - 554,264 476,504 TOTAL 85,218,973 (780,244) 84,438,729 5,318,882 (950,329) 4,368,553 2,978,791 (2,127,921) 850,870 296,953 142,101 2,295,910 96,251,610 92,393,116 Off-balance sheet items 25,368,774 (74,033) 25,294,741 108,931 (7,668) 101,263 62,906 (11,790) 51,116 - - - 25,540,611 25,447,120 TOTAL EXPOSURE 110,587,747 (854,277) 109,733,470 5,427,813 (957,997) 4,469,816 3,041,697 (2,139,711) 901,986 296,953 142,101 2,295,910 121,792,221 117,840,236

Based on the implementation of the Law on the Conversion of Housing Loans Indexed to Swiss Francs (hereinafter: the “Conversion Law”) coming into force on the eighth day from its publica- tion in the RS Official Gazette no. 031/19 dated 29 April 2019 and further written instructions of the National Bank of Serbia presented to banks, the Bank performed the conversion of housing loans indexed in CHF to EUR-indexed debts at the conversion exchange rate.

In relation to loans covered by the Conversion Law, after initial recognition, the Bank implements, in the context of recording, classification and monitoring, the same criteria and all regular procedural rules as for receivables due from other loans, except the condition of their reclassification from NPL to performing loans and stopping to consider POCI receivables from converted loans as non-performing (shown in the table as POCI 3) in case the criterion of timeliness in repayment is fulfilled, as defined in more detail by a separate methodology. Accordingly, the change of classification to performing does not result in changing the manner of measuring such receivables, implying that it is still compliant with IAS/IFRS rules, with the value being adjusted in time for changes of lifetime ECL in relation to the moment of initial recognition to POCI. The lifetime ECL calculation is compliant with the methodology applied for Stage 2 receivables (shown in the table as POCI 2). 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued) 4.1.1.2 Credit Risk Measurement, Impairment and Provisioning Policy (Continued) Breakdown of receivables per rating and status

The following table shows gross financial instruments per rating class as at 31 December 2020:

Financial assets measured at fair value through OCI

(in RSD ‘000)

31 December 2020

1A-1E 2A-2E 3A-3E Watch List NPLs Non-rated clients Total

Loans due from state agencies 98,627 10,004,501 535,089 - - - 10,638,217 and institutions Total 98,627 10,004,501 535,089 - - - 10,638,217

Loans and receivables due from banks and other financial institutions

(in RSD ‘000)

31 December 2020

1A-1E 2A-2E 3A-3E Watch List NPLs Non-rated clients Total Loans due from other banks and financial 1,620,983 1,110,516 4,728 - - - 2,736,227 institutions Total 1,620,983 1,110,516 4,728 - - - 2,736,227

Loans and receivables due from customers

(in RSD ‘000)

31 December 2020

1A-1E 2A-2E 3A-3E Watch List NPLs Non-rated clients Total Loans due from private 2,087,954 15,013,161 10,016,346 5,285,537 1,932,467 - 34,335,465 individuals SME loans 169,448 5,684,525 16,990,761 2,879,197 347,610 - 26,071,541 Loans due from corpo- 21,948 4,804,110 9,762,842 279,828 34,755 - 14,903,483 rate clients Loans due from state agencies and insti------tutions Total 2,279,350 25,501,796 36,769,949 8,444,562 2,314,832 - 75,310,489

Other assets

(in RSD ‘000)

31 December 2020

1A-1E 2A-2E 3A-3E Watch List NPLs Non-rated clients Total Loans due from private 21 10,468 10,454 3,223 63,355 - 87,520 individuals SME loans 749 3,073 10,577 11,976 10,318 - 36,693 Loans due from other banks and financial - 374,268 2 - - - 374,270 institutions Loans due from corpo- 8 3,533 36,852 33 5,563 - 45,989 rate clients Loans due from state agencies and insti------tutions Total 778 391,342 57,884 15,232 79,236 - 544,472 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued) 4.1.1.2 Credit Risk Measurement, Impairment and Provisioning Policy (Continued) The following tables show gross financial instruments per rating class as at 31 December 2019:

Financial assets measured at fair value through OCI

(in RSD ‘000)

31 December 2019

Non-rated 1A-1E 2A-2E 3A-3E Watch List NPLs Total clients Loans due from state agencies 112,363 10,701,082 558,642 - - - 11,372,087 and institutions Total 112,363 10,701,082 558,642 - - - 11,372,087

Loans and receivables due from banks and other financial institutions

(in RSD ‘000)

31 December 2019

1A-1E 2A-2E 3A-3E Watch List NPLs Non-rated clients Total Loans due from other banks 1,378,438 1,407,450 24 - - - 2,785,912 and financial institutions

Total 1,378,438 1,407,450 24 - - - 2,785,912

Loans and receivables due from customers

(in RSD ‘000)

31 December 2019

Non-rated 1A-1E 2A-2E 3A-3E Watch List NPLs Total clients Loans due from private individuals 2,089,174 13,506,963 9,982,712 5,218,249 1,885,835 678,429 33,361,362 SME loans 224,767 5,083,838 14,967,231 871,581 584,155 - 21,731,572 Loans due from corporate clients 2,252,851 6,912,349 6,562,996 12,763 524,793 - 16,265,751 Loans due from state agencies and ------institutions Total 4,566,792 25,503,150 31,512,938 6,102,593 2,994,783 678,429 71,358,685

Other assets

(in RSD ‘000)

31 December 2019

Non-rated 1A-1E 2A-2E 3A-3E Watch List NPLs Total clients Loans due from private individuals 153 13,712 3,354 1,935 61,327 5,366 85,847 SME loans 32 64,572 881 11,946 8,577 44,801 130,809 Loans due from other banks and 50 259,924 - - - - 259,974 financial institutions Loans due from corporate clients 1 2,049 736 26 5,561 68,591 76,964 Loans due from state agencies and - 37 9 5 7 612 670 institutions Total 236 340,294 4,980 13,912 75,472 119,370 554,264 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued) 4.1.1.2 Credit Risk Measurement, Impairment and Provisioning Policy (Continued)

Loans and receivables due from customers

Breakdown of receivables and allowance for impairment per rating class as at 31 December 2020:

Financial assets measured at fair value through OCI

(in RSD ‘000) STAGE1 31 December 2020 Fair value 1A-1E 98,627 2A-2E 10,004,501 3A-3E 535,089 Total 10,638,217

Loans and receivables due from banks and other financial institutions (in RSD ‘000) STAGE1 31 December 2020 Gross exposure Allowance for impairment Net exposure 1A-1E 1,620,983 (4,774) 1,616,209 2A-2E 1,110,516 (47,176) 1,063,341 3A-3E 4,728 (66) 4,661 Unrated clients - - - Total 2,736,227 (52,016) 2,684,211

Loans and receivables due from customers

(in RSD ‘000) Allowance for impairment

Gross exposure Net exposure STAGE1 STAGE2 STAGE3 POCI 2 POCI 3 31 December 2020 1A-1E 2,270,575 (6,608) (113) - 8,774 - 2,272,627 2A-2E 25,435,289 (213,013) (18,642) - 66,507 - 25,270,141 3A-3E 36,710,689 (573,527) (124,645) - 59,261 - 36,071,777 Watch List 8,327,989 (121,416) (886,506) - 116,572 - 7,436,640 Non-performing loans 2,162,236 - - (1,696,189) - 152,597 618,644 Unrated clients ------Total 74,906,779 (914,564) (1,029,906) (1,696,189) 251,113 152,597 71,669,829

Other assets (in RSD ‘000) Allowance for impairment Gross 31 December Net exposure exposure STAGE1 STAGE2 STAGE3 2020 1A-1E 776 (0) (0) - 776 2A-2E 391,344 (6,225) (203) - 384,916 3A-3E 57,884 (1,091) (48) - 56,745 Watch List 15,232 (620) (455) - 14,157 Non-perform- 79,236 - - (77,915) 1,321 ing loans Unrated clients - - - - - Total 544,472 (7,936) (706) (77,915) 457,915 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued) 4.1.1.2 Credit Risk Measurement, Impairment and Provisioning Policy (Continued)

Breakdown of receivables and allowance for impairment per rating class as at 31 December 2019:

Financial assets measured at fair value through OCI (in RSD ‘000) STAGE1 31 December 2019 Fair value 1A-1E 112,363 2A-2E 10,701,082 3A-3E 558,642 Total 11,372,087 Loans and receivables due from banks and other financial institutions

(in RSD ‘000) STAGE1 Gross Net

31 December 2019 exposure Allowance for impairment exposure 1A-1E 1,378,438 (2,397) 1,376,041 2A-2E 1,407,450 (6,576) 1,400,874 3A-3E 24 - 24 Unrated clients - - - Total 2,785,912 (8,973) 2,776,939

Loans and receivables due from customers (in RSD ‘000) Allowance for impairment Gross

31 December 2019 exposure STAGE1 STAGE2 STAGE3 POCI 2 POCI 3 Net exposure 1A-1E 4,566,792 (11,081) (777) - - - 4,554,934 2A-2E 25,503,150 (192,492) (10,913) (1,287) - - 25,298,458 3A-3E 31,512,938 (464,762) (65,022) (19,088) - - 30,964,066 Watch List 5,805,640 (84,208) (871,843) (62,004) 296,953 - 5,084,538

Non-performing loans 2,852,682 (1,115) (102) (1,973,026) - 142,101 1,020,540 Unrated clients 678,429 (13,757) (269) - - 664,403 Total 70,919,631 (767,415) (948,926) (2,055,405) 296,953 142,101 67,586,939

Other assets (in RSD ‘000) Gross Allowance for impairment

31 December 2019 exposure STAGE1 STAGE2 STAGE3 Net exposure 1A-1E 236 (1) - - 235 2A-2E 340,296 (1,781) (0) - 338,515 3A-3E 4,980 (99) (9) (10) 4,862 Watch List 13,912 (115) (1,391) (88) 12,318 Non-performing loans 75,470 (13) - (71,839) 3,618 Unrated clients 119,370 (1,832) (3) (579) 116,956 Total 554,264 (3,841) (1,403) (72,516) 476,504 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued) 4.1.1.2 Credit Risk Measurement, Impairment and Provisioning Policy (Continued)

Exposure per geographic area, region and industry

The following table shows the distribution of the amounts of financial instruments with allowance for impairment per geographic areas and regions as at 31 December 2020 and 31 December 2019:

The Bank’s loan portfolio focuses on the EU and Serbia, which is shown in the following table:

Financial assets measured at fair value through OCI – net

(in RSD ‘000) 31 December 2020 31 December 2019 Serbia 9,996,507 10,701,082 European Union 98,624 112,363 Rest of the world 534,550 558,642 Total 10,629,681 11,372,087

Net loans and receivables due from banks and other financial institutions

(in RSD ‘000)

31 December 2020 31 December 2019 Serbia 15,114 31,218 European Union 2,218,593 2,683,817 Rest of the world 502,520 70,877 Less: allowance for impairment (52,016) (8,973) Total 2,684,211 2,776,939

Net loans and receivables due from customers

(in RSD ‘000) 31 December 2020 31 December 2019 Belgrade 40,761,798 46,266,347 Vojvodina 15,606,902 11,984,912 Central and Southern Serbia 18,770,567 12,380,192 European Union 55,638 22,315 Rest of the world 115,584 704,919 Less: allowance for impairment (3,640,659) (3,771,746) Total 71,669,830 67,586,939

Net other assets

(in RSD ‘000) 31 December 2020 31 December 2019 Belgrade 282,143 291,378 Vojvodina 21,055 23,789 Central and Southern Serbia 33,913 14,342 European Union 173,429 183,342 Rest of the world 33,932 41,413 Less: allowance for impairment (86,559) (77,760) Total 457,913 476,504 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued) 4.1.1.2 Credit Risk Measurement, Impairment and Provisioning Policy (Continued)

Exposure per geographic area, region and industry (Continued)

The following table shows the distribution of gross amounts of financial instruments per geographic areas and branches of industry as at 31 December 2020:

Financial assets measured at fair value through OCI

(in RSD ‘000)

31 December 2020 Serbia European Union Rest of the world Total exposure Financial institutions 10,004,501 98,627 535,089 10,638,217 Total 10,004,501 98,627 535,089 10,638,217

Loans and receivables due from banks and other financial institutions

(in RSD ‘000)

31 December 2020 Serbia Europe Rest of the world Total exposure Financial institutions - 2.218.593 502.520 2.721.113 Services 15.114 - - 15.114 Total 15.114 2.218.593 502.520 2.736.227

Loans and receivables due from customers

(in RSD ‘000)

31 December 2020 Serbia Europe Rest of the world Total exposure State (government) 232,541 - - 232,541 Private individuals 34,329,868 22,592 49,487 34,401,947 Trade 10,644,591 - - 10,644,591 Construction industry 3,461,053 - - 3,461,053 Manufacturing and oil industry 17,742,572 - - 17,742,572 Services 8,728,641 33,047 66,097 8,827,785 Total 75,139,266 55,639 115,584 75,310,489

Other assets

(in RSD ‘000) 31 December 2020 Serbia European Union Rest of the world Total exposure State (government) 213 - - 213 Financial institutions 158,828 173,348 32,742 364,918 Private individuals 67,784 77 97 67,958 Construction industry 4,225 - - 4,225 Manufacturing and oil industry 11,212 - - 11,212 Trade 12,208 - - 12,208 Services 82,641 5 1,092 83,738 Total 337,111 173,430 33,931 544,472 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued) 4.1.1.2 Credit Risk Measurement, Impairment and Provisioning Policy (Continued)

Exposure per geographic area, region and industry (Continued)

The following table shows the distribution of gross amounts of loans and receivables per geographic areas and branches of industry as at 31 December 2019:

Financial assets measured at fair value through OCI

(in RSD ‘000)

31 December 2019 Serbia European Union Rest of the world Total exposure

Financial institutions 10,701,082 112,363 558,642 11,372,087 Total 10,701,082 112,363 558,642 11,372,087

Loans and receivables due from banks and other financial institutions

(in RSD ‘000)

31 December 2019 Serbia European Union Rest of the world Total Financial institutions 4,590 2,683,817 70,840 2,759,247 Services 26,628 - 37 26,665 Total 31,218 2,683,817 70,877 2,785,912

Loans and receivables due from customers

(in RSD ‘000)

31 December 2019 Serbia Europe Rest of the world Total State (government) 310,083 - - 310,083 Private individuals 33,129,290 22,315 59,948 33,211,553 Trade 10,805,412 - - 10,805,412 Construction industry 3,571,691 - - 3,571,691 Manufacturing and oil industry 15,254,245 - - 15,254,245 Services 7,560,730 - 644,971 8,205,701 Total 70,631,451 22,315 704,919 71,358,685

Other assets

(in RSD ‘000) 31 December 2019 Serbia European Union Rest of the world Total exposure State (government) 571 - - 571 Financial institutions 35,706 183,288 40,989 259,983 Private individuals 64,737 12 34 64,783 Construction industry 62,465 - - 62,465 Manufacturing and oil industry 8,237 - - 8,237 Trade 52,760 - - 52,760 Services 105,032 42 391 105,465 Total 329,508 183,342 41,414 554,264 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued) 4.1.1.2 Credit Risk Measurement, Impairment and Provisioning Policy (Continued)

Exposure intervals

The following tables show the distribution of gross amounts of loans and receivables per exposure intervals as at 31 December 2020 and 31 December 2019:

As at 31 December 2020, the maximum – approx. 32% (31 December 2018: 28% in interval of RSD 1,000- 5,000 thousand) of gross amount of loans and receivables due from clients was in the interval of RSD 1,000- 5,000 thousand.

(in RSD ‘000)

31 December 2020 Financial Cash and assets mea- Loans and balances Exposure intervals sured at receivables Loans and re- with the fair value from banks ceivables due Other as- Central (In RSD ‘000) through OCI and other FI from clients sets Bank Total

< 1,000 781 9.367.285 56.726 145 9.424.937

1,000- 5,000 15.458 23.183.489 43.366 23.242.313

5,000 - 10,000 22.097 77.115 6.332.046 67.491 6.498.749 10,000- 25,000 7.695.676 650.008 13.698.078 274.305 178.390 22.496.457

25,000 - 50,000 102.102 5.987.902 69.794 29 6.159.827

50,000 - 100,000 19.742 3.613.325 32.759 3.665.826

100,000 - 500,000 186.401 68.104 7.574.367 31 7.828.903

500,000 - 1,000,000 1.306.246 752.750 3.539.406 942.596 6.540.998

>1,000,000 1.427.797 1.050.167 2.014.591 10.610.849 15.103.404 Total 10.638.217 2.736.227 75.310.489 544.472 11.732.009 100.961.414

(in RSD ‘000)

31 December 2019 Financial Cash and assets mea- Loans and balances Exposure intervals sured at receivables Loans and re- with the fair value from banks ceivables due Other as- Central (in RSD ‘000) through OCI and other FI from clients sets Bank Total

< 1,000 - 1,404 8,116,287 60,184 1,364 8,179,239 1,000- 5,000 - 16,733 22,700,504 28,261 - 22,745,498 5,000 - 10,000 - 34,723 3,546,478 22,536 - 3,603,737 10,000- 25,000 - 72,595 5,507,342 77,216 - 5,657,153 25,000 - 50,000 42,870 73,604 5,211,682 173,539 - 5,501,695 50,000 - 100,000 92,895 66,751 5,852,008 192,528 - 6,204,182 100,000 - 500,000 7,705,883 - 13,499,044 - 254,687 21,459,614 500,000 - 1,000,000 3,530,439 1,158,041 4,672,489 - - 9,360,969 >1,000,000 - 1,362,061 2,252,851 - 7,628,701 11,243,613 Total 11,372,087 2,785,912 71,358,685 554,264 7,884,752 93,955,700 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued) 4.1.1.2 Credit Risk Measurement, Impairment and Provisioning Policy (Continued)

Exposure intervals (continued)

Data on credit risk exposure per sectors and categories of receivables, per impairment status and number of days in default in gross amounts as at 31 December 2020 and 31 December 2019 are shown in the following tables:

(in RSD ‘000)

31 December 2020 Non-impaired receivables Impaired receivables Up Not in Up to 30 Not in to 30 31-90 91-365 Over a default days 31-90 days default days days days year Total Receivables due from private individuals 30,339,225 1,308,993 631,431 261,024 47,755 107,397 776,207 691,182 34,163,214

Consumer and cash loans 21,079,462 1,252,121 445,073 92,666 43,310 61,458 553,709 262,100 23,789,900 Housing loans 8,776,906 27,545 171,682 166,463 4,235 45,120 195,198 417,486 9,804,635 Transactional loans and credit cards 482,857 29,327 14,676 1,895 210 819 27,299 11,596 568,679 Receivables due from corporate clients 38,840,020 1,279,092 920,836 4,637 2,260 42,489 197,385 263,733 41,550,452 Micro companies and entrepreneurs 343,759 25,621 4,229 3,413 2,204 - 20,240 86,400 485,866 SMEs 24,658,422 201,041 901,271 1,207 57 42,279 167,041 147,345 26,118,663 Large companies 12,373,220 1,052,430 15,336 17 - 210 10,105 19,786 13,471,103 Public enterprises 1,464,619 ------10,201 1,474,820 Receivables due from other clients 25,247,747 ------25,247,747 Total 94,426,992 2,588,086 1,552,267 265,661 50,015 149,886 973,592 954,915 100,961,413

(in RSD ‘000)

31 December 2019 Non-impaired receivables Impaired receivables

Not in Up to 30 31-90 Not in Up to 30 31-90 91-365 default days days default days days days Over a year Total Receivables due from private individuals 29,994,896 786,224 268,909 346,744 61,936 35,181 649,810 789,415 32,933,115

Consumer and cash loans 19,581,329 744,441 230,520 135,279 54,032 24,118 542,780 216,201 21,528,700 Housing loans 9,884,970 15,930 30,469 206,406 6,639 9,784 91,900 498,384 10,744,482 Transactional loans and credit cards 504,708 25,782 7,715 4,082 1,264 1,228 14,023 15,397 574,199 Other receivables due from private individuals 23,888 71 204 977 1 51 1,106 59,433 85,734 Receivables due from corporate clients 36,306,187 1,084,213 117,542 521,181 - 135,303 441,321 139,994 38,745,740 Micro companies and entrepreneurs 325,008 31,832 42,498 9,351 - 3,341 10,343 91,609 513,981 SMEs 21,058,959 162,242 75,032 13,162 - 131,951 404,853 42,786 21,888,984 Large companies 13,855,607 138,681 12 498,668 - 11 16,659 5,599 14,515,239 Public enterprises 1,066,612 751,459 - - - - 9,465 - 1,827,536 Receivables due from other clients 22,276,836 - - 2 - - 6 - 22,276,844 Total 88,577,919 1,870,437 386,451 867,927 61,936 170,484 1,091,136 929,409 93,955,700

4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued) 4.1.1.2 Credit Risk Measurement, Impairment and Provisioning Policy (Continued)

Exposure intervals (continued)

The table below shows the movement of total exposures according to type of financial instrument for 2020:

Cash and balances with the Central Bank

(in RSD ‘000) Stage 1 Total Opening balance as at 1 January 2020 7,884,752 7,884,752 Transfer to Stage 1 - - Transfer to Stage 2 - - Transfer to Stage 3 - - Origination 5,900,125 5,900,125 Collection (2,052,196) (2,052,196) Transfer to off-balance sheet items - - Sale/assignment of receivables - - Foreign exchange gains/losses (16,811) (16,811) Balance - 31 December 2020 11,732,681 11,732,681

Financial assets measured at fair value through OCI

(in RSD ‘000) Stage 1 Total Opening balance as at 1 January 2020 11,372,087 11,372,087 Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Origination 5,145,707 5,145,707 Collection (5,789,948) (5,789,948) Transfer to off-balance sheet items Sale/assignment of receivables Foreign exchange gains/losses (89,629) (89,629) Balance - 31 December 2020 10,638,217 10,638,217

Loans and receivables due from banks and other financial institutions (in RSD ‘000) Stage 1 Stage 2 Total Opening balance as at 1 January 2020 2,785,912 - 2,785,912 Transfer to Stage 1 (1,110,540) - (1,110,540) Transfer to Stage 2 - 1,110,540 1,110,540 Transfer to Stage 3 - - - Origination 79,402 - 79,402 Collection Transfer to off-balance sheet items - - - Sale/assignment of receivables - - - Foreign exchange gains/losses (129,087) - (129,087) Balance - 31 December 2020 1,625,687 1,110,540 2,736,227 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued) 4.1.1.2 Credit Risk Measurement, Impairment and Provisioning Policy (Continued)

Loans and receivables due from clients

(in RSD ‘000) Stage 1 Stage 2 Stage 3 POCI 2 POCI 3 Total Opening balance as at 62,709,448 5,307,177 2,903,006 296,953 142,101 71,358,685 1 January 2020 Transfer to Stage 1 (147,634) 335,087 (187,453) - - - Transfer to Stage 2 (4,477,798) 4,510,127 (32,329) - - - Transfer to Stage 3 (494,238) (319,704) 813,942 (109,012) 109,012 - Transfer to POCI 2 Origination 31,327,171 - - - - 31,327,171 Increase of receivables of existing portfolio ------Collection (24,903,557) (1,072,818) (644,279) (35,344) (26,655,999) Transfer to off-balance sheet items - - (690,305) - - (690,305) Sale/assignment of receivables ------Foreign exchange gains/losses (25,064) (3,654) (346) - - (29,064) Balance - 31 December 2020 63,988,328 8,756,215 2,162,236 152,596 251,114 75,310,489

Other assets

(in RSD ‘000) Stage 1 Stage 2 Stage 3 Total Opening balance as at 466,774 11,705 75,785 554,264 1 January 2020 Transfer to Stage 1 2,230 (5,047) 2,818 - Transfer to Stage 2 (6,049) 6,140 (91) - Transfer to Stage 3 (856) (433) 1,289 - Origination 187,778 - - 187,778 Increase of receivables of existing portfolio - - - - Collection (200,258) (396) (1,411) (202,065) Transfer to off-balance sheet items - - - - Sale/assignment of receivables - - - - Foreign exchange gains/losses 3,354 293 848 494 Balance - 31 December 2020 452,973 12,262 79,237 544,472

The table below shows the movement of total exposures according to type of financial instrument for 2019:

Financial assets measured at fair value through OCI

(in RSD ‘000) Stage 1 Total Opening balance as at 1 January 2019 10,402,924 10,402,924 Transfer to Stage 1 - - Transfer to Stage 2 - - Transfer to Stage 3 - - Origination 2,776,486 2,776,486 Collection (1,807,323) (1,807,323) Transfer to off-balance sheet items - - Sale/assignment of receivables - - Foreign exchange gains/losses - - Balance - 31 December 2019 11,372,087 11,372,087 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued) 4.1.1.2 Credit Risk Measurement, Impairment and Provisioning Policy (Continued)

Loans and receivables due from banks and other financial institutions

(in RSD ’000) Stage 1 Total Opening balance as at 1 January 2019 2,445,394 2,445,394 Transfer to Stage 1 - - Transfer to Stage 2 - - Transfer to Stage 3 - - Origination 1,912,801 1,912,801 Collection (1,567,242) (1,567,242) Transfer to off-balance sheet items - - Sale/assignment of receivables - - Foreign exchange gains/losses (5,041) (5,041) Balance - 31 December 2019 2,785,912 2,785,912

Loans and receivables due from clients

(in RSD ’000) Stage 1 Stage 2 Stage 3 POCI 2 POCI 3 Total Opening balance as at 1 January 2019 60,255,807 14,167,814 6,004,102 - - 80,427,723 Transfer to Stage 1 (6,930,572) 5,659,377 1,271,195 - - - Transfer to Stage 2 2,277,255 (2,383,459) 106,204 - - - Transfer to Stage 3 329,403 (2,475,463) 2,146,060 - - - Transfer to POCI 2 - - - 78,057 (78,057) - Origination 41,030,573 - - 218,896 238,065 41,487,534 Increase of receivables of existing portfolio 721,023 - 1,332,109 - - 2,053,132 Collection (34,971,995) (8,615,893) (4,886,549) - (13,766) (48,488,203) Transfer to off-balance sheet items - (1,041,178) (2,299,508) - - (3,340,686) Sale/assignment of receivables - - (860,758) - - (860,758) Foreign exchange gains/losses (2,046) (4,021) 90,151 - (4,141) 79,943 Balance - 31 December 2019 62,709,448 5,307,177 2,903,006 296,953 142,101 71,358,685

Other assets

(in RSD ‘000) Stage 1 Stage 2 Stage 3 Total Opening balance as at 1 January 2019 358,426 2,750 73,622 434,798 Transfer to Stage 1 (13,235) 7,113 6,122 - Transfer to Stage 2 10,497 (10,648) 151 - Transfer to Stage 3 160 534 (694) - Origination 146,982 - - 146,982 Increase of receivables of existing portfolio 84,498 17,579 3,313 105,390 Collection (20,653) (5,623) (6,728) (33,004) Transfer to off-balance sheet items - - - - Sale/assignment of receivables (99,902) - - (99,902) Foreign exchange gains/losses 1 - (1) - Balance - 31 December 2019 466,774 11,705 75,785 554,264 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued) 4.1.1.2 Credit Risk Measurement, Impairment and Provisioning Policy (Continued)

Loans and receivables due from banks and other financial institutions (continued)

The table below shows the movement of total allowance for impairment according to type of financial instrument for 2020:

Cash and balances with the Central Bank

(in RSD ‘000) Stage 1 Total Opening balance as at 1 January 2020 (15) (15) Transfer to Stage 1 - - Transfer to Stage 2 - - Transfer to Stage 3 - - Origination (672) (672) Collection 15 15 Transfer to off-balance sheet items - - Sale/assignment of receivables - - Foreign exchange gains/losses - - Balance - 31 December 2020 (672) (672)

Financial assets measured at fair value through OCI

(in RSD ‘000) Stage 1 Total Opening balance as at 1 January 2020 (864) (864) Transfer to Stage 1 - - Transfer to Stage 2 - - Transfer to Stage 3 - - Origination (8,536) (8,536) Collection 864 864 Transfer to off-balance sheet items - - Sale/assignment of receivables - - Foreign exchange gains/losses - - Balance - 31 December 2020 (8,536) (8,536)

Loans and receivables due from banks and other financial institutions

(in RSD ‘000) Stage 1 Stage 2 Total Opening balance as at 1 January 2020 (8,973) - (8,793) Transfer to Stage 1 - - - Transfer to Stage 2 4,006 (4,006) - Transfer to Stage 3 - - - Origination - (43,170) (43,170) Collection - - - Transfer to off-balance sheet items - - - Sale/assignment of receivables - - - Foreign exchange gains/losses 127 - 127 Balance - 31 December 2020 (4,840) (47,176) (52,016) 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued) 4.1.1.2 Credit Risk Measurement, Impairment and Provisioning Policy (Continued)

Loans and receivables due from banks and other financial institutions (continued)

Loans and receivables due from clients

(in RSD ‘000) Stage 1 Stage 2 Stage 3 Total Opening balance as at 1 January 2020 (767,415) (948,926) (2,055,405) (3,771,746) Transfer to Stage 1 123,747 (96,542) (27,205) - Transfer to Stage 2 537,119 (542,281) 5,162 - Transfer to Stage 3 288,929 226,370 (515,299) - Origination (601,277) - - (601,277) Increase of receivables of existing portfolio (629,324) - - (629,324) Collection 132,284 330,488 345,348 808,120 Transfer to off-balance sheet items 676,182 676,182 Sale/assignment of receivables - - - - Decrease from unwinding - - (124,987) (124,987) Foreign exchange gains/losses 1,372 985 15 2,372 Balance - 31 December 2020 (914,564) (1,029,906) (1,696,189) (3,640,659)

Other assets

(in RSD ‘000) Stage 1 Stage 2 Stage 3 Total Opening balance as at 1 January 2020 (3,841) (1,403) (72,516) (77,760) Transfer to Stage 1 3,570 (834) (2,736) - Transfer to Stage 2 (218) 231 (13) - Transfer to Stage 3 (451) (299) 750 - Origination (6,770) (6,770) Increase of receivables of existing portfolio (1,148) (20) (3,514) (4,682) Collection 915 1,618 113 2,646 Transfer to off-balance sheet items Sale/assignment of receivables Foreign exchange gains/losses 7 7 Balance - 31 December 2020 (7,936) (707) (77,916) (86,559)

Exposure and collateral

The following tables show the distribution of internally accepted collateral values (level of market value of collateral the Bank recognises per its internal methodology to the level of exposure) for the needs of exposure coverage as at 31 December 2020 and 31 December 2019:

(in RSD ‘000) 31 December 31 December Collateral amount 2020 2019 Mortgages 11,223,725 13,440,267 - residential property 6,133,229 7,068,469 - commercial property 2,472,099 3,477,705 - land and other 2,618,397 2,894,093 Pledges on equipment, machinery and other movable assets 409,980 322,093 Other 2,117,584 664,290 Total 13,751,289 14,426,650 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued) 4.1.1.2Credit Risk Measurement, Impairment and Provisioning Policy (Continued)

Loans and receivables due from banks and other financial institutions

(in RSD ‘000) 31 December 2020 31 December 2019 Collateral Collateral Exposure amount Exposure amount 1A-1E 1,620,983 - 1,378,438 171 2A-2E 1,110,516 - 1,407,450 - 3A-3E 4,728 - 24 - Unrated clients 0 - - - Total 2,736,227 - 2,785,912 171

Loans and receivables due from clients

(in RSD ‘000) 31 December 2020 31 December 2019 Collateral Collateral Exposure amount Exposure amount 1A-1E 2,279,349 1,369,058 4,566,792 2,753,678 2A-2E 25,501,796 5,117,444 25,503,150 4,037,930 3A-3E 36,769,949 4,924,946 31,512,938 5,073,275 Watch list 8,444,562 1,532,057 6,102,593 7,454 Non-performing loans 2,314,833 807,784 2,994,783 1,363,499 Unrated clients - - 678,429 1,190,643 Total 75,310,489 13,751,289 71,358,685 14,426,479

Loans and receivables due from banks and other financial institutions

(in RSD ‘000) 31 December 2020 31 December 2019 Collateral Collateral Exposure Exposure amount amount Up to 30 days past due 2,736,227 0 2,785,912 171 Total 2,736,227 0 2,785,912 171

Loans and receivables due from clients

(in RSD ‘000) 31 December 2020 31 December 2019

Collateral Collateral Exposure Exposure amount amount

Up to 30 days past due 71.758.119 13.032.696 68,855,415 13,926,709

31 to 60 days past due 1.318.278 162.829 457,643 32,942

61 to 90 days past due 382.645 73.867 98,904 15,720

91 to 180 days past due 486.312 147.833 394,984 127,080

181 to 365 days past due 483.667 77.288 692,139 27,168

Over 365 days past due 881.468 256.776 859,600 296,860

Total 75.310.489 13.751.289 71,358,685 14,426,479 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued) 4.1.1.2 Credit Risk Measurement, Impairment and Provisioning Policy (Continued)

Forbearance

A forborne asset is considered an asset, or client unable to adhere to the repayment schedule and terms of the contract due to financial difficulties. Due to newly arisen financial difficulties, the Bank may decide to extend the schedule and terms of the contract, to give the client the opportunity to repay the debt and to refinance the contract, in full or partially, in a either of the following ways:

a) The amendments to the contractual terms and schedule which the client is unable to comply with due to financial difficulties and which are approved as a result of the client’s new situation;

b) Total or partial refinancing of non-performing contracts, which would not be approved were the client not experiencing financial difficulties.

