CONSOLIDATED Annual Report 2020

CONSOLIDATED Annual report 2020. Content

2 Annual report 2020. 01 4 OTP Group

02 8 A word from the management

03 10 OTP Bank Serbia A.D. Beograd

04 12 Macroeconomic overview for 2020

05 16 Retail Banking Division

06 20 Corporate banking division

07 24 Financial market activities

08 26 Human Resources Department

09 32 Corporate social responsibility

10 38 Risk management

11 42 Liquidity and interest rate risk management

12 46 Capital management and capital adequacy indicators

13 50 Consolidated financial indicators of the bank

14 56 Future development of the Bank

15 60 Affiliates

OTP banka Srbija A.D. Beograd 3 01 OTP Group

• 1,700 branches • 5,000 ATMs • 40.000 employees • 20 million clients

4 Annual report 2020. OTP Group provides high-quality financial Digitalization solutions to meet the needs of almost 20 million private and corporate clients in The Group is a pioneer in digitalization the Central and Eastern European region, and has been proactive for 25 years in through nearly 1,700 branches and 5,000 the field of digital transformation of its ATMs, internet and electronic channels, operations and implementation of new and with its almost 40,000 employees. technologies in the financial market. The Among the European banking groups, it strategic orientation towards innovations boast one of the best capital and liquid- has opened the possibility of working with ity positions and is always able to pro- almost 900 start-up companies, with 30 vide conditions for stable operations and pilot projects already realized. The fourth growth. The profitability of operations is a OTP Start-up Partnership Program is key precondition for continued growth and underway, which is the most comprehen- sustainable renewal. OTP Group currently sive innovation program of the Group so operates in Albania (Banka OTP Albania), far, as all members of the group, includ- Bulgaria (DSK banka, Expressbank), Cro- ing Vojvodjanska and OTP banka, are atia (OTP banka Hrvatska), Romania (OTP looking for start-up partners who sup- banka Romania), Serbia (Vojvodjanska port their business goals. banka, OTP banka Srbija), Slovenia (SKB banka), Ukraine (CJSC OTP banka), Russia OTP Group in Serbia (OAO OTP Bank), Moldova (Mobiasbanca) and Montenegro (Crnogorska komerci- OTP Group in Serbia is present through jalna banka, Podgorička banka) via its the operations of Vojvodjanska banka and subsidiaries. The banking group holds OTP banka, which are currently in the pro- market leader or near market leader cess of integration which will last until position in Bulgaria, Hungary, Montene- mid-2021, and which will result in the gro, and Serbia. creation of one of the leading financial institutions in Serbia in terms of assets, Results number of branches, and size of credit and deposit portfolio. In the previous year, the OTP Group achieved a record high consolidated profit Goals of EUR 1.2 billion, ending the third quarter of 2020 with a consolidated profit of The strategic goal of the OTP Group is EUR 515 million after tax. All banks oper- to become the most successful univer- ated profitably within the group and par- sal banking group in Central and East- ticipated with 50% in the total profit of the ern Europe. The banking group spares Group, with increased market share in no effort to constantly evolve in order to all key segments in Hungary and Serbia. provide unique, convenient and contem- Adjusted consolidated profit in the first porary services to both retail and corpo- nine months was almost EUR 637 million, rate sector, services that are easier and while adjusted return on equity (ROE) for faster to access and that facilitate meet- that period increased to 13.2%. ing the challenges of the digital age and customer expectations.

OTP banka Srbija A.D. Beograd 5 01

6 Annual report 2020. History

The predecessor of OTP Bank, called the National Savings Bank (OTP Bank) was established in 1949 as a nation-wide, state-owned, banking entity providing retail deposits and loans. In the ensuing years, its activities and the scope of its authority gradually widened. In 1990, the National Savings Bank became a public company with a share capital of HUF 23 billion. Its name was changed to the National Savings and Commercial Bank. Subsequently, non-banking activities were separated from the bank, along with their supporting organisational units.

OTP Bank’s privatisation began in 1995. Currently the bank is characterized by dispersed ownership of mostly private and institutional (financial) investors. It started its international expansion in the countries of the CEE region, which offer great economic growth potentials similar to that in Hungary. It has completed several successful acquisitions in the past years, becoming a key player in the region.

OTP banka Srbija A.D. Beograd 7 02 A word from the management

In the coming period, we continue to strategically develop even better customer experience, innovation, and business stability, which, after our merger with Vojvodjanska banka, will be the basis for building a leading bank in the domestic market.

8 Annual report 2020. The year 2020 was in many ways different ing the program of the Government of from all the previous ones. We walked into Serbia, during which the entire financial it fully committed to the project of integra- sector proved to be a reliable and efficient tion with Vojvodjanska banka, a member partner to the state and society when it is of the OTP group, and already in March most needed. Also, our goal was to main- we faced the COVID-19 pandemic. The tain loan activities in line with our cus- new circumstances have brought uncer- tomers’ needs and to support companies tain times for everyone, which require a to successfully overcome the challenges thoughtful and a quick reaction, adjust- posed by crisis circumstances. ment and making responsible decisions. We also provided support to the Ser- The pandemic put us all to various tests. bian health care system when it was Above all, to the tests of humanity and most needed, by donating the necessary solidarity, and also of the readiness to delivery vehicle to the Torlak Institute of transform our business in a very short Virology, Vaccines and Sera, as well as by time in order to protect everyone’s health donating funds to a group of six key health and reorganize our life and business cir- care institutions across the country. cumstances in line with the challenges we face for the first time in recent history. We continued our strategic cooperation with innovation and creative hubs and We remained a true support to our clients organized the Generator project for the and directed them to our digital channels, fourth time, with which we invest in inno- such as our online branch, where they can vations in entrepreneurship. This year, safely and without a physical contact with we have awarded technological solu- a banker arrange a cash loan, overdraft, tions that directly help small and medi- buy insurance, etc. We have been moti- um-sized businesses overcome the cri- vated to invest even more in the digi- sis through the digitalization of business. talization of our products and services. For our customers who use iPhones, we The changes that have taken place this have enabled Apple Pay for mobile pay- year have brought us many obstacles ments, while the customers who use that we have overcome, good practices Android phones have already had the that we adhere to today and the results mCard payment option at their disposal. that we proudly stand behind. In the com- The latest novelty was the arrangement ing period, we continue to strategically of cash loans by mobile phone, using the develop even better customer experi- mCash option in the m-banking applica- ence, innovation, and business stabil- tion. Owing to the strong support of the ity, which, after our merger with Vojvod- National Bank of Serbia, we have imple- janska banka, will be the basis for building mented an instant payment system and a leading bank in the domestic market. enabled citizens to make fast transactions and pay with the IPS QR code. Together, we move forward.

Our priority was to successfully support Predrag Mihajlović, Chairman of the the economy and citizens by implement- Executive Board of OTP bank Srbija

OTP banka Srbija A.D. Beograd 9 03 OTP Bank Serbia A.D. Beograd

• 1.315 employees • 94 branches

10 Annual report 2020. Availability to customers Next steps

With the full commitment of our 1,315 Integration with Vojvodjanska banka employees, OTP Bank provides qual- is currently underway, expected to be ity service and a diverse offer of prod- completed in mid-2021. This merger will ucts to our customers, natural persons result in the creation of one of the leading and legal entities - large private and banks in the Serbian market by size, num- state companies, national and multina- ber of branches, loans and deposits. Until tional companies, financial institutions, then, we will operate as separate legal and sector of small and medium-sized entities, and our clients will have over enterprises, microenterprises and entre- 300 ATMs of both banks in the territory preneurs. Our imperative is to meet the of Serbia at their disposal for withdrawing customers’ needs where it suits them - cash free of charge. The strategic vision of in one of our 94 branches across Serbia, the management is to create a company at our contemporary e-banking platform, that will focus on innovation and further or via mobile applications. Growth and improve the products, services and cus- development, dedication to customers tomer experience of our clients. and product and service improvements remain the Bank’s priorities, with strong support from the OTP Group.

