A Year of Sustainable Growth

A year of Sustainable Growth

TEB SH.A. Annual Report 2014 CONTENTS

ABOUT TEB SH.A. 2 CORPORATE PROFILE 4 OUR VISION, MISSION AND STRATEGY 6 OUR CORE VALUES: 7 SHAREHOLDER’ S STRUCTURE

2014 OVERVIEW AND 2015 OUTLOOK 10 MACROECONOMIC OVERVIEW 12 MESSAGE FROM THE CHAIRMAN 13 MESSAGE FROM THE CEO

TEB SH.A. IN 2014 16 2014 AT A GLANCE 18 TEB IN FIGURES 20 KEY FINANCIAL INDICATORS

ACTIVITIES AND PROJECTIONS 22 INDIVIDUAL BANKING 24 CARD BUSINESS 26 SME BANKING 28 COMMERCIAL AND CORPORATE BANKING 30 TRADE FINANCE 31 CASH MANAGEMENT AND PAYMENT SYSTEMS 32 TRADE FINANCE 33 TREASURY 34 HUMAN RESOURCES 36 ORGANIZATION AND PROCESS DEVELOPMENT 37 INFORMATION TECHNOLOGY 38 INFORMATION SECURITY AND DATA PERSONAL DATA PROTECTION

MANAGEMENT / CORPORATE GOVERNANCE 40 BOARD OF DIRECTORS 42 COMMITTEES 45 INTERNAL AUDIT 46 RISK MANAGEMENT 48 COMPLIANCE, INTERNAL CONTROL AND OPERATIONAL RISK

FINANCIAL REPORTS 50 FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS FOR THE YEAR ENDED DECEMBER 31, 2014 Activities and Projections Management / Corporate Financial Reports Governance

BEING A RESPONSIBLE BANK FOCUSING ON THE FUTURE: WE WILL STRIVE TO FURTHER INCREASE OUR CUSTOMERS’ SATISFACTION.

DRIVEN BY A STRONG SERVICE PROVIDED TO INDIVIDUAL PEOPLE AND BUSINESSES ALIKE, TEB SH. A. HAS ALWAYS REGARDED ETHICS AS CENTRAL TO ITS MISSION. THE RELATIONSHIP OF TRUST WITH ITS CLIENTS THAT THE BANK HAS BUILT UP OVER TIME TODAY CONSTITUTES ITS NUMBER ONE ASSET.

OUR VALUES • HONEST AND TRUSTWORTHY • LEADING, PIONEERING AND INNOVATIVE • CUSTOMER ORIENTED WITH A STRONG FOCUS ON HIGH QUALITY • RESPECTFUL TO SOCIETY, HUMAN RIGHTS AND ENVIRONMENT • TRANSPARENT

TEB SH.A. 2014 ANNUAL REPORT 01 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

CORPORATE PROFILE

Being a Responsible Bank The systematic, year-on-year growth in our service network, number of customers, transaction volumes and Focusing on the future: we will strive to further human resources is a confirmation that we: increase our customers’ satisfaction. • continually expand the range of our non-branch After seven successful years in Kosovo, TEB Sh. A, or banking products and services. We offer all manner TEB as many of our clients call us, has become one of of quality-focused banking products and services that the foremost names in the banking sector, earning a people need at different stages in their lives - all through well-deserved reputation for excellent service. We have our extensive and multi-channel delivery network. systematically pioneered meeting the banking and financial needs of individuals and businesses by launching • offer optimal financial solutions to private banking numerous ‘firsts’ for the Kosovo market throughout our customers based on a “personalized service” approach. seven-year history. • outperform the industry in terms of growth in credit In a rapidly changing world, TEB is there to consistently cards, growth that is enhanced continuously by new support customers and employees. This ability is also products and services, as well as through specific card based on our position as a prominent member of the campaigns organized with another customer group, our TEB Group. The Group was formed through a joint merchant members. venture between one of the world’s strongest financial institutions, BNP Paribas, and one of the most reputable • maintain our strong position in retail cash management banks in Turkey, Turk Ekonomi Bankasi. services.

We aim to be a responsible bank. That is why we pursue • provide the commercial banking support that is a key a range of socially responsible activities that contribute driver in the roadmap to future economic growth in to social development. For TEB, corporate social Kosovo. Every year, we reinforce our already strong responsibility is a highly valuable and fundamental tool focus on supporting TEB’s hundreds of thousands that complements our economic mission. So, in addition of commercial and SME customers as they play to providing excellent, innovative and responsible service an increasingly important role in the economic to our customers, we also undertake projects that are development process. designed to make a difference in education, culture and With these factors in mind, we were the first to introduce: sports. All aimed at positive impacts for the broadest possible number of people in Kosovo. • a Direct Debit System which helps companies maintain their liquidity through a self-monitoring system to What we do decrease their financing costs; For TEB, the customer is at the center of everything we do. • an installment-based credit card called the StarCard Our customers are special and valued. This is expressed which had multi-impacts on many levels of society in in all of the specially-designewd products and services Kosovo: it helped increase consumption, grew company that we offer to different groups of customers, ranging turnover, and indirectly enabled the further restriction of from entrepreneurs to pensioners and from employees to the country’s informal economy. students. • an Agro Credit Card that enables farmers to buy their inputs on installment while increasing cash collection for merchants selling those inputs.