In this regard, there are the following possibilities:

An exposure will not be considered a forborne asset if the client is not experiencing financial difficulties.

Forbearance and risks are regularly monitored by operational units responsible for the risk management of loans granted to corporates and private individuals. Additionally, forbearance is a trigger indicating the need to conduct impairment testing in line with IFRS 9 requirements.

The Bank’s analysis of the impact caused by modification to forbearance measures did not have a financially significant effect on the total results for 2019.

The following table provides an overview of the Bank’s forborne receivables for 2020 and 2019, respectively:

(in RSD ‘000) Receivables that have not be- Receivables that have come forborne Adjust- Opening become forborne or the forbear- ments Closing balance 1 or the forbearance ance measure due to Loans Other ad- balance 31 January measure has been is no longer IFRS 5 and FX justments December 2020 extended (+) valid (-) (+/-) (+/-) (+/-) 2020 National Bank of Serbia ------State and other related parties ------Lending institutions ------Financial corporations ------Loans due from non-financial corporations 1,208,708 713,097 (721,901) - - - 1,199,904 Loans due from private individuals 776,215 2,842 (333,350) - - - 445,707 Loans and receivables - balance sheet assets 1,984,923 715,939 (1,055,251) - - - 1,645,611 Off-balance sheet items 29 39,233 - - - - 39,263

(in RSD ‘000) Receivables Receivables that in default and Interest income Balance - 31 are not in de- not impaired for forborne December 2020 fault/impaired (> 0 days) Impaired receivables receivables (+) National Bank of Serbia - - - - - State and other related parties - - - - - Lending institutions - - - - - Financial corporations - - - - - Loans due from non-financial corporations 1,199,904 1,072,759 17,886 109,259 6,603 Loans due from private individuals 445,707 139,089 15,118 291,500 5,088 Loans and receivables - balance sheet assets 1,645,611 1,211,848 33,004 400,759 11,691 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued) 4.1.1.2 Credit Risk Measurement, Impairment and Provisioning Policy (Continued)

Forbearance (Continued)

(in RSD ‘000) Receivables that have become for- Receivables that borne or the have not become Opening forbearance forborne or the Other Closing balance 1 measure has forbearance mea- Adjustments Loans and adjust- balance 31 January been extend- sure is no longer due to IFRS 5 FX ments December 2019 ed (+) valid (-) (+/-) (+/-) (+/-) 2019 National Bank of Serbia ------State and other related parties ------Lending institutions ------Financial corporations ------Loans due from non-financial corporations 2,109,273 1,178,063 (1,217,870) (860,758) - - 1,208,708 Loans due from private individuals 1,231,724 338,018 (793,528) - - - 776,215 Loans and receivables - balance sheet assets 3,340,998 1,516,081 (2,011,397) (860,758) - - 1,984,923 Off-balance sheet items 29 - - - - - 29

(in RSD ‘000) Receiv- ables in default Receiv- and not ables that impaired Balance - are not in 31 Decem- default/ (> 0 Impaired Interest income for forborne re- ber 2019 impaired days) receivables ceivables (+) National Bank of Serbia - - - - - State and other related parties - - - - - Lending institutions - - - - - Financial corporations - - - - - Loans due from non-financial corporations 1,208,708 497,725 - 710,983 33,028 Loans due from private individuals 776,215 258,940 2,112 515,163 29,048 Loans and receivables - balance sheet assets 1,984,923 756,665 2,112 1,226,146 62,075

Review of Non-Performing Receivables in Total Receivables

The following table shows exposures in default (Stage 3) and the level of coverage (Coverage 1 takes into account allowance for impairment in Stage 3, while Coverage 2 takes into account collateral value as well, hence Coverage 2 shows the relationship between the gross exposure on one end and the impairment allowance plus collateral on the other end) in line with the internal segmentation, as at 31 December 2020 and 31 December 2019, respectively: 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued) 4.1.1.2 Credit Risk Measurement, Impairment and Provisioning Policy (Continued)

Loans and receivables from clients

(in RSD ‘000) Allowance for impairment on Collateral Non-performing non-performing 31 December 2020 Exposure loans (Stage 3) exposures (NPE) NPE ratio Coverage 1 Coverage 2 Loans due from private individuals 34,335,464 1,932,467 (1,394,005) 768,558 5.63% 72.14% 111.91% SME loans 26,071,541 347,610 (286,834) 24,810 1.33% 82.52% 89.65% Loans due from corporate clients 14,903,483 34,756 (15,349) 14,416 0.23% 44.16% 85.64% Loans due from state agencies and institutions ------Total 75,310,488 2,314,833 (1,696,188) 807,784 3.07% 73.27% 108.17%

(in RSD ‘000) Allowance for impairment on Collateral Non-performing non-performing 31 December 2019 Exposure loans (Stage 3) exposures (NPE) NPE ratio Coverage 1 Coverage 2 Loans due from private individuals 33,361,362 1,936,160 (1,475,202) 798,360 5.65% 75.53% 117.91% SME loans 21,731,572 584,155 (480,759) 38,106 2.69% 82.30% 88.82%

Loans due from corporate clients 15,408,899 515,327 (93,477) 514,944 3.34% 18.14% 118.06% Loans due from state agencies and institutions 856,852 9,465 (5,966) - 1.10% 63.03% 63.03% Total 71,358,685 3,045,107 (2,055,404) 1,351,410 4.27% 67.50% 111.88%

A decrease in coverage was to a great extent caused by the continuous reduction of default exposures (unsettled liabilities) through write-off activities and substantial collection.

4.1.1.3 Credit Risk Reporting Process

Reporting for Local Purposes

The Risk Control Department reports to the Executive Board on credit risk at the Bank’s portfolio level at least quarterly through delivery of materials presented at the Risk Advisory Body sessions.

These materials provide an analysis of the existing total credit portfolio and development dynamics over previous quarters and per various bases, as well as a review of the risk of certain forms of exposure relevant to current operations and control over total credit risk.

The underlying purpose of the analyses presented is to provide an overview of the Bank’s exposure relating to its balance sheet and off-balance sheet items as at the last day of the reporting month, corresponding relevant positions and indicators (provisions, ratio of provisions and exposure, number of clients, etc.), as well as their dynamics and development in comparison to previous reporting periods.

On a quarterly basis, the Board of Directors and the Committee for Monitoring Bank’s Operations (hereinafter: Audit Committee) of the Bank receive a risk management report, the format and contents of which are standardised. In the part related to credit risk, this report includes various overviews and aspects of measurement, assessment and monitoring of credit risk in the context of credit risk exposure, portfolio quality per various criteria, as well as influence on the Bank’s equity (having also in mind the ICAAP methodology). 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.1 Credit Risk (Continued) 4.1.1.3 Credit Risk Reporting Process (Continued)

Reporting to Addiko Bank AG

The Risk Control Department creates and delivers to Addiko Bank AG on a monthly basis the Key Risk Indicators – KRI Report, used to prepare material for the monthly conference call meetings with Addiko bank AG CRO and CRO team members, re the previous month’s portfolio movements.

The same report provides information re loan monitoring and reporting to the Bank’s Risk Advisory Body, Board of Directors and Audit Committee.

4.1.2 Market Risks Within market risks, the Bank is exposed to foreign exchange risks, interest rate risk arising from the Banking Book and interest rate risk arising from debt securities (in line with the Group’s standards, this risk is considered interest rate risk arising from the Trading Book) and equity securities (in line with the Group’s standards, this risk is considered equity price risk). Additionally, in accordance with the Group’s standards, the Bank also recognises credit spread risk, which matches specific equity price risk from the perspective of local regulations.

Market risks consists of contingent losses arising from equity price fluctuations on the market. The Bank has defined a market risk structure based on various factors: interest rate, interest spread, FX risk and securities investment risk. The Bank, in particular, focuses on identification, measurement, analysis and management of market risks. Market risks can be a result of securities (and similar products), cash and products in FX, derivatives, hedging exchange rate and hedging results, assets similar to the principal or they can also arise from the management of assets and capital/liabilities. In addition to market risks, market liquidity risks may occur if, in the event of poor demand, the Bank is unable to sell its trading positions in liquidity bottlenecks (or due to demands relative to risk based set-offs) within a short period of time. They are taken into account for the existing positions, as part of market risk related limitations.

4.1.2.2 Measurement of Market Risks

In addition to the standard definition and measurement prescribed by the National Bank of Serbia, being a member of Addiko Group, the Bank also measures exposure to market risks (FX), as well as by applying the value-at-risk method, 1-day, with a confidence interval of 99%. The main instrument used for this process is the Monte Carlo simulation which includes exponentially weighted volatility and correlation over a time horizon of 250 days. In order to determine available economic capital for market risks and calculate the ability to assume risk, VaR values are adjusted to a unique level of confidence of 99.7% and a time horizon of 250 days. The models are used to calculate contingent losses, taking into account historical market fluctuation (volatility) and market context (correlation).

4.1.2.3 Summary of Market Risks

4.1.2.3.1 Foreign Exchange Risk Through various policies, procedures and working instruction manuals, the Risk Control Department defines all activities re controlling FX risks.

General activities which refer to the management of FX risk are as follows:

• Identification,

• Measurement,

• Control,

• Monitoring and

• Reporting.

FX risk is the possible occurrence of negative effects on the Bank’s financial result and equity due to exchange rate fluctuations. The Bank is exposed to this risk based on positions maintained on the Bank’s Banking Book and Trading Book. 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.2 Market Risks (Continued)

4.1.2.3 Summary of Market Risks (Continued)

4.1.2.3.1 Foreign Exchange Risk (Continued) The FX risk ratio is monitored as a ratio between the net open FX position and the Bank’s equity. The FX risk ratio is calculated in accordance with the NBS Decision governing the capital adequacy of banks. The Bank maintains the ratio between assets and liabilities in a manner ensuring that its total net open FX position at the end of each business day does not exceed the level set out in corresponding regulations.

The Accounting and Reporting Department calculates on a daily basis the total net open position and the Bank’s FX risk ratio, in accordance with the NBS Decision governing the capital adequacy of banks.

Based on the Bank’s net open position determined in this manner, in collaboration with Addiko Group and using the Group’s methodology and tools, the Risk Control Department calculates on a daily basis the VaR for open FX positions, calculated per the J.P. Morgan - Geometric StDev - Monte Carlo methodology, with a confidence interval of 99% and time horizon of 1 day, which must be within internally prescribed limits. As at 31 December 2020, VaR (99%, 1 day) for the open FX position was EUR 3.97 thousand, i.e. RSD 467 thousand and was significantly below the internally defined limit of EUR 50 thousand, i.e. RSD 5.9 million.

The table below shows a summary of VaR (99%, 1 day) for the open FX position of the Bank in 2020.

Open FX Position – FX VaR (99%, 1-day), EUR ‘000

In addition to Addiko Group’s standardised scenarios which refer to the conversion of the EUR, at least once per month, the Bank runs a stress test scenario whose purpose is to estimate potential effects on the value of the local currency in fluctuations of +/-5 or +/-10 in the income statement and the financial results of the Bank prior to taxation.

In a scenario where the Bank’s existing open FX position (with all other variables held constant) as at 31 December 2020 there was a decrease/increase in the local currency (RSD depreciation/appreciation) by 5% / 10% against EUR, USD CHF and all other currencies cumulatively, effects on the income statement before tax would be negative/positive by approx. RSD 30 million, i.e. RSD 60 million respectively, mainly due to calculated FX gains/losses arising from foreign currency denominated receivables and obligations. 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.2 Market Risks (Continued)

4.1.2.3 Summary of Market Risks (Continued)

4.1.2.3.1 Foreign Exchange Risk (Continued)

The following analysis calculates the results of reasonably possible movements of exchange rates against RSD, with other variables held constant.

Effect on the income Exchange rate fluctuations Effect on the income statement Exchange rate fluctuations statement before tax Currency in 2020 before tax 2020 in 2019 2019 (%) in RSD ‘000 (%) in RSD ‘000 EUR +5% (30,980) +5% (19,907) CHF +5% 20 +5% 425 USD +5% 28 +5% 118 Other currencies +5% 730 +5% 2,396 Effect on the income Exchange rate fluctuations Effect on the income statement Exchange rate fluctuations statement before tax Currency in 2020 before tax 2020 in 2019 2019 in RSD ‘000 in RSD ‘000 EUR -5% 30,980 -5% 19,907 CHF -5% (20) -5% (425) USD -5% (28) -5% (118) Other currencies -5% (730) -5% (2,396)

Analysis of effects of movements of exchange rates for the previous period:

Exchange rate Exchange rate fluctuations in Effect on the income state- fluctuations in Effect on the income state- Currency 2019 ment before tax 2019 2018 ment before tax 2018

in RSD ‘000 in RSD ‘000 EUR +10% (61,960) +10% (39,813) CHF +10% 39 +10% 851 USD +10% 56 +10% 235 Other currencies +10% 1,460 +10% 4,791

Exchange rate Exchange rate fluctuations in Effect on the income state- fluctuations in Effect on the income state- Currency 2019 ment before tax 2019 2018 ment before tax 2018

in RSD ‘000 in RSD ‘000 EUR -10% 61,960 -10% 39,813 CHF -10% (39) -10% (851) USD -10% (56) -10% (235) Other currencies -10% (1,460) -10% (4,791)

* The tables above show exchange rate fluctuations of +5%/+10% (RSD depreciation) and exchange rate fluctuations of -5%/-10% (RSD appreciation) and their effects on the income statement before taxation. 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.2 Market Risks (Continued)

4.1.2.3 Summary of Market Risks (Continued)

4.1.2.3.1 Foreign Exchange Risk (Continued)

The Risk Control Department performs said stress test on a monthly basis and reports to the Assets and Liabilities Management Committee (ALCO) on the results, in accordance with the schedule of the Committee’s sessions.

Possible exchange rate fluctuations against the RSD (with other variables held constant) on equity from the perspective of the Bank’s foreign FX risk ratio, which is determined pursuant to the Decision on the Capital Adequacy of Banks, is provided in the following table:

Bank’s foreign exchange risk ratio at 31 December 2020 Bank’s foreign exchange risk ratio at Exchange rate fluctuations after fluctuations in exchange Exchange rate fluctuations in 31 December 2019 after fluctuations in 2020 rates in 2020 2019 in exchange rates in 2019

(equity %) (equity %) +5% 3.1 +5% 2.0 -5% 2.8 -5% 1.8 +10% 3.3 +10% 2.1 -10% 2.7 -10% 1.7

* The table above shows exchange rate fluctuations of +5%/+10% (RSD depreciation) and exchange rate fluctuations of -5%/-10% (RSD appreciation) and their effect on equity from the perspective of the Bank’s FX risk ratio determined pursuant to the Decision on the Capital Adequacy of Banks.

The assumptions used to calculate the sensitivity analysis scenario in 2020 for the income statement before tax and capital are the same as the assumptions applied in sensitivity analysis scenario for 2019.

In order to protect itself against FX risk, the Bank executes derivative agreements and loan contracts with a foreign currency clause index. 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.2 Market Risks (Continued)

4.1.2.3 Summary of Market Risks (Continued)

4.1.2.3.1 Foreign Exchange Risk (Continued)

The currency structure of financial instruments as at 31 December 2020 is provided in the table below. Financial assets with a contracted currency clause index are included in the appropriate FX position that a particular receivable is linked to.

(in RSD ‘000)

Other ASSETS EUR USD CHF GBP currencies RSD Total Cash and balances held with the Central Bank 5,080,723 62,883 262,587 9,022 50,909 6,265,885 11,732,009 Receivables under derivatives - - - - - 1,408 1,408 Securities 1,438,798 1,426,656 - - - 9,737,374 12,602,828 Loans and receivables due from banks and other financial institutions 1,931,070 514,130 94,565 41,940 97,371 5,135 2,684,611

Loans, receivables and pledged receivables due from clients 40,057,231 - 222,905 - - 31,389,693 71,669,829 Other assets 223,906 1,753 66 16 39,348 2,506,474 2,771,562 Total balance sheet assets 48,731,728 2,005,421 580,123 50,978 187,628 49,905,969 101,461,847 Derivative instruments 1,528,739 1,787,476 5,870 - - - 3,322,085 Total Assets 50,260,467 3,792,897 585,993 50,978 187,628 49,905,969 104,783,932

LIABILITIES Liabilities under derivatives - - - - - 38,201 38,201 Deposits and other liabilities due to banks, other financial institutions and the Central Bank 9,111,045 77 123 - - 1,007,500 10,118,045 Deposits and other liabilities due to clients 39,288,375 3,728,445 564,104 50,065 94,775 22,862,757 66,588,521 Subordinate liabilities ------Other financial liabilities 651,398 63,985 628 212 774 796,111 1,513,107 Total balance sheet liabilities 49,050,818 3,792,506 564,855 50,277 95,549 24,704,569 78,258,574 Derivative instruments 1,829,254 0 20,581 0 78,177 0 1,928,012 Total liabilities 50,880,072 3,792,506 585,436 50,277 173,726 24,704,569 80,186,586 Long foreign currency position 391 557 701 14,384 16,034 Short foreign currency position (619,605) 482 (620,087) 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.2 Market Risks (Continued)

4.1.2.3 Summary of Market Risks (Continued)

4.1.2.3.1 Foreign Exchange Risk (Continued)

The currency structure of financial instruments as at 31 December 2019 is provided in the table below. Financial assets with a contracted currency clause index are included in the appropriate FX position that a particular receivable is linked to.

(in RSD ‘000)

Other ASSETS EUR USD CHF GBP currencies RSD Total Cash and balances held with the Central Bank 2,927,536 57,434 128,341 21,624 180,752 4,569,050 7,884,737 Receivables under derivatives - - - - - 1,680 1,680 Securities 1,567,275 2,288,415 - - - 9,812,307 13,667,997 Loans and receivables due from banks and other financial institutions 2,562,312 68,626 10,018 37,401 88,695 9,887 2,776,939

Loans, receivables and pledged receivables due from clients 42,676,537 32,988 266,284 - - 24,611,130 67,586,939 Other assets 231,007 1,672 41 5 8 243,771 476,504 Total balance sheet assets 49,964,667 2,449,135 404,684 59,030 269,455 39,247,825 92,394,794 Derivative instruments 409,811 1,520,652 153,998 - - - 2,084,461 Total Assets 50,374,478 3,969,787 558,682 59,030 269,455 39,247,825 94,479,257

LIABILITIES Liabilities under derivatives - - - - - 9,608 9,608 Deposits and other liabilities due to banks, other financial institutions and the Central Bank 5,275,799 42 36 - - 366,014 5,641,891 Deposits and other liabilities due to clients 38,851,563 3,917,623 517,900 53,400 122,133 17,526,366 60,988,985 Subordinate liabilities 3,934,511 - - - - - 3,934,511 Other financial liabilities 448,400 5,323 721 223 15 625,703 1,080,385 Total balance sheet liabilities 48,510,273 3,922,988 518,657 53,623 122,148 18,527,691 71,655,380 Derivative instruments 2,034,355 35,281 37,671 - 102,253 - 2,209,560 Total liabilities 50,544,628 3,958,269 556,328 53,623 224,401 18,527,691 73,864,940 Long foreign currency position 11,518 2,354 5,407 45,054 64,333 Short foreign currency position (170,150) (170,150) 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.2.3 Summary of Market Risks (Continued)

4.1.2.3.1 Foreign Exchange Risk (Continued)

4.1.2 Market risks In accordance with the Decision on the Capital Adequacy of Banks (RS Official Gazette no. 103/2016, 103/2018 and 88/2019), the Bank is to maintain its FX risk ratio, i.e., currency matching of assets and liabilities, in such a manner that the Bank’s total net open FX position, including absolute value of the net position in gold, does not exceed 20% of its capital at the end of each business day.

Throughout 2019, the Bank’s foreign exchange risk ratio was in compliance with the regulations of the National Bank of Serbia.

As at 31 December 2020 and 31 December 2019, the Bank’s FX risk ratio was as follows:

Foreign exchange risk ratio in % 2020 2019 as at 31 December * 2.99 1.92 maximum for period - month of December ** 3.34 5.43 minimum for period - month of December ** 0.55 0.99

*Indicator after calculation of the Bank’s equity and recording of all transactions **Indicator was achieved for current business days in December

4.1.2.3.2 Interest Rate Risk per Items in the Banking Book Interest rate risk is a risk of negative effects on the financial result and capital of the Bank due to changes in interest rates. The Bank is exposed to this risk per items carried in the Banking Book.

The Bank specifically analyses and manages exposures arising from the following types of interest risk: a) Maturity mismatching risk (for items with a fixed interest rate) and repricing risk (for items with a variable interest rate) for individual items in assets and liabilities, and for the Bank’s off-balance sheet items; b) Yield curve risk exposure arising from change in the shape and inclination of the yield curve; c) Basis risk exposure arising from different reference interest rates with interest-sensitive items with similar characteristics in terms of maturity or repricing; d) Optionality risk exposure arising from contractual provisions related to interest-sensitive items (loans with the possibility of prepayment, deposits with the possibility of early withdrawal, etc.). In line with the responsibilities and competences prescribed by NBS regulations and enactments, the Bank’s Board of Directors defines the strategy and goals of the Bank to comply with the criteria for the risks and the result, whereas the Executive Board has overall competence for the Bank’s operations and implementation of the risk management strategy and policies and the strategy for capital management.

Other responsibilities related to interest rate risk are carried out through the following committees established by the Bank, in line with the law, regulations and enactments of the National Bank of Serbia: • Audit Committee • Assets and Liabilities Committee (ALCO). The Risk Control Department is, in respect of interest risk management, inter alia, responsible for overall interest rate analysis, measurement, assessment, monitoring, control and reporting as well as creation and implementation of an adequate limits system and early warning procedures in compliance with the ICAAP process (Internal Capital Adequacy Assessment Process).

BSM & Treasury Department is, in respect of interest risk management, inter alia, responsible for:

• Managing interest-sensitive items of the assets and liabilities of the Bank in general and per each materially significant currency, so that interest rate risk is within acceptable limits; • Submitting proposals to the ALCO for interest rate risk mitigation, avoidance and hedging in cases of higher operating costs and exceeding of defined limits due to changes in interest rates; • In collaboration with other market sectors, implementing the measures rendered by the Executive Board on reducing the interest rate risk exposure; and • Performing other operations defined by the applicable internal rules and regulations of the Bank. 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.2 Market Risks (Continued)

4.1.2.3 Summary of Market Risks (Continued)

4.1.2.3.2 Interest Rate Risk per Items in the Banking Book (Continued) In accordance with NBS Decision on Risk Management by Banks and the Addiko Group methodology, via GAP analysis (Interest Sen- sitivity Gap Balance) applied to balance sheet items of assets and liabilities of the Bank, as well as interest-sensitive off-balance sheet items from the Banking Book, the Risk Control Department measures, i.e. assesses, at least on a quarterly basis, negative effects of interest rate change on the financial result (income statement) and the economic value of the Bank.

Exposure to interest rate risk in the Banking Book and assessment of effects of this rate on the Bank’s financial result (income statement) is determined in accordance with the Earning approach based on the Delta approach whereby the result shows solely the delta (change) of interest income calculated by the predefined movement/change of interest rate. The calculation takes into consideration only interest-sensitive items from the Banking Book, while interest sensitivity gap balance is the calculation basis. Likewise, there is no dynamic overview (the planned new operations and the aspect of loan maturity are not included, there is no transfer among risk categories – fixed, variable and UFN).

EVE (economic value of equity) represents a measure of the interest rate risk in the Banking Book (IRRBB), implying a current or potential risk to the Bank’s equity occurring due to unfavourable interest rate movements affecting the Banking Book items. Interest rate changes result in changes of the present value and structure of future cash flows. In turn, the core value of assets, liabilities and off-balance sheet items of the Bank, and consequently, its economic value are changed.

EVE measures a theoretical change of the net present value of the balance sheet excluding equity. Equity market value is calculated as the present value of assets cash flows less the present value of liabilities cash flows.

Change of NII (net interest income) as a measure of the interest rate risk in the Banking Book (IRRBB), implies current or potential risk affecting the Bank’s result; occurring due to unfavourable interest rate movements affecting the Banking Book items.

Changes in interest rates affect the Bank’s result by changing interest rate sensitive income and expenses, affecting its NII.

In order to assess potential consequences of interest rate changes to the result of the Bank with using the above two approaches (EVE and DNII), scenarios with predefined assumptions on interest rate movement are implemented as follows:

• Parallel upward movement +200bps • Parallel downward movement -200bps • Parallel upward shock BSBS • Parallel downward shock BSBS • ‘Steepener’ shock BCBS • ‘Flattener’ shock BCBS • Short-term rates upward shock BCBS • Short-term rates downward shock BCBS

The complementarity of the EVE and DNII approaches implies the following: • Both measures reflect the impact of changes of net cash flows resulting from interest rate changes; • Change in expected gains is reflected through economic value change; • They are affected by usual modelling assumptions. 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.2 Market Risks (Continued)

4.1.2.3 Summary of Market Risks (Continued)

4.1.2.3.2 Interest Rate Risk per Items in the Banking Book (Continued) As at 31 December 2020, the effect to DNII was as follows:

Scenario Effect in EUR million Parallel upward movement +200bps 0.62 Parallel downward movement -200bps -0.62 Parallel upward shock BSBS 0.36 Parallel downward shock BSBS -0.34 ‘Steepener’ shock BCBS 0.42 ‘Flattener’ shock BCBS -0.34 Short-term rates upward shock BCBS -0.22 Short-term rates downward shock BCBS 0.22

For a more comprehensive measurement of the overall effect of the interest rate risk on the Bank’s equity, taking into account only interest rate sensitive asset and liability items, the Bank measures the risk-equity-ratio as the determined economic value of the Bank relative to the Bank’s equity calculated in accordance with the NBS Decision on Capital Adequacy of Banks, the risk-equity-ratio, under said assumptions, shows the level of the Bank’s equity exposure to interest rate risk.