OTP banka Srbija A.D. Beograd 11 04 Macroeconomic overview for 2020

• 0.7% GDP growth in 2015 • 4.2% GDP growth in 2019 • 5.2% economic growth in Q1 2020

12 Annual report 2020. The pace of economic growth in Serbian sectors with low rates and ample liquid- had been increasing at a faster pace ity. Even with such measures, most devel- for five straight years, rising from 0.7% oped economies fell by more than 10% in 2015 to 4.2% in 2019. This trend was during Q2, especially economies where expected to continue in 2020 and 2021, tourism and hospitality business are with the GDP growting between 4.0% and large economic sectors. 4.5%. Such strong growth was expected despite difficult external environment, The low interest rate policy of the ECB led slow growth among Western European to lower monthly payments for Serbian trading partners and in general slow entities borrowing Euro, thereby bring- global growth. ing some relief for households and businesses. At the same time, NBS also low- However, with the arrival of covid-19, ered its Key policy rate from 2.25% to everything changed. Economic growth 1.00% by the end of 2020 while increas- was strong in Q1 2020, +5.2%, which was ing the M2 money supply by 30.6% as of a bit less than expected. As a result of November 2020. Even with stimulus it is covid, European countries started clos- still a bit surprising that the total number ing their borders and the global supply of persons employed increased during chain starting breaking down. Serbia too most of the year with rising wages, +7.8% started to implement strict border con- y-o-y in October 2020. trols and the government implanted a state of emergency for a period of roughly The 12-month moving average of monthly two months. As a result, Q2 GDP fell by net wages in October 2020 rose to EUR 6.3%, year-on-year. Manufacturing, trade, 511, compared to EUR 456 in the previ- household spending, investments and ous twelve-month period, +9.1%. As was foreign trade all crashed. Only govern- expected last year, this increase is slow- ment spending, agricultural production ing to a more sustainable rate. We con- and the banking and IT sectors grow. tinue to expect wages to grow at a faster pace than the overall economy due to Due to covid-19, inflation fell around the the government’s campaign to force all globe and central banks lowered interest companies to report actual wages paid to rates and increased asset purchases in employees and as a demand for Serbian order to support the corporate and retail workers in the EU returns to pre-covid-19

OTP banka Srbija A.D. Beograd 13 04

14 Annual report 2020. level. This once again, underscores how covid, there will be a deficit in 2020, most the Serbian economy is dependent upon likely around 9.0%/ GDP, a result of neg- and integrated with other European econ- ative economic growth and increased omies. spending due to covid-19, particulary in Q2 2020. Total public debt was more The global drop in inflation has also been than 70%/ GDP in 2015 but fell to 52% in witnessed in Serbia, which has allowed 2019. We expect this figure to approach the NBS to further lower its Key Policy 60%/GDP for 2020. However, we do not Rate. This is leading to increased borrow- expect this to lower Serbia’s sovereign ing while not igniting inflation. Headline rating, which is close to being investment CPI averaged 1.9% in 2019 and fell to 1.6% grade. This should lead to even stronger last year, while Core CPI rose from 1.3% FDI figures and lower borrowing costs on to 1.6% during the same period. domestic and international markets.

Lower interest rates can lead to a depre- While many headwinds continue to pre- ciation of the local currency, especially in vail, both internally (need to finalize many emerging markets, however, that has not economic reforms) and externally (region- been the case with the dinar, as the EUR/ ally, in the EU and globally), we continue RSD rate has fallen from nearly 125.00 in to expect that the local economic cycle early 2017 to its present market rate just will move forward at a reasonable rate below 117.60, where it has been trading of around 4.0%, with low interest rates since mid-2019. In 2019 and 2020, the and a stable currency rate. However, eco- EUR/RSD rate fell by 0.51% and 0.01%, nomic results for 2021 will mostly depend respectively. on how the corona pandemic is handled and how companies and invidicuals adapt Between 2016 and 2019, average gov- if it takes longer than expected to be put ernment surplus was 0.1%/ GDP. Due to under control.

OTP banka Srbija A.D. Beograd 15 05 Retail Banking Division

16 Annual report 2020. In 2020, the Retail Division remained management of customers’ finances, focused on the needs of its custom- which has served as a good indicator of ers and the development of long-term the importance of digitalization of prod- relationships. Constant growth in retail ucts and services. loans is one of the key indicators of support that a bank with affiliates provides Some of the additional innovations intro- to its clients, natural persons. Thus, in the duced into the Bank’s operations in 2020 last year, 2020, there was an increase in are: loan growth of17.2% compared to 2019, to RSD 140.2 billion (EUR 1,193 million), • Launching the Apple Pay option that occupying a market share of 11.7%. In allows mobile payments to all users 2020, as well, the Bank was among the of the iOS operating system. leaders in the housing loans market. • IPS QR code – the functionality that allows quick and easy payment of When it comes to cash loans, OTP banka monthly utility bills or payment at has strengthened its position as one of the points of sale without using cash or local market leaders. The total amount payment cards. of deposits in the Retail Division reached • mKeš – option within the m-bank RSD 96.2 billion (EUR 818 million), which application that enables arrangement is an increase of 7.1% compared to 2019. of a dinar online cash loan with a fixed interest rate. Since the focus of the retail division is customer satisfaction and outstanding Small Business Operations customer experience, many changes have continued to be made in a system The Small Enterprises and Entrepreneurs that fosters a culture of innovation at the Sector continued its trend of growing the level of the entire Group, which means customer base in 2020, as well. The loan continuous work on an offer that has a portfolio grew by 13,1%, while deposits use value for the clients and that facili- increased by 13,4% compared to 2019. A tates their daily banking activities to the unique approach to these customers con- greatest extent possible. tributed to this, in which the bank is led by the activity of a particular company or Innovations in Digital Banking an entrepreneur and where it adapts to specific needs in the fields of production, OTP banka is investing enormous efforts transport, trade and professional services in digitalizing its business and it strives through a segmental offer. The network of to improve its offer and services on the 94 bank branches has personal bankers, online channels on a quarterly basis. specialized in business operations with The function of digital tools is to save small businesses and entrepreneurs. both the customers’ and the employees’ time, which further improves the mutual The loan repayment period for permanent experience. Also, since the beginning of working capital is 36 months and the only the pandemic, all digital functionalities of collateral is a bill of exchange. Investment the Bank have notably facilitated the daily loans for the purchase of equipment are

OTP banka Srbija A.D. Beograd 17 05

approved with 30 to 60 months repay- new idea, and existing solution. The prizes ment periods, exclusively with a bill of were one million dinars per each cate- exchange, i.e., with a pledge on the sub- gory, along with the valuable prizes of the ject of financing. partners of the competition.

Our common goal is to provide clients Private Banking from the SME segment with more favour- able financing to promote their business OTP banka holds a leading position in the development, with longer repayment private banking segment in Europe with periods and with minimal collateral. We numerous accolades for the best bank are pleased to join the COSME program, in this field, received from prestigious as an important additional form of busi- European institutions, organizations and ness improvement support, within our media that follow the private banking sec- overall SME offer. tor.

COSME (Programme for the Competitive- In our country, it is also recognized as ness of Enterprises and SME) is a Euro- a bank chosen by customers with high pean Union programme for the compet- expectations in terms of offer, products, itiveness of small and medium-sized services, as a Bank that recognizes the enterprises, with a budget of EUR 2.3 lifestyle of these customers and that pro- billion for the period between 2014 and vides them with professional and partner 2020. support with the help of its bankers.

OTP banka further confirms its commit- OTP banka’s Private Banking has an ment and belief that small businesses exclusive package of accounts and ser- have great potential and importance to vices called Eminent that provides cli- the national economy by providing sup- ents with first-class, customized services, port through the fourth Generator com- investment, and financial consulting, with petition, which supported digital projects numerous benefits offered by Visa Infinite this year - websites, apps, and other dig- debit card. Users of the Eminent private ital platforms - that help and offer new banking package can also expect support opportunities to small and medium enter- in the domain of investment consulting. prises to overcome the challenges they Licensed investment consultants rec- face due to the pandemic. From more ommend to each customer individually than 170 entries, the jury selected ten the way in which they can invest their semi-finalists who were awarded a media funds on the domestic or foreign mar- promotion so that as many people and ket in accordance with their profile, finan- small and medium enterprises as possi- cial plans, and other factors. The Eminent ble could hear about their projects. After package also offers a variety of other ser- that, at a large-scale online event, six vices for the quick and easy management finalists were selected, out of which the of funds and a range of benefits within jury chose one winner in each category - digital banking services.