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How we do it Loan and Green StarCard and the Agro Card. In terms of business support, we are working through the Women’s As a member of two strong international financial groups Entrepreneurship Support Program, the Business Academy – TEB A.S., a highly reputable and premier financial and the Business Forum. institution in the Turkish banking sector and BNP Paribas, one of the eurozone’s top banks with an extensive Our sports commitments include cooperation with the and international network – TEB benefits from Group Basketball Federation of Kosovo and support for the experience, solidity and range. This enables us to generate “Dielli TEB Open” tennis tournament. Our parents, TEB AS the best outcomes for our clients. and BNP Paribas, are already long-standing sponsors of major international tennis tournaments. In the arts, we From these sound foundations, TEB continues to progress are supporting philanthropy through sponsorship of the by enhancing the quality of its services and by developing Hand-to-Hand music project. TEB has been associated products tailored to customer’s expectations. In line with with the Vihuela Guitar Festival since 2010 and we are rapid advances in technology, we. systematically improve providing sponsorship for a prestigious music video our innovative multi-channel banking network (such as festival. E-banking, Call Center, SMS Services, ATMs, POS) allowing customers to utilize the most suitable distribution channel TEB’s working for customers for their banking transactions - conveniently, quickly and reliably. TEB owes its success story to our people who bring our innovative and proactive approach to customers, work What we stand for hard to maintain and grow the quality of our services and the assets our brand name represents. Our goals are to Since TEB was established in 2008, we have had a help people and businesses build their future, to realize pioneering position. As a strong full-service bank, we their ambitions and to help them manage their financial have focused on responding to customer demand for risks. We want to be a financial institution our customers financial services. Over the years, we have been able feel comfortable with. to put our corporate competencies and vision to work effectively, producing added value for both customers With 25 branches, 53 ATMs, 3,500 POS Terminals and and shareholders. In 2014, we continued to pursue our our team of relationship managers who provide tailored – now expected - balanced and healthy growth, further advice and service to our customers, we believe this reinforcing our position as the country’s strongest financial extensive domestic service delivery network is what institution. This gives us an even firmer foundation for our defines TEB’ s scale and service delivery strength. future as an important force in Kosovo.

Corporate social responsibility plays a significant role. Our policy is to contribute to Kosovo’s social development. We have created a framework of long-term initiatives based on a range of projects that will create the highest social benefits. These include projects such as the Green

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OUR VISION, MISSION AND STRATEGY

Our Vision Our Strategy Our vision is to be the best bank in In line with our vision and mission, Kosovo. our strategy is to provide an outstanding and efficient banking Our Mission experience for all our customers. We To continually create and increase achieve this by offering innovative outstanding value for our customers, and practical products and shareholders, employees and society. services to achieve continuous and sustainable growth. TEB’s offering is always founded on our commitment to being a responsible bank. This is embedded in all our values and is reflected in our business, the way we develop products and services and how we deliver on our goals and promises.

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We act with integrity, we are open and clear, we respect each other, and we are socially and environmentally responsible. This translates into: 5 Major Strategic Priorities

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OUR CORE VALUES:

Customer-centricity Innovation

Our success is based on complete commitment to We aspire to innovations that matter. TEB values our customers at all times, earning us the trust and enthusiasm coupled with intellectual curiosity in our loyalty of our customer base. We maintain that trust people as they continuously seek to create products by always placing our customers at the heart of that will facilitate our customers’ success and everything we do. Customer needs and expectations provide suitable solutions to their needs. are our drivers through our fast, proactive approach and response to rapidly-evolving requirements. Operational Efficiency This enables us to create and deliver true value as We build processes and products that are user- we serve our customers with innovative, above- friendly, easy to access and designed to add value. expectation, tailored and trend-setting products and We strive to ensure that the services offered to our services. customers are priced in a way that equates fairly Integrity with the actual cost of providing them.

We have embraced the highest standards of Discipline integrity in everything we say and do and we We think and act like owners of the Bank, so we commit to creating added value for our customers, protect its resources and focus on shared rather than shareholders and employees by always doing more individual goals. We are proud of TEB’s successes than just what is right. We communicate openly and and the value we create for our shareholders and honestly, we invite and appreciate challenging views customers. Every one of our 555 employees feels aimed at generating better ideas and reaching more responsible if we fail to meet customer expectations appropriate and balanced decisions. and we are all accountable for delivering on our We generate value for our shareholders through promises – there are no excuses. We strive for long-term success rather than short-term gain. operational excellence by getting it right first time. So our objective is for our core business to deliver sound and strong operating profitability and dividends through an entrepreneurial spirit that balances risks and returns responsibly.

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Competent HR Strong distribution channels

We seek to strengthen our position as an employer We strive to offer services and support to our of choice and strive to create a culture that attracts customers at their own convenience by providing talented individuals, fosters diverse yet responsible diverse distribution channels, including our branch and agile collaborative teamwork, nurturing and offices, call center, direct sales and extensive investing in the best talents, and management alternative distribution channels. based on merit and equal opportunities.

Partnership

We pursue lasting and mutually beneficial customer and employee relationships in which the value created is shared fairly. We are responsible partners with all our stakeholders and regulators, and in serving society.

SHAREHOLDER’ S STRUCTURE

The share capital of the Bank is €24,000,000 based Number of shares relates to ordinary shares with no on 2,400,000 issued shares each with a par value of rights, preferences or restrictions attached to them. €10.

Ownership Structure as of December 31, 2014

Shareholder as of December 31, 2014 Share Ownership Paid in Capital (C) Share TEB HOLDİNG A.Ş.* 24,000,000 100%

*50%-50% BNP Paribas Fortis