The Bank’s interest rate risk ratio as at 31 December 2020, as an indicator of a change in economic value for interest-sensitive items relative to the Bank’s equity as at 31 December 2020 stood at 8.5% for the EVE scenario ‘parallel upward shock BSBS’ (31 December 2019: 9.85%), which was still below the internal limit set at 15% of the Bank’s equity, while in case of the effect of the second scenario group, i.e. ‘parallel downward movement -200bps’ scenario, it stood at 3.37%, being significantly below the internal limit set at 20% of the Bank’s equity. 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.2 Market Risks (Continued)

4.1.2.3 Summary of Market Risks (Continued)

4.1.2.3.2 Interest Rate Risk per Items in the Banking Book (Continued)

The table below shows the total amount of financial assets and liabilities at their carrying values, categorised by the earlier of re-pricing date and maturity date, as at 31 December 2020:

Up to 1 1-3 3-12 1-5 Non-interest (in RSD ‘000) Over 5 years Total month months months years bearing FINANCIAL ASSETS Cash and balances held with the Central Bank 8,452,384 94,059 502,738 581,884 - 2,100,944 11,732,009 Receivables due from derivatives - - - - - 1,408 1,408 Securities - - 1,478,356 6,202,139 2,957,723 - 10,638,218 Loans and receivables due from banks and other 2,683,875 23 - - - 313 2,684,211 financial institutions Loans and receivables due from clients 12,841,925 33,014,226 5,691,626 12,042,566 5,429,343 2,650,142 71,669,828 Other assets - - - - - 457,914 457,914 Assets total 23,978,184 33,108,308 7,672,720 18,826,589 8,387,066 5,210,721 97,183,588 FINANCIAL LIABILITIES Liabilities due to derivatives - - - - - 38,201 38,201 Deposits and other financial liabilities due to banks, 2,028,349 1,856,476 6,171,746 30.000 - 32,172 10,118,743 other financial institutions and the Central Bank Deposits and other financial liabilities due to other 27,979,936 8,423,122 14,312,933 8,990,275 6,011,960 870,294 66,588,520 clients Subordinate liabilities ------Other liabilities - - - - - 1,287,118 1,287,118 Liabilities total 30,008,285 10,279,598 20,484,679 9,020,275 6,011,960 2,227,785 78,032,582 Interest rate gap (6,030,101) 22,828,710 (12,811,959) 9,806,314 2‚375,106 2,982,936 19,151,006

* Including only securities in the Banking Book (securities in the Trading Book of RSD 1,964,610 thousand are excluded). 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.2 Market Risks (Continued)

4.1.2.3 Summary of Market Risks (Continued)

4.1.2.3.2 Interest Rate Risk per Items in the Banking Book (Continued)

The table below shows the total amount of financial assets and liabilities at their carrying values, categorised by the earlier of re-pricing date and maturity date, as at 31 December 2019:

Up to 1 1-3 3-12 1-5 Non-interest (in RSD ‘000) month months months years Over 5 years bearing Total

FINANCIAL ASSETS Cash and balances held with the Central Bank 2,731,583 190,260 1,741,677 1,171,993 5,028 2,044,196 7,884,737 Receivables due from derivatives - - - - - 1,680 1,680 Securities - 664,491 1,716,314 6,688,832 2,302,450 - 11,372,087 Loans and receivables due from banks and other financial 2,043,145 729,090 - - 4,704 2,776,939 institutions - Loans and receivables due from clients 9,947,997 36,391,459 4,753,449 8,846,681 6,428,551 1,218,802 67,586,939 Other assets - - - - - 476,504 476,504 Assets total 14,722,725 37,246,210 8,940,530 16,707,506 8,736,029 3,745,886 90,098,886

FINANCIAL LIABILITIES Liabilities due to derivatives - - - - - 9,608 9,608

Deposits and other financial liabilities due to banks, other financial institutions and the Central Bank 1,021,054 1,497,812 3,107,890 - - 15,135 5,641,891 Deposits and other financial liabilities due to other clients 21,873,949 6,984,341 14,923,957 10,486,960 6,540,409 179,369 60,988,985 Subordinate liabilities - 3,934,511 - - - - 3,934,511 Other liabilities - - - - - 1,080,385 1,080,385 Liabilities total 22,895,003 12,416,664 18,031,847 10,486,960 6,540,409 1,284,497 71,655,380 Interest rate gap (8,172,278) 24,829,546 (9,091,317) 6,220,546 2,195,620 2,461,389 18,443,506 4.RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.2 Market Risks (Continued)

4.1.2.3 Summary of Market Risks (Continued)

4.1.2.3.2 Interest Rate Risk per Items in the Banking Book (Continued) The table below shows the total amount of financial assets and liabilities at their carrying values, categorised by the earlier of re-pricing date and maturity and type of interest rate date, as at 31 December 2020:

(in RSD ‘000) Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Non-interest bearing Total FINANCIAL ASSETS Cash and balances held with the Central Bank 8,452,384 94,059 502,738 581,884 - 2,100,944 11,732,009 Of which: fix IR 8,452,384 94,059 502,738 581,884 - - 9.631.065 Of which: variable IR ------Of which: non-interest bearing 2,100,944 2.100.944 Receivables due from derivatives - - - - - 1,408 1,408 Of which: fix IR - - Of which: variable IR ------Of which: non-interest bearing - - - - - 1.408 1,408 Securities - - 1,478,356 6,202,139 2,957,723 - 10,638,218 Of which: fix IR 1,478,356 6,202,139 2,957,723 - 10,638,218 Of which: variable IR ------Of which: non-interest bearing ------Loans and receivables due from banks and other financial institutions 2,683,875 23 - - - 313 2,684,211 Of which: fix IR 2,683,875 23 2,683,898 Of which: variable IR ------Of which: non-interest bearing - - - - - 313 313 Loans and receivables due from clients 12,841,925 33,014,226 5,691,626 12,042,566 5,429,343 2,650,142 71,669,828 Of which: fix IR 913,650 1,360,801 3,594,860 12,042,566 5,429,343 23,341,220 Of which: variable IR 11,928,275 31,653,425 2,096,766 - - - 45,678,466 Of which: non-interest bearing - - - - - 2,650,142 2,650,142 Other assets - - - - - 457,914 457,914 Of which: fix IR ------Of which: variable IR ------Of which: non-interest bearing - - - - - 457,914 457,914 Assets total 23,978,184 33,108,308 7,672,720 18,826,589 8,387,066 5,210,721 97,183,588 Of which: fix IR 12,049,909 1,454,883 5,575,955 18,826,589 8,387,066 - 46,294,402 Of which: variable IR 11,928,275 31,653,425 2,096,765 - - - 45,678,465 Of which: non-interest bearing - - - - - 5,210,721 5,210,721 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.2 Market Risks (Continued) 4.1.2.3 Summary of Market Risks (Continued) 4.1.2.3.2 Interest Rate Risk per Items in the Banking Book (Continued)

The table below shows the total amount of financial assets and liabilities at their carrying values, categorised by the earlier of re-pricing date and maturity and type of interest rate date, as at 31 December 2020:

Non-interest (in RSD ‘000) Up to 1 month 1-3 months 3-12 months 1-5 years Over 5years Total bearing

FINANCIAL LIABILITIES

Liabilities due to derivatives - - - - - 38,201 38,201 Of which: fix IR ------Of which: variable IR ------Of which: non-interest bearing - - - - - 38,201 38,201 Deposits and other financial liabilities due to banks, other financial institutions and 2,028,349 1,856,476 6,171,746 30,000 - 32,172 10,118,743 the Central Bank Of which: fix IR 1,166,026 785,321 4,156,085 30,000 - - 6,137,432 Of which: variable IR 862,323 1,071,155 2,015,661 - - - 3,949,139 Of which: non-interest bearing - - - - - 32,172 32,172 Deposits and other financial liabilities due to other clients 27,979,936 8,423,122 14,312,933 8,990,275 6,011,960 870,294 66,588,520 Of which: fix IR 27,020,198 8,423,122 14,312,933 8,990,275 6,011,960 - 64,758,488 Of which: variable IR 959,738 - - - - - 959,738 Of which: non-interest bearing - - - - - 870,294 870,294 Subordinate liabilities ------Of which: fix IR ------Of which: variable IR ------Of which: non-interest bearing ------Other liabilities - - - - - 1,287,118 1,287,118 Of which: fix IR ------Of which: variable IR ------Of which: non-interest bearing - - - - - 1,287,118 1,287,118 Liabilities total 30,008,285 10,279,598 20,484,679 9,020,275 6,011,960 2,227,785 78,032,582 Of which: fix IR 28,186,224 9,208,443 18,469,018 9,020,275 6,011,960 - 70,895,920 Of which: variable IR 1,822,061 1,071,155 2,015,661 - - - 4,908,877 Of which: non-interest bearing - - - - - 2,227,785 2,227,785 Interest rate gap (6,030,101) 22,828,710 (12,811,959) 9,806,314 2‚375,106 2,982,936 19,151,006 Of which: fix IR (16,136,316) (7,753,559) (14,371,420) 3,604,175 (582,617) - (35,239,737) Of which: variable IR 10,106,215 30,582,269 1,559,461 6,202,139 2,957,723 - 51,407,807 Of which: non-interest bearing - - - - - 2,982,936 2,982,936 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.2 Market Risks (Continued) 4.1.2.3 Summary of Market Risks (Continued) 4.1.2.3.2 Interest Rate Risk per Items in the Banking Book (Continued)

(in RSD ‘000) Up to 1 month 1-3 months 3-12 months 1-5 years Over 5years Non-interest bearing Total FINANCIAL ASSETS Cash and balances held with the Central Bank 2,731,583 190,260 1,741,677 1,171,993 5,028 2,044,196 7,884,737 Of which: fix IR 2,731,583 190,260 1,741,677 1,171,993 5,028 - 5,840,541 Of which: variable IR ------Of which: non-interest bearing - - - - - 2,044,196 2,044,196 Receivables due from derivatives - - - - - 1,680 1,680 Of which: fix IR ------Of which: variable IR ------Of which: non-interest bearing - - - - - 1,680 1,680 Securities - 664,491 1,716,314 6,688,832 2,302,450 - 11,372,087 Of which: fix IR - 664,491 1,716,314 6,688,832 2,302,450 - 11,372,087 Of which: variable IR ------Of which: non-interest bearing ------Loans and receivables due from banks and other financial institutions 2,043,145 - 729,090 - - 4,704 2,776,939 Of which: fix IR 2,043,145 - 729,090 - - - 2,772,235 Of which: variable IR ------Of which: non-interest bearing - - - - - 4,704 4,704 Loans and receivables due from clients 9,947,997 36,391,459 4,753,449 8,846,681 6,428,551 1,218,802 67,586,939 Of which: fix IR 989,857 716,016 2,969,740 8,846,681 6,428,551 - 19,950,845 Of which: variable IR 8,958,140 35,675,443 1,783,710 - - - 46,417,292 Of which: non-interest bearing - - - - - 1,218,802 1,218,802 Other assets - - - - - 476,504 476,504 Of which: fix IR ------Of which: variable IR ------Of which: non-interest bearing - - - - - 476,504 476,504 Assets total 14,722,725 37,246,210 8,940,530 16,707,506 8,736,029 3,745,886 90,098,886 Of which: fix IR 5,764,585 1,570,767 7,156,820 16,707,506 8,736,029 - 39,935,707 Of which: variable IR 8.958.140 35,675,443 1,783,710 - - - 46,417,293 Of which: non-interest bearing - - - - - 3,745,886 3,745,886 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued) 4.1.2 Market Risks (Continued) 4.1.2.3 Summary of Market Risks (Continued) 4.1.2.3.2 Interest Rate Risk per Items in the Banking Book (Continued)

(in RSD ‘000) Up to 1 month 1-3 months 3-12 months 1-5 years Over 5years Non-interest bearing Total

FINANCIAL LIABILITIES

Liabilities due to derivatives - - - - - 9,608 9,608 Of which: fix IR ------Of which: variable IR ------Of which: non-interest bearing - - - - - 9,608 9,608 Deposits and other financial liabilities due to banks, other 1,021,054 1,497,812 3,107,890 - - 15,135 5,641,891 financial institutions and the Central Bank

Of which: fix IR 1,021,054 756,034 - - - 1,777,088

Of which: variable IR - 1,497,812 2,351,856 - - - 3,849,668 Of which: non-interest bearing - - - - - 15,135 15,135 Deposits and other financial liabilities due to other clients 21,873,949 6,984,341 14,923,957 10,486,960 6,540,409 179,369 60,988,985 Of which: fix IR 18,810,326 6,984,341 14,923,957 10,486,960 6,540,409 - 57,745,993 Of which: variable IR 3,063,623 - - - - - 3,063,623 Of which: non-interest bearing - - - - - 179,369 179,369 Subordinate liabilities - 3,934,511 - - - - 3,934,511 Of which: fix IR ------Of which: variable IR - 3,934,511 - - - - 3,934,511 Of which: non-interest bearing ------Other liabilities - - - - - 1,080,385 1,080,385 Of which: fix IR ------Of which: variable IR ------Of which: non-interest bearing - - - - - 1,080,385 1,080,385 Liabilities total 22,895,003 12,416,664 18,031,847 10,486,960 6,540,409 1,284,497 71,655,380 Of which: fix IR 19,831,380 6,984,341 15,679,991 10,486,960 6,540,409 - 59,523,081 Of which: variable IR 3,063,623 5,432,323 2,351,856 - - - 10,847,802 Of which: non-interest bearing - - - - - 1,284,497 1,284,497 Interest rate gap (8,172,278) 24,829,546 (9,091,317) 6,220,546 2,195,620 2,461,389 18,443,506 Of which: fix IR (14,066,795) (5,413,574) (8,523,171) 6,220,546 2,195,620 - (19,587,374) Of which: variable IR 5,894,517 30,243,120 (568,146) - - - 35,569,491 Of which: non-interest bearing - - - - - 2,461,389 2,461,389 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.2 Market Risks (Continued)

4.1.2.3 Summary of Market Risks (Continued)

4.1.2.3.2 Interest Rate Risk per Items in the Banking Book (Continued)

Throughout 2020, the interest rate risk VaR (99, 1-day) was at quite a low level, except in March and April when the interest rate risk in the Banking Book stood at EUR 696.55 and 407.18 thousand, respectively. Such significant deviations from the annual average were attributed to significantly increased interest rate volatility due to the COVID-19 pandemic. As at 31 December 2020, interest rate risk VaR (99%, 1-day) in the Banking Book was EUR 236.88 thousand, i.e. RSD 27.85 million, being significantly below the limit of EUR 400 thousand, i.e. RSD 47.4 million. The figure below shows the movements of this ratio in 2020:

Interest Rate Risk in the Trading Book – VaR (99%, 1-day), EUR ‘000

4.1.2.3.3 Equity Price Risk The Bank is exposed to the risk of changes in the prices of equity securities, since the Bank’s investments are classified in the balance sheet at fair value through other comprehensive income and partly as investment through the Trading Book. At the proposal of the Executive Board, the Bank’s Board of Directors adopts appropriate market risk management policies. In turn, at the proposal the Risk Control Department (and BSM & Treasury Department) the Executive Board adopts the related supporting procedures and manuals for identification, measurement/assessment, mitigation and monitoring of market risks. These policies, procedures and manuals are based on the principles of the Bank and Addiko Group pertaining to the market risk management and control and in compliance with the minimum standards and criteria prescribed by the NBS.

Management of the price risk in debt and equity securities the Bank is exposed to is the responsibility of the Executive Board of the Bank. ALCO proposes to the Executive Board measures aimed at efficient and successful management of other market risks. For monitoring and control of the price and other market risks arising from the Banking Book and Trading Book, once per year the Bank defines a set of limits, as follows: volume/position limit, stop-loss limit p.a. and VaR limit (1-day, 99%). The limits for the Trading Book and Banking Book are defined at least once a year in coordination with Addiko Group, at the request/proposal of the BSM & Treasury Department, containing also the business strategy of the BSM & Treasury Department within each of the said Books. The request also contains the evaluation, i.e. the comments by the Risk Control Department regarding the proposed positions and limits, starting from the capital level and other parameters and ratios. The request for operating limits in the Banking Book and Trading Book is approved by the Bank’s Executive Board and forwarded to Addiko Group. According to the standard of the Parent Bank, the positions and limits are defined in the same way for the Market Risk Steering Book, which in the case of the Bank, contains the following: VaR limit for interest rate risk and open FX position, which serve the purpose of strategic operations.

Within the Market Risk Steering Book, in 2020, the Bank operated and had limits established for the VaR interest rate risk portfolio from the Banking Book, as well as the total open FX position. 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.2 Market Risks (Continued)

4.1.2.3 Summary of Market Risks (Continued)

4.1.2.3.3 Equity Price Risk (Continued)

In 2020, in accordance with the Group and local strategy, procedures and approved limits, the Bank did not have equity investments in other legal entities based on share trading at the Belgrade Stock Exchange (directly), but from early 2020 and throughout the year it had investment fund units carried in the Banking Book and in the Trading Book.

In 2020, the Bank continued to apply elements of additional credit risk protection in the financial derivative trading process with Addiko Group through mutual collateralisation (between the Bank and Addiko Group), in accordance with the executed Master Agreement for Financial Derivatives Transactions and Collateral Addendum to the said Master Agreement for Financial Derivatives Transactions, which are aligned with the ISDA (International Swaps and Derivatives Association) standards.

The securities induced price risk, as per relative NBS regulations, matches interest rate risks from the Trading Book, in accordance with the Addiko Group standards. The most significant factor which affects this risk are treasury bills and bonds carried in the Trad- ing Book. In Q4 2020, interest rate risk (VaR) increased significantly due to an increase of the treasury bill portfolio in the Trading Book. As at 31 December 2020, interest rate risk VaR from the Trading Book amounted to EUR 19.6 thousand or RSD 2.3 million, being below the limit of EUR 106 thousand, i.e. RSD 12.5 million.

The table below shows a summary of VaR (99%, 1-day) movements for interest rate risk from the Trading Book in 2020:

Kamatni rizik u Knjizi trgovanja - VaR (99%,1 dan) - u Credit Spread Risk (Trading Bookhiljadama and Banking EUR Book) – VaR (99%, 1-day), EUR ‘000 80,00 73,26 70,00 60,00 47,04 50,00 40,13 40,00 30,99 32,15 23,74 23,16 30,00 19,60 24,66 17,14 18,07 14,09 20,00 10,00 0,00

4.1.2.3.4 Risk of Investment in Equity Securities According to Addiko Group standards, the Bank recognises the risk of investment in equity securities. However, in 2020 the Bank did not have any exposures under these securities.

4.1.2.3.5 Credit Spread Risk The Bank also monitors credit spread risk - liquid, as a separate market risk component, which is defined as the risk of market price changes, as a result of changes in interest rate spreads. The key factor that impacts the credit spread risk is liquidity held in the form of securities. As at 31 December 2020, VaR (99%, 1-day) of the credit spread risk was EUR 63.87 thousand, i.e. RSD 7.5 million, which was significantly below the limit of EUR 270 thousand, i.e. RSD 31.75 million. 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.2 Market Risks (Continued)

4.1.2.3 Summary of Market Risks (Continued)

4.1.2.3.5 Credit Spread Risk (Continued)

The table below shows a summary of VaR (99%, 1-day) movements for credit spread risk in 2020:

CreditRizik kreditne Spread Risk marže (Trading (Knjiga Book Trgovanja and Banking i Bankarska Book) –knjiga) VaR (99%, - VaR 1-day), (99%, EUR1 ‘000 dan) - u hiljadama EUR 400,00 360,00 320,00 280,00 240,00 200,00 160,00 114,95 90,95 120,00 60,47 63,87 80,00 33,82 46,83 25,57 18,38 4,64 24,09 40,00 13,72 8,71 0,00

4.1.3 Liquidity Risk Liquidity risk is the possibility of adverse eﬀects on financial result and equity, due to the Bank’s inability to full its liabilities when these fall due as a result of:

• Withdrawal of existing sources of financing, and/or inability to obtain new sources of financing (funding liquidity risk), or

• Difficulties in converting assets into liquid funds due to market disturbances (market liquidity risk).

The Banks’ liquidity management implies maintaining sufficient amounts of assets for settling due liabilities, ensuring regular and undisturbed operations with minimal costs. This implies the Bank’s obligation to provide and maintain the liquidity reserve in its regular operations for emergencies and unforeseen circumstances.

Accordingly, the Bank has defined the area of liquidity risk control and management by a set of bylaws and enactments (strategies, policies, procedures, etc.), which are aligned with the legislation and bylaws of the National Bank of Serbia governing liquidity management and with other Bank’s policies and relevant bylaws, as well as with standards of Addiko Group, to which the Bank is a member.

The objective of the liquidity risk strategy is to set out general parameters for prudent and ongoing management of liquidity risk inherent in the Bank’s business model.

The monitoring and management of liquidity at the Bank level is within the competence of the Balance Sheet Management & Trea- sury Department. This is where the management of situational and structural liquidity and the coordination of financing resources at the Bank level takes place. Control of liquidity risk is within the competence of the Risk Control Department which performs activities re the measure and mitigation of risk, as well as timely and consistent reporting on exposure to liquidity risk.

The Bank has a business plan in place in the event of a liquidity crisis which defines the processes and instruments of control and protection necessary to eliminate an immediate crisis or overcome an acute crisis. In the event of a liquidity crisis, the Bank’s main priorities are to rigorously sustain solvency and prevent reputational damage. 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.3 Liquidity Risk (Continued)

This Strategy defines:

• adequate identifying, defining, analysing, measuring, monitoring, reporting and limiting the Bank’s overall appetite for liquidity risk, with the aim of ensuring sustainable development of its operations; • ensuring that the liquidity risk structure is formed in accordance with available capital and liquidity, thus supporting its protection and value preservation for the Bank’s shareholders; • organisational framework for daily management and decision-making regarding liquidity risk; • Efficient liquidity management (including data quality) and forward-looking approach that observes the defined early warning signals for the purpose of establishing liquidity adequacy on a long-term basis. In line with the responsibilities and competences prescribed by NBS regulations and enactments, the Bank’s Board of Directors defines the strategy and goals of the Bank to comply with the criteria for the risks and the result, whereas the Executive Board has overall competence for the Bank’s operations and implementation of the risk management strategy and policies and the strategy for capital management. Other responsibilities in respect of liquidity risk are exercised by the following committees, in line with the legislation, regulations and enactments of the National Bank of Serbia: • Audit Committee • Assets and Liabilities Committee (ALCO) The Risk Control Department takes care of overall analysis, measurement, assessment, control and reporting on liquidity risk (including funding spread risk) as well as the creation and implementation of adequate limits system and early warning procedures in compliance with the ICAAP (Internal Capital Adequacy Assessment Process) and ILAAP (Internal Liquidity Adequacy Assessment Process) frameworks. The BSM & Treasury Department is in charge of liquidity management at the local level, hence within this organisational unit, an employee is designated to perform, in line with Addiko Group standards, duties of the Bank’s Liquidity Manager. The basic instruments and indicators for monitoring and measuring short-term and long-term liquidity are the following: • preparation and execution of cash flow plans in a defined timeframe (at least one month); • liquidity ratios prescribed by the National Bank of Serbia (and calculated and delivered by the Accounting and Reporting Department); • monitoring of the Liquidity Coverage Ratio (LCR); • analysis of developments and projections of cash flow matching (GAP analysis) in certain time intervals; • analysis, monitoring and limitation of negative net cash flows against available liquidity reserve under both normal conditions and a range of stress scenarios within on-year horizon; and • monitoring of internally defined liquidity ratios. In line with the Decision of the National Bank of Serbia on Liquidity Risk Management by Banks (RS Official Gazette no. 103/2016), the Bank is obligated to maintain the prescribed liquidity levels. The ratio between the sum of the first-ranking liquid receivables and the second-ranking liquid receivables, on one hand, and the sum of the Bank’s demand deposit liabilities or liabilities without agreed maturity and liabilities with maturity within one month from the day of liquidity ratio calculation, on the other hand, must be maintained by the Bank so that it equals: a) at least 1.0 when calculated as an average of liquidity ratios for all business days in a month; b) not below 0.9 for more than three consecutive business days; c) at least 0.8 when calculated for one business day.

In accordance with the same Decision, since 24 December 2012 the Bank has also been monitoring the rigid (or cash) liquidity ratio, which represents first-ranking receivables relative to the sum of the Bank’s demand deposit liabilities or liabilities without agreed maturity and liabilities with maturity within one month from the day of liquidity ratio calculation. The Bank shall maintain the level of the rigid (cash) liquidity ratio so that it equals: a) at least 0.7 when calculated as an average of the liquidity ratio for all business days in a month, b) not below 0.6 for more than three consecutive business days, c) at least 0.5 when calculated for one business day. 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.3 Liquidity Risk (Continued)

Under NBS Decision on Liquidity Risk Management (Official Gazette of the RS No. 103/2016) effective as from 30 June 2017, the Bank is required to calculate the liquidity coverage ratio on monthly basis. The liquidity coverage ratio represents the Bank’s liquidity buffer relative to the net liquid asset outflows over an assumed stress period of 30 days. The Bank is required to maintain the liquidity coverage ratio at a level of minimum 100% for all currencies.

A critically low level of liquidity of the Bank is the liquidity level whose ratio is lower than the above ratios. If the Bank establishes a critically low liquidity level, it is required to inform the National Bank of Serbia thereof no later than the following day.

In addition to the regulatory liquidity ratios (liquidity ratio - LIK and rigid liquidity ratio - rigid LIK), for the needs of internal liquidity monitoring, the Bank defines the following ratios which it monitors daily:

• the liquidity ratio (by analogy with LIK) per all significant currencies individually (EUR, USD, CHF and RSD) as well as other currencies in the aggregate, supplemented with swap and forward transactions maturing within a month from the day of applicable calculation (GAP limits per currency and currency ratio limits are established), and

• a set of liquidity ratios estimated as potentially significant for internal liquidity management (limits are established).

As in the case of internal limits for liquidity ratio and rigid liquidity ratio, the liquidity ratio limits per significant currencies individually are adopted by the Executive Board at the proposal of the Risk Control Department.

The Risk Control Department monitors movements of internal ratios/liquidity ratios and reports on the value of these ratios to the BSM & Treasury Department on a daily basis.

In addition, at least once a month at ALCO meetings, the Risk Control Department reports on the periodic trend of internal liquidity ratio movements.

For the purpose of analysing the effects of potential (negative) movements of the liquidity position, i.e. creating a number of liquidity stress scenarios, the Risk Control Department, in cooperation with the BSM & Treasury Department providing minimum information on availability and time lag of the liquidity potential and the responsible Finance Controlling Department, defines/ updates on a weekly basis projected cash flows for a period of up to a year and determines the liquidity flows sensitivity to the disturbances envisaged by the scenarios. The stress scenario methodology is developed in cooperation with Addiko Group. For quantitative and qualitative measurement, monitoring, control and reporting on long-term liquidity, in the aggregate separately for major currencies, the Risk Control Department applies the methodologies defined internally and/or in coordination with Addiko Group and its standards.

Stress sensitivity is used to calculate stress effects on the cash flows, as well as on the liquidity reserve. Stress analysis is performed for various timeframes and levels of unforeseen events.

The Risk Control Department monitors and reports monthly on maturity (mis)matches of balance sheet liabilities and receivables and off-balance sheet items through the maturity scale (GAP analysis) for predefined periods of time, taking into consideration the set of predefined model assumptions (criteria for classification of assets and liabilities without maturity). This report is based on the GAP analysis applied to maturity structure of assets and liabilities of the Bank. The underlying purpose of such measurement and the report is to recognise assets and liabilities, i.e. (net) cash flows (inflows/outflows) starting from their agreed maturity per the remaining period until maturity. Balance sheet items without contractually defined maturities are included yet can also be treated separately and are grouped according to the documented assumptions. With regards to odd-balance sheet items, the report includes derivatives with the effect on cash flows and undrawn framework loans, guarantees, and letters of credit under the stated assumptions.

Items without maturity that do not generate cash flows (fixed assets, intangible assets, other assets, equity investments, provisions, other liabilities, equity, etc.) are grouped in a separate column – non-relevant cash flows (‘NR’). 4. RISK MANAGEMENT POLICY (continued)

4.1. Financial Risk Factors (continued)

4.1.3 Liquidity Risk (continued)

Overall liquidity at Addiko Bank in 2020 remained at a satisfactory level. Throughout the year, the Bank did not experience critically low levels of liquidity, i.e. none of the ratios monitored by the Bank were in violation.

A comparative review of the liquidity ratios for 2020 and 2019, respectively, is found below:

Liquidity ratio 2020 2019 as at 31 December 1.67 1.87 average in December 1.58 1.74 maximum ratio throughout the year 2.16 2.17 minimum ratio throughout the year 1.41 1.32

A comparative review of the rigid liquidity ratios for 2020 and 2019, respectively, is found below:

Rigid liquidity ratio 2020 2019 as at 31 December 1.36 1.54 average in December 1.30 1.46 maximum ratio throughout the year 1.88 1.87 minimum ratio throughout the year 1.16 1.10

Throughout 2020, the Bank’s liquidity coverage ratio was in compliance with the limits prescribed by the bylaws of the National Bank of Serbia.

The table below shows the movement of the liquidity coverage ratio in 2020 and 2019, respectively:

Liquidity Coverage Ratio (LCR) 2020 2019 as at 31 December 143% 167% average ratio throughout the year 153% 158% maximum ratio throughout the year 179% 183% minimum ratio throughout the year 123% 135% 4. RISK MANAGEMENT POLICY (continued)

4.1. Financial Risk Factors (continued)

4.1.3 Liquidity Risk (continued) The following table provides an analysis of the Bank’s non-derivative financial assets and financial liabilities grouped according to maturity date, by the net remaining maturity.

Gross receivables due from banks and customers are decreased by the amount of allowance for impairment as per loan facilities underlying the receivables. In maturities up to 1 months, the following are categorised: mature receivables, receivables and liabilities without contracted maturity, prepaid fees and commissions per loans and early repayment of interest per savings deposits.