18 Annual report 2020. OTP banka Srbija A.D. Beograd 19 06 Corporate banking division

• 11% corporate loans • 8.5% growth of the number of active clients

20 Annual report 2020. One of the most significant impacts on In the given, multiple challenging circum- the Bank’s operations in 2020 and the stances, the Corporate Banking Division corporate sector itself was entering into managed to exceed the expected market the new banking Group after the acquisi- share in the segment of loans to corpo- tion of the Bank by the OTP Group. In this rate entities, achieving a credit portfolio regard, the activities of the sector were growth of almost 10%, as well as to raise focused on maintaining the existing cli- its deposit base by more than 20% com- ent portfolio, with action to increase the pared to 2019. The increase in the level number of active clients, expanding and of credit exposure was accompanied by diversifying the portfolio, and also on har- an improvement in its quality and degree monization with the Group and its inter- of risk through: nal strategy, rules and policies. In addition to harmonizing with the OTP Group’s • Improving the maturity structure of principles of operation, the business sec- loan placements, towards increas- tor in 2020 was engaged in pre-integra- ing the share of long-term financing, tion activities that will form the basis for which recorded a growth of 6.5% in the status change planned for the second the total credit portfolio, quarter of 2021. • Increasing the share of dinar loans placed to corporate entities, in line Through its close engagement in cus- with the dinarization strategy, with tomer support, the corporate sector the introduction of additional inter- has been directly involved in a num- nal measures to hedge against cur- ber of activities launched to mitigate rency risk, and address the consequences of mar- • Portfolio diversification by types of ket developments caused by the Covid- financing and affiliation of clients to 19 pandemic. In line with the occurring different industries. changes, the clients were promptly provided with financial, legal, advisory and Portfolio diversification is a consequence technical support, relying on internal of expanding the base and scope of proj- capabilities, as well as incentive mea- ect financing, where the goal is to increase sures of the Government of Serbia. the Bank’s presence in the market, and to achieve a solid base of diverse projects through adequate projects of reputable

OTP banka Srbija A.D. Beograd 21 06

investors. This goal was achieved with the Government of the Republic of Serbia, a credit exposure increase of 53% com- where the Bank took a significant share pared to 2019. of over 11%, which exceeds the Bank’s current share in total corporate lending. The number of active clients also increased, due to the constant growth in In the factoring segment, the volume the medium-sized enterprise segment, of activities was directly conditioned by where an annual growth of 8.5% was fluctuations in economic activity during recorded. the year. A record positive result was achieved in the first quarter of 2020, Direct support to the economic sector in when the factoring turnover volume the conditions of the pandemic during exceeded the results of the same quarter 2020 is reflected in the placement of loans of the previous year by over 20%. With the supported by the guarantee scheme of decrease in economic activity and financ-

22 Annual report 2020. ing of operations from the guarantee tinues to improve and develop transac- scheme, there was a certain slowdown tion banking services, continuously focus- in sales in the coming months, which led ing on optimizing the processing time of to a slight decline in the total volume of requests, from requests for opening and financing in 2020 compared to 2019. The activating current accounts, process- Bank continues to occupy a leading posi- ing domestic and international payment tion in the market in the factoring seg- orders, to processing of the request for ment, relying on a digital platform, a con- documentary operations. sistent team of experts, and a stable base of service users. In addition, the Bank recognized the increased needs of clients to offer their Continuing its mission of maintaining products and services on the Internet, close contacts with clients and nurturing so in 2020 customer turnover through long-term partnerships, OTP banka con- e-commerce services of the Bank tripled compared to the previous year, with a significant rise in the number of transactions. Simultaneously, there was an increase in traffic at POS terminals by 24% compared to the previous year, which is especially important if we take into account the circumstances and restrictions that characterized most of 2020.

During 2020, independent studies com- paring the operations of banks were conducted by PWC, a renowned international consulting agency, and it is especially important to highlight the results of a study that took into account five banks of direct competitors. The aforementioned study shows that OTP banka’s Corporate Banking Division achieves the previously presented results with the lowest number of employees compared to the largest competitors, and also that the average volume of financing carried out by one OTP Bank employee exceeds the average of the main competitors by 40%, and to an even greater extent the average of the entire market. This further reflects the effectiveness of the Division itself as one of the most cost-effective in the industry, as well as the efficiency and expertise of the employees.

OTP banka Srbija A.D. Beograd 23 07 Financial market activities

• 8.27% in operations involving domestic legal persons • 47 billion total assets of the pension funds

24 Annual report 2020. Activities in the financial markets it has been successfully providing custody services and services of daily eval- Long-term cooperation and stable part- uation and calculation of assets for years. nership with clients and users of prod- At the end of 2020, the total assets of the ucts and services on the financial market pension funds under the custody of OTP are proof that the Bank continuously and Custody Bank Serbia amounted to RSD carefully monitors and understands their 47 billion – for almost RSD 2 billion more demands, and provide them with efficient then previous year. When it comes to the responses and adequate innovative solu- provision of custody services to the vol- tions. The Bank has kept its position in the untary pension fund segment, the Bank foreign exchange market in terms of vol- is still an absolute leader in the market ume of transactions involving corporate with 100% share. clients. According to the official statistics of the National Bank of Serbia, the Bank Other custody clients of the Bank, for the has achieved market share of 8.27% in largest part, come from the segment of operations involving domestic legal per- domestic and foreign professional inves- sons, which ranked the Bank forth for the tors. In addition to respectable domestic 2020. insurance companies, our custody clients also include the foreign global custodi- Custody services ans and investment banks. In 2020, the assets under custody have increased for In view of the basic parameters, inter alia almost RSD 3 billion – which is great suc- the clients’ assets under custody, in 2020 cess despite the pandemic situation. The the OTP Bank Serbia was among the first situation in the domestic capital market is three banks in the domestic market that very similar to the situation we had previ- provide custody services in accordance ous year, and thus the domestic and for- with the permission granted by the Secu- eign custody clients primarily invested rities commission. The custody services into bonds issued by the Republic of Ser- fall within the domain of specialized and bia with various maturities. In 2020, this sophisticated services being developed in financial instrument also experienced a difficult and competitive environment growth in the number of transactions in as is the domestic capital market, with the secondary market. Also, in 2020, the the aim to follow the trends existing in Bank signed an agreement with OTP bank other developing markets, all in accor- Hrvatska on the provision of custody ser- dance with the regulations. The Bank has vices in foreign markets thereby giving proven that the quality of the service pro- clients access to significantly more mar- vided to the clients is the most important kets and raised quality custody services part of its strategy and, together with the at a higher level. Guided by a partnership experience and expertise of the employ- with clients, constructive exchanges of ees, makes a distinction which results in information, proactivity, commitment and the years-long trust of our clients. efficiency, OTP Custody Bank Serbia will strive to meet the expectations of custody OTP Bank Serbia is a custody bank of clients in the next year as well. seven voluntary pension funds for whom

OTP banka Srbija A.D. Beograd 25 08 Human Resources Department

• 119 new members • 1.315 employees

26 Annual report 2020. The year 2020 started with big plans for key positions and operational teams, and the Bank with demanding tasks related to paid absence of particularly vulnerable the integration project. The Covid-19 pan- categories of employees was provided. demic that hit the world brought some In the first wave of the pandemic, 95% of completely new challenges: organization employees worked from home, and the of work activities during the state of emer- current standard is 80%. Constant com- gency, work from home for all employees munication was maintained with infected at the headquarters, three moratoriums employees, as well as with employees in of the National Bank of Serbia, continu- self-isolation. The status of these employ- ation of all integration activities, as well ees was monitored on a daily basis, and as performing regular operations and a special algorithm of steps was created achieving set goals. Throughout the year, for all employees so that they could keep employee safety and health came first, track of virus protection measures and with ongoing support, digital transforma- take care of their health and the health tion, and new development models that of their colleagues. After the lifting of contributed to outstanding results. state of emergency, organizational models were adapted to current instructions, Employee care comes first but the employees’ health has always remained in focus. The declaration of a state of emergency required a quick reaction and adapta- During 2020, the Bank’s employees tion to completely new working condi- received benefits that are especially tions. Enabling employees to work from important to them - private health insur- home, in addition to technical aspects and ance and supplementary pension insur- access to the necessary applications, also ance with the Bank’s participation in a required different organizational models. voluntary pension fund. Private health Team rotation was organized with the aim insurance policies are supplemented of optimizing the presence of employees with financial and logistical support for in the Bank, equipment was provided employees who are hospitalized, as well for employees working from the Bank’s as with Teledoctor consultations ser- premises, a service for generating and vice during recovery. A new way of reg- distributing personal documents was ulating reimbursement of transportation developed, relocation was organized for costs through NIS personalized cards

OTP banka Srbija A.D. Beograd 27 08

with remote top-up and Bus plus system, New Year’s gifts for children of employees through contactless distribution and use of digital vouchers has been created. In the situation caused by the pandemic, these benefits, as well as the altered model of working from home, addition- ally affected the satisfaction of employees. During the state of emergency, the policy of salaries and rewards did not change.