Data as at 31 December 2020

(in RSD ‘000) Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Carrying value Cash and balances held with the Central Bank 11,732,009 - - - - 11,732,009 Receivables under derivatives 1,154 254 - - - 1,408 Securities 1 186,401 1,547,345 7,911,359 2,957,722 12,602,828 Loans and receivables due from banks and other financial 2,673,809 4,962 201 5,239 - 2,684,211 institutions Loans and receivables due from clients 2,963,620 3,340,459 10,128,626 22,698,762 32,538,361 71,669,828 Other assets 457,721 2 153 38 - 457,914 Assets – Receivables 17,828,314 3,532,078 11,676,325 30,615,398 35,496,083 99,148,198 Liabilities under derivatives 38,201 - - - - 38,201 Deposits and other financial liabilities due to banks, other 1,818,669 902,901 5,351,512 2,045,661 - 10,118,743 financial institutions and the Central Bank Deposits and other financial liabilities due to other clients 42,111,957 9,098,714 13,272,821 1,939,545 165,483 66,588,520 Subordinate liabilities ------Other liabilities (2,636,587) 663,085 3,066,782 26,064 167,774 1,287,118 Liabilities 41,332,240 10,664,700 21,691,115 4,011,270 333,257 78,032,582 Maturity mismatch at year-end (23,503,926) (7,132,622) (10,014,790) 26,604,128 35,162,826 21,115,616 Cumulative gap - asset and liability maturity mismatch (23,503,926) (30,636,548) (40,651,338) (14,047,210) 21,115,616

Bearing in mind that in 2020 all of the Bank’s liquidity ratios were constantly in compliance with the regulatory requirements, and that continuing on into 2021, the Bank plans to apply to its liabilities a partial maturity extension strategy in collaboration with international financial institutions (additional long-term borrowings), rollover retail deposits with the same or extended maturities (for amortised contingent groups of deposit assets that are scheduled to mature in the first half of 2021), as well as decrease the maturity of its assets by shorter term lending to retail clients, the expected result expected is a reduction of the liquidity GAP against that set on 31 December 2020. 4. RISK MANAGEMENT POLICY (continued)

4.1. Financial Risk Factors (continued)

4.1.3 Liquidity Risk (continued)

Data as at 31 December 2019

(in RSD ‘000) Up to 1month 1-3months 3-12months 1-5years Over 5years Carrying value Cash and balances held with the Central Bank 7,884,737 - - - - 7,884,737 Receivables under derivatives 1,680 - - - - 1,680 Securities 2 664,491 1,716,314 8,984,741 2,302,449 13,667,997 Loans and receivables due from banks and other financial institutions 2,750,388 171 18,517 7,863 - 2,776,939 Loans and receivables due from clients 2,120,618 2,465,036 14,865,731 14,556,224 33,579,330 67,586,939 Other assets 476,269 5 174 56 - 476,504 Assets – Receivables 13,233,694 3,129,703 16,600,736 23,548,884 35,881,779 92,394,796 Liabilities under derivatives 9,608 - - - - 9,608 Deposits and other liabilities due to banks, other financial institutions and the Central Bank 1,225,705 530,461 1,533,869 2,351,856 - 5,641,891 Deposits and other liabilities due to clients 35,010,073 6,789,491 15,214,430 3,813,094 161,897 60,988,985 Subordinate liabilities 584 - 3,933,927 - - 3,934,511 Other liabilities (967,259) 388,752 1,441,774 38,236 178,882 1,080,385 Liabilities 35,278,711 7,708,704 22,124,000 6,203,186 340,779 71,655,380 Maturity mismatch at year-end (22,045,017) (4,579,001) (5,523,264) 17,345,698 35,541,000 20,739,416 Cumulative gap - asset and liability maturity mismatch (22,045,017) (26,624,018) (32,147,282) (14,801,584) 20,739,416 4. RISK MANAGEMENT POLICY (continued)

4.1. Financial Risk Factors (continued)

4.1.3 Liquidity Risk (continued) For the purpose of monitoring liquidity risk, the off-balance sheet items are treated in line with the following assumptions:

• Guarantees - 5% payment for a period of up to 1 month,

• Framework loans - 5% payment up to 6 month,

• Irrevocable liabilities for undrawn credit lines - 100% payment up to 1 year.

These assumptions re off-balance sheet items, as well as overall assumptions for monitoring needs and measuring liquidity risk, are defined in collaboration with the Group, taking into account estimates of the expert department and the assumptions defined by the NBS for these same items for measuring liquidity ratios (liquidity ratio and rigid liquidity ratio), in that the Risk Control Department notifies the ALCO of all these established assumptions as well as their adjustments.

In accordance with the aforesaid assumptions, the table below provides maturities of these items as at 31 December 2020:

(in RSD ‘000) Up to 1 1-3 3-12 Over 5 1-5 years Total month months months years Guarantees 5% 620,543 - - - - 620,543 Revocable frame agreements 5% 49,594 99,188 446,344 - - 595,126 Irrevocable liabilities for undrawn credit 85,328 170,656 767,953 - -- 1,023,937 lines - 100% Total 755,465 269,844 1,214,297 - 2,239,606

In accordance with the aforesaid assumptions, the table below provides maturities of these items as at 31 December 2019:

(in RSD ‘000) Up to 1 1-3 months 3-12 months 1-5 years Over 5 years Total month Guarantees 5% 623,334 - - - - 623,334 Revocable frame agreements 5% 48,525 97,049 436,722 - - 582,296 Irrevocable liabilities for un- 99,243 198,486 893,186 - - 1,190,915 drawn credit lines - 100% Total 771,102 295,535 1,329,908 - - 2,396,545

Maturity structure of derivatives according to the contractually agreed maturities as at 31 December 2020:

(in RSD ‘000) 1-3 months 1-5 years Total Purchase transactions 2,270,682 2,270,682 Swaps with related banks 1,478,125 1,478,125 Swaps with other banks - - Swaps with legal entities 792,557 792,557 Sales transactions 3,738,802 3,738,802 Swaps with related banks 1,482,109 1,482,109 Swaps with other banks 1,431,623 1,431,623 Swaps with legal entities 825,070 825,070 Maturity mismatch at (1,468,120) (1,468,120) year-end 4. RISK MANAGEMENT POLICY (continued)

4.1. Financial Risk Factors (continued)

4.1.3 Liquidity Risk (continued)

Maturity structure of derivatives according to the contractually agreed maturities as at 31 December 2019:

(in RSD ‘000) 1-3 months 1-5 years Total Purchase transactions (1,498,261) - (1,498,261) Swaps with related banks (1,733,447) - (1,733,447) Swaps with other banks 235,186 - 235,186 Swaps with legal entities - - - Sales transactions (1,976,173) - (1,976,173) Swaps with related banks (1,740,996) - (1,740,996) Swaps with other banks (235,177) - (235,177) Swaps with legal entities - - - Maturity mismatch at year-end 477,912 - 477,912

4.1.6 Other risks

● Compliance Risk

Compliance risk is the result of a failure to align operations with the laws and by-laws, internal acts, procedures for the prevention of money laundering and financing of terrorism and standard professional rules and codes, good professional practices and the Bank’s business ethic. Three major compliance risks are the following: a) Risk of sanctions imposed by the regulatory body – risk resulting from business irregularities which may lead to the regulator imposing measures against the Bank under conditions and as provided for under legislation; b) A risk of financial losses – risk resulting from all risks the Bank is exposed to, particularly due to non-compliance with the laws and internal acts and inadequate application of strategies and policies, i.e., due to management of the Bank resulting in financial losses for any reason, and c) Reputational risk – risk arising from non-compliance with the laws and internal acts which leads to disruption to reputation and trust of the clients.

● Operational Risk

Operational risk is the risk of occurrence of losses arising from inappropriate or unsuccessful internal processes, human error and systemic or external events, which include legal risk. The definition of operational risk does not include strategic and reputational risks. According to its internal acts, the Bank also accepts the definition set out in the Law on Banks and the National Bank of Ser- bia Decision on Risk Management by Bank, and therefore this risk also includes the risk of possible occurrence of negative effects on the Bank’s financial result and capital due to failures in the work of employees (unintentional and intentional), inappropriate internal procedures and processes, inadequate information management and other systems within the Bank, as well as due to the occurrence of unforeseen external events.

The Bank measures, i.e. evaluates operational risk exposure taking into consideration the possibility, i.e. the frequency of occurrence of said risk, as well as its potential effect on the Bank, paying close attention to events whose occurrence is less likely, but which may potentially cause significant material losses.

The Bank applies two approaches to operational risk identification and evaluation: reactive approach to risk assessment, based on event occurrence, and proactive approach through scenario analysis (SA) and risk assessment - Risk and Control Self-Assessment (RCSA), as an instrument of qualitative assessment.

The goal of managing operational risk in the Bank is to achieve a proactive approach (i.e. risk management) instead of a reactive approach (i.e. loss management). 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.6 Other Risks (Continued)

● Operational Risk (continued)

The Bank applies the following methods and tools to support operational risk management:

• Loss database for systematic collection of data on losses due to operational risk throughout the institution;

• Qualitative assessments (scenarios and risk assessments) to identify and assess the risks occurring within business processes;

• Regular reporting on operational risk.

All the Bank’s employees are obligated to take active part in identifying and reporting on operational risk related losses.

Identification of operational risks is performed and assessed so as to allow defining appropriate actions for avoiding, mitigating, transferring or accepting the risks, including the priorities for implementing safeguards.

The goal is to reduce losses as much as possible, in accordance with allocated resources and budget. The Bank will propose measures to minimise operational risk if it deems that the benefit arising from these measures will not exceed the costs of their implementation, and that they will contribute to the Bank’s efficiency.

The Bank identifies, assesses and monitors operational risk in all materially significant products, activities, processes and systems, including outsourcing, and before their introduction it estimates operational risk which may arise from their introduction.

The Bank applies the basic indicator approach (BIA) to calculate the capital requirement for operational risk. According to this approach, the capital requirement for operational risk equals the amount of the three-year average exposure ratio multiplied by a capital requirement rate of 15%.

The three-year average exposure ratio is the arithmetic mean of the ratios for the past three years. If the exposure ratio is negative or equal to zero in any of the three years, the amount is not included in the calculation of the three-year average. Instead, the average is calculated as the ratio of the sum of positive values of the exposure ratio and the number of years when such values were generated.

The Bank monitors exposure to operational risk through regular reports on operational risk related losses (contingent losses), which are submitted to the Operational Risk Management Advisory Body and the Executive Board of the Bank.

The Bank’s Operational Risk Officer (ORO) drafts reports on operational risk on a regular basis.

The Board of Directors of the Bank and the Audit Committee are notified by way of operational risk reports in line with the schedule of these meetings. The National Bank of Serbia is notified of operational risk events in accordance with statutory regulations or as required by the regulatory body. In addition, the Bank reports to the Group on a regular basis, in line with their prescribed reporting standards.

● Investment risk

The Bank’s investment risks include the risks of its investments in other legal entities and in fixed assets and investment property, considering the following:

• the Bank’s investments in a single non-financial sector entity cannot exceed 10% of its capital (implying investments based on which the Bank acquires a stake or shares of a non-financial sector entity),

• the Bank’s total investments in non-financial sector entities and in fixed assets and investment property of the Bank cannot exceed 60% of the Bank’s capital, provided that this limit does not apply to the acquisition of shares for the purpose of their resale within six months from the date of their acquisition.

In 2020, the Bank’s investment risk exposure ranged within the prescribed limits. 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.6 Other Risks (Continued)

● Country risk

The country risk is the risk relating to: • country of origin of the entity establishing a business relation with the Bank,

• risk of possible adverse effects on the financial result and capital of the Bank due to the Bank’s inability to collect receivables from such entity(ies) for reasons arising from political, economic or social circumstances in such entity’s country of origin.

The country risk includes the following risks: • political-economic risk (implying the inability to collect receivables due to restrictions established under regulations of government and other authorities of the borrower’s country, as well as general and systemic circumstances in such country),

• transfer risk (implying the inability to collect receivables in a currency which is not the official currency of the borrower’s country of origin due to restrictions on settlement of obligations to creditors from other countries in a specific currency established under regulations of government and other authorities in the borrower’s country of origin).

The Bank manages the country risk by establishing and monitoring the exposure limits. The Bank’s limits of exposure to the country risk are established individually by borrower’s country of origin, and the risk assessment and measurement are based on interna- tionally defined and recognised standards for country risk assessment.

In order to protect its business from the country risk, the Bank implements the internally adopted Risk Management Policy, as well as the Procedure for Country Risk Management.

In 2020, the Bank’s country risk exposure ranged within the prescribed limits.

Legal Risk

The total number of passive legal proceedings increased in 2020. The number of legal proceedings which refer to loan application processing fees significantly increased during 2020. The majority of pending court cases refer to the loan processing fee, FX clause, increase in margin and interest rate clause - which are described in more detail in the section entitled Historical Risks of Unilateral Change of the Margin.

This increase in the number of pending cases shows that there is risk of an increase in the number of court cases due to changes in judicial practices and new laws (e.g. the Law on conversion, the amended law on consumer lending, and the law on consumer protection).

Addiko Bank a.d. Beograd has established a centralised data base (as is the case in Addiko Group and all its subsidiaries), which allows both Addiko Bank a.d. Beograd and Addiko Bank AG, i.e. the holding company to monitor and manage court cases and early identification of possible new developments and court decisions in the countries where Addiko Group subsidiaries operate. In addition to this, other monitoring and management tools have been implemented in order to establish and ensure reliable data quality and dispute handling, in order to monitor activities pertaining to passive disputes as well as their development on a daily basis.

Historical Risks of Unilateral Change of the Margin

In 2020, the value of amounts claimed through courts from Addiko Bank a.d. Beograd, with regard to the FX clause, unilateral adjustment of the margin and lawsuits for damage compensation amounted to RSD 2,728 million. 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.6 Other Risks (Continued)

Legal Risk Monitoring and Provisions

Provisions for passive court proceedings involving Addiko Bank a.d. Beograd, in particular, in terms of the risk of losing lawsuits and incurring corresponding court expenses, are determined mainly in accordance with the international accounting standards applied throughout Addiko Group. Accordingly, it is not necessary to allocate provisions if it is highly likely that Addiko Bank a.d. Beograd will win a particular dispute. If the probability of successful outcome is less than 50%, provisions must be allocated. The local Legal Departments, which are familiar with specific court cases and/or outsourced attorneys, are responsible for successful performance assessment. This particularly refers to very complex litigation or litigation involving high claimed amounts. In addition to the overall provisions, provisions are also allocated in very complex and/or important disputes which carry a higher legal risk. The same criteria are applied to passive disputes initiated by claimants with relation to FX indexed loans, however with two important additions: firstly, successful outcome of a particular lawsuit are not assessed by local Legal Departments only but also by several outsourced attorneys and secondly, these types of legal disputes are monitored more intensely on a Group level, as a result of a growing number of regulations pertaining to foreign currency indexed loans in SEE countries (e.g. the so called ‘legal regulations on conversion’).

In addition to the legal data base, where data are updated on a daily basis, Addiko Bank a.d. Beograd as well as all other Addiko Group members, are obligated to provide regular reports on local legal matters and the latest developments and also to draft ad hoc reports on every new lawsuit. Consequently, this manner of reporting allows for information pertaining to the total number of court proceedings to which Addiko Group is a party, as well as legal risks underlying such proceedings (measured in performance assessments recording legal risk provisions in appropriate amounts, effective monitoring of changes and, when necessary, adoption of measures be available at all times.

Summary of legal disputes - possible ensuing invalidation of the contracted FX clause, clause re change of the interest rate and interest rates in accordance with court decisions and changes in relevant legislation

In the past ten years, many private individuals throughout SEE took out loans indexed in a foreign currency (particularly CHF indexed loans). As was the case in earlier years, such contracts are no longer subject to client complaint and court proceedings; however, the latter is primarily an exercise initiated by consumer protection organisations. The main argument is that borrowing clients were not given sufficient information on the consequences of these contracts at the time of their execution and/or that FX clauses and/or interest rates were contracted in breach of contractual provisions. This is an attempt at renegotiating terms and conditions and provisions of FX indexed loan contracts with clients.

At the time of adopting these financial statements, several first-instance and second-instance court decisions were passed with regard to the above described disputes; some of the court decisions were to the Group’s detriment, while in other cases they were in favour of the Bank.

In Serbia, a lawsuit against Addiko Bank a.d. Beograd and another two banks initiated by Efektiva, a consumer protection organisation, was dismissed in favour of the defendants, with legal enforceability.

At the session of the Civil Department of the Supreme Court of Cassation held on 2 April 2019, a legal opinion on a currency clause was adopted. In line with the said opinion, a currency clause may be legally contracted in order to preserve equality of mutual payments – market value of RSD amount of placed and repaid loan funds established by indexing EUR exchange rate, whereas a loan contract clause on indexing a RSD debt by applying CHF exchange rate is null and void in case there is no reliable written evidence that the bank has obtained placed RSD funds from own borrowing in this currency and if prior to contract conclusion, the bank failed to present to the client a comprehensive written information on all business risks and economic and financial consequences which may occur from applying the said clause.

After publishing the legal opinion of the Supreme Court of Cassation related to the right of contracting a currency clause, on 7 May 2019, the Law on the Conversion of Housing Loans Indexed to Swiss Francs (RS Official Gazette no. 31/2019) was adopted, regulating rights and obligations of banks and financial service consumers – private individuals having housing loan contracts with currency clause – CHF indexed in the procedure of the loan debt conversion to EUR-indexed debt. In view of the fact that the majority of CHF housing loan borrowers accepted the conversion offer, in which case termination of court procedure related to the currency clause is envisaged, the legal risk from an increase of such court cases in the future was decreased. 4. RISK MANAGEMENT POLICY (Continued)

4.1. Financial Risk Factors (Continued)

4.1.6 Other Risks (Continued)

Legal Risk Monitoring and Provisions (Continued)

Currently, there are certain indications of the courts changing their decision-making in CHF-related proceedings by deciding in favour of clients-plaintiffs, and allowing the termination or annulment of CHF loan agreements in court cases where clients did not perform conversion. Nevertheless, based on monitoring of the inflow of new lawsuits for annulment of foreign currency clauses or agreement termination due to changed circumstances, it may be concluded that their growth trend is low, based on the share of these lawsuits in their overall structure.

Lawsuits related to loan application processing fees and claims related to loans insured by the National Loan Insurance Corporation have an upward trend (as at 31 December 2020, the total number of lawsuits related to loan application processing fees stood at 2,751, out of which number, 1,624 lawsuits were filed in 2020, and the total number of lawsuits related to insurance premiums charged by the National Loan Insurance Corporation was 213, out of which number, 91 lawsuits were filed in 2020).

Despite the fact that the Supreme Court of Cassation has released its legal opinion on this issue stating that contracting of fees and costs is legally admissible provided that the bank clearly and unambiguously presented the amount of costs and fees to the borrower, there still are differing interpretations of this legal opinion by courts.

The number of disputes dealing with contract termination due to new circumstances did not significantly increase (3 new court cases in 2019), while disputes re the fees pertaining to loan application processing and those referring to loans insured by the National Mortgage Insurance Corporation were increasing (1280 in total, of which 661 were initiated in 2019).

It is expected that more clients will file lawsuits due to charged loan application processing fees, since the Supreme Court of Cassation rendered the opinion stating that contracting of fees and expenses is legally admissible in case a bank has clearly and unambiguously presented the amount of costs and fees to the client.

As regards banks in Serbia, there still have been no legislatively initiatives, however regulatory initiatives exist. In Serbia, the Na- tional Bank of Serbia issued a recommendation to all banks in May 2013 and stated that borrowing clients with CHF indexed loans should be given certain reliefs (such as the possibility to repay CHF loans in smaller instalments in the next three years) or that increased interest rates should be reimbursed as a result of interest rate adjustments. Furthermore, the National Bank of Serbia Decision on Measures for Preserving Stability of the Financial System in the Context of Foreign Currency Indexed Loans, which took effect in March 2015, envisages four models of contract amendment (e.g. conversion of CHF indexed loans to EUR indexation based on certain criteria) which banks must offer to clients who borrowed in a foreign currency and who intend to convert indexation. Addiko Bank in Serbia has already met its implementation obligations referring to these regulatory measures. Nevertheless, it should be noted that a small number of clients have accepted the offer.

4.2 Capital Management The strategic goals of the Bank with respect to capital management are as follows:

• Ensuring sufficient capital to meet the minimum regulatory capital requirements in compliance with the regulations of the Na- tional Bank of Serbia;

• Ensuring sufficient capital to support the Bank’s aptitude for risk assumption and satisfy internal capital needs;

• Ensuring the going concern concept, providing return on equity to the shareholders and benefits to other interested parties;

• Ensuring a strong capital base, as support for further sustainable development of the Bank’s operations;

• Capital allocation in line with the Bank’s strategic goals, including optimisation of return on internal and regulatory capital.

The Bank’s capital management is compliant with the effective relevant legislation and regulations of the National Bank of Serbia governing banking operations. In addition to this, capital management also complies with the requirements of Addiko Group, of which the Bank is a member. 4. RISK MANAGEMENT POLICY (Continued)

4.2 Capital Management (Continued)

The Bank’s Board of Directors defines and approves the Strategy for Capital Management, which constitutes the Bank’s basic document for capital management.

The Bank’s Executive Board has formed a working body: Risk Control Advisory Body. The Risk Control Advisory Body monitors, analyses and implements simulations and stress tests related to changes in the Bank’s capital in the forthcoming period, such as changes in the regulatory capital, capital adequacy and internal capital (calculated based on the Internal Capital Adequacy Assess- ment Process – ICAAP). The Risk Control Advisory Body proposes to the Executive Board measures for managing the Bank’s capital.

The Bank establishes a capital management plan for the purpose of maintaining an adequate level and structure of available internal capital that may support the expected growth of loans and receivables, future sources of funding and their use, risks to which the Bank is exposed and may be exposed to in the forthcoming period, as well as any changes in minimum capital requirement set forth by the Decision on the Capital Adequacy of Banks. Taking into account said elements, including guidelines under the Decision on Risk Management by Banks, the Bank performs capital planning quantification.

The Capital Management Plan includes:

• Strategic objectives and period for their achievement, taking into consideration the influence of the macroeconomic environment and phases of business cycle; • Manner of organising the available internal capital management process; • Process and procedures for planning an adequate level of available internal capital; • Manner of achieving and maintaining an adequate level of available internal capital; and • Contingency plan in the event of emergencies that may affect the amount of available internal capital. In accordance with the Decision on the Capital Adequacy of Banks (RS Official Gazette no. 103/2016, 103/2018 and 88/2019), the Bank is required to maintain the minimum amount of capital in RSD equivalent of EUR 10,0000,000 at the official middle exchange rate of the National Bank of Serbia.

The Bank is required to maintain at all times its capital adequacy ratios listed above at the following minimum prescribed levels:

• the common equity Tier 1 capital ratio (CET1 ratio) minimum of 4.5%; • the core capital adequacy ratio (T1 ratio) minimum of 6%; and • the total capital adequacy ratio (CAR) minimum of 8%. Additionally, the Bank is to maintain capital adequacy ratios increased in a manner that will ensure coverage of the following capital buffer requirements:

• the capital conservation buffer equal to 2.5% of the Bank’s total risk-weighted assets; and • the systemic risk buffer equal to 3% of the total foreign currency and FX indexed corporate and retail loans in the Republic of Serbia on condition that the share of such loans in the total Bank’s loans approved to corporate and retail clients is above 10%. The Decision defines the Bank’s regulatory capital is the sum of the core (Tier 1) capital and supplementary (Tier 2) capital, where the core (Tier 1) capital is comprised of the common equity Tier 1 capital (CET1) and additional Tier 1 capital, less deductibles. In order to be included in the core or supplementary capital, items of the Bank’s capital must meet the criteria prescribed by the Decision at all times.

The Bank’s common equity Tier 1 capital is the sum of the following items (adjusted for the regulatory adjustments less deductible items):

1) shares and other equity instruments; 2) relevant share premium with the common equity Tier 1 instruments; 3) the Bank’s profit; 4) revaluation reserves and other unrealised gains; 5) reserves from profit and other reserves of the Bank; 6) reserve funds for general banking risks.

Elements are included in the Bank’s common equity Tier 1 capital only if the Bank may use them unconditionally, fully and without delays to cover or absorb risks or losses if any occur. 4. RISK MANAGEMENT POLICY (Continued)

4.2 Capital Management (Continued) Deductible items from the common equity Tier 1 capital are:

1) current and prior year’s losses and unrealised losses; 2) intangible assets; 3) deferred tax assets dependable on the Bank’s future profitability in line with the effective regulations; 4) negative amount obtained from calculation in line with item 134 of the Decision – for banks which received a consent of the National Bank of Serbia for the IRB approach implementation; 5) defined benefit pension fund assets on the Bank’s balance sheet; 6) the Bank’s direct, indirect and synthetic holdings of its own common equity Tier 1 instruments, including those that the Bank is under an actual or contingent obligation to repurchase by virtue of a contractual obligation; 7) the Bank’s direct, indirect and synthetic holdings of common equity Tier 1 instruments of FSI entities where those entities have reciprocal holdings in the Bank, designed to artificially inflate the Bank’s capital; 8) the Bank’s applicable direct, indirect and synthetic holdings of common equity Tier 1 instruments of FSI entities where the Bank holds no significant investments; 9) the Bank’s applicable direct, indirect and synthetic holdings of common equity Tier 1 instruments of FSI entities where the Bank holds significant investments; 10) the amount for which the Bank’s additional Tier 1 capital deductible items exceed the Bank’s additional Tier 1 capital; 11) the amount of exposures qualifying for application of a risk weight of 1.250%, where the Bank decides to deduct the exposure from the common equity Tier 1 rather than apply the said risk weight; 12) any tax charge relating to the common equity Tier 1 items foreseeable at the moment of its calculation, except where the Bank has previously suitably adjusted the amount of common equity Tier 1 items insofar as such tax charges reduce the amount up to which those items may be used to absorb risks or losses; 13) gross amount of receivables from a borrower – private individual (except agricultural producers and entrepreneurs) implying granted consumer loans, cash loans or other loans recorded in accounts 102, 107 and 108 in line with the decision regulating the chart of accounts and contents of accounts within the chart of accounts for banks where the indebtedness level of such a borrower prior to loan approval was higher than the percent established in line with the decision regulating classification of balance sheet assets and off-balance sheet items of banks or such percent will be higher after loan approval, with the deductible being implemented regardless of whether the indebtedness level of such borrower becomes lower than the said percent after the loan approval; 14) gross amount of receivables from a borrower – private individual (except agricultural producers and entrepreneurs) implying granted consumer loans, cash loans or other loans, except loans under item 15) hereof recorded in accounts 102, 107 and 108 in line with the decision under item 13) hereof whose agreed maturity is: - over 2920 days – if such loans are approved in the period 1 January – 31 December 2019, - over 2555 days – if such loans are approved in the period 1 January – 31 December 2020, - over 2190 days – if such loans are approved after 1 January 2021; 15) gross amount of receivables from a borrower – private individual (except agricultural producers and entrepreneurs) implying consumer loans for buying motor vehicles recorded in account 102 in line with the decision under item 13) hereof whose agreed maturity is over 2920 days and such a loan is approved after 1 January 2019; 16) amount of provisions for estimated losses calculated in line with regulations of the National Bank of Serbia, if the said regulations prescribe the obligation of allocating the said reserve; 17) total amount of exposure to RSD loans indexed to FX clause and FX loans under item 13a, paragraph 1 of the decision with exceeding of the percent under the said paragraph, i.e. the total amount of bank exposure to RSD loans indexed in FX clause and FX loans under item 13a, paragraph 2 of the decision where the percent under the said paragraph is exceeded. An exception from the item 13 are loans for refinancing loans approved until 18 March 2020 under the following conditions:

1. a refinancing loan was approved in the period from 19 March 2020 to 31 December 2020 with agreed maturity not exceeding 3,285 days, or refinancing loan was approved in the period from 1 January 2021 to 31 December 2021 with agreed maturity not exceeding 2,920 days;

2. a refinancing loan amount does not exceed the remaining outstanding amount of the loan being refinanced.

An exception from the item 14 are loans for refinancing loans approved until 18 March 2020 provided that refinancing loan was approved in the period 19 March 2020 to 31 December 2020 with its agreed maturity not exceeding 3,650 days and the refinancing loan amount not exceeding the remaining outstanding amount of the loan being refinanced.

For purposes of the common equity Tier 1 capital calculation during the year the Bank is required to determine profit/loss at the end of each interim period and deduct all losses from CET1 as these are incurred in accordance with paragraph 1 of the legal provision under 1) of this item. 4. RISK MANAGEMENT POLICY (Continued)

4.2 Capital Management (Continued) The Bank’s additional Tier 1 capital consists of the sum of the following items less respective deductibles:

1) shares and other equity instruments that meet the criteria of additional Tier 1 capital instruments; 2) relevant share premiums that accompany additional Tier 1 capital.

Deductible items from additional Tier 1 capital are: 1) the Bank’s direct, indirect and synthetic holdings of own s additional Tier 1 capital instruments, including those that the Bank is under an actual or contingent obligation to repurchase by virtue of a contractual obligation; 2) the Bank’s direct, indirect and synthetic holdings of additional Tier 1 capital instruments of FSI entities where those entities have reciprocal holdings in the Bank, designed to artificially inflate the Bank’s capital; 3) the Bank’s applicable direct, indirect and synthetic holdings of additional Tier 1 capital instruments of FSI entities where the Bank holds no significant investments; 4) the Bank’s direct, indirect and synthetic holdings of additional Tier 1 capital instruments of FSI entities where the Bank holds significant investments, excluding items that, as the issue underwriter, it has held for no more than five business days or less; 5) the amount for which the Bank’s supplementary capital deductible items exceed the Bank’s supplementary Tier 2 capital; 6) any tax charge relating to the additional Tier 1 capital items foreseeable at the moment of its calculation, except where the Bank has previously suitably adjusted the amount of additional Tier 1 items insofar as such tax charges reduce the amount up to which those items may be used to absorb risks or losses.

The Bank’s supplementary (Tier 2) capital consists of the sum of the following items less respective deductibles: 1) shares and other Tier 2 instruments and liabilities under subordinated loans; 2) the relevant share premium, i.e., amounts paid in above the par value of such instruments; 3) general credit risk adjustments gross of tax effects, of up to 1.25% of the risk-weighted credit risk exposures.