Objective circumstances and shifting to predominantly remote work posed an additional challenge to timely con- sideration of potential risks, but the Bank strived to provide adequate support in critical situations and situations of increased uncertainty, not only in the field of financial compensation, but also in maintaining partnership relationships with employees.

Development and digital transformation

Although 2020 brought special challenges and unpredictably changed priorities, employee development came first. The digital transformation of the Bank’s development activities has been in focus during the previous years as well, so the Bank was ready to meet the During 2020, two Pulse Check surveys challenges and put an additional effort were conducted, which in both Banks to transform in an even faster and effective way. The whole process of develop- examine the satisfaction of employees ment activities has been completely dig- with communication and information itized using various tools (Teams, Zoom, exchange within integration projects. Doodle, Matrix, Vyond, Camtasia, Smart- Survey Slido). Prompted by the situation in which the world found itself and will- ing to use it as an opportunity for further transformation, the Bank has created a development strategy that relies

28 Annual report 2020. on three principal pillars: must have, candidates with the best experience in in line with industry, embracing tomor- all moments of interaction with the Bank row. The HR Department also worked on as their potential employer. The result of key competencies through professional this is the new Career portal where all the trainings such as IT security, SAS and BI job vacancies are published, and where tools, data science, Recharge programs, candidates have an insight into the stage PCM communication models, and inno- their application is in at any time. When vation programs. During the year, it pro- it comes to managing the selection provided special support to leadership and cess, the OA tool has enabled the hiring customer relations: through a remote manager and HR to be synchronized at leadership program for managers who every stage of the process, and to digitize manage teams from home, as well as a the request for each type of work engage- program for personal resilience and bet- ment, applications, and candidate evalua- ter communication skills for branch man- tion. This enables a virtual unified base of agers and sales managers to work with candidates, which provides the Bank with the corporate entities. better efficiency in the process of finding adequate candidates for the vacancies. The Bank also recognized the possibility for improving the processes in men- The Bank has also participated in numer- toring during the onboarding process, so ous events as a desirable employer in the it applied for the OTP lab start-up pro- market, and the management is espe- gram and received support for the devel- cially proud of its participation in the first opment of a platform that should improve online job fair, Career is Not on a Break the employees’ experience during the first (Karijera nije na pauzi). months and enable managers to monitor their work in an easier and more effec- Through the My First Salary (Moja prva tive way. plata) program in cooperation with the National Employment Service, the Bank Becoming an attractive employer has employed 32 people in 15 different through a better candidate organizational units of the Bank, both in experience Belgrade and in 12 branches across the country. The goal of that program is pro- The digital collaborative tool - ATS sys- fessional development of young grad- tem “One Assessment” for managing the uates and profiling for potential career recruitment and selection process in both continuation in the Bank. banks has also been implemented. This tool has enabled the automation of the Through open communication to employment process through a defined greater employee satisfaction workflow, and will also be implemented in the future, integrated Bank. Guided by the As it recognizes the importance of care- importance of customer experience as a fully created messages, especially in strategic commitment, the Bank assessed unpredictable circumstances, open com- that the Employer Brand is of great sig- munication with employees accompanied nificance when it comes to providing all activities of the Human Resources

OTP banka Srbija A.D. Beograd 29 08

During 2020, the Bank’s employees received benefits that are especially important to them - private health insurance and supplementary pension insurance with the Bank’s participation in a voluntary pension fund.

30 Annual report 2020. Department. During the state of emer- During 2020, integration trainings for gency, the Department cooperated with employees of both banks were imple- colleagues from the Marketing Depart- mented, through which they were intro- ment on the newsletter Distance Con- duced to the applications, processes and nects Us (Daljina nas spaja), and created products selected for the future Bank. a special Support Guide for all employees, The corporate innovations program was whether they worked from home or from realized in cooperation with the ICT Hub, the Bank’s premises. After the state of aimed at employees, so that they would emergency had been lifted, it conducted nurture innovation in the future Bank a survey on employees’ satisfaction with as well. The Department is proud of the working from home, with the participation numbers that summarize the integration of 65% of employees. Based on the results training activities: 3,395 participants, 31 and recommendations of the survey, it internal trainers, 3,194 training hours created a Guide to Working from Home, a and 100% of activities conducted through Guide to Managing a Team While Working online platforms. from Home, and a Guide to Online Meet- ings that were distributed to employees In order to undertake activities on bring- with symbolic gifts to show that we care. ing the corporate cultures of Banks closer Based on a survey conducted in Septem- together by integrating and combining ber, on the occasion of one year anniver- different successful models, the Rotation sary of the change of ownership struc- Leads to Success (Rotacijom do uspeha) ture of the Bank and of joining the OTP program was created in the Retail Divi- group, it was determined that over 65% sion, in which 20 outstanding branch of respondents feel satisfied with being a managers are rotating their positions part of the OTP group and with their work until the day of the merger. The rotation within the group. initiative was realized in other divisions at different position levels. In addition, Integration activities the initiative of mutual visits of branch managers from the two Banks has been The project of integration of the two banks launched, which will be realized monthly was a priority throughout the year, and until the end of the integration. the Human Resources Department contributed through numerous activities. During 2020, two Pulse Check surveys The organization of the future Bank was were conducted, which in both Banks designed, the systematization of opera- examine the satisfaction of employees tions was made, the grading structure with communication and information was established, the remuneration pol- exchange within integration projects. icy was adopted, and all HR processes Based on both researches, additional rec- were designed and adopted. The selection ommendations were created for further of B2 and B3 level managers was made improvement in these areas. and all employees from both banks were allocated.

OTP banka Srbija A.D. Beograd 31 09 Corporate social responsibility

32 Annual report 2020. The principles of social responsibility are • responsible management and integrated into all business activities of employee policy, OTP banka. As part of a large banking • reduction of the negative effects of group, the Bank applies high standards in business on the environment, its policy towards employees, clients, the • contribution to civil society. local community, and the environment. In each of these areas, the bank focuses As a member and one of the founders on different activities. In the area of inte- of the UN Global Compact Agreement in gration of socially responsible criteria in Serbia, as well as a member and one of business activities, the emphasis is on the founders of the Responsible Busi- the creation of socially responsible prod- ness Forum (RBF) Serbia, the Bank mobi- ucts and services, transparency, business lized the most important initiatives in ethics, and responsibility towards clients. the country by bringing together socially When it comes to employees, the priori- responsible companies. It bases its cor- ties are corporate management, profes- porate social responsibility upon support sional education and training, incentive to entrepreneurship and innovation, for and reward program and diversity policy, creation of better environment and giv- while in the field of environmental pro- ing back to the community in which it tection the emphasis is on reducing the operates, supporting culture and young consumption of resources that arise from talents, as well as vulnerable groups of business activities. citizens (through social inclusion and professional integration through the educa- The Bank’s active contribution to civil soci- tion of socially vulnerable groups and vol- ety is reflected in its support for organi- unteering actions). zations and projects dealing with socially disadvantaged and vulnerable groups of The strategic guidelines are deeply rooted the population, as well as for projects in in the Bank’s corporate values and are the field of culture. implemented in accordance with the following priorities: Since 2016, OTP banka has been included in the Responsible Business Index list - • integration of the social responsibility the first national platform for the assess- principles into business activities, ment of corporate social responsibility,

OTP banka Srbija A.D. Beograd 33 09

which enables an objective comparison of the performance and impact that companies have on society through their operations.

As a member of the Responsible Busi- ness Forum, the Bank took part in the research “Better Business for a Better Society 2019/2020” and contributed to creating a clearer picture of business sector investments in the community during 2019 and during the crisis caused by the coronavirus pandemic. The results of the research, as well as examples of good practice are presented in the publi- cation Better Business for a Better Soci- ety 2019/2020, which is available on the Responsible Business Forum’s website.

Partners in innovation

Wishing to give additional contribution to empowering technological entrepreneurship in Serbia, the Bank has initiated cooperation with the ICT Hub Centre for Technological Entrepreneurship and Innovation, creating a long-term partner- This year, the preparation of meals ship. Joint organization of various events, for vulnerable population categories such as three FinTech Hackathons and was organized, which brought several Open Innovation Challenge, which rewarded teams with the best ideas appli- together the members of the Forum, cable in the development of the banking and many deliciously prepared meals future. Also, the cooperation opened the delighted our fellow citizens - the Bank’s door to new partners from the sellers of the Liceulice magazine. start-up ecosystem that are developing innovative products and services for users in an increasingly advanced digital environment.