Deductible items from supplementary Tier 2 capital are: 1) the Bank’s direct, indirect and synthetic holdings of own supplementary capital instruments and subordinated liabilities, including those that the Bank is under an actual or contingent obligation to repurchase by virtue of a contractual obligation; 2) the Bank’s direct, indirect and synthetic holdings of supplementary capital instruments and subordinated liabilities of FSI entities where those entities have reciprocal holdings in the Bank, designed to artificially inflate the Bank’s capital; 3) the Bank’s applicable direct, indirect and synthetic holdings of supplementary capital instruments and subordinated liabilities of FSI entities where the Bank holds no significant investments; 4) the Bank’s direct, indirect and synthetic holdings of supplementary capital instruments and subordinated liabilities of FSI entities where the Bank holds significant investments, excluding items that, as the issue underwriter, it has held for no more than five business days or less. The following table presents the Bank’s balance of capital in 2020 and 2019:

(in RSD ‘000)

31 December Calculation of the Bank’s Capital 31 December 2019 2020

Common Equity Tier 1 Capital (CET1) 20,766,674 20,208,757

Common Equity Tier 1 Capital Instruments 17,517,484 17,517,484 Share premium 3,027,810 3,027,810 Reserves from profit 2,104,903 1,580,792 Losses due to initial application of IFRS 9 (1,126,066) (1,126,066) Intangible assets (844,940) (1,045,047) Other unrealised losses 108,228 278,951 Deductible items per indebtedness level or agreed maturity (20,745) (25,167)

Additional Tier 1 capital - Supplementary Tier 2 capital - 579,215 Subordinated liabilities - 579,215 CAPITAL 20,766,674 20,787,972 4. RISK MANAGEMENT POLICY (Continued)

4.2 Capital Management (Continued) Capital requirements are calculated in accordance with the Decision on the Capital Adequacy of Banks (RS Official Gazette no. 103/2016, 103/2018 and 88/2019).

When establishing the projected amount of liabilities from dividends, the Bank must implement regulatory restrictions for profit distribution, including distribution restrictions under para. 455 of the Decision.

The table below shows the Bank’s capital adequacy ratio calculation at year-end 2020 and 2019 in compliance with the regulations of the National Bank of Serbia.

(in RSD ‘000) CAR calculation 2020 2019 Capital 20,766,674 20,787,972 Credit-risk weighted assets multiplied by the CAR reciprocal value 67,780,345 65,807,472 Foreign exchange risk exposure multiplied by the CAR reciprocal value 620,086 - Equity price risk exposure multiplied by the CAR reciprocal value 503,053 714,482 Operational risk exposure 9,758,376 10,326,832 Risk-weighted assets per exposure to credit valuation adjustment (CVA) risk 1,868 - Total risk-weighted assets 78,663,728 76,848,786 Capital adequacy ratio (CAR) 26.40% 27.05%

4.3 Fair Value Assessment

The fair value is the price that would be received to sell an asset or paid to transfer obligations in a regular transaction between market participants, on the measurement date.

Fair value of financial instruments traded in an active market (such as tradable securities and securities available for sale) is based on quoted market prices as at the reporting date. Quoted market prices used for the Bank’s financial assets represent the current bidding prices. Fair value of financial instruments not traded in the active market (such as derivatives which are traded OTC) is determined by various valuation techniques. The Bank applies different methods and determines assumptions based on the market conditions existing as at the reporting date. Quoted market prices or quoted prices for similar instruments are used for long-term liabilities. Other techniques, such as estimated discounted cash flows, are used for determining the fair value of the remaining financial instruments.

Fair value of interest rate swaps is recalculated as the present value of estimated future cash flows. Fair value of forward FX contracts is determined by applying quoted market exchange rates as at the reporting date. It is assumed that the nominal values of receivables and payables, less any impairment losses, approximate their fair values. Fair values of financial liabilities for disclosure purposes are assessed by discounting future cash flows at the current market interest rate available to the Bank for similar financial instruments.

IFRS 13 - Fair Value Measurement - establishes the fair value hierarchy which categorises the inputs used in valuation techniques into three levels that are applied for fair value measurement:

• Level 1:Quoted market price (unadjusted) in an active market for an identical instrument

• Level 2: Information based on market inputs for assets or liabilities, other than quoted prices included in Level 1, observable either directly (i.e. as prices) or indirectly (i.e. derived from prices)

• Level 3: Information on an asset or a liability that are not based on observable market data (unobservable inputs).

Fair value of financial instruments traded in active markets is based on quoted market prices as of the balance sheet date. A market is deemed active if quoted prices are immediately and regularly available at the stock exchange, with dealers, brokers, industrial groups, units for pricing or the regulatory agency, and if the said prices reflect the current market transactions, which are regularly performed at arm’s length. Quoted market prices used for the Bank’s financial assets represent current bidding prices. The said instruments are recorded within Level 1 of the fair value hierarchy. The instruments within Level 1 primarily include BELEX investments into equity instruments classified as financial assets held for trading or financial assets available for sale. 4 RISK MANAGEMENT POLICY (Continued)

4.3 Fair Value Assessment (Continued)

Fair value of financial instruments not traded in an active market (such as derivatives traded OTC, with publicly available data) is determined by application of various valuation techniques. Those valuation techniques use observable data from the market as much as possible, if available, and rely on special estimates of the Bank as little as possible. If all materially significant inputs necessary for determining fair value of an instrument are present, the instrument measured is classified within Level 2 of the fair value hierarchy.

If one or more materially significant inputs are not based on available market data, the instrument is classified within Level 3 of the fair value hierarchy. Special valuation techniques used for financial instruments are:

• Quoted market prices or prices of dealers for similar instruments,

• Fair value of interest rate swaps is calculated as the present value of estimated future cash flows based on the available yield trend,

• Fair value of forward FX forward contracts is determined by application of forward exchange rates as of the reporting date, with discounting the acquired value to the present value,

• Other techniques, such as analysis of discounted cash flow, are used to determine fair values of the remaining financial instruments.

Fair Value of Financial Assets and Liabilities Carried at Fair Value

In 2020 and 2019, the Bank did not transfer financial assets held for trading and financial assets available for sale from Level 1 to Level 2.

(in RSD ‘000) 31 December 2019 Level 1 Level 2 Level 3 Total

Financial assets Securities - 13,667,997 - 13,667,997 Receivables under derivatives - 1,680 - 1,680

Total financial assets - 13,669,677 - 13,669,677

Financial liabilities - - - Liabilities under derivatives - (9,608) - (9,608) Total financial liabilities - (9,608) - (9,608)

(in RSD ‘000) 31 December 2020 Level 1 Level 2 Level 3 Total

Financial assets Securities - 12,604,236 - 12,604,236 Receivables under derivatives - 1,408 - 1,408 Total financial assets - 12,605,644 - 12,605,644 Financial liabilities Liabilities under derivatives (38,201) (38,201) Total financial liabilities - (38,201) - (38,201)

Fair value of financial derivatives in established by discounting cash flows at interest rates taken fromeuters R or Bloomberg.

Fair value of treasury bills is calculated on the basis of their par value discounting by the interest rate published on the website of the Treasury Department of the Ministry of Finance. 4. RISK MANAGEMENT POLICY (Continued)

4.3 Fair Value Assessment (Continued)

Fair value of Financial Assets and Liabilities Carried at Other than Fair Value

The Bank assessed the fair values of the financial instruments carried at other than fair value, as follows:

• By discounting the expected future cash inflows from financial assets at the expected rate of return, consisting of the ‘risk-free’ interest rate and premiums for credit risk per corresponding maturities of the financial assets,

• By discounting the expected future cash outflows arising from financial liabilities at the ‘risk-free’ interest rate plus the zero credit spread applicable to the corresponding financial liability according to its maturity.

The Bank’s management believes that, due to the nature of the Bank’s financial assets, as well as the type of its clients, the carrying amounts of loans and receivables due from banks and other financial institutions do not depart from their fair values.

Fair values of the financial assets and liabilities carried at other than fair value as at 31 December 2020 are presented in the table below:

Carrying value Fair value Level 3 Financial assets Cash and balances held with the Central Bank 11,732,009 11,732,009 11,732,009 Loans and receivables due from banks and other financial institutions 2,684,211 2,684,313 2,684,313 Loans and receivables due from clients 71,669,828 76,344,059 76,344,059 Other assets 457,914 457,914 457,914 Total 86,543,962 91,218,295 91,218,295 Financial liabilities Deposits and other liabilities due to banks, other financial institutions 10,118,743 10,214,256 10,214,256 Deposits and other liabilities due to clients 66,588,520 66,744,855 66,744,855 Subordinate liabilities - - - Other liabilities 1,287,118 1,287,118 1,287,118 Total 77,994,381 78,246,229 78,246,229

Fair values of the financial assets and liabilities carried at other than fair value as at 31 December 2019 are presented in the table below:

(in RSD ‘000) Carrying value Fair value Level 3 Financial assets Cash and balances held with the Central Bank 7,884,737 7,884,737 7,884,737 Loans and receivables due from banks and other financial institutions 2,776,939 2,777,191 2,777,191 Loans and receivables due from clients 67,586,939 71,525,408 71,525,408 Other assets 554,264 554,264 554,264 Total 78,802,879 82,741,600 82,741,600 Financial liabilities Deposits and other liabilities due to banks, other financial institu- 5,641,891 5,762,659 5,762,659 tions and the Central Bank Deposits and other liabilities due to other clients 60,988,985 61,195,008 61,195,008 Subordinate liabilities 3,934,511 4,104,468 4,104,468 Other liabilities 1,080,385 1,080,385 1,080,385 Total 71,645,772 72,142,520 72,142,520 5. INTEREST INCOME AND EXPENSES

a) Interest income from: (in RSD ‘000) 2020 2019 Required reserves held with the Central Bank 13,778 48,778 Operations with the Central Bank 3,602 4,165 Loans due from banks and financial institutions 823 9,033 Loans due from corporate clients 1,142,654 1,225,371 Loans due from retail clients 2,467,586 2,545,733 Corporate loan origination fees 77,820 95,179 Retail loan origination fees 49,500 123,594 Securities 470,704 488,517 Total interest income 4,226,467 4,540,370

b) Interest expenses from: Liabilities due to banks and financial institutions 67,981 53,052 Liabilities due to corporate clients 300,978 349,860 Liabilities due to retail clients 230,277 291,700 Borrowings 207,958 256,905 Leases 5,563 4,555 Total interest expenses 812,757 956,072

NET INTEREST INCOME 3,413,710 3,584,298

b) Interest income (in RSD ‘000) 2020 2019

Financial assets available for sale 83,307 42,440 Financial assets measured through other comprehensive income 387,397 452,552 Financial assets measured at amortised cost 3,755,763 4,045,378 Total interest income 4,226,467 4,540,370

Interest expenses per financial liabilities were measured at amortized cost in the entire amount. Interest income on impaired NPLs (unwinding) in 2020 amounted to RSD 43.335 thousand (2019: RSD 62.075 thousand). 6. FEE AND COMMISSION INCOME AND EXPENSES

a) Fee and commission income (in RSD ‘000) 2020 2019 Documentary business 7,661 14,450 Guarantees 167,545 159,958 Securities 307 424 Cards 288,413 307,331 Loans 73,636 116,156 Insurance 2,288 1,482 International payments 276,024 315,884 Domestic payments 359,903 369,020 Account maintenance 238,481 234,722 Total fee and commission income 1,414,258 1,519,427

b) Fee and commission expenses Securities 1,032 973 International payments 41,050 43,510 Cards 53,265 45,532 Other retail client fees 16,627 8,994 Domestic payments 43,553 40,209 Transactions with banks 4,513 2,704 Transactions with corporate clients 9,738 7,029 Guarantee fee expenses 1,970,00 794 Total fee and commission expenses 171,748 149,745 NET FEE AND COMMISSION INCOME 1,242,510 1,369,682

Fee and commission income and expenses per financial assets/liabilities were measured at amortized cost in the entire amount.

7. NET GAINS ON FINANCIAL ASSETS (in RSD ‘000) 2020 2019

(29,672) Losses on the value adjustment of derivatives held for trading (40,618) Gains on the value adjustment of derivatives held for trading 16,044 100,049 Fair value adjustments of securities held for trading 14,836 61,691 Net gains on financial assets held for trading 1,208 121,122

Net gains on reclassification of financial instruments 10,116 32,598 Losses on financial assets available for sale (27,225) (12,337) Gains on financial assets available for sale 203,586 56,683 Gains on sale of financial assets held for trading 16,700 5,241

Net gains on financial assets available for sale 193,061 49,587

TOTAL 204,385 203,307 8. NET FOREIGN EXCHANGE LOSSES/(GAINS) AND CURRENCY CLAUSE EFFECTS (in RSD ‘000) 2020 2019 Foreign exchange losses per foreign currency receivables and liabilities (30,165,281) (25,071,366) Negative currency clause effects per receivables (1,951) (106) Negative currency clause effects per liabilities (10) (4,051) Total foreign exchange losses (30,167,242) (25,075,523) Foreign exchange gains per foreign currency receivables and liabilities 643 1,805 Positive currency clause effects per receivables 17,280 123,010 Positive currency clause effects per liabilities 30,192,565 24,945,225 Total foreign exchange gains 30,210,488 25,070,040 NET EFFECT 43,246 (5,483)

9. OTHER OPERATING INCOME (in RSD ‘000) 2020 2019 Rental income 4,743 3,312 Income from unused employee bonuses 749 28,768 Other income from employees 3,909 4,714 Income per the centralised management function 213,521 200,830 Gains on the sales of loans and receivables - - Other income 16,935 17,489 Total other operating income 239,857 255,113

10. OTHER INCOME

(in RSD ‘000) 2020 2019

Gains on the sales of other equipment 570 351 Collected damages 91 - Reversal of provisions for liabilities 34,896 34,065 Other income 5,645 65,059 Total other income 41,202 99,475 11. NET GAINS/(LOSSES) ON REVERSAL OF/ IMPAIRMENT OF FINANCIAL ASSETS NOT MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS

Losses on impairment of financial assets and credit risk-bearing off-balance sheet items in RSD ‘000 2020 2019 Losses on impairment of balance sheet items Cash and cash equivalents (Note 20c) (672) (294) Loans and receivables due from banks and other financial institutions (Note 20c) (43,170) (45,893) Loans and receivables due from clients (Note 20c) (5,816,204) (15,103,253) Securities (128,048) (14,502) Other assets (Note 20c) (11,454) (63,834) Write-offs in the course of the year (8,594) (319,164) Modification effect (Note 20c) (177,543) - Total expenses on the impairment of balance sheet items (6,185,685) (15,546,940)

Provisions for losses per off-balance sheet assets (154,789) (208,514) Total expenses (6,340,474) (15,755,454)

Gains on decrease of impairment of financial assets and credit risk-bearing off-balance sheet items

in RSD ‘000 2020 2019 Cash and cash equivalents (Note 20c) 15 277 Loans and receivables due from banks and other financial institutions (Note 20c) - 42,427 Loans and receivables due from clients (Note 20c) 5,474,598 14,937,384 Securities 120,190 14,671 Other assets (Note 20c) 2,646 50,679 Collected in the course of the year 165,064 263,402 Total on balance sheet assets 5,762,513 15,308,840

Income from the release of provisions for off-balance sheet items 152,804 220,244 Total income 5,915,317 15,529,084 Net gains/(losses) on reversal of/impairment of financial assets and credit (425,157) (226,370) risk-bearing off-balance sheet items

12. SALARIES, SALARY COMPENSATIONS AND OTHER STAFF COSTS

(in RSD ‘000) 2020 2019 Net salaries 842,572 902,554 Payroll taxes and contributions 320,617 342,916 Other staff costs 43,139 153,840 Provisioning charge for termination benefits 25,891 20,939 Provisioning charge for retirement benefits / income from reversal of (1,100) 96 retirement provisions Total salaries, salary compensations and other staff costs 1,231,119 1,420,345 13. AMORTISATION / DEPRECIATION COSTS

(in RSD ‘000) 2020 2019 Amortisation charge of intangible assets (Note 21) 204,957 145,113 Depreciation charge of leasehold improvements (Note 22) 29,086 25,800 Depreciation charge of buildings (Note 22) 8,753 9,521 Depreciation charge of other equipment (Note 22) 57,705 58,728 Depreciation charge of car leasing (Note 22) 9,109 9,047 Depreciation charge of real estate leasing (Note 22) 193,845 184,082 Total amortisation and depreciation charge 503,455 432,291

14. OTHER EXPENSES (in RSD ‘000) 2020 2019 Donations and financial aid 9,991 27,016 Leases (rentals) 72,970 95,017 Other costs related to rented premises 85,469 101,546 Insurance premiums 222,900 346,257 Entertainment 2,838 5,429 Marketing and advertising 90,490 170,829 IT usage 652,826 660,402 Cost of fuel for vehicles and vehicle maintenance 3,835 6,429 Telecommunications and postage services 66,023 71,115 Membership fees, foreign and domestic 3,062 2,967 Indirect taxes and contributions 207,030 231,127 Audit cots 13,639 11,919 Consultant services 59,807 74,186 Municipal utilities 40,150 45,779 Office supplies 4,601 7,577 Other expenses to and on behalf of employees 20,483 46,403 Court and administrative fees 48,678 56,819 Costs of card operations 156,140 117,104 Security services 62,336 65,876 Other administrative costs 78,092 94,406 Cost of materials 1,975 3,902 Losses on write-off and sales of property, equipment and intangible assets 397,270 20,750 Cost of provisions for liabilities 124,574 80,011 Other expenses 16,706 10,365 Impairment of property - 36,658 TOTAL OTHER EXPENSES 2,441,885 2,389,889

Insurance premiums mostly comprise insurance of deposits amounting to RSD 199,273 thousand (31 December 2019: RSD 318,424 thousand). Indirect taxes and contributions are payroll taxes and contributions charged to the Bank as the employer. Marketing and advertising costs mostly pertain to the costs of TV commercials of RSD 13,287 thousand (31 December 2019: RSD 60,640 thousand), internet advertising of RSD 23,171 thousand (31 December 2019: RSD 29,896 thousand), while the remaining costs included research, promotional materials, etc. IS usage costs mostly refer to the costs of services relating to the core banking system of RSD 213,656 thousand (31 December 2019: RSD 183,403 thousand), while costs of licenses and software maintenance amounted to RSD 298,291 thousand (31 December 2019: RSD 323,646 thousand). In 2020, leases (rentals) imply small value leases, short-term leases of business premises an related costs, amounting to RSD 55,669 thousand (2019: RSD 41,541 thousand) and costs of tax on long-term and short-term leases stand at RSD 8,566 thousand (2019: RSD 7,414 thousand). 15. INCOME TAX

(a) Components of income tax

Total income tax expense comprises: (in RSD ‘000) 2020 2019 Current income tax expenses (211) (750) Total (211) (750)

Calculated tax on the initial application of IFRS 9 (39,743) (39,743) Calculated income tax (211) (750) Total tax expense (39,594) (40,493)

(b) Reconciliation of the Income Tax Expense Recognised in the Income Statement and Product of Profit Before Tax and the Statutory Income Tax Rate

(in RSD ‘000) 2020 2019

Profit before tax 583,294 1,148,188

Income tax at the rate of 15% 87,494 172,228 Tax effects of income and expenses not recognised for tax purposes (87,494) (77,139) Tax on capital gains 211 750 Tax losses utilised - (95,089) Other 39,743 39,743 Total tax included in the income statement 39,954 40,493 Effective tax rate 0.04% 0.07%

(c) Basis for recording deferred tax assets and liabilities and their effect on the Bank’s income statement for 2020 and 2019:

(in RSD ‘000)

Deferred Deferred Income Deferred Deferred Income Deferred Deferred Income tax assets tax liabili- statement tax assets tax liabili- statement tax assets tax liabili- statement 2020 ties 2020 2020 2019 ties 2019 2019 2018 ties 2018 2018 Unrealised gains on available- for-sale securities (206,43) - - (49,227) - - (33,785) - Unrealised losses due to initial application of IFRS 9 79,489 - 39,743 119,232 - 39,743 158,974 - 39,743

79,489 (20,643) 39,743 119,232 (49,227) 39,743 158,974 (33,785) 39,743

UNUSED TAX LOSSES

In RSD ‘000

Remaining Year of inception Tax loss amount Portion utilised Year of utilisation tax loss Year of expiry amount

2013 7,565,484 2,310,496 2017/2018 2018

2014 1,996,873 712,828 2019- 2019 2015 7,080,127 - - 2020 2016 1,463,306 - 1,463,306 2021 Total 18,105,790 3,023,324 1,463,306 15. INCOME TAX (Continued)

Losses stated in the tax statement, other than capital gains and losses, are available for carryforward against taxable profits of the future accounting periods for duration of no longer than five years.

As at 31 December 2018, the Bank formed deferred tax assets per initial application of IFRS 9 in the amount RSD 198,717 thousand, available for use in the forthcoming 5-year period. In the current year, 2020, RSD 39,743 thousand was utilised (2019: RSD 39,743).

In the following year, the Bank will reassess its unrecognised deferred tax assets and recognise them to the extent it is probable that future taxable income will be available to allow for the recovery of deferred tax assets as prescribed by IAS 12.37.

16. CASH AND BALANCES HELD WITH THE CENTRAL BANK

(in RSD ‘000) 31 December 31 December 2020 2019 In RSD Gyro account 5,108,192 3,370,929 Cash on hand 1,157,876 1,196,649 Interest receivables from NBS 173 1,483 Total in RSD 6,266,241 4,569,061 In foreign currencies Required foreign currency reserve 4,523,548 2,468,088 Cash on hand 942,570 847,549 Foreign currency accounts for trading in securities 323 54 Total in foreign currencies 5,466,440 3,315,691 Allowance for impairment (672) (15)

Balance as at 31 December 11,732,009 7,884,737

In the statement of cash flows, cash and cash equivalents are considered cash assets held on the Bank’s accounts, cash on hand, FX assets held on accounts with domestic and foreign banks.

The following items are included in cash and cash equivalents for the purposes of the cash flow statement:

(in RSD ‘000) 31 December 2020 31 December 2019

Gyro account 1,308,192 3,370,929 Cash on hand 2,100,446 2,044,198 Foreign currency accounts held with foreign banks 2,669,141 2,745.691 Foreign currency accounts for trading in securities 323 54 Balance as at 31 December 6,078,102 8,160,872

In 2020, the Bank calculated the required RSD and foreign currency reserves in accordance with the Decision on Obligatory Re- serves Held with the National Bank of Serbia (RS Official Gazette no. 3/2011, 31/2012, 57/2012, 78/2012,87/2012, 107/2012, 62/2013, 125/2014, 135/2014, 4/2015, 78/2015, 102/2015 and 21/2019) until October 2018. Under the Amendment to the De- cision from October 2018 (RS Official Gazette no. 76/2018, 21/2019 and 102/2020), the funds received from the international financial institution shall no longer be fully exempt from the required reserve calculation.

The Bank is required to notify NBS by the end of each calendar month of its intention not to calculate the required reserve on the balance of funds received from the international financial institutions after October 17, 2018 as from the ensuing period. At the same time, the Bank is required to submit to NBS information on the sources and amounts of such funds received, purpose of the funds and interest rates per sources of funding and per of loans extended from such funds and on the average interest margins on the loans approved from other sources. 16. CASH AND BALANCES HELD WITH THE CENTRAL BANK (Continued)

The Bank is under obligation to maintain the average daily balance of the allocated required reserve over the reporting period in the amount of the calculated required reserve, where it is allowed that during the month daily balances of both RSD and foreign currency required reserves may be above or below the calculated required reserves. All days within the accounting period are taken into account in calculation of the average daily balance of the required reserve.

The RSD required reserve is calculated for deposits, loans and securities as well as other RSD denominated liabilities with the exception of RSD deposits received under transactions calculated by the Bank in the name and on behalf of third parties. Such amounts, however, do not exceed loans and receivables amounts which the Bank extended from these deposits.

The required reserve allocated in RSD consists of the sum of the calculated RSD reserve and a portion of the calculated FX reserve. For the basis which includes FX reserves with maturities of up to two years, the calculated required reserve was allocated in RSD, at 38%. For the basis which includes FX reserves with maturities over two years, the calculated required reserve was allocated in RSD, at 30%. The allocations were made in these percentages throughout the reporting period.

As at 31 December 2020, the calculated RSD required reserve, the amount of which had to be maintained in the gyro account from 18 December 2020 to 17 January 2021 totalled RSD 4,711,074 thousand and was in compliance with said Decision of the National Bank of Serbia.

In 2020, the required RSD reserve was calculated at the following unchanged rates:

• 5% – applicable to the amount of RSD liabilities with agreed maturities of up to two years;

• 0% – applicable to the amount of RSD liabilities with agreed maturities of over two years;

The National Bank of Serbia pays interest to banks on the amount of the actual average daily balance of the allocated RSD required reserve in the reporting period, up to the amount of the calculated RSD required reserve.

The interest rate payable by the National Bank of Serbia throughout 2020 was 0.75% p.a. from January to 17 March, then it was reduced and equalled 0.5% from 18 March to 17 April, from 18 April to 17 June it equalled 0.25% and from 18 June up to the end of 2020, it was 0.1% p.a.

In 2020, the required FX reserve was calculated at the following unchanged rates:

• 20% – applicable to the amount of FX liabilities with agreed maturities of up to two years;

• 13% – applicable to the amount of FX liabilities with agreed maturities of over two years;

• 100% – applicable to the amount of RSD liabilities with the currency clause index, irrespective of maturity.

In 2020, the calculated required reserve allocated in foreign currency in percentage terms remained unchanged throughout the year. Allocated reserves in foreign currency amounted to:

• 62% of the amount calculated on foreign currency liabilities and currency clause-indexed liabilities with agreed maturities of up to two years,

• 70% the amount calculated on foreign currency liabilities and currency clause-indexed liabilities with agreed maturities of over two years.

As at 31 December 2020, the calculated FX required reserve, the amount of which had to be maintained from 18 December 2020 to 17 January 2021 was EUR 50,928 thousand.

The National Bank of Serbia does not pay any interest on the amount of the average balance of the allocated foreign currency reserve. 17. RECEIVABLES AND LIABILITIES UNDER DERIVATIVES

(in RSD ‘000) 31 December 31 December 2020 2019

Derivative receivables 1,408 1,680 Total securities 1,408 1,680

(in RSD ‘000) 31 December 31 December 2020 2019 Derivative payables 38,201 9,608

Total securities 38,201 9,608

All derivative financial instruments are carried at fair value within the Bank’s off-balance sheet items with positive changes in the fair value of derivatives recognised as assets and negative changes in the fair value of derivatives as liabilities. Fair value at the beginning of a transaction equals the price of the transaction.

The table below shows contracts for FX swaps with the settlement dates after the reporting date in gross amounts as at 31 De- cember 2020:

Positive fair Negative fair Contracts with positive Contracts with nega- value in RSD value in RSD value tive value ‘000 ‘000

USD 14.713.800 / FX swap - Receivable on settlement date USD / 1,006 Liability on settlement date EUR EUR 12,000,000 EUR 300,000 / FX swap - Receivable on settlement date EUR / 85 Liability on settlement date NOK NOK 3.174.000 EUR 8,000,000 / FX swap - Receivable on settlement date EUR / 253 Liability on settlement date RSD RSD 941.45.200,00 USD 143,713,800/ FX swap - Receivable on settlement date USD / 4,485 Liability on settlement date EUR EUR 12,000,000 EUR 300.00/ FX swap - Receivable on settlement date EUR / 352 Liability on settlement date AUD AUD 483.540,00 EUR 300,000 / FX swap - Receivable on settlement date EUR / 328 Liability on settlement date NOK NOK 3.174.000EUR

FX swap - Receivable on settlement date EUR / EUR 4.166.606,67 / 280 Liability on settlement date RSD RSD 490.207.500,67

EUR 3.207.501,04 / Forward transactions 64 RSD 412.657.497,36 USD 3.971.194,07/ Forward transactions 32,756 RSD379.899.118,15 Fair value at year-end 1,408 38,201 17. RECEIVABLES AND LIABILITIES UNDER DERIVATIVES (Continued)

The table below shows contracts for FX swaps with the settlement dates after the reporting date in gross amounts as at 31 De- cember 2019:

Negative fair Contracts with Positive fair val- Contracts with value in RSD positive value ue in RSD ‘000 negative value ‘000

CHF 1,420,640 / FX swap - Receivable on settlement date RSD / 1,338 Liability on settlement date EUR EUR 1,300,000 USD 1,114,600 / FX swap - Receivable on settlement date RSD / 55 Liability on settlement date EUR EUR 1,000,000 EUR 500,000 / FX swap - Receivable on settlement date GBP / 237 Liability on settlement date EUR NOK 4,992,500 EUR 2,000,000 / FX swap - Receivable on settlement date RSD / 50 Liability on settlement date EUR RSD 235,176,600 CHF 1,420,640 / FX swap - Receivable on settlement date CHF/ 211 Liability on settlement date EUR EUR 1,300,000 USD 13,379,040/ FX swap - Receivable on settlement date CHF / 7,815 Liability on settlement date EUR EUR 12,000,000 USD 1,114,600 / FX swap - Receivable on settlement date EUR / 740 Liability on settlement date RSD EUR 1,000,000 EUR 500,000 / FX swap - Receivable on settlement date USD / 842 Liability on settlement date EUR NOK 4,992,500

FX swap - Receivable on settlement date EUR / Liability on settlement date RSD

Fair value at year-end 1,680 9,608

18. SECURITIES

(in RSD ‘000) 31 December 2020 31 December 2019

Securities measured through profit or loss 1,964,611 2,295,910 Securities measured through equity 10,638,217 11,372,087 Investment units measured through equity - - Investment units measured through profit and loss - - Total securities 12,602,828 13,667,997

Allowance for impairment on securities measured through other comprehensive income is presented within equity in the amount of RSD 8,536 thousand.

Debt securities of the Republic of Serbia may be short-term and long-term, in local or foreign currencies.

Short-term debt securities are issued in the form of no coupon treasury bills by the Republic of Serbia Ministry of Finance.

Long-term debt securities are issued in the form of coupon bonds by the Republic of Serbia.