34 Annual report 2020. The Generator project tion for the best student entrepreneurial innovations), which have so far pro- At the end of 2017, together with numer- moted and awarded 60 entrepreneurial ous partners, the Bank launched the Gen- innovations, at the end of 2018 the Gen- erator project. erator 2.0 project was launched with the aim of empowering small and medium Generator is a long-term platform where enterprises and giving them the oppor- the initiatives and events that contribute tunity to improve their knowledge in the to the development of innovation and field of digital transformation and gain entrepreneurship are promoted. After access to the necessary tools that can two successful competitions (Generator help them further develop their busi- and Generator Fluo - the first competi- ness using digital technologies. In 2019

OTP banka Srbija A.D. Beograd 35 and 2020, the digital transformation was prize. At the presentations, the finalists applied on their products and included a introduced their solutions, after which the complete analysis of the current state of jury announced two winners who won a business and recommendations with the prize of one million dinars. The semi-fi- action plan, implementation of one of the nalists also won special awards from proposed recommendations worth up to the competition partners - Vojvodjanska EUR 5,000, as well as marketing make- banka and the ICT Hub Centre for Techno- over and a media campaign. logical Entrepreneurship and Innovation, TeleGroup, BOS - Belgrade Open School, At the end of 2019, and also within the and ENECA. Generator project, the Good Deed Gener- ator initiative was launched, which sup- COVID-19 ports social entrepreneurship and those who create within it. In the lobby of the Considering the need to involve the busi- new OTP Banka building, the employees ness sector in solving the serious chal- had the opportunity to get acquainted lenges that the health care system has with and support six companies. This been facing, OTP banka was among the activity does not end there, as the sup- first to get involved in various initiatives. port to social enterprises will also continue in 2020. In order to support to our health care system, at the beginning of April, the Bank In 2020, the Bank launched the fourth Gen- provided what was most needed at the erator competition called Gamechanger, time and donated a delivery vehicle worth considering the challenges small and over 3 million dinars to the Torlak Insti- medium-sized businesses in our country tute of Virology, Vaccines and Sera. The faced due to the COVID-19 pandemic. This vehicle has been used since day one as year’s competition focused on supporting it plays a significant role in transporting digital projects - websites, applications, COVID-19 tests and thus directly help and other digital platforms - that help and in faster and more efficient delivery of offer new opportunities for SMEs to suc- test results. It is fully adapted for these cessfully overcome the effects of the cri- needs and has additional equipment that sis. The competition was open to all indi- includes a built-in thermal insulation, a viduals, informal teams, entrepreneurs, cooling device, and a thermal recorder and companies that have a new idea that that records the temperature. Gratitude is needs support to come to life, or an exist- also due to the Bank’s partners who con- ing solution that needs to be improved. tributed to this donation - Renault Nissan Based on the 170 applications received, Serbia and Renault Sava. the jury made a shortlist of ten semi-finalists who received video material, as In addition, to improve the general work- well as media promotion and promotion ing conditions and procurement of nec- through the Bank’s channels, so that as essary medical and protective equipment, many people as possible could learn the Bank donated a total of RSD 2,650,000 about their solution. Six finalists were to the General Hospitals in Sremska Mitro- then selected to compete for the grand vica and Subotica, the Nis Clinical Center,

36 Annual report 2020. Wishing to give additional contribution to empowering technological entrepreneurship in Serbia, the Bank has initiated cooperation with the ICT Hub Centre for Technological Entrepreneurship and Innovation, creating a long-term partnership. the Institute of Oncology and Radiology of Our Belgrade in the spirit of Serbia - Children’s Department, and to solidarity with the most vulnerable the city of Valjevo, which raises funds for #zanašebeograđane local health care institutions. Although more than a decade has passed The Bank also invited its clients to help since the first “Our Belgrade” action was the health care system financially if they organized, this day of volunteerism con- have the opportunity. To facilitate the tinues to inspire engagement and support process, the bank has included the NHIF to local communities in an innovative and account in predefined templates within efficient way. So far, volunteering actions its e-banking application. organized by the Responsible Business Forum have brought together over 3,500 Culture employees from more than 30 companies and directly improved the quality of Wishing to support the nurturing of Ser- life for over 11,000 fellow citizens from bian culture and the Serbian language vulnerable social groups. and recognizing the true values that “Politika” and “Politikin Zabavnik” stand OTP banka also fosters the culture of for, the Bank decided to be the patron employee volunteerism and traditionally of the award for the best literary work responds to this action. This year, the intended for young people. Jury’s unan- preparation of meals for vulnerable pop- imous decision was to award Sonja Ciric ulation categories was organized, which for the novel “I Will Not Think of Prague”, brought together the members of the published by “Laguna” Belgrade, for the Forum, and many deliciously prepared best literary work intended for youth that meals delighted our fellow citizens - the was published in 2019. sellers of the Liceulice magazine.

OTP banka Srbija A.D. Beograd 37 10 Risk management

38 Annual report 2020. Operational risk Operational risk management includes:

Operational risk is the risk of possi- • Activities to identify, monitor and mea- ble adverse effects on the Bank’s finan- sure operational risks through: cial result and capital due to errors - Collection of internal operational (either intentional or accidental) made risk data by employees, inadequate internal pro- - Key risk indicators cedures and processes, inadequate - Self-assessment and risk control management of information and other - Scenario analysis systems in the Bank, as well as due to - Assessment of operational risk unforeseen external events, especially when introducing/modifying new including those with a low probability of products and outsourcing activi- occurrence but with a risk of high loss, ties to third parties risks of internal and external fraud, and - Assessing the impact of disruption model-related risks. Apart from strate- on business. gic risk, operational risk includes legal risk, regulatory compliance risk, as well • Preventive activities such as: as reputational risk. The Group includes - Permanent supervision or Man- in its risk management system the risks agerial supervision as part of the arising from the introduction of new prod- internal control system ucts, services and activities related to its - A business continuity plan that processes and systems, as well as risks provides protection against dis- arising from the activities the Bank out- ruptions in business activities and sourced to third parties. against extreme risks.

In order to successfully manage opera- Operational risk is an integral part of all tional risk, Group has introduced a con- products, activities, procedures and sys- tinuous system for identifying, measur- tems of the Group. Operational risk man- ing, monitoring and controlling/mitigating agement is an integral part of manage- operational risk. ment functions at all levels. It is based on

OTP banka Srbija A.D. Beograd 39 10

the part of the internal control system, as well as limiting losses in emergency which includes the Management Super- situations. This plan is based on business vision system that is implemented at all impact analysis and risk assessment. Key levels, as well as the periodic controls business activities for which it is neces- conducted by the internal audit depart- sary to maintain business continuity in ment. The system of internal controls emergency situations are determined, implies that operational risk is viewed the plan is regularly updated in accor- as a separate type of risk and thus sub- dance with business changes, changes jected to specific methods of detection in products, activities, processes and sys- and assessment, monitoring and control, tems, changes in the environment, as well in order to develop appropriate risk mit- as with the business policy and strategy igation measures and enable to review of the bank; the plan is tested, and test the Group’s risk profile. For operational results are reported to the Bank’s authori- risk management to be effective, it is ties - the Board of Directors and the Exec- necessary to have an appropriate man- utive Board. agement structure, led by a specialized Operational Risk Committee (ORCO), Internal audit implemented the aforementioned internal controls and appropriate organiza- Through the performance of planned tional structure, whose cornerstone is audits and special engagements / inves- the Operational Risk Control and Man- tigations, the Internal Audit assesses the agement Department, which proposes adequacy and reliability of the Bank’s policies, methodologies, plans and pro- internal control system and the func- cedures for managing operational risk, as tion of controlling the compliance of the well as the necessary management tools Bank’s operations. The internal audit (data collection, RCSA, etc.). communicates the results of its work to the Bank’s management, ensuring that For the purpose of calculating the reg- the risks are properly identified and con- ulatory capital requirement for opera- trolled. Internal Audit regularly prepares tional risk, the Group uses the basic indi- reports on its activities and submits them cator approach in accordance with the to the Board of Directors and the Audit Bank’s Decision on Capital Adequacy. The Committee. internal capital requirement for operational risk is quantified using a special The risk of non-compliance of approach based on internal losses and bank’s operations scenario analysis. The risk of non-compliance of bank’s Business continuity plan operations is the possibility of adverse effects on the financial result and the cap- In order to ensure business continuity, the ital of the bank due to failure to harmo- Group has implemented a business conti- nize the bank’s operations with the law, nuity plan aimed at enabling the smooth by-laws, internal acts of the bank, as well and continuous functioning of all signifi- as with the rules of profession, good busi- cant systems and processes of the Group, ness practices, and business ethics of the