The nominal value is 10,000.00 monetary units if a debt security is denominated in RSD, or 1,000 if it is denominated in foreign currency.

Debt securities of the Republic of Serbia are issued with maturities ranging from 1 to 15 years. 18. SECURITIES (Continued)

The market value of the Republic of Serbia debt securities is calculated by discounting all future cash flows of the securities by the relevant debt securities interest rate used in the most recent auctions as published on the website of the Treasury Department of the Ministry of Finance.

In 2020, the Bank invested its free RSD funds in debt securities of the Republic of Serbia at interest rates (rates of return) ranging from 2.11% to 3.20% (2019: 3.40% to 4.57%),

The Bank earned interest income through investments in securities at fair value at fair value through OCI in 2020 in the amount of RSD 387,397 thousand (2019: RSD 452,552 thousand).

Securities measured at fair value through OCI

(in RSD ‘000)

Opening gross balance as at 1 January 2020 11,372,087 Decrease during the year (6,353,707) Increase during the year 5,145,707 Net gains on sales 176,361 Interest income 387,397

Increase in unrealised loss - Foreign exchange effects (89,628) Net balance as at 31 December 2020 10,638,217

Opening gross balance as at 1 January 2019 10,402,924 Decrease during the year (2,391,561) Increase during the year 2,776,486 Net gains on sales 44,346 Interest income 452,552 Increase in unrealised gain 58,301 Foreign exchange effects 29,039 Net balance as at 31 December 2019 11,372,087

In 2020, the Bank earned interest income on investments in securities held for trading in the amount of RSD 83,307 thousand (2019: RSD 42,440 thousand).

Securities within the Bank’s portfolio are remeasured every ten days. A number of days remaining to maturity is considered for each security and the pricing is performed by interpolation of the interest rates applied according to the number of days to maturity.

Interest rate input data for remeasurement of securities are obtained from Bloomberg and Reuters systems. The most recent interest rate on securities in the auctions held by the Ministry of Finance are obtained from Bloomberg. Interest rates for RSD securities with maturities below 3 months and EUR securities with maturities below 12 months are obtained from the Reuters system (Reuter’s interbank interest rates) as follows:

- Overnight and 2-week rates are applied to RSD securities,

- Overnight rate increased by annual CDS of the Republic of Serbia expressed in USD (YCCD2104) is applied to EUR securities.

The prices made are imported into the Bank’s information system where each price is multiplied by the par value of the security and divided by 100. The value arrived at in this manner represents the security’s current value.

The fair value is obtained by deducting the sum of the cost and deferred discount value from the securities current value. 19. LOANS AND RECEIVABLES DUE FROM BANKS AND OTHER FINANCIAL INSTITUTIONS

(in RSD ‘000) 31 December 31 December 2020 2019 In RSD Loans and receivable under REPO transactions - - Loans and receivables to banks - - Loans and receivables to other financial institution 5,137 9,865 Total in RSD 5,137 9,865 In foreign currencies Foreign currency accounts held with other banks 2,721,113 2,754,649 FX loans and receivables 9,968 21,398 Other FX loans and receivables 9 - Total in foreign currencies 2,731,090 2,776‚047 Gross loans and receivables due from banks 2,736,227 2,785,912 Allowance for impairment in RSD (1) (5) Allowance for impairment in foreign currencies (52,015) (8,968) Total 2,684,211 2,776,939

In 2020, the Bank approved RSD loans to other banks at interest rates ranging from 0.10% to 1.00% (2019: 1.00% to 3.60%) and EUR loans at interest rates ranging from 0.00% to 0.05% (2019: 0.05% to 0.10%).

20. LOANS AND RECEIVABLES DUE FROM CUSTOMERS

The table below shows loans and receivables due from clients grouped per initial net maturities.

(in RSD ‘000) 31 December 2020 31 December 2019 Short-term Long-term Total Short-term Long-term Total In RSD - Legal entities (corporate clients) 2,681,868 6,369,972 9,051,840 1,532,484 84,678 1,617,162 - Retail (private individuals) 1,287,095 22,728,170 24,015,265 986,790 20,973,161 21,959,951 - Public sector 403,487 133,941 537,428 55,997 8 56,005 - Other clients 9,084 18,479 27,563 5,438 5,478 10,916 Total In RSD 4,381,534 29,250,562 33,632,096 2,580,709 21,063,325 23,644,034 In foreign currencies - Legal entities (corporate clients) 9,740,522 18,163,957 27,904,479 16,926,497 18,620,386 35,546,883 - Retail (private individuals) 533,414 9,859,165 10,392,579 578,944 10,469,300 11,048,244 - Public sector 2,506,696 898,193 3,404,889 425,113 94,205 519,318 - Other clients 244,896 204,629 449,525 296,506 303,700 600,206 Total in foreign currencies 13,025,528 29,125,944 42,151,472 18,227,060 29,487,591 47,714,651 Gross loans 17,407,062 58,376,506 75,783,568 20,807,769 50,550,916 71,358,685 Allowance for impairment - In RSD (410,065) (1,832,348) (2,242,413) (580,682) (1,533,301) (2,113,983) - In foreign currency (655,725) (1,215,601) (1,871,326) (775,702) (882,061) (1,657,763) Total allowance for impairment (1,065,790) (3,047,949) (4,113,739) (1,356,384) (2,415,362) (3,771,746) Balance as at 31 December 16,341,272 55,328,557 71,669,829 19,451,385 48,135,554 67,586,939

In 2020, loan interest for clients of the Corporate Banking and Public Sector Division was accrued depending on a particular clients’ credit rating, type of loan and provided collateral. 20. LOANS AND RECEIVABLES DUE FROM CUSTOMERS (Continued)

Accordingly, interest for working capital loans approved to corporate clients in 2020 was accrued at the rate equalling EURIBOR increased by the average spread of 3.14% p.a. for foreign currency indexed loans and for RSD loans at the rate equalling BELIBOR increased by the average spread of 2.67% (investment loans to corporate clients in 2019: equalling EURIBOR increased by the average spread of 3.17% p.a. for foreign currency indexed loans and for RSD loans at the rate equalling BELIBOR increased by the average spread of 2.44%).

Investment loans to corporate clients in 2020 were approved with maximum 10 year term and with average spread of 3.47% increased by EURIBOR for indexed loans, while RSD long-term loans were approved to 43 months on average with the spread of 2.80% increased by BELIBOR (2019: long-term loans to corporate clients were approved with maximum term of 10 years and average spread of 3.39% increased by EURIBOR for indexed loans, while RSD long-term loans were approved to 37 months on average with the spread of 3.00% increased by BELIBOR).

All-purpose retail loans in RSD were extended during 2020 at interest rates ranging from 4.49% to 18% (2019: 6% to 17%).

The table below shows allowance for impairment movements in 2020 and 2019:

Loans due from Loans due from financial insti- Other assets (in RSD ‘000) Cash (Note 16) clients (Note Total tutions (Note (Note 24) 20) 19)

(3,238) (7,425,868) (73,234) (7,502,340) Balance as at 1 January 2019 - Increase of expenses (294) (45,893) (15,103,253) (63,834) (15,213,274) Reversal of impairment allowance credited 277 42,427 14,937,384 50,679 15,030,767 to income Conversion effects - - 943,691 - 943,691 Foreign exchange effects 2 (2,269) (2,539) 195 (4,611) Sale of receivables - - 774,567 - 774,567 Write-off and derecognition - - 2,363,686 8,434 2,372,120 Decrease per unwinding effect (Note 5) - - (259,414) - (259,414) Balance as at 31 December 2019 (15) (8,973) (3,771,746) (77,760) (3,858,494) Balance as at 1 January 2020 (15) (8,973) (3,771,746) (77,760) (3,858,494) Increase of expenses (672) (43,170) (5,816,204) (11,452) (5,871,498) Reversal of impairment allowance credited 15 - 5,474,598 2,646 5,477,259 to income Additional allowance for impairment - - (1,327,270) (11,452) (1,382,564) Modification effects - - (177,543) - (177,543) Foreign exchange effects - 127 2,372 7 2,506 Sale of receivables - - - - - Write-off and derecognition - - 772,851 - 772,851 Decrease per unwinding effect (Note 5) - - (124,987) - (124,987) Balance as at 31 December 2020 (672) (52,016) (3,640,659) (86,559) (3,779,906) 21. INTANGIBLE ASSETS

(in RSD ‘000) Licenses and Licenses in Total similar rights progress Cost Balance as at 1 January 2019 2,238,682 15,451 2,254,133 Additions - 247,202 247,202 Transfers (activations) 232,073 (232,073) - Retirement and disposal (6,842) - (6,842) Balance as at 1 January 2020 2,463,913 30,580 2,494,493 Additions - 310,332 310,332 Transfers (activations) 293,250 (293,250) - Retirement and disposal (345,604) - (345,604) Balance as at 31 December 2020 2,411,559 47,662 2,459,221 Accumulated amortisation Balance as at 1 January 2019 1,308,080 - 1,308,080 Amortisation charge for the current year (Note 13) 145,113 - 145,113 Retirement and disposal - - - Impairment (3,746) - (3,746) Balance as at 31 December 2019 1,449,447 - 1,449,447 Amortisation charge for the current year (Note 13) 204,957 - 204,956 Retirement and disposal (40,123) - (40,123) Balance as at 31 December 2020 1,614,280 - 1,614,280

Net book value at: 31 December 2020 797,279 47,662 844,941 31 December 2019 1,014,466 30,580 1,045,046

In 2020 Bank performed impairment testing of its intangible assets as it was necessary to upgrade the existing core banking system R16, implement its new version and review the value of the previous version. The Bank determined impairment in the amount of RSD 397,067 thousand and recorded it in 2020.

22. PROPERTY, PLANT AND EQUIPMENT 31 December 31 Decem- (in RSD ‘000) 2020 ber 2019 Buildings 331,889 366,136 Investments in progress (buildings) 100,264 81,873 Leasehold improvements 60,954 56,430 Computer and other equipment 103,837 109,652 Investments in progress 8,311 6,982 Real estate leased 458,551 383,507 Automobiles leased 3,621 11,919 Total 1,067,427 1,016,499 22. PROPERTY, PLANT AND EQUIPMENT (Continued)

Leasehold im- Computer equip- Investments in (in RSD ‘000) Buildings Other equipment Real estate leases Vehicle leases Total provements ment progress Cost Balance as at 1 January 2019 447,110 829,346 503,074 754,295 25,488 - - 2,559,313 Effect of initial implementation of IFRS 16 1 Jan 2019 - - - - - 500,734 20,966 521,700 Additions 988 37,525 - 47,328 96,390 - 182,231 Transfers (activations) - - 40,322 25,154 (65,834) 358 - - Retirement and disposal - - - - (5,905) - (5,905) Impairment - - - (25,066) - (23,991) - (49,057) Balance as at 31 December 2019 448,098 866,871 543,396 754,383 6,982 567,586 20,966 3,208,282 Additions 18,506 47,622 57,740 327,044 811 451,723 Transfers (activations) 34,436 21,975 (56,411) Transfers from investment property - Retirement and disposal (61,223) (22,165) (11,766) (14,934) - (101,312) - (211,400) Adjustment of initial balance Balance as at 31 December 2020 405,381 892,328 566,066 761,424 8,311 793,318 21,777 3,448,605 Accumulated depreciation Balance as at 1 January 2019 72,441 759,199 458,539 639,258 - 184,080 9,047 1,929,437 Depreciation charge for the current year (Note 13) 9,521 25,800 28,427 30,304 - - - 287,178 Transfers from investment property - - - (24,831) - (1) - (24,832) Retirement and disposal ------Balance as at 31 December 2019 81,962 784,998 486,966 644,731 - 184,079 9,047 2,191,783 Depreciation charge for the current year (Note 13) 8,753 29,086 30,587 27,119 - 193,845 9,109 298,498 Transfers from investment property ------Retirement and disposal (17,223) (22,020) (12,439) (14,263) - (43,157) - (109,103) Balance as at 31 December 2020 73,492 792,064 505,112 657,587 - 334,767 18,0156 2,381,178 Net book value at: 31 December 2020 331,889 100,264 60,954 103,837 8,311 458,551 3,621 1,067,427 31 December 2019 366,136 81,873 56,430 109,652 6,982 383,507 11,919 1,016,499

The Bank owns buildings with premises for the performance of its operations on 6 locations: Branch Bežanijska Kosa, Branch Hill Belgrade, Branch Bačka Palanka, Branch Subotica and Branch Kruševac, a part of a house in Šekspirova Street in Belgrade.

All other business premises are rented and the line item of leasehold improvements relates to the refurbishment, equipment and putting to use of the rented premises.

The Bank did not pledge its property as collateral. 23. NON-CURRENT ASSETS HELD FOR SALE

(in RSD ‘000) 2020 2019 Cost Balance at the beginning of the year 15,446 72,446 Transfer from assets acquired in lieu of debt collection - 63,617 Transfer from investment property - - Sales during the year (15,446) (120,617) Net book value at year-end - 15,446

In previous years the Bank acquired a number of buildings provided as collateral securitising repayment of loans. The Bank’s management decided to complete the sale of these assets so that the assets fulfilling the criteria of IAS 5 – Non-Current Assets Held for Sale and Discontinued Operations were transferred from the assets acquired in lieu of debt collection to the non-current assets held for sale.

In 2020, an item of property totalling RSD 15,446 thousand was transferred to the property, plant and equipment due to the fact that the Bank withdrew from selling this property located in Subotica.

The Bank’s management is taking all the necessary actions to make the sale of the remaining assets – engagement of a real estate agency, advertising, search for prospective buyers – all in order to complete the sales as soon as possible.

24. OTHER ASSETS (in RSD ‘000) 2020 2019

Receivables 631,579 621,900 Receivables from employees 237 302 Receivables from banks for card operations 389,938 310,472 Advances and deposits paid 63,712 85,991 Receivables for client liabilities paid 9,838 8,095 Other fees and other receivables 28,132 25,231 Receivables for rent (lease) 10,884 10,305 Other receivables 128,838 181,504

Other assets and prepayments and accrued income 265,439 159,147 Prepaid expenses 240,469 125,396 Prepayments and accrued income 1,007 905 Assets acquired in lieu of debt collection 12,312 21,193 Office supplies 11,651 11,653 Other assets, gross 897,018 781,047

Allowances for impairment of other receivables (86,559) (77,760) allowance for impairment of inventories (11,653) (11,653) Other assets, net 798,806 691,634

As at 31 December 2020, the Bank’s assets acquired in lieu of debt collection mainly comprise of buildings and apartments totalling RSD 12,312 thousand.

Out of the total amount of allowance for impairment for other receivables, allowance for impairment of other receivables amounts to RSD 86,559 thousand (2019: RSD 77,760 thousand), while RSD 11,635 thousand refers to the allowance for impairment of inventories (2019: RSD 11,635 thousand). 25. DEPOSITS AND OTHER LIABILITIES DUE TO BANKS, OTHER FINANCIAL INSTITUTIONS AND THE CENTRAL BANK (in RSD ‘000) 2020 2019

RSD transaction deposits 202,342 217,581 Transaction deposits of other bank 19,893 16,600 Transaction deposits of other financial institutions 182,449 200,981

Transaction deposits in foreign currency 273,439 322,662 Transaction deposits of other bank 90,963 130,320 Transaction deposits of other financial institutions 182,476 192,342

Other RSD deposits 805,159 147,019 Other deposits of other banks - 3 Other deposits of other financial institutions 798,401 145,001 Liabilities for interest and fees 6,758 2,015

Other foreign currency deposits 956,562 637,445 Other deposits of other banks 11,758 11,759 Other deposits of other financial institutions 940,641 618,286 Liabilities for interest and fees and prepaid fees 4,163 7,400

Borrowings 7,881,243 4,317,184 Balance as at 31 December 10,118,745 5,641,891

In 2020, short-term loans and deposits were approved to the Bank in EUR at interest rates depending on maturity, ranging from 0.5% to 0.75% p.a. (2019 interest rate: 0.5% to 0.65%). in RSD ‘000

Amount in Interest 31 December Currency Due date currency Rate 2020

EBRD - long-term loans EUR 8,571,429 4.12.2023 1.40% 1,007,830 EUR 4,285,714 4.12.2023 1.40% 503,915

EUR 4,285,714 4.12.2023 1.40% 503,915 Addiko Bank AG - long-term loan EUR 33,453,803 2.04.2021 1.00% 3,933,505

Total long-term loans 5,949,165 EBRD – short-term loans EUR 3,077,000 13.01.2021 0.75% 361,794 EUR 2,200,000 13.01.2021 0.60% 258,676

EUR 300,000 10.03.2021 0.75% 35,274

EUR 700,000 23.03.2021 0.75% 82,306

EUR 545,000 13.04.2021 0.75% 64,081

EUR 1,500,000 21.04.2021 0.75% 176,370

EUR 2,250,000 4.05.2021 0.75% 264,555

EUR 3,560,000 11.06.2021 0.75% 418,586

EUR 2,300,000 24.06.2021 0.75% 270,434

Total short-term loans 1,932,078

Total received loans 7,881,243 26. DEPOSITS AND OTHER LIABILITIES DUE TO CUSTOMERS

(in RSD ‘000) 2020 2019 RSD Transaction deposits 14,025,493 9,589,294 Corporate clients 8,486,975 5,602,895 Public companies - 498,347 Public sector 227,612 364,679 Non-resident legal entities 955,504 - Other clients 336,084 301,081 Retail clients 4,019,318 2,822,292 Foreign currency transaction deposits 21,765,338 20,860,769 Corporate clients 6,656,451 6,452,992 Public companies - 925 Public sector 24,133 39,030 Non-resident legal entities - - Other clients 210,621 128,436 Retail clients 14,874,133 14,239,386

Other RSD deposits 8,267,703 5,841,826 Corporate clients 7,509,713 4,770,548 Public companies - - Public sector 75,431 63,208 Non-resident legal entities - - Other clients 641,973 969,374 Retail clients 12,975 15,240 Interest and fee liabilities 27,611 23,456 Interest and fee liabilities with currency clause index - - Other foreign currency deposits 3,902,747 5,291,868 Corporate clients 2,592,468 3,366,491 Public companies - - Public sector 1,147,965 1,074,686 Other clients 1,915 678,692 Retail clients 160,399 171,999 Earmarked RSD deposits 14,077 260 Corporate clients 13,377 260 Public companies - - Public sector - - Other clients - - Retail clients 700 - Earmarked foreign currency deposits 125,906 396,687 Corporate clients 28,366 256,669 Public companies - 117,593 Public sector 19,420 - Other clients 542 18,475 Retail clients 77,578 3,950 Savings deposits 18,487,257 19,008,281 RSD savings deposits 555,480 984,832 Foreign currency savings deposits 17,755,951 17,870,221 Deferred foreign currency interest 175,826 153,228 Balance as at 31 December 66,588,521 60,988,985

On demand deposits of corporate clients, both in RSD and foreign currencies, the Bank calculates 0% interest, except in instances of special arrangements, where the interest rate is defined by individual contracts with significant clients. Most commonly, upon execution of special arrangements, interest rates are linked to the National Bank of Serbia’s key policy rate. The Bank calculates and pays interest on demand deposits of local government budget beneficiaries the rate of which may not be lower than the current discount rate of the National Bank of Serbia. 26. DEPOSITS AND OTHER LIABILITIES DUE TO CUSTOMERS (Continued)

Corporate and public sector term deposits accrue interest in accordance with the maturity and the amount of funds deposited. At the initiative of the BSM & Treasury Department and during 2020 and ranged from 1% to 3.5% for dinar deposits on p.a. (transaction, demand deposits, time deposits, special-purpose deposits) or 0% to 6.27% for foreign currency deposits (transaction, deposits). demand deposits, time deposits, special-purpose deposits).

Within the stated interest rate ranges on:

• transaction accounts of households in RSD are ranged from 0.00% to 0.10% and for foreign currency transaction accounts in the range from 0.00% to 2.00% • a vista savings deposits of individuals in RSD 0.10% (cash-back account), while foreign currency savings deposits ranged from 0.00% to 3.00% (0.00% to 0.10% on standard demand deposits, 0.00% to 3.00% on children’s savings) • erm savings deposits of households in RSD (Standard term savings, premium savings, Kasica spasica term savings and Step savings) ranged from 0.10% to 4.20% p.a., while the interest rate on foreign currency term savings of households for these products ranged ranging from 0.10% to 2.50%. • earmarked deposits in RSD amounted to 0.00% while for earmarked foreign currency deposits ranged from 0.0% to 6.27% A breakdown of deposits and other liabilities due to clients per remaining maturity is shown in the following table:

(in RSD ‘000) 2020 2019 Short-term Long-term Total Short-term Long-term Total

In RSD Transaction deposits 14,025,493 - 14,025,493 9,589,294 - 9,589,294 Other deposits 8,041,386 198,706 8,240,092 5,705,724 112,646 5,818,370 Earmarked deposits 2,900 11,177 14,077 - 260 260 Savings deposits 545,123 10,357 555,480 972,960 11,872 984,832 Interest liabilities 27,611 - 27,611 23,456 - 23,456 Total in RSD 22,642,513 220,240 22,862,753 16,291,434 124,778 16,416,212

In foreign currencies Transaction deposits 21,765,339 - 21,765,339 20,860,769 - 20,860,769 Other deposits 3,703,303 199,444 3,902,747 4,885,388 406,480 5,291,868 Earmarked deposits 62,066 63,840 125,906 396,687 - 396,687 Savings deposits 16,134,442 1,621,508 17,755,950 14,426,483 3,443,738 17,870,221 Interest and fee liabilities 175,826 - 175,826 153,228 - 153,228 Total in foreign currencies 41,840,976 1,884,792 43,725,768 40,722,555 3,850,218 44,572,773 Balance as at 31 December 64,483,489 2,105,032 66,588,521 57,013,989 3,974,996 60,988,985

27. SUBORDINATED LIABILITIES

Subordininated liabilities as at 31 of December 2020. and 2019. is presented in follow table:

(RSD ‘000)

Amount 31 December 31 December Currency in original Maturity date Interest rate 2019 2020 currency Addiko Bank AG EUR 33,453,803 26.09.2020. 5.3880% 3,933,927 -

Interest expenses 584 -

Total in RSD ‘000 3,934,511 -

In 2020, the Bank transferred a subordinated loan to the line item of borrowings, which are presented in Note 25. 28. PROVISIONS

The Bank made the following provisions:

(in RSD ‘000) 31 December 2020 31 December 2019 Provisions for losses on guarantees 85,384 79,446 Provisions per unsecured letters of credit 42 679 Provisions per long-term commitments 10,052 13,368 Total provisions for losses per off-balance sheet assets 95,478 93,493 Provisions for litigations and disputes 263,047 205,051 Provisions for termination benefits - 50 Provisions for retirement benefits 53,049 54,149 Provisions for bonuses 32,417 32,971 348,513 292,221 Balance as at 31 December 443,991 385,714 a) Provisions per losses from guarantees, other contingent liabilities and termination/retirement benefits:

The Bank made provisions for losses on off-balance sheet items charged to expenses, in line with its business policy.

Provisions for other contingent liabilities, amounting to RSD 263,048 thousand were made based on the calculation of a potential loss that would be incurred by the Bank in respect of a probable outcome of a lawsuit.

Provisions for termination benefits were not made in 2020 (the 2019 provisions amounted to RSD 50 thousand).

In accordance with these decisions and the Bank’s Labour Rulebook, the Executive Board drafted a redundancy programme, which was submitted to the National Employment Agency. These measures aimed at headcount reduction will be implemented observing the corporate social responsibility principle. The priority is to reach an agreement with employees, i.e. to match the headcount with the reduced number of jobs through voluntary termination of employment or an annex to the employment contract for re- assignment to new jobs within the Bank. In accordance with these decisions, in 2020, termination benefits totalling RSD 25,941 thousand were paid to the employees whose employment contracts were terminated (2019: RSD 20,889 thousand).

Provisions for retirement benefits were formed based on the independent actuary’s report as at the reporting date, and they are recognised in the amount of the present value of expected future payments.

The starting assumptions for the said calculation were as follows:

- Data on employees (total years of service as at 31 December 2020, gender, age)

- Mortality rate tables: 2010-2012

- Assumed gross salary growth rate: 0%

- Interest rate: 3.5%

- Salaries paid by ADDIKO BANK in 2020 per employee,

The Labour Law (RS Official Gazette no. 75/2014) stipulates an obligation of the employer to pay a retirement benefit to the re- tiring employee in the minimum amount of two average salaries of the employee, whereby the amount of such retirement benefit may not be below two average salaries paid per employee in the Republic of Serbia, according to the latest available data published by the Statistical Office of the Republic of Serbia. 28. PROVISIONS (Continued)

a) Provisions per losses from guarantees, other contingent liabilities and termination/retirement benefits (continued):

Movements on provision accounts are presented in the following table:

Guarantees Provisions for Provisions for and other Other contin- Provisions for (in RSD ‘000) termination retirement Total off-balance gent liabilities bonuses benefits benefits sheet items Balance as at 1 January 2019 105,621 184,552 5,964 56,789 16,607 369,533 Additional provision (12,128) (34,065) - (2,544) - (28,724) Payment of provisioned amount - (25,447) (5,914) (96) (3,648) (35,106) Release of provisions - 80,011 20,012 1000,23 Balance at 31 December 2019 93,493 205,051 50 54,149 32,971 385,714 Balance as at 1 January 2020 93,493 205,051 50 54,149 32,971 385,714 Additional provision (152,804) (34,896) (5,782) (1,100) (12,544) (207,126) 6Payment of provisioned amount - (31,682) - - - (31,682) Release of provisions 154,789 124,5754 5,732 - 11,990 297,086 Balance at 31 December 2020 95,478 263,047 - 53,049 32,417 443,991 b) Provisions for Litigations As at 31 December 2020, there were 3,170 lawsuits involving the Bank as a defendant.

The aggregate value of all lawsuits, excluding interest, filed against the Bank in 2020 amounts to EUR 35,972 thousand (RSD 4,344,210 thousand). In 2019 this amount was EUR 37,065 thousand (RSD 4,358,577 thousand).

The Bank has adopted a procedure for performance assessment of passive legal proceedings and court cases and for the definition of provisions for the legal risk arising from these proceedings.

Performance assessment of passive legal proceedings is made based on:

- Legal merits of the claim;

- Legal analysis of the course of every court case;

- Consideration of facts and evidence presented in the course of the proceedings by the counterparty and facts and evidence presented or which may be presented by the Bank and mutual dependence and connection of such facts and evidence;

- Customary jurisprudence in the same or similar court cases;

- If a lawsuit is conducted by an attorney hired by the Bank, the performance assessment will take into account his/her opinion as well; exceptionally, in very complex cases, the Bank’s unit in charge of the case at hand may seek an external legal opinion on the success of the case even if it is not conducted by an attorney, but by the Bank;

- Possibility to reach court or out-of-court settlement with the counterparty;

- Rules and conditions for provisioning as set out in the International Accounting Standard – IAS 37;

- Other elements that may affect the Bank’s success in a court case.

Performance assessment of passive legal cases is carried out after lawsuit reception, at case entry into the Legal Database, and provisions are allocated at quarterly level, not later than on the last day of the month prior to expiry of the calendar quarter.

The assessment is done based on legal and factual state at the assessment day.

The Bank was also involved in a number of lawsuits filed against third parties mostly in an attempt to collect receivables. All the Bank’s receivables claimed before court have been impaired in accordance with the Bank’s methodology and charged to the Bank’s expenses. 29. OTHER LIABILITIES

31 December 31 December (in RSD ‘000) 2020 2019 RSD trade payables 38,099 39,587 Trade payables in foreign currency 17,294 2,237 Early loan repayments 247,886 251,575 Liabilities for employees 5,644 99,629 Other RSD liabilities 316,452 142,220 Other foreign currency liabilities 173,522 121,305 RSD advances received 13,725 10,334 Taxes and contributions payable 14,729 9,598 Liabilities from card operations 1,912 4,793 Accrued expenses 176,699 283,550 Deferred income 20,622 24,927 Financial leasing liabilities 486,312 419,039 Total other liabilities 1,512,896 1,408,794

Other liabilities denominated in foreign currencies in the amount of RSD 173,522 thousand refer to the undisbursed payments per collections made from abroad in the amount of RSD 102 thousand. In 2020, the Bank made payments on financial leasing liabilities in the amount of RSD 227,726 thousand (2019: RSD 186,179 thousand) and interest payments in the amount of RSD 5,336 thousand (2019: RSD 4,594 thousand). The amount of cash outflows in respect of lease arrangements is presented in the statement of cash flows within cash outflows from operating activities. Financial leasing liabilities per maturity are the following:

(in RSD ‘000) Principal Interest Total 2021 41,339 660 41,999 2022 38,235 788 39,023 2023 29,515 899 30,414 2024 65,387 1,411 66,798 2025 304,576 3,503 308,079 479,052 7,261 486,313

30. EQUITY AND RESERVES

As at 31 December 2020, the Bank’s equity comprised share capital, share issue premium, reserves, revaluation reserves, fair value reserves and retained earnings/accumulated losses. The Bank’s equity structure is presented below:

(in RSD ‘000) 2020 2019 Share capital 17,517,484 17,517,484 Share premium 3,027,810 3,027,810 Reserves from profit 2,104,903 1,580,792 Fair value reserves 108,227 278,952 Losses on the first-time adoption of IFRS 9 ( 1,126,066) (1,126,066) Current year’s profit 1,126,924 1,107,695 Balance as at 31 December 22,759,282 22,386,667 a) Share Capital and Share Premium As at 31 December 2020, the Bank’s subscribed capital paid in comprised of 8,758,742 ordinary shares (31 December 2019: 8,758,742 shares) with the par value of RSD 2,000 per share. Each share entitles the holder to one vote. All shares outstanding were fully paid in. 30. EQUITY AND RESERVES (Continued) a) Share capital and Share Premium (continued)

The shares are registered with the Securities Commission: CFI Code: ESVUFR ISIN No.: RSHYPOE 68424 On 27 March 2014 a change to the majority shareholder of Hypo Alpe-Adria-Bank a.d. Beograd was registered in the Central Secu- rities Depository and Clearing House. Instead of the majority shareholder Hypo Alpe-Adria-Bank International AG Klagenfurt, Hypo SEE Holding AG Klagenfurt was registered as the majority shareholder. On 30 October 2014 Hypo SEE Holding AG changed its name to Hypo Group Alpe Adria AG.

As at 31 December 2014 Hypo Group Alpe Adria AG owned 7,159,669 Bank’s shares while Industrija kotrljajućih ležajeva a.d. u stečaju, Beograd owned 73 shares.

On 13 November 2015, the Commercial Court in Belgrade approved the sale of 73 shares owned by the bankruptcy debtor Industrija kotrljajućih ležajeva ad, Beograd. The shares were purchased by Hypo Group Alpe Adria AG, which thus became the sole shareholder of Hypo Alpe-Adria-Bank a.d. Beograd.

On 30 December 2015 an increase in share capital was registered with the Serbian Business Registers Agency. The capital increase was recorded with the Central Securities Depository through the 29th issue of 1,599,000 ordinary shares, at the par value of RSD 2,000 per share. The shares were paid by converting a portion of subordinated loan into share capital amounting to RSD 3,198,000,000.

On 8 July 2016, under Decision of the Commercial Court in Vienna no. FN 350921k, Hypo Group Alpe Adria AG changed its legal name to Addiko Bank AG, headquartered at the address of Wipplingerstrasse 34/4 Vienna, Austria.

In 2020, there was no increase in the share capital. Hence, the total number of shares outstanding paid in was 8,758,742 and the nominal (par) value per share amounted to RSD 2,000.

The Bank has no subscribed capital not paid in. Each share entitles the holder to one vote and are no restrictions to the payment of dividend on shares.

The structure of the Bank’s shareholders as at 31 December 2020 was:

31 December 2020 Shareholder Amount in RSD ‘000 % Equity interest Number of shares Addiko Bank AG 17,517,484 100% 8,758,742 Total 17,517,484 100% 8,758,742

The table below shows the Bank’s shareholders as at 31 December 2019:

31 December 2019 Shareholder Amount in RSD ‘000 % Equity interest Number of shares Addiko Bank AG 17,517,484 100% 8,758,742 Total 17,517,484 100% 8,758,742

Share Issue Premium

The share issue premium is the difference between the achieved selling price of shares and their par value: a) From 2002 to 2008 the Bank formed a share issue premium in the amount of RSD 2,790,840 thousand; b) In 2008, after two issues of shares, the Bank formed a share issue premium in the amount of RSD 4,414,469 thousand; c) In March 2009 the total of 392,205 shares were issued with the par value of RSD 2,000, which were thereafter sold at RSD 8,500, resulting in the share issue premium of RSD 2,549,332 thousand; d) In July 2010, the total of 584 shares were issued with the par value of RSD 2,000, which were later sold at RSD 8,500, resulting in a share issue premium of RSD 3,797 thousand; e) Under Decision of the Bank’s Shareholder Assembly No. 11866/16 dated 26 April 2016, the Bank absorbed the loss incurred in 2015 in the amount of RSD 5,452,120 thousand; f) Under Decision of the Bank’s Shareholder Assembly No. 13115/17 dated 28 April 2017, the Bank absorbed the loss incurred in 2016 in the amount of RSD 1,278,508 thousand, so that the share premium amounted to RSD 3,027,810 thousand as at 31 December 2017. 30. EQUITY AND RESERVES (Continued)

b) Reserves from Profit

Under Decision of the Bank’s Assembly dated 31 March 2020 no. 07678/20, the Bank allocated 47.32% of the realised profit after tax, amounting to RSD 524,111 thousand, to the Bank reserves and the remaining amount of RSD 583,584 thousand remained within undistributed profit. c) Fair Value Reserves Positive effects of fair value adjustments of the Bank’s financial assets available for sale arose from the adjustment of the investments into financial assets available for sale to their fair values. These reserves were then adjusted for the effects of deferred taxes (Notes 15 and 18).

As at 31 December 2020, the Bank’s revaluation reserves totalled RSD 108,227 thousand (31 December 2019: RSD 278,952 thousand). Securities’ impairment allowances amounted to RSD 8,536 thousand, less deferred tax amounting to RSD 1,280 thousand.

31. THE BANK’S REGULATORY COMPLIANCE The Bank is required to align its volume of operations and the structure of its risk-weighted assets with the adequacy and performance ratios prescribed by the Law on Banks and the relevant decisions of the National Bank of Serbia enacted in accordance with the aforementioned Law.

As at 31 December 2020, the Bank was in full compliance with all the prescribed ratio values.

The following table presents the adequacy/performance ratios achieved by the Bank:

Prescribed Performance/adequacy ratios values 2020 2019 Min EUR 10 mil- 1. Capital amount EUR 177 million EUR 177 million lion 2. Capital adequacy: - Capital adequacy ratio min 8 % 26.40% 27.05% - Core capital adequacy ratio (Tier 1 ratio) min 6 % 26.40% 26.30% - Common equity capital adequacy (CET1 ratio) min 4.5 % 26.40% 26.30% 3. Bank’s investments in non-financial sector entities and fixed assets max 60% 5.14% 4.89% 4. The sum of the Bank’s large exposures max 400% 7.27% 28.98% 5. Liquidity ratios: min 1 1.69% 2.03% - in the first month of the reporting period min 1 1.75% 1.95% - in the second month of the reporting period min 1 1.54% 1.90% - in the third month of the reporting period min 1 1.58% 1.71% 6. Rigid liquidity ratios: min 0.7 1.40% 1.76% - in the first month of the reporting period min 0.7 1.48% 1.66% - in the second month of the reporting period min 0.7 1.28% 1.64% - in the third month of the reporting period min 0.7 1.30% 1.46% 7. Foreign exchange risk ratio max 20% 2.99% 1.92% 8. The Bank’s large exposures to a single entity or a group of related max 25% 7.27% 10.83% parties 9. The Bank’s investments in non-financial sector entities max 10% 0.00% 0.00% 32. TRANSACTIONS WITH RELATED PARTIES AND ADDIKO GROUP MEMBERS

The sole owner of Addiko Bank a.d. Beograd is Addiko Bank AG, holding all (100%) shares of Addiko Bank a.d. Beograd.

Related party transactions are performed at arm’s length. a) Statement of the Financial Position (Balance Sheet)

The table below presents balances arising from related party transactions as at 31 December 2020:

(in RSD ‘000) Addiko Addiko Addiko Addiko Addiko Addiko Bank Bank Financial assets 31 December 2020 Bank AG Bank Bank Bank Total Banja Podgori- Vienna Ljubljana Zagreb Sarajevo Luka ca Loans and receivables from banks and 125,015 5,491 35,302 6,821 20,809 4,735 198,173 other financial institutions Receivables under derivatives 1,091 - - - - - 1,091 Other assets 1,046,781 5,592 8,468 1,163 1,338 - 1,063,342 Total financial assets 1,172,887 11,083 43,770 7,984 22,147 4,735 1,262,606 Financial liabilities 31 December 2020 Liabilities under derivatives 5,165 - - - - - 5,165 Deposits and other financial liabilities to 3,969,015 - 18,825 3,702 64,316 23,938 4,079,796 other banks Subordinate liabilities ------Provisions - - - 1,100 - - 1,100 Other liabilities 30,934 - 2,477 - - - 33,411 Total financial liabilities 4,005,114 - 21,302 4,802 64,316 23,938 4,119,472

The table below presents balances arising from related party transactions as at 31 December 2019:

(in RSD ‘000)

Addiko Financial assets 31 De- Addiko Bank Addiko Bank Addiko Bank Addiko Bank Addiko Bank Bank AG Total cember 2019 Ljubljana Zagreb Banja Luka Sarajevo Podgorica Vienna Loans and receivables from banks and other 80,041 48,418 38,381 18,415 13,206 9,176 207,637 financial institutions Receivables under deriv- 1,630 - - - - - 1,630 atives Other assets 1,358,854 2,702 22,972 3,740 330 - 1,388,598 Total financial assets 1,440,525 51,120 61,353 22,155 13,536 9,176 1,597,865 Financial liabilities 31 December 2019 Liabilities under deriv- 9,607 - - - - - 9,607 atives Deposits and other financial liabilities to other 14,017 - 10,724 4,381 102,905 23,109 155,136 banks Subordinate liabilities 3,933,926 - - - - - 3,933,926 Provisions - - - 293 - - 293 Other liabilities 105,989 - 12,796 - - - 118,785 Total financial liabilities 4,063,539 - 23,520 4,674 102,905 23,109 4,217,747 32. TRANSACTIONS WITH RELATED PARTIES AND ADDIKO GROUP MEMBERS (Continued) b) Income Statement

(in RSD ‘000)

Addiko Addiko Addiko Addiko Addiko Addiko Income in 2020 Bank AG Bank Lju- Bank Banja Bank Sara- Bank Pod- Total Bank Zagreb Vienna bljana Luka jevo gorica

Interest income 15,548 - - - - - 15,548 Fee and commission income - 116 - 156 - - 272 Other income 127,204 29,969 35,392 6,829 8,059 6,068 213,521 Total income 142,752 30,085 35,392 6,985 8,059 6,068 229,341 Expenses in 2020 Interest expenses (177,390) - (41) - - - (177,431) Fee and commission expenses - - (487) - - - (487) Administrative expenses (25,886) - (40,970) 305 - - (66,551) Total expenses (203,276) - (41,498) 305 - - (244,469)

The table below presents balances arising from related party transactions as at 31 December 2019:

(000 RSD)

Addiko Addiko Addiko Addiko Addiko Addiko Income in 2019 Bank AG Bank Lju- Bank Za- Bank Banja Bank Sara- Bank Pod- Total Vienna bljana greb Luka jevo gorica Interest income 97,515 - - - - - 97,515 Fee and commission income - - 12 24 25 - 61 Other income 80,515 48,756 38,206 11,956 13,161 8,237 200,831 Total income 178,030 48,756 38,218 11,980 13,186 8,237 298,407 Interest income

Expenses in 2019 Interest expenses (209,538) - (104) - - - (209,642) Fee and commission expenses - (6) (594) - - - (600) Administrative and other expenses (106,803) (1,224) (44,743) - - - (152,770) Total expenses (316,341) (1,230) (45,441) - - - (363,012) c) Transactions with related parties - private individuals in 2020, the Bank paid to the members of the Board of Directors for their engagement gross remuneration in the amount of RSD 3,821 thousand (2019: RSD 3,820 thousand).

In 2020, the Bank paid to the members of the Executive Board for their engagement gross salaries in the amount of RSD 79,569 thousand (2019: RSD 93,046 thousand).

In 2020, gross salaries of the key management personnel amounted to RSD 124,405 thousand (2019: RSD 128,067 thousand).

The key management personnel are persons authorised and responsible for planning, managing and controlling the Bank’s activities, directly or indirectly, including all Directors, (whether Executive Directors or not).

There were no payments of other remunerations save for the above said remunerations.

As at 31 December 2020, individuals related to the Bank had deposits placed with the Bank totalling RSD 99,894 thousand (31 December 2019: RSD 91,146 thousand).

As at 31 December 2020, loans extended to the individuals related to the Bank totalled RSD 58,745 thousand (31 December 2019: RSD 5,803 thousand). 33. BALANCE RECONCILIATION OF RECEIVABLES AND PAYABLES

The Bank reconciled amounts receivable and payable as at 31 October 2020 while another reconciliation was carried out with the major clients as at 31 December 2020, using outstanding item statement (OIS) forms.

Out of the total of 13,338 forms sent, 97 were contested.

The aggregate amount of unreconciled receivables and liabilities per sent OIS forms totalled RSD 40,048 thousand, pertaining mainly to the interest, fee and commission receivables and other receivables.

The Bank has continued to take actions to reconcile balances of receivables and liabilities with its customers and the reconciliation process is underway.

34. OFF-BALANCE SHEET ITEMS

(in RSD ‘000) 2020 2019

Total guarantees and commitments 25,358,389 25,607,616 Payment guarantees 4,342,926 3,396,207 Performance guarantees 8,049,938 9,070,470 Unsecured letters of credit 21,071 286,100 Irrevocable commitments 1,023,937 1,190,915 Revocable commitments for undrawn loans 11,902,517 11,645,924 Other guarantees 18,000 18,000

Total derivatives 7,440,043 3,944,805 Receivables for sold currencies 4,113,898 1,968,632 Liabilities for purchased currencies 3,326,145 1,976,173

Other off-balance sheet items 254,525,883 586,391,461 Managed funds 1,028,442 1,047,880 Other commitments 66,992 937,104 Guarantees and sureties received 3,617,629 10,440,910 Collaterals 240,749,941 565,269,469 Pledged receivables - - Other off-balance sheet assets 9,062,879 8,696,098

TOTAL OFF-BALANCE SHEET ITEMS 287,324,315 615,943,882

At the end of each accounting period, the Bank calculates provisions for commitments and contingent liabilities. The amount recognised as a provision is the best estimate of an outflow of resources required to settle the existing liabilities as at the reporting date. Breakdown of provisions per off-balance sheet items is presented in Note 28.

Derivative Financial Instruments

Within off-balance sheet items derivatives are presented as receivables and liabilities under FX swaps. Swaps represent contracts between two parties on exchange of payments in a period, with amounts of payments depending on the change of a relevant index, such as an interest rate or an exchange rate.

Derivatives, including FX contracts, FX swaps and other derived financial instruments, are initially recognised at fair value within the off-balance sheet items on the contract execution date and are subsequently remeasured at fair value.

Derivatives are initially recognised at the moment when derivative contract has been agreed with the counterparty (date of agreement). The notional amount of principal to which the respective derivative is agreed is carried as an off-balance sheet item.

The positive or negative change of fair value of the derivative is carried within assets or liabilities, as shown in Note 17. 35. EXCHANGE RATES

The official middle exchange rates of the National Bank of Serbia, determined in the interbank foreign exchange market and used in the translation of the statement of financial position components denominated in foreign currencies into RSD as at 31 December 2019 and 2018 were as follows:

2020 2019

USD 95.6637 104.9186 EUR 117.5802 117.5928 CHF 108.4388 108.4004 GBP 130.3984 137.5998 JPY 0.9276 0.9653

36. EVENTS AFTER THE REPORTING PERIOD Addiko bank a.d. Beograd Annual Report 2020 Key data Addiko Bank a.d. Beograd operating results based on the financial statements prepared in accordance with the IFRS

2020 2019 Income statement (in RSD ‘000) 01-Jan to 31-Dec 01-Jan to 31-Dec Net operating income 4,656,220 4,953,980 Net interest income 3,413,710 3,584,298 Net fee and commission income 1,242,510 1,369,682 Other operating income 528,690 668,586 Operating expenses -4,176,459 -4,248,008 Operating result before credit risk provisions 1,008,451 1,374,558 Credit risk provisioning costs -425,157 -226,370 Income tax -39,954 -40,493 Result for the period after tax 543,340 1,107,695 Balance sheet (in RSD ‘000) 31.12.2020 31.12.2019 Loans and receivables due from clients 71,669,829 67,586,939 Deposits and financial liabilities due to clients 66,588,521 60,988,985 Equity 22,759,282 22,386,667 Total assets 101,461,847 94,756,170 Key performance ratios 2020 2019 Net interest income/total assets 3.36% 3.78% Cost to income ratio (CIR) 71.02% 67.18% Tier 1 capital ratio 26.40% 26.30% Total capital adequacy ratio 26.40% 27.05% Headcount as of the reporting date 532 558 Number of branches 36 37 Letter from the Executive Board Poštovani,

Poslovanje u 2020. godini obeleženo je pandemijom koronavirusa i pre svega izazovima u domenu bezbednosti i zdravlja kako zaposlenih tako i klijenata kao i izazovima vezanim za održivost kontinuiteta poslovanja. Prioritet nam je bila bezbednost svih i veoma smo ponosni na način na koji smo reagovali i prilagodili način poslovanja.

Uprkos svim nametnutim okolnostima rezultat koji smo ostvarili je pozitivan i veoma smo ponosni na sve ostvareno. I u ovoj situaci- ji Addiko tim je pokazao da brzo može da odgovori na sve zahteve koji se pred nas postave i da smo napravili agilnu i posvećenu or- ganizaciju. U tim teškim trenucima pokazali smo izuzetnu solidarnost, timski duh i kolegijalnost. Isto tako trudili smo se da potrebe klijenata budu uvek na prvom mestu uprkos svemu. Sve vreme tokom pandemije virusa Covid-19 klijenti su imali na raspolaganju sve proizvode i usluge Addiko banke, kako kad su u pitanju fizička tako i pravna lica. Osim toga olakšice za građane koje su doneli moratorijumi značajno su klijentima pomogle da stabilizuju svoje finansije. Sa druge strane mala i srednja preduzea su dobila značajan izvor finansiranja kroz garancijske šeme. Takođe, trudili smo se da budemo nesebični i da u teškim okolnostima pokažemo empatiju prema zajednici u kojoj poslujemo tako da smo novac namenjen internim proslavama i novogodišnjim poklonima donirali za potrebe borbe protiv koronavirusa i za podršku rada Nacionalne organizacije za borbu protiv retkih bolesti. Addiko brend je već duži niz godina prepoznat kao lider u domenu digitalne transformacije tako da smo i ove godine nastavil taj trend. I pored svega uspeli smo da naš mobilni eko-sistem nadogradimo još jednim digitalnim proizvodom – mRačunom. Otvaranje računa uz pomoć video identifikacije obavlja se jednostavno i u rekordnom roku. O posvećenosti digitalnoj transformaciji govori i podatak da godinu završavamo sa učešćem digitalnih kanala u rezultatu od preko 30 odsto, a da se preko 90 odsto transakcija obavi digitalnim putem.

U toku 2020. godine napredak je ostvaren u segmentima koji su u fokusu poslovanja Addiko banke, finansiranje građana, i u okviru poslovanja sa malim i srednjim preduzećima. U domenu gotovinskih kredita smo ostvarili rast od 7 odsto, a u SME segmentu smo povećali portfolio za 35 odsto tokom 2020. godine i time potvrdili strateski pravac Addiko banke kao specijalizovane banke u ovim segmentima.

Addiko banka će nastaviti i u narednom periodu da prati svoj strateški pravac banke specijaliste za finansiranje građana i SME segmenta kao i digitalnog lidera na bankarskom tržištu.

S poštovanjem, Izvršni odbor Addiko bank a.d. Beograd

Vojislav Lazarević Mirko Španović Vladimir Stanisavljević

Chairman of the Deputy Chairman of the Member of the Executive Board Executive Board Executive Board The Annual Business Report is prepared in accordance with Article 29 of the Law on Accounting (Official Gazette of RS nos. 62/13, 30/2018 and 73/2019 – the other law), containing the following: Addiko Bank a.d. Beograd Annual Report 2020

Contents 1. Overview of Addiko Bank 2 2. General economic environment 2 3. Earnings performance in brief 3 4. 2020 at a glance 4 4.1 Response to the Covid-19 Pandemic 4 4.1. Supporting clients 4 4.2. Operational stability 4 4.3. Retail 4 4.4. Corporate 5 4.5. Corporate social responsibility 5 5. Financial statements 6 5.1. Income statement analysis 6 5.2. Balance sheet analysis 7 6. Corporate Governance 9 6.1. Addiko Bank a.d. Beograd Board of Directors and Executive Board 9 7. Transformation towards out-of-branch sales and digital development 9 7.1. Great customer experience with efficient distribution transformation 9 7.2. Digital transformation 9 7.3. IT Strategy 10 7.4. Branches 10 8. Human resource management 10 9. Internal Control System for accounting procedures 11 10. Financial risk management 12 10.1. Credit risk 12 10.2. Liquidity risk and interest rate risk 12 10.3. FX risk and other market risks 13 10.4. Exposure risk 13 10.5. Operational risk 13 10.6. Adequacy of the risk management system 13 11. Organisational chart 14 Annual Business Report of Addiko Bank a.d. Beograd

1. Overview of Addiko Bank naled the possibility of a sound recovery ahead, after easing of the measures imposed by governments, the second wave of in- Addiko Group is a consumer and small and medium-sized en- fections in autumn quickly changed this outlook. Sailing through terprises (SME) specialist banking group in Central and South such heavy storm will prove to be quite a challenge, especially Eastern Europe (CSEE). Addiko Group consists of Addiko Bank for SEE economies due to a rather distinct feature of the crisis AG, the listed fully-licensed Austrian parent bank registered in that lies not in its intensity, although it is comparable in am- Vienna, Austria, and regulated by the Austrian Financial Mar- plitude only to the last great depression of the 30´s, but in the kets Authority and by the European Central Bank, as well as fact that contraction is more severe in the service sector due to six subsidiary banks, registered, licensed and operating in five social distancing measures. CSEE countries: Serbia, Croatia, Slovenia, Bosnia & Herzegovina (where it operates two banks) and Montenegro. Addiko Group, Main channels of impact of Covid-19 related crisis on the econ- through its six subsidiary banks, services as of 31 December 2020 omies can be split into two broad categories: (i) external - in- approximately 0.8 million customers in CSEE, using a well-dis- cluding weaker export demand, a reduction in FDI, lower rate persed network of 168 branches and modern digital banking of portfolio and remittance inflows, substandard tourists num- channels. Addiko bank in Serbia have 36 branches and one of bers; and (ii) internal - reflecting the imposition of severe lock- the best scaled mbanking application in the banking industry. down measures and the negative knock-on effects.

Addiko Bank a.d. Beograd (Addiko Bank) as well as Addiko Group Having said that, it seems that the negative effect for Serbia is based on its focused strategy, repositioned itself as a special- was far more contained comparing to most Europian as well as ist consumer and SME banking group with a focus on growing its all neighboring countries - expected GDP move for Serbia for Consumer and SME lending activities as well as payment services 2020 now stands at -2.0%, while comeback to pre-crisis GDP (its “focus areas”), offering unsecured personal loan products level is forecasted to already take place in 2021. for consumers and working capital loans for its SME customers funded largely by retail deposits. Addiko Banks Public Lending Although Serbia is neither in euro zone, nor its currency is in and Large Corporate lending portfolios (its “non-focus areas”) the regime of managed/fixed exchange rates, RSD proved to be have been gradually reduced over time, thereby providing li- quite stable despite initial crises relature depretionary pres- quidity and capital for the gradual growth in its Consumer and sures. SME lending. Comparatevely good Serbian economic results are partly Addiko Bank delivers a modern customer experience in line achieved with the help of supportive fiscal policy, including with its strategy of providing straightforward banking – “focus credit guarantee schemes and credit lines to corporates, direct on essentials, deliver on efficiency and communicate simplic- cash support to population as well as a moratorium on loan ity”. Banking products and services have been standardised, repayment, which lasted 5 months in total, and was used by especially in the Consumer and the SME segment, to improve around two thirds of the clients. In addition, Serbia broad- efficiency, reduce risks and maintain asset quality. ened economic interactions with outside-EU partners, primarily China. While some progress has been made in the reforms Addiko Bank a.d. Beograd is in 100 percent ownership of Addiko of the tax administration and the privatization of state-owned Bank AG. Addiko Bank AG became a listed company on the Vien- banks, other structural reforms of public administration and na Stock Exchange in 2019. Around 51.08% of the bank’s shares state-owned enterprises advanced slowly. Nevertheless, indus- are in free float, the rest of the shareholder base is well diver- trial sector and private consumptions seem to remain quite ro- sified with a broad geographic spread and different investment bust and will certainly prove to be important drivers of future strategies. The institutional investors are primarily from Europe growth. and North America.

Addiko Group’s Investor relations website https://www.addiko. com/investor-relations/ contains further information, including financial and other information for investors.

2. General economic environment

The 2019 economic slowdown in the Eurozone, driven by the manufacturing crisis in the largest European countries, soon morphed into a deep depression after Covid-19 pandemic started to spread in the first quarter of 2020. Lockdown measures brought European economies to a halt. While policy measures alleviated some of the pressures, and the summer rebound sig- 3. Earnings performance in brief at the same time it has accelerated the digital transformation in societies, especially the growth of the use of digital banking Although behind us is a year characterized by a pandemic, the products. Addiko Bank a.d Beograd remained in 2020 a leader closure of countries, limited business of large companies both in the digitalization of banking services, offering, in addition to on a global and local level, Addiko Bank a.d. Beograd imme- mLoan, also mAccount, which enables online account opening diately recognized the importance of its role in the financial without going to one of the bank’s branches. The efforts of Ad- market, the need to adapt to new business conditions and that diko Bank a.d. Beograd was also recognized in facilitating the accessibility to its clients will be one of the key factors for busi- business of its clients at the Innovation Week organized by AFA, ness success and stability. Despite all the challenges that are where Addiko Bank a.d. Beograd won the award for the most still around us, Addiko Bank a.d. Beograd achieved a net profit innovative banking product - mLoan and mAccount. at the end of 2020 in the amount of 543 million dinars. In the position of fee income, the effects of the state of emer- Drawing on the experience of previous financial crises Addiko gency during the second quarter of 2020 were mostly reflected Bank a.d. Beograd has proactively and quickly identified the due to the restriction of population movements, temporary in- most affected sectors and clients in order to understand how terruption of work of a large number of legal entities and their it can provide adequate support. Availability of liquid assets smaller business volume. Therefore, this position recorded a is one of the keys if not the most important factor for the sur- decrease in the amount of 127.2 million dinars compared to the vival of an economy. Based on the achieved growth rates of previous year. However, in the second half of the year, with the a healthy portfolio of loans intended for households and the easing of restrictive measures caused by the Covid-19 pandem- micro segment (excluding the portfolio of housing loans) of 7% ic, the recovery of these revenues is noticeable. (+1.7 billion dinars) and loans intended for small and medium enterprises of 22% (6.1 billion dinars), Addiko Bank a.d. Bel- Regardless of the year behind us, which was full of uncertainty, grade has managed to overcome the challenges dictated by the the growth of the deposit portfolio in the amount of 5.6 bil- dynamic environment and to remain a reliable business partner lion dinars shows that clients have great confidence in Addiko to its clients. Bank a.d. Beograd. The largest growth was achieved in the focus segments: The retail and micro clients sector grew by RSD The measures taken by the Government and the Central Bank 2.0 billion, while the SME segment grew by as much as RSD 4.4 were largely aimed at the banking system (expansionary mon- billion, or 35%, with the largest growth achieved in the local etary and fiscal policy, postponement and easing of regulatory currency deposit portfolio which increased participation from requirements, guarantee scheme), in order to provide space for 56% in 2019 year to 64% in 2020. financial institutions to provide liquidity to the economy and households. However, this situation conditioned by Covid-19 has Addiko Bank a.d. Belgrade, in co-operation with the European led on the one hand to higher risk costs and to a decrease in Bank for Reconstruction and Development (EBRD), has provid- interest income due to historically low reference rates. ed additional sources of financing targeted at small and medium-sized enterprises, necessary for investment and working The total interest income of the bank was 4.23 billion dinars. capital. Also, successful cooperation with USAID has been es- The Retail and Micro Clients Sector (excluding the housing loan tablished and implementation has started during 2020. portfolio) realized RSD 2.1 billion, while the SME Segment generated interest income in the amount of RSD 0.7 billion. The portfolio of housing loans, loans to large companies and the public sector is not in the focus of the bank, which is in line with Bank orientation on unsecured loans of households and loans for the business strategy, and the gradual reduction achieved in small and medium enterprises is in line with the business strat- these segments during 2020 provided additional access to liquid egy of the bank, and it is noticeable that in the last quarter the funds that are further directed to financing “focus” segments bank realized a significant growth of the portfolio which gives a of the bank. Housing loans have not been offered by the bank strong impulse for further growth of the loan portfolio primary for a long time and the gradual reduction is the result of regular segments of banks. repayments of existing clients. Large companies and the public sector have been identified as less profitable and quite volatile, The total loan portfolio of Addiko Bank a.d Beograd at the end so exposure to them has gradually decreased. However, despite of 2020 amounts to 71.7 billion dinars. The result of the imple- that, Addiko Banka a.d. Beograd has improved the successful mentation of the bank’s business strategy is an increase in the cooperation with individual / profitable clients of these busi- share of unsecured retail loans and loans intended for small and ness segments. medium enterprises, two more profitable segments to 70% in total gross bank loans (end of 2019: 62%). At the end of the year, The previous year was characterized by successful risk manage- the growth of cash loans was also supported by the Red Friday ment and responsible credit policy, which is evident through the marketing campaigns, which enabled clients to borrow at more reduction of the portfolio of problem placements. favorable interest rates. Loans intended for small and medium enterprises were placed through the guarantee scheme of the Expenditures of the bank, not counting depreciation, amounted Republic of Serbia and the Appian platform, which optimized to 3.7 billion dinars in 2020, which is a decrease of 137 million the loan approval process, and the dinar portfolio grew by 4.3 dinars compared to the same period last year as a result of billion dinars and makes 24% of the total healthy portfolio of the applied operating model and strict cost control. The Bank this segment (end of 2019: 11%). continued the process of cost optimization with the aim of increasing efficiency, saving time and guaranteeing higher quality The Covid-19 pandemic has far-reaching consequences in social, of service and at the same time reducing activities that do not economic and trade terms since the financial crisis of 2008, but add new value. 4. 2020 at a glance within few minutes, without having to go to the branch. Also, in 2020 Addiko Bank introduced revolutionary digital mAccount, 4.1 Response to the Covid-19 Pandemic opening via video identification. In order to ensure comparative advantage in the field of digital banking, a new mSaving project 4.1 Supporting clients was announced and the product was launched in early 2021. In the micro segment, Addiko Bank focused on client transac- The Covid-19 pandemic is having unprecedented effects around tion business and further sale of the unique offer of account the globe, both on people and economies. The pandemic deter- packages in 2020. Clients recognised the simplicity and speed mined governments in the countries of operation of the Group of the account package opening process (with the only prereq- to take essential measures such as business lockdowns and re- uisite being the ID card) and the customer database of users of strictions with regards to social contacts, which have affected these products is constantly increasing. strongly social and economic activities. 4.4 Corporate Customers remain the priority for Addiko Bank a.d. Beograd through this crisis and a comprehensive range of measures have Addiko Bank is one of the leaders in the digital transformation been implemented to support retail and business customers. segment, both in Serbia and other markets where operating. During the challenging 2020 year, we did not give up on our values Client needs represent our foremost interest and the main rea- and we continued to keep the needs of our clients in our focus. son for introducing changes and improving existing processes. Thus, we have implemented three moratoriums with state bod- The SME segment is one of the three focus areas of Addiko Bank. ies and the regulator in order to facilitate repayment for clients The corporate digital team, in cooperation with the company and ensure the best possible functioning of the financial system. Appian, developed internal platform for business process man- Also, guarantee schemes were available to clients from the SME agement in order to deliver advanced and fast service. segment, which facilitated the path to financial resources and The platform provided significant expedition and simplification shortened the procedures that clients go through. of the loan approval process, resulting in increased satisfaction of Addiko Bank clients. The Appian BPM platform provides the 4.2 Operational stability following functionalities: • high-level automation, Addiko Bank a.d. Beograd has enabled safe working conditions • shorter time of approval procedure, for its personnel in their workplace and extensive remote work- • approval process transparency through its real-time mon- ing has been implemented already in mid March. The home office itoring, has been extended voluntary throughout the year, with the goal • improved data quality, of incorporating this permanently into Addiko’s operating frame- resulting in a faster and more efficient loan approval de- work. cision-making for focus segment. The following measures were taken in the branches: Working Based on the simple Addiko loan approval procedure, the Bank hours were decreased in accordance to regulations. All branch- is able to disburse loan funds to clients within three business es were equipped with physical distancing measures including banking days. In view of this, the process of loan approval and plexiglass separators and sanitary measures to protect staff and disbursement is now significantly faster. clients. Consequently, SME clients of Addiko Bank can now submit an Through these measures, Addiko Bank has ensured the availability application for a loan or a trade finance product (performance of critical services to its stakeholders during the Covid-19 crisis. guarantees, binding letters of intent) up to EUR 300,000 in three simple steps. 4.3 Retail Undoubtedly, speed, transparency and simplicity are the three things appreciated by clients when doing business with a bank. Addiko Bank offers to its clients – private individuals a modern Digital transformation of processes and products implemented user experience based on the straightforward banking strategy by Addiko Bank ensures these three factors. – focus on essentials, aiming at becoming a primary bank for the key products: cash loans, overdrafts, credit cards and current accounts. Retail banking products are standardised and improved. 4.5 Corporate social responsibility The primary focus in 2020, in addition to the lending business, In 2020, Addiko Bank acted according to the global situation was the improvement of card business. Clients accepted the Mas- caused by Covid-19, so we donated funds for the fight against terCard card very well, along with the successful implementation Covid-19. Addiko Bank donated a full budget for internal celebra- of the new MasterCard credit card offering repayment in three tion activities - EUR 25.000 to the Institute for Virology, Vaccines different ways (as per client’s choice). The offer of bancassur- and Serums “Torlak” and to the General Hospital in Subotica for ance products during previous years was enlarged by products buying equipment for diagnostic Covid-19. Budget for our corpo- available to the majority of our clients. rate New Years presents was allocated and donated to the Na- The digital potential of the Bank was continually developed with tional organization for rare diseases. the mission to improve the user experience primarily on the mobile platform. In addition to transaction banking, Addiko Bank’s In addition, Addiko bank also donated fixed assets to institu- clients can now apply for cash loans and authorised overdrafts tions in need. This is the programme we have been conducting through m-banking, with their current accounts being credited for more than ten years and the programme that has not been interrupted during Covid-19 pandemic. of 127 million dinars. The largest decrease was recorded in rev- 5. Financial statements enues from the FX changes, revenues from payment trans