40 Annual report 2020. bank. The bank’s operations compliance sonal data and banking secrecy, identi- controlling function enables identifica- fication and assessment of clients, cus- tion, assessment, and monitoring of the tomer complaints management, sales risks of the bank’s operations non-com- and marketing relations, market integ- pliance that include the following three rity, market abuse and insider trading, risk groups: compliance with professional behaviour codes, risk of conflict of interest, risk of • Regulatory body sanctions risk, bribery and corruption, internal whis- • Risk of financial losses, tleblowing rights, and other regulatory • Reputational risk. areas in accordance with the adopted program of the operations compliance In accordance with the Law on Banks, controlling function. the Bank has established an independent organizational unit - the Operations Com- The Department conducts continuous pliance Controlling Department in charge monitoring in a manner that ensures the of identifying, monitoring, and managing identification and management of exist- the risk of non-compliance. In order to ing and potential risks of non-compli- perform tasks within its scope, the Opera- ance, which is reported to the competent tions Compliance Controlling Department authorities of the Bank. It strives to pro- monitors the compliance of internal acts mote the highest standards of compliance of the Bank with the regulations, in par- and raises the employees’ awareness of ticular those relating to the protection of the need to operate in accordance with client’s interests, adequate informing and regulations, internal acts, and good busi- notification of clients, protection of per- ness practices.

OTP banka Srbija A.D. Beograd 41 11 Liquidity and interest rate risk management

42 Annual report 2020. Liquidity is the ability of the bank to pro- Within the liquidity management process, vide sufficient liquid assets to uncondi- the Bank: tionally settle all due liabilities arising from balance sheet liabilities (withdrawal • Continuously monitors and analy- of deposits and other sources of financ- ses all the factors that influence the ing), balance sheet assets (financing of Bank’s liquidity position, new placements), as well as from off-bal- • Maintains the required level of the ance sheet positions. obligatory dinar and foreign currency reserves, in accordance with the reg- Liquidity management represents a con- ulations of the National Bank of Ser- tinuous process of reviewing the need for bia, liquidity in regular business situations • Continuously work on optimizing daily (“business as usual”), but also manage- liquidity by providing funds in suffi- ment planning in unforeseen circum- cient amount and currency structure stances, by providing an adequate level (at the level of each currency) for the of liquid assets based on an analysis of smooth settlement of liabilities, which needs for liquidity, as well as reviewing includes estimating the expected cash changes in the structure of the Bank’s flows for a period of 30 days, balance sheet and off-balance sheet posi- • Reviews and monitors the long-term tions. liquidity position based on the projec- tions of liquidity gaps, i.e., monitor- During 2020, the Bank’s liquidity level was ing the compliance of cash inflows above the minimum required, and the and outflows on the basis of balance Bank placed excess liquidity in debt secu- sheet and off-balance sheet items in rities of the Republic of Serbia. All liquid- the long run, ity indicators were in line with regulatory • Provides diversified sources of fund- and internally set limits. Stress tests per- ing, formed on a quarterly basis and within • Maintains liquidity reserves, includ- the recovery plan showed the Bank’s high ing a portfolio of securities issued by resilience to potential stressful situations.

OTP banka Srbija A.D. Beograd 43 11

In the process of diversifying the sources of funding, in 2020 the Bank successfully worked to preserve the stability of the deposit base of both retail and corporate, with further diversification in terms of maturity structure and cost reduction.

44 Annual report 2020. the state or the NBS, at an adequate Interest Rates Risk level and structure, • Places liquidity surplus within the Interest rate risk is defined as the risk defined limits. of possible negative effects on the financial result and capital of the Bank due to The Bank manages liquidity in a way that unfavourable trends in the interest rates ensures the stability, diversification, and market. The main types of interest rate flexibility of the sources of funding. risk are the risk of maturity time mis- match (for items of assets and liabili- In the process of diversifying the sources ties related to a fixed, invariable interest of funding, in 2020 the Bank success- rate) and re-determination of prices (for fully worked to preserve the stability of items related to variable interest rate), the deposit base of both retail and corpo- yield curve risk, base risk and embedded rate, with further diversification in terms options risk, i.e. optionality risk. of maturity structure and cost reduction. The Bank also achieves diversifi- The process of managing the interest rate cation of funding sources by contracting change risk involves monitoring, identify- loan arrangements with the international ing, measuring, and mitigating the effects financial institutions and the parent bank that adverse interest rate movements can and its affiliates. have to the financial result and capital of the Bank. Measurement of the impact of The achieved liquidity indicators are pre- the interest rate risk to the Bank’s finan- sented in the following table: cial result can be made by calculating changes in the net interest margin in cer- The daily indicator of the tain scenarios of future trends of market 2020 2019 level of liquidity interest rates (NIM sensitivity analysis), Period average 1.90 1.68 while the measurement of the impact of Highest 2.36 2.17 the interest rate risk to the Bank’s capi- Lowest 1.45 1.37 tal is made by monitoring the change in On December 31 1,89 1,99 the economic value of capital in the event of a change of interest rates (EVE sensi- In accordance with the applicable reg- tivity analysis). ulations, the Bank also calculates the Liquidity Coverage Ratio (LCR), which is In order to adequately manage the inter- a measure of the bank’s ability to pro- est rate risk, the Bank has established vide sufficient liquid assets in order to limits that are monitored on a regular fulfil all outstanding liabilities under the basis. Compliance with the limits is reg- assumed stressed conditions. The Liquid- ularly reported to the relevant boards ity Coverage Ratio (LCR) during 2020 was (Assets and Liabilities Management above the regulatory and internally pre- Board of the Bank, Executive and Man- scribed limit and ranged between 113% agement Board). During 2020, the Bank and 140%, and on 31 December 2020 it followed the defined limits. amounted to 130%.

OTP banka Srbija A.D. Beograd 45 12 Capital management and capital adequacy indicators

The Bank’s capital level that is considered as adequate is the level of capital that ensures the implementation of the Bank’s strategy and business policy, and at the same time provides cover for all the risks that the Bank is exposed to in its operations.

46 Annual report 2020. The basic strategic goal of the Bank in The central role in the capital manage- terms of capital management is the effort ment process is the Bank’s management to use the available capital resources - the Assembly, Board of Directors, and economically and in accordance with the the Executive Board. It is the responsibil- defined business development prospects ity of the Bank’s Assembly to decide on all of the Bank. The Bank’s capital manage- capital increases, as well as the adoption ment policy priority is to cover the poten- of the Bank’s business policy and strat- tial losses of the Bank and the resulting egy, which defines the input data for the negative effects arising from risk expo- Bank’s capital planning for the next busi- sure, in relation to yield performance. In ness year. the process of capital management, the focus in on continuous monitoring of capi- It is within the competence of the Bank’s tal adequacy. The Bank’s capital level that Board of Directors to establish a strategy is considered as adequate is the level of for risk management and risk supervi- capital that ensures the implementation sion that the Bank takes over as part of its of the Bank’s strategy and business pol- business activities, which affect the level icy, and at the same time provides cover of the Bank’s capital adequacy, as well for all the risks that the Bank is exposed as the strategy for managing the Bank’s to in its operations. Capital management capital. is based on: Within the function of the Bank’s strategic • The process of risk identification, risk management, the Executive Board of measurement, and assessment, the Bank proposes the Bank’s business • Ensuring an adequate level of capital policy and strategy of the Bank, capital in accordance with the risks that the management strategy, and risk manage- Bank is exposed to in its operations, ment strategy and policies to the Board • Adequate incorporation of capital of Directors, implements all these policies management into the Bank’s manage- and strategies and adopts the procedures ment and decision-making system, to identify, measure, assess and monitor • Regular analyses, monitoring and ver- the risks to which the Bank is exposed in ification of the capital management its business operations, and which affect process of the Bank. the adequacy of the Bank’s capital and hence the future business decisions.