5.1 Income statement analysis

000 RSD 2020 2019 Change Interest income 4,226,467 4,540,370 -6.91% Interest expenses -812,757 -956,072 -14.99% Net interest income 3,413,710 3,584,298 -4.76% Commission income 1,414,258 1,519,427 -6.92% Commission expenses -171,748 -149,745 14.69% Net commission income 1,242,510 1,369,682 -9.28% Net gains on changes in the fair value of financial instruments 1,208 121,122 -99.00% Net gains on reclassification of financial instruments 10,116 32,598 -68.97%

Net gains on derecognition of financial instruments measured at 193,061 49,587 289.34% fair value

Net exchange gains / losses and negative currency clause effects 43,246 -5,483 -888.73%

Net losses on impairment of financial assets not measured at fair -425,157- -226,370 87.82% value through profit or loss

Net gains on derecognition of financial instruments measured at - 110,691 -100.00% amortized cost

Other operating income 239,857 255,113 -5.98% TOTAL NET OPERATING INCOME 4,718,551 5,291,238 -10.82% Salary expenses, salary compensations and other personal expenses -1,231,119 -1,420,345 -13.32% Amortisation/depreciation charge -503,455 -432,291 16.46% Other income 41,202 99,475 -58.58% Other expenses -2,441,885 -2,389,889 2.18% PROFIT / (LOSS) BEFORE TAX 583,294 1,148,188 -49.20% Income tax -211 -750 -71.86% Deferred tax losses -39,743 -39,743 0.00% PROFIT / (LOSS) AFTER TAX 543,340 1,107,695 -50.95%

The measures of the central bank to prevent the negative con- actions, revenues from the use of payment cards, which is all sequences of the spread of the coronavirus on economic growth conditioned by the movement, consumer and business habits in 2020 were aimed at providing sufficient liquid funds through of the bank’s clients, which were limited to the state of emer- expansionary monetary and fiscal policies, which resulted in gency, especially during the second quarter of 2020 year. The low reference interest rates. The effects of this policy can be corona pandemic has caused customers to reorient themselves seen through the reduc-tion of interest income in the amount to digital channels and bank products. Thus, clients focused on of 313.9 million dinars, although the bank recorded an increase payment operations performed its business through e-banking in the total loan portfolio to the bank’s clients. and m-banking applications, which affected the reduction of revenues from payment transactions, since the Bank generates Due to optimized funding sources, exploiting lower prices, as lower revenues based on these transactions compared to clas- well as by carefully defining the prices of financing sources, the sic paper orders. On the expensess side, we have the highest interest expenses decreased by 143 million dinars. This fact growth in the position of bankassurance due to higher early is especially important if we take into account the growth of loan repayments, which was very current during 2020, because the client’s deposit portfolio, especially in the local currency, clients themselves avoided additional borrowing due to uncer- which carries a higher interest rate. tainty caused by the global crisis and tried to settle their obligations to banks. The most sensitive position of the income statement due to the corona virus pandemic is the Net income from fees and com- Through efficient asset and liability management, as well as missions, which recorded a decline during 2020 in the amount monitoring the currency structure, the bank has ensured 5.2 Balance sheet analysis ditioned the reduction of other expenses by 137 million dinars.

Total assets of Addiko Bank a.d. Beograd has increased by 6.7 The costs of impairment of financial assets increased during billion dinars which is mainly conditioned by the growth of 2020, but the positive effect of managing problematic place- banks loan portfolio that are in the “Focus” or the portfolio of ments is visible through the reduction of this portfolio, through cash loans intended for individuals and micro seg-ment of 7% the recovery of individual large corporate clients and increased (+1.7 billion) and loans aimed at small and medium enterprises collection activities. The effect of the modification conditioned of 22% (6.1 billion dinars). by the implementation of the mandatory moratorium in the amount of 177 million dinars, is one of the reasons for the in- that other operating income is in line with the growth of fo- crease in this posi-tion of the income statement cused business segments.

Profit after tax is lower by 564 million dinars. The operating result before the change in impairment was realized in the amount of 1,008 million dinars and recorded a The second position that records growth in 2020 is Cash and decrease compared to 2019 by 366 million dinars, primarily due funds with the National Bank, which increased by 3.8 billion di- to falling interest income and fees, while the optimization of nars, mostly due to surplus liquid funds deposited with the NBS the process and organizational structure that allows activities . to be focused towards clients in the shortest possible time, con- In RS‘000

31-Dec-2020 31-Dec-2019 Change Cash and balances held with the Central Bank 11,732,009 7,884,737 49% Pledged financial assets 0 Receivables from derivatives 1,408 1,680 -16% Securities 12,602,828 13,667,997 -8% Loans and receivables due from banks and other financial institu- 2,684,211 2,776,939 -3% tions Loans and receivables due from customers 71,669,829 67,586,939 6% Intangible assets 844,940 1,045,046 -19% Property, plant and equipment 1,067,427 1,016,499 5% Deferred tax assets 60,388 70,003 -14%

Non-current assets held for sale and discontinued operations - 15,446 -100%

Other assets 798,807 691,634 15% TOTAL ASSETS 101,461,847 94,756,920 7% Investment securities include financial assets “available for level as at the end of 2019, which is the result of continuous im- sale” and this position decreased compared to the previous provement of results in collection of receivables and resolution year. The sale of securities is accompanied by an increase in net of problematic placements, which is extremely important in an gains on derecognition of financial instruments measured at fair uncertain year such as 2020. value through profit or loss. Other assets recorded an increase of 107 million dinars due to At the end of 2020, provisions for credit risk are at the same an increase in the deferral of costs over several years.

In RS‘000 31-Dec-2020 31-Dec-2019 Change Liabilities under derivatives 38,201 9,608 298% Deposits and other financial liabilities due to banks, other 10,118,745 5,641,891 79% financial institutions and the Central Bank Deposits and other financial liabilities due to customers 66,588,521 60,988,985 9% Subordinate liabilities - 3,934,511 -100% Provisions 443,991 385,714 15% Current tax liabilities 211 750 -72% Deferred tax liabilities - - - Other liabilities 1,512,896 1,408,794 7% Share capital 20,545,294 20,545,294 0% Profit 1,126,924 1,107,695 2% Loss -1,126,066 -1,126,066 0% Reserves 2,213,130 1,859,744 19% TOTAL LIABILITIES 101,461,847 94,756,920 7% Total liabilities during 2020 recorded an increase mostly due plex one, empowering employees to go outside the branch and to the growth of customer deposits. One of the main tasks of serve customers at their workplace. Under the Bank@Work la- Addiko Bank a.d. Beograd was to develop a stable deposit base bel, a team comprised of Addiko Bank’s sellers using mobile of clients during 2020, which should support the growth of as- technology is continuously delivering the convenience promise sets. The growth of the deposit portfolio, mostly in the two to thousands of customers every month. Customers are re- segments that are in the focus of the bank’s operations, show ceiving advice regarding their financial needs, they can open that the clients have shown by their behavior that they have current accounts, order debit cards, apply for loans or credit confidence in the operations of Addiko Bank a.d. Beograd, in a cards and obtaining credit approval on the spot. Throughout period of uncertainty such as 2020. 2020 most Bank@Work activities were performed using alternative channels to safely communicate with customers like email, Due to the high level of capital adequacy ratios, Addiko phone calls and most importantly webinars. Bank a.d. Beograd decided not to extend the subordinated loan agreement it had concluded with the Group and to replace it 7.2 Digital transformation with a short-term loan in the first period, which led to an increase in the position Deposits and other liabilities to banks, Addiko Bank’s successes over the past years were to a great ex- other financial organisations and central bank. tent made possible due to the digital strategy being an essential part of the business strategy and both driving and supporting 6.0 Corporate Governance the change to reflect the transformation in banking business and customer expectations. 6.1 Addiko Bank a.d. Beograd Board of Directors and Ex- ecutive Board With respect to daily banking, Addiko Bank aims to differentiate The Assembly of the bank at its session held on 30 December itself from the competition through superior online and mobile 2020 appointed Mr. Dragan Lončar Member of Addiko Bank a.d. banking services, innovative banking channels and innovative Beograd Board of Directors, while Mr. Dragan Djuričin resigned ways of helping customers manage their daily financial needs, from his function. Mr. Dragan Lončar has also been appointed for instance by giving them the ability to utilise various types Member of the Audit Committee of Addiko Bank a.d. Beograd. of payment methods.

In September 2020 Mr. Nebojša Pantelić has been released from Addiko Bank’s retail customers are able to conduct digital bank- the position of Addiko Bank a.d. Beograd Executive Board Mem- ing transactions via Addiko Bank’s digital banking offerings and ber due to expiration of his mandate, thus the Executive Board non-customers are able to find out details and apply for Addiko is comprised of three members, Chairman position being held Bank’s consumer products via specific Addiko Bank lending pag- by Mr. Vojislav Lazarević (CEO & CMO), Deputy Chairman posi- es, which consists of interactive calculators, contact forms and tion by Mr. Mirko Španović (COO) and Mr. Vladimir Stanisavljević a multichannel acquisition platform / chatbot that per-forms being Member of the Executive Board (CRO & CFO). sales dialogues with a focus on the products provided in each particular market.

7.0 Transformation towards out-of-branch Addiko Bank focuses particularly on selling standard-ised sales and digital development products (unsecured loans and account packages) over digital channels, in line with specific re-strictions/limitations of the 7.1 Great customer experience with efficient distribu- individual markets. Products are accessible through digital, al- tion transformation lowing simulations where appropriate, end-to-end sales where legally possible. A state-of-the-art loan application pro-cessing Addiko Bank a.d. Beograd approaches its retail customers pri- system combined with a credit decision engine has been rolled marily through branches and for the coming years expects an out in Addiko Bank in Serbia - mLoan. Content delivery through increased contribution from digital channels and partnerships social media, support of regular communication through digital, with third parties. and implementation of features such as chat pay over Viber, chatbot, branch designs compatible with the digital age – all Addiko Bank is dedicated to delivering the straightforward such features contribute to the strengthening of the digital di- banking promise and ensuring great customer experience. An mension of Addiko Bank’s brand, customers’ accessibility and important part of this goal is further development and seamless convenience. integration of the Bank’s digital channels across all customer touchpoints. Digital transformation by creating new digital capabilities re- mains one of the strategic focus points of the Addiko Bank. For Accordingly, Addiko Bank has started a process of transforming the Consumer segment the share of consumer loans sold digital- its distribution model to keep close to the market’s continuously Addiko Bank a.d. Beograd improved to 28% in 2020 (11% for ly evolving needs. 2019) and in December 2020. it was 51%.

The Bank’s digital capabilities are being continuously developed 7.3 IT Strategy with the mission to improve and enrich the user experience on the mobile app and the internet banking platform as well as Information Technology continue to support digitalization ini- end-to-end digital solutions for obtaining a loan. tiatives implementig full online onboarding with video identification and account opening on mobile banking application and The Group is also capitalizing on one of its best capabilities: providing unique service on the market - mAccount. transforming the classic branch employee role into a more com- Whilst continuing the support for the roll out of the mobile ini- unpredictable circumstances. In order to obtain this certificate, tiatives a strong focus for the Information Technology is on the the Bank had to receive positive evaluation in the following stabilisation and optimisation of the infrastructure and service business segments: Agile HR, Strategic planning and work or- providers utilised for the group. This will help to improve the ganization, Crisis communication, Physical health and safety of customer experience and satisfaction on one hand, but it will employees, Empowerment and employee well-being, Leader- also impact the cost bottom line on the other. ship in times of crisis and Technological and digital readiness.

Optimisation activities in the area of data and data quality will Given that the Covid-19 virus pandemic brought as a challenge provide the foundation for further data driven innovations for the distance between colleagues and work from home, the goal the banking group, allowing better targeted services and prod- was to communicate more with employees in order to better ucts for the core client segments. adapt to the new situation. Communication with employees was more frequent and with the necessary facts related to safety, Investments in Cybersecurity tools and processes for the IT advice was given about how to take care of the balance of busi- landscape, starting from infrastructure activities to improved ness and private life, how to organize efficient online meet- thread detection and mitigation tools and processes will result ings, how to reduce stress and better organize vacations. On in a higher level of safety for the banks and the clients. the intranet are shared positive stories about how colleagues All above activities are ensured by strict adherence and compli- can help each other and Bank even organized and online yoga ance with all regulatory frameworks governing the infrastruc- classes for the employees. ture of the financial system.

With the launch of mDeposit in 2021, enabling opening of term 9.0 Internal Control System for accounting deposit online, the bank will complete the product offer on procedures m banking and provide end to end online experience for customers. In 2021, Digital Development will keep the course of Addiko Bank has an internal control system (ICS) for accounting further developing the systems that enables offering banking procedures, in which suitable structures and processes are de- products in digital world, with clear emphasis on cash loans. fined and implemented throughout the organisation.

7.4 Branches The aim of the internal control system of Addiko Bank a.d. Beo- grad is to ensure effective and efficient operations, adequate At the end of the year 2020 Addiko Bank a.d. Beograd operated identification, measurement and mitigation of risks, prudent in total of 36 branches. There are three regions Belgrade, Novi conduct of business, reliability of financial and non-financial in- Sad, Central and South Serbia. In order to optimize resources formation reported, both internally and externally, and compli- as a part of Branch transformation project, Addiko Bank Serbia ance with laws, regulations, supervisory requirements and the introduced concept where one manager leads 2 branches. Total institution’s internal rules and decisions. number of those managers is 8 and they are leading 16 branches. The internal control system consists of a set of rules, procedures and organisational structures which aim to: 8.0 Human resource management • ensure that corporate strategy is implemented, The human resource strategy is a driver of the cultural trans- • achieve effective and efficient corporate processes, formation of Addiko Bank. HR, processes of Addiko Bank possess • safeguard the value of corporate assets, quality and imply performance management, selection and re- • ensure the reliability and integrity of accounting and cruiting, talent development, education and development of management data, leadership skills aiming at ensuring agility of employee opinions • ensure that operations comply with all relevant rules and regulations. and capabilities. Performance appraisal and talent management were the key processes for the identification, develop- The particular objectives with regard to Addiko Bank account- ment, valuation and recognition of high-quality employees and ing procedures are that the ICS ensures that all business trans- talents. In this way, Addiko Bank aims at establishing a good actions are recorded immediately, correctly and in a uniform work environment in order to become one of the most desirable way for accounting purposes. The implementation of the inter- employers, attract talents and offer possibilities for further ca- nal control system in relation to the financial reporting process reer development of its employees. In line with that in 2020 is also set out in the internal rules and regulations. Addiko Bank a.d. Beograd was granted the “Employer Partner Certificate” second year in a row. The internal control system of Addiko Bank in Serbia is built on a process-oriented approach. Addiko Bank deploys control The specific situation and Covid-19 pandemic during 2020 re- activities through process documentation which incorporates flected in the development activities intended for employees, the tracking and documentation of each process, including the so that the activities were focused primarily on successful func- information about process flow according to the internally set tioning in the new circumstances as well as on the psychological up guidelines for process management. well-being of employees. The overall effectiveness of the internal controls is monitored In 2020 Addiko Bank was granted certificate “Excellence in chal- on an ongoing basis. Monitoring of key risks is part of daily ac- lenges”. The aim of the recognition is to recognizes organiza- tivities of Addiko Bank as well as periodic evaluations by the tions that have developed quality HR management practices in business lines, internal control functions, risk management, nal capital level. compliance and internal audit. In the course of 2020, the Bank’s risk management (risk identi- Regular internal control system monitoring and promptly re- fication, measurement/assessment, mitigation and monitoring) porting on internal control deficiency and escalation to relevant was performed by the following: stakeholders (e.g. committees) is established. Internal control • Bank bodies and other committees envisaged by the deficiencies, whether identified by business line, internal au- Law on Banks – Board of Directors, Executive Board, Au- dit, or other control functions are reported in a timely manner dit Committee, Asset & Liability Management Commit- to the appropriate management level for further decision and tee (ALCO) and Credit Committee; addressed promptly. • Working bodies of the Executive Board of the Bank – Risk Control Advisory Body, Corporate Client Monitoring Internal Audit performs independent and regular reviews of Advisory Body and Operational Risk Management Body; compliance with legal provisions and internal rules. • Organisational units of the Bank – Risk Control Depart- ment, Corporate Risk Management Division, Retail Risk The internal control system itself is not a static system but is Management and Collection Division, Balance Sheet Man- continuously adapted to the changing environment. The im- agement and Treasury Department, Compliance Depart- plementation of the internal control system is fundamentally ment and other organisational parts of the Bank when based on the integrity and ethical behavior of the employees. needed. The Executive Board and the leadership team actively and consciously embrace their role of leading by example by promoting The key risks the Bank is exposed to are inherent in the Bank’s high ethical and integrity standards and establishing a risk and business and market conditions and they are manifested as the control culture within the organisation that emphasizes and credit risk, liquidity risk, interest rate risk, market risks, oper- demonstrates to all levels the importance of internal controls ational risk and other risks, such as the risk of investments in legal entities and fixed assets and country risk. 10.0 Financial risk management 10.1 Credit risk The risk management system of the Bank is aimed at ensuring, by observing and applying risk management principles, policies The process of credit risk assessment and monitoring at the level and procedures, that the risks the Bank is exposed to in its of individual clients and groups of related parties is performed operation are minimised to the largest possible extent, that all in line with adopted policies and procedures establishing rules aspects of the Bank’s business operations are stable and sensi- and criteria for approving new placements and defining activ- tive to negative internal and external factors to the smallest ities to be undertaken and obligations and responsibilities of possible extent and that the Bank’s risk profile satisfies require- persons involved in the credit risk monitoring process. ments of prudent banking operation at all times. The credit risk identification, assessment, measurement and The Bank’s risk strategy stems from its business strategy and management is implemented on an ongoing basis and covers depicts planned business structure, strategic development and the total Bank portfolio prone to credit risk. growth with considering processes, methodologies and organisational structure relevant for managing risk factors. It defines The Bank’s impairment methodology under the IFRS 9 was ad- a framework for monitoring, control and limiting of risks to ditionally improved in 2020 by applying new macroeconomic which the Bank is exposed in its operations, while ensuring ad- forecasts and calibrating to longer time series, equacy of internal capital, liquidity position, solvency position In the course of 2020, the Bank was fully compliant with the and total profitability. Policies and procedures for managing in- Basel III standards of capital adequacy. As at 31 December 2020, dividual risks are grounded on requirements of laws and bylaws the total capital requirement for credit risk stood at RSD 5.4 of the National Bank of Serbia and guidelines, principles and billion, the capital adequacy ratio (CAR) stood at 26,40%, with relevant documents of the Addiko Group. the Common Equity Tier 1 capital ratio (equalling the Tier 1 capital ratio) also at 26.40%. The Bank established a comprehensive risk management system which is integrated in all business activities and ensures the 10.2 Liquidity risk and interest rate risk compliance of the Bank’s risk profile with the established risk appetite framework – RAF at all times. The risk management The Bank’s liquidity risk management system is based on mea- framework defines the level of risks acceptable by the Bank. sures and criteria prescribed by the National Bank of Serbia and Measures of the RAF definition are calibrated with considering it is focused on short-term and structural liquidity, with imple- the business plan, risk strategy and recovery plan representing menting an adequate limit system and early warning policies a framework for adequate internal risk management and con- and procedures compliant with the ICAAP and ILAAP (Internal trol. Liquidity Adequacy Assessment Process) and liquidity risk management principles of the Addiko Group. Furthermore, within its strategic risk management, the Bank implements another key process - Internal Capital Adequacy The liquidity risk management activities in the course of 2020 Assessment Process – ICAAP in order to establish the level of were aimed at measurement, monitoring and reporting on capital sufficient to cover all material risks the Bank is exposed forecasts of liquidity inflows and outflows, liquidity reserves to. The ICAAP serves as a tool for assessment of internal capital in various scenarios of normal business and potential liquidity adequacy in relation to the Bank’s risk profile and implementa- crises and at monitoring and regular reporting to Bank bodies tion of the Bank’s strategy applied to preserve adequate inter- and ALCO on movements of regulatory liquidity ratios (liquidity ratio, quick liquidity ratio, liquidity coverage ratio - LCR and exposure to the operational risk. other liquidity ratios according to the internal methodology of the Bank or the Basel III standard (Liquidity Value-at-Risk, Net In the course of 2020, the Bank continued assessing potential Stable Funding Ratio – NSFR). operational risks from new products and outsourcing, as well as the Risk and Control Self-Assessment. In the course of 2020, all liquidity ratios, both regulatory and internally defined, in relation to liquidity risk management The calculation of the capital requirement for operational risk were aligned and above the prescribed limits. The liquidity ra- is based on the standardised approach according to which the tios prescribed by regulations of the National Bank of Serbia as capital requirement for operational risk of the Bank as at 31 at 31 December 2020 were as follows: liquidity ratio: 1.67%, December 2020 stood at RSD 781 million. narow liquidity ratio: 1.36% and LCR: 143%. 10.6 Adequacy of the risk management system The interest rate risk management system of the Bank is based on principles prescribed by the National Bank of Serbia and the In the course of 2020, the Bank’s risk management system was Addiko Group, focusing on the analysis, measurement, moni- adequate, in view of the following facts for the period: toring and reporting on banking book interest rate risk. In the • In extraordinary year, in which full pandemic challeng- course of 2020, all interest rate risk ratios of the Bank were es were present, Bank manage to have all risks under aligned and within limits defined by Bank’s policies and proce- control; dures on interest rate risk management. • Bank has completely complied with all the regualtor’s requests concerning implementation referring to the 10.3 FX risk and other market risks Moratorium related extraordinary requirements; • In accordance with the Decision of the National Bank of Serbia • As a result of an adequate approach to approving new on Capital Adequacy of Banks, the Bank must maintain the for- placements and improvements in NPL management and eign exchange risk ratio, being the ratio between the total net resolving, the Bank decreased the share of NPLs in total open fx position and the capital of the Bank, so that the total exposure, being well below the planned level and in line net open fx position of the Bank, including the absolute value with the market average; of the net open position in gold, at the end of each business • Within the continued implementation of the IFRS 9 day, does not exceed 20% of the Bank’s capital. In the course standards for the calculation of impairment of financial of 2020, the fx risk ratio of the Bank was aligned with require- assets, the Bank applied new macroeconomic forecasts ments of the National Bank of Serbia and as at 31 December and updated risk parameters - PD (Probability of Default) 2020, it stood at 2.99%. and LGD (Loss Given Default) models for calculation of value adjustment of on-balance sheet assets and off-bal- Market risk management of the Bank is regulated by adequate ance sheet items; policies defining the manner of implementing criteria and mea- • The Bank aligned the concentration from exposure sures prescribed by the National Bank of Serbia and principles to certain product types by lowering the share of the of the Addiko Group for market risk control and management portfolio with initial maturity above 7 years below the adopted, at a proposal of the Executive Board, by the Board of prescribed ratio; Directors of the Bank. In the course of 2020, the Bank managed • The Bank maintained regulatory and internal ratios of and continually aligned the level of exposure to the price risk exposure to significant risks within prescribed limits and stemming from Bank investments in debt securities, and the regularly monitored and reported to the management exposure was predominantly generated from Bank investments bodies and working bodies of the Bank, including the ra- in government securities of the Republic of Serbia. tios envisaged by the effective recovery plan; • The Bank regularly monitored exposures to various 10.4 Exposure risk types of risk in relation to regulatory and internal limits and timely defined measures for limit breaching preven- The risk of exposure to one person or a group of related tion; persons is controlled and monitored through unified databases • The Bank implemented the ICAAP regularly and main- of information on related persons, active monitoring and the tained all calculated capital values aligned with internal regulatory reporting process. In the course of 2020, the Bank and regulatory limits; did not record any exceeding of regulatory limits of exposure • Though recommendations from the National Bank of to one person/group of related persons, which was regularly re- Serbia within the Supervisory Review and Evaluation Pro- ported to the Risk Control Advisory Body and bodies of the Bank. cess (SREP) remained the same, improvement of Banks system of integrated risk management are made. 10.5 Operational risk 11.0 Organisational chart Aiming at comprehensive monitoring of Bank’s exposure to the operational risk, the operational risk management system is The organisational chart of the Bank as at 31 December 2019 is based on standard principles of identification through obtaining presented below: and classifying data on operational risk events and related losses, implementing and monitoring measures for the elimination and mitigation and regular reporting to Bank bodies and the Operational Risk Advisory Body, focusing on timely analysis of causes and proposals of measures for minimisation of Bank’s Addiko Bank a.d. Beograd Bulevar Mihajla Pupina 6 11000 Beograd, Serbia

Board of Directors Internal Audit

Compliance

Executive Board

Regulatory Compliance AML/CFT

Board Area / CEO Board Area / CFO Board Area / CRO Board Area / COO Board Area / CMO

Risk Control Credit Risk Operations BSM & Treasury Finance IT Business Support Corporate /SME/ Management Retail Sales Management Public Finance

Human Resources Accounting & Credit Risk IT Architecture, and Organisation Reporting Underwriting Client and Account Sales Mngm Department Banking services SME Control Operations and IT Administration Region Belgrade Security

Market, Liquidity & Transactions Sales Mngm Department Compensation and Financial Controlling Distressed Asset Business Solutions Internal services OpRisk Control Region Novi Sad Small Banking Benefits Management & DWH/BI Development and process Direct Sales

Back Office Sales Mngm Department Credit Portfolio Analytics IT Governance, Administration and Organisation Data Office Central and Southern Distribution Financial Analysis Group Cost and Investment and Steering Risks & Controlling Controlling Serbia channels

Distribution channels Customer Care BPM and Project Talent Management and Group Business Modelling & Legal and Card Documentary Sales Expert Function Communication Portfolio Analytics business – Competence Centre for Large and Public Clients

Procurement Sales management products Group Retail Risk Reporting and services through third Treasury sales Product and Customer and Analytics Legal Real Estate parties Relationship Management Management Group Credit and Collateral Administration Back office SFE Fraud Prevention Group Retail Markets Legal Support Development Product Management Team for legal REM Administration entities and PI, bancassurance and daily Group REM Steering banking Internal control Group Digital banking Lending Product Management Team for PI Valuation Monitoring Security (ISO/SSO)

Retention Mobile Application Development Investments and Marketing Maintenance

Legend:

Division Department Team / Desk Expert Function Group Function