OTP banka Srbija A.D. Beograd 47 12

Within the process of capital manage- Tier 2 consists of subordinated liabilities ment, the competence of the Executive that are included in the supplementary Board of the Bank is to incorporate the capital of the Bank in accordance with the planning of capital into all business deci- valid Decision on capital adequacy. sions and procedures related to business planning, timely inform the Board In accordance with the valid Decision on of Directors of the needs for capital and capital adequacy, the Bank is obliged to enable adequate reporting of the bank’s calculate the following indicators: external supervisory authorities on the level of capital adequacy. Considering • the Bank’s basic Common Equity Tier that the Bank’s capital management is 1 capital adequacy ratio which is equal in high correlation with the risk profile of to the ratio of the CET1 capital and the the Bank, in addition to the Bank’s orga- risk-weighted assets of the Bank and nizational parts belonging to the stan- cannot be below 4.5%, dard management hierarchy, the Bank • the Bank’s Tier 1 capital adequacy has established a number of committees ratio which is equal to the ratio of the in charge of monitoring the exposure to Tier 1 capital and the risk-weighted existing risks, as well as planning and assets of the Bank and cannot be anticipating the potential exposure to new below 6%, types of risks. • the Bank’s total capital adequacy ratio, which is equal to the ratio of the total Capital of the Bank in 2020 capital and the risk-weighted assets of the Bank and cannot be below 8%. The total capital of the Bank consists of Common Equity Tier 1 capital, additional Also, the Bank is required to maintain Tier 1 capital, and Tier 2 capital. capital adequacy ratios increased in a manner that allows it to cover the com- The Tier 1 capital of Bank consists of: bined capital buffer requirements. share capital based on ordinary shares, share premium, revalorization reserves, The Bank’s risk assets represent the sum profit reserves, regulatory adjustments of the total amount of risk-weighted expo- of value of the Bank’s basic share capital sure to loan risk, counterparty risk, and elements value, intangible investments, price risk for trading book activities, for- deferred tax assets that are dependent on eign exchange risk, and risk of adjusting the future profitability of the Bank, other loan exposure for all business activities than those arising from temporary dif- the bank and for operational risk. ferences, decreased for deferred tax liabilities and other deductible items prescribed by Decision on capital adequacy.

48 Annual report 2020. In 2020 the level of capital and the indicator of adequacy had the following trend:

Capital In RSD 000 JUN 2020 DEC 2020 Total capital 56,192,111 57,165,154 Tier 1 capital 47,139,338 48,467,308 Common equity Tier 1 capital 47,139,338 48,467,308 Share capital and share premium 23,724,274 23,724,274 Profit reserves 22,661,416 24,043,492 Revalorization reserves 1,844,228 1,645,008 Intangible investments -718,229 -706,647 Deductible items related to DTI ratio and maturity exceeding in -275,733 -196,880 case of cash, consumer, and other loans placed to retail segment

Deferred tax assets dependent on the future profitability -55,717 0 Other regulatory adjustments -40,902 -41,939 Additional Tier 1 capital 0 0 Tier 2 capital 9,052,773 8,697,846 Subordinated obligations 9,052,773 8,697,846 Total risk-weighted assets 266,556,507 278,680,286 Total risk-weighted assets for credit risk 236,689,217 247,741,107 Total risk-weighted assets for market risk 772,433 783,729 Total risk-weighted assets for operational risk 28,961,469 30,041,346 Total risk-weighted assets for CVA risk 133,388 114,104 Total capital adequacy ratio 8% 21.08% 20.51% Tier 1 capital adequacy ratio 6% 17.68% 17.39% CET 1 adequacy ratio 4.5% 17.68% 17.39%

During 2020, the Bank maintained the level of capital adequacy in regulatory frame- works.

During 2020, there was no need for recapitalization in the form of the new issue of shares.

OTP banka Srbija A.D. Beograd 49 13 Consolidated financial indicators of the bank

50 Annual report 2020. 1. Consolidated income statement

RSD 000 2020 2019 VAR 20/19 OPERATING INCOME 15,593,110 16,453,274 -5,2% Interest income 13,618,804 14,599,404 -6,7% Interest expense -1,474,288 -2,288,423 -35,6% Net income from interests 12,144,516 12,310,981 -1,4% Fee and commission income 5,050,986 5,713,494 -11,6% Fee and commission expense -1,942,632 -2,269,972 -14,4% Net income from fees and commissions 3,108,354 3,443,522 -9,7% Net gain (loss) based on change of fair value of financial instruments -612,355 270,188 Net gain (loss) based on cease of recognition of financial instruments 0 141,097 valued based on fair value Net income (expense) from exchange rate differences and effects of 576,160 -331,434 contracted currency clause Net gain from investments in associates and joint ventures 53,064 37,614 Other operating income 16,805 13,857 Other income 306,566 567,449 OPERATING EXPENSE -7,880,922 -8,564,566 -8,0% Salaries, wages and other personal expenses -3,458,724 -3,358,897 3,0% Depreciation costs -833,588 -841,664 -1,0% Other expenses -3,588,610 -4,364,005 -17,8% REGULAR OPERATING PERFORMANCE 7,712,188 7,888,708 -2,2% Net income/expense based on decrease of impairment of financial -5,425,697 -3,015,961 79,9% assets that are not valued at fair value through income statement Net (loss)/gain based on cease of recognition of financial instruments valued 46,391 149,987 based on depreciated value INCOME BEFORE TAXES 2,332,882 5,022,734 -53,6% Income tax -241,249 -648,716 Deferred taxes gain (loss) -19,234 199,917 INCOME AFTER TAXES 2,072,399 4,573,935 -54,7%

OTP banka Srbija A.D. Beograd 51 13

The total operating income of the bank Total operating expenses at the end of reached RSD 15.6 billion (EUR 132.6 mil- 2020 amounted to RSD 7.9 billion (EUR lion), which is a -5.2% (RSD -860,2 mil- 67 million), which is by 8.0% (RSD 683,6 lion) drop compared to the previous year. million) below the 2019 level, mainly as The biggest impact on the decline in total a consequence of lower other expenses. operating income comes from net fee Within other expenses, the biggest cost and commission income by -9.7% (RSD reduction was achieved on deposit insur- -335.2 million), which mostly stems from ance costs (RSD 352 million), on trans- the decline in net payment card income portation costs for employees and other (RSD -237 million), as well as from the travel expenses (RSD 36 million), and decline in total net income from financial the rest comes from efficient cost con- transactions (RSD -66 million), primarily trol in most positions, as well as reduced as a consequence of the strong effect of write-offs compared to the previous year the pandemic and the state of emergency (related to the integration process). during the second quarter of 2020. Also, net income from interests of RSD 12.1 bil- In 2020, the bank generated a profit after lion (EUR 103.3 million) was at a slightly taxes of RSD 2.1 billion (EUR 17.6 mil- lower level compared to 2019, with a lion) at the consolidated level, which is a decrease of -1.4% (RSD -166.5 million), -54.7% (RSD -2,5 billion) decrease com- mainly as a result of decrease in inter- pared to 2019. The decline in net results, est income. Despite the strong growth of in addition to a slight decline in net oper- the loan portfolio during 2020, lowering ating result (-2.2%, RSD -176.5 million), the dinar reference interest rate several was primarily influenced by net expense times during the year to the level of 1% based on decrease of impairment of (the level of the reference rate in Decem- financial assets that are not valued at fair ber 2019 was at the level of 2.25%), as value through income statement, marking additional support to economic recovery, an increase of RSD -2.5 billion, which is affected the decline in all basic dinar rates primarily due to the prudent cost of risk and thus the nominal decline in interest policy during 2020, with regard to the income, as well as the decline in the aver- pandemic and the effects of COVID-19. age net margin during 2020.

52 Annual report 2020. 2. Consolidated balance sheet

Assets in RSD 000 31/12/2020 31/12/2019 VAR 20/19 Cash and assets with the central bank 52,426,136 39,923,288 31,3% Pledged financial assets 1.000.000 - Receivables coming from derivatives 158,115 145,131 8,9% Securities 40,515,224 41,346,380 -2,0% Loans and receivables from banks and other financial organizations 1,948,385 1,667,210 16,9% Loans and receivables from customers 289,926,094 258,605,611 12,1% Retail 140,236,011 119,607,464 17,2% Corporate 149,690,083 138,998,147 7,7% Investments in associates and joint ventures 357,620 304,556 17,4% Investments in subsidiaries - - Intangible investments 706,647 808,541 -12,6% Real estates, plants and equipment 3,736,017 3,592,792 4,0% Investment real estates 15,590 16,164 -3,6% Current tax assets 783,208 410,885 90,6% Deferred tax assets - - Other assets 1,149,716 1,846,147 -37,7% Total assets 392,722,752 348,666,705 12,6% Liabilities 31/12/2020 31/12/2019 VAR 20/19 Liabilities coming from derivatives 200,386 189,074 6,0% Deposits and other financial liabilities to banks, other financial 119,108,904 100,900,513 18,0% organizations and the central bank Deposits and other financial liabilities to other customers 204,957,343 181,867,166 12,7% Retail 96,177,952 89,819,807 7,1% Corporate 108,779,391 92,047,359 18,2% Subordinated obligations 9,427,824 9,429,522 0,0% Provisions 2,053,902 1,344,864 52,7% Current tax liabilities 0 0 Deferred tax liabilities 23,973 86,083 -72,2% Other liabilities 4,240,420 3,952,315 7,3% Total liabilities 340,012,752 297,769,537 14,2% Capital 31/12/2020 31/12/2019 VAR 20/19 Share capital 23,724,274 23,724,274 0,0% Gain 2,866,821 8,474,344 -66,2% Loss - - Reserves 26,118,905 18,698,550 39,7% Total capital 52,710,000 50,897,168 3,6% Total liabilities 392,722,752 348,666,705 12,6%

OTP banka Srbija A.D. Beograd 53 13

54 Annual report 2020. The consolidated balance sum is The corporate sector reached RSD 149.7 increased by 12.6% to RSD 392.7 billion billion (EUR 1.3 billion), recording a 7.7% (EUR 3.3 billion) in 2020, from RSD 348.7 growth compared to the previous year, billion (EUR 3 billion) at the end of 2019. due to the continued dynamic growth in the corporate segment. A significant At the end of 2020, the amount of loans increase in leasing portfolio of 6.6% to customers reached RSD 289.9 billion compared to the previous year has been (EUR 2.5 billion), which is an increase of achieved as well. 12.1% compared to the previous year. The positive trend of increase in place- Total deposits at the end of 2020 reached ments in the retail segment continued RSD 205 billion or EUR 1.7 billion (+12.7% in 2020 and amounted to 17.2% com- compared to 2019). The retail deposits pared to 2019, i.e., it reached the level of at the end of 2020 reached RSD 96.2 bil- RSD 140.2 billion (EUR 1,2 million), which lion (EUR 818 billion, +7.1% compared is largely a result of increase in place- to 2019). On the other hand, corporate ments of cash (+22.3%) and housing loans deposits reached RSD 108.8 billion (EUR (+14.6%). 925 million) in 2020, which is an increase of 18.2% compared to 2019.

OTP banka Srbija A.D. Beograd 55 14 Future development of the Bank

56 Annual report 2020. Favorable macroeconomic trends from lowering interest rates on dinar loans to the previous year continued at the begin- the new lowest level so far. The National ning of 2020 in the Serbian market, but Bank of Serbia has taken additional mea- since March, as in other European coun- sures to support the real sector, provid- tries and countries worldwide, economic ing a significant amount of dinar and for- activity in the country has been negatively eign currency liquidity to banks through affected by the corona virus pandemic. direct repo operations, swap auctions and The crisis caused a significant decline in bilateral purchases of dinar government economic activity in the second quarter securities from banks. A moratorium on of 2020. The National Bank of Serbia and repayment of loans and financial leasing the Government of the Republic of Ser- obligations has also been prescribed in bia have accordingly adopted a signifi- order to alleviate the burden of the crisis cant package of monetary and fiscal stim- on the citizens and the country’s econ- ulus measures to support the economy omy. In July, stimulative measures were in overcoming the negative effects of the introduced within the guarantee scheme pandemic. of the Government of the Republic of Ser- bia, which contribute to better conditions At the beginning of March, the National for lending in RSD currency to the corpo- Bank of Serbia decided to lower the ref- rate sector, and thus increase the degree erence interest rate by 50 basis points to of dinarization and further strengthen 1.75%. Also, at the sessions held in April, financial stability. June and December, the reference interest rate was lowered by 25 basis points Despite the uncertainty regarding the to 1.00%, since the proportions of the cri- pandemic, the National Bank of Serbia sis worldwide caused by the pandemic revised the GDP growth projection for required additional support from the 2020 upwards (to the level of -1%) as a monetary policy. This provides additional result of faster recovery of industrial pro- support to the domestic economy, given duction, smaller decline in investments, the repeated deterioration of the epide- better performance of the service sec- miological situation and slowing down of tor and better agricultural season. A swift the economic recovery, and contributes economic recovery driven by domestic to a further decrease in interest rates on demand and exports is expected next the interbank money market, as well as to year, with an economic growth rate of

OTP banka Srbija A.D. Beograd 57 14

The commercial activity of OTP banka Srbija (OTP) remained stable during 2020. despite the unfavorable economic environment, which is the result of quality operations in the corporate and retail sector through stable production of cash, consumer and housing loans

58 Annual report 2020. around 6%. The commercial activity of Vojvodjanska banka is expected to be OTP banka Srbija (OTP) remained stable completed. OTP banka remains focused during 2020. despite the unfavorable eco- on strengthening customer relations, as nomic environment, which is the result of well as improving efficiency, which con- quality operations in the corporate and tributes to excellent commercial results retail sector through stable production in all segments: of cash, consumer and housing loans, enabling the Bank to maintain the position • In the retail segment, the Bank contin- of one of the leading banks in the market ued to improve its product offering as (fifth in terms of assets, third in terms of well as tariffs, simplifying the process loans, and fifth in terms of total deposits of accepting new clients and activities at the end of the third quarter of 2020). aimed at reducing customer churn, as well as improving the process of On September 24, 2019, the Bank approving small business loans. changed its ownership structure, fol- • In the corporate segment, the pro- lowing the completion of the acquisition active approach to the development process in which OTP Bank Plc Budapest of client cooperation with the Bank bought 100% of the shares from the pre- in all operating segments continued, vious owner - Societe Generale SA Paris. as well as support through additional By doing so, the Bank became a member lending for various needs, including of the OTP Group, a dominant player in the loans from the business support pro- Central and Eastern European region. At grams, so-called guarantee schemes. the same time, the Bank changed its busi- In addition to focusing on clients, the ness name to OTP banka Srbija AD Beo- bank continued with the integration grad. In addition to the strategic goals of process in order to ensure the effi- the OTP Group to increase market share ciency of future processes and main- in the countries in which it operates, the tain the quality of services after the business policy includes the success- integration of the two banks. ful completion of the integration project at the end of April 2021 and the merger The Bank’s innovative approach, cus- with Vojvodjanska banka. That is why OTP tomer focus, together with the expected banka created its plan for 2021 up to April growth of the economy in 2021, lower 2021, when the integration process with unemployment and higher wages leading to increased spending and lending activity, will enable OTP banka to further strengthen its commercial activity and consolidate its rating among leading market players.

OTP banka Srbija A.D. Beograd 59 15 Affiliates

60 Annual report 2020. OTP Leasing Srbija Owing to the applied technological innovations, improved processes, and excel- OTP Leasing Srbija, a company involved lent cooperation with the partners, as well in financial leasing, which is 100% owned as the support of OTP banka, the company by OTP banka Srbija, was established in achieved remarkable results in 2020. A 2006. In a relatively short time, the Com- total of 2,659 new contracts were con- pany managed to take up a good position cluded, while new placements amount to in the market, with constant improvement EUR 73.11 million. In 2020, due to the cri- in its financial market domain, despite sis caused by the coronavirus, the costs of the intensity of the effects of the global provisions increased, so that the financial financial crisis. At the end of the year, OTP result at the end of the year was signifi- Leasing ranked first in the financial leas- cantly lower compared to previous years. ing market in terms of total assets. When Profit after tax is RSD 2.12 million. it comes to new placements, the company held the second position in 2020 and is OTP Osiguranje (OTP Insurance) the leader in the financing of passenger Srbija vehicles. In 2020, OTP Osiguranje a.d.o. Društvo At the end of 2019, there were 59 employ- za životno osiguranje Beograd has main- ees, who, as always, received the support tained a positive trend in its business, of all staff members of the OTP banka despite all the challenges that arose Srbija branch network where OTP Leas- during the pandemic. OTP Osiguranje has ing Srbija’s products are available. further improved its business results, so that at the end of 2020, the Company’s The successful cooperation with import- net profit amounted to RSD 108 million, ant partners in financing passenger and which is an increase of 40% compared to commercial vehicles and agricultural 2019 and a 7% better result than planned machinery for the needs of legal entities for this year. In 2020, OTP Osiguranje con- continued, as well as successful cooper- tinued with the business optimization ation with partners in the field of financial and digitalization of the work process, leasing for natural persons. OTP Leasing and began its cooperation with Vojvod- maintained continuity in cooperation with janska banka, which also included sell- the long-standing partners for the pro- ing life insurance. In 2021, it plans further curement of passenger and commercial activities on the digital transformation of vehicles, as well as agricultural machin- business strategy and the use of the full ery. sales potential of the new, united Bank, all with the aim of expanding the customer base and ensuring revenue growth in the long run.

OTP banka Srbija A.D. Beograd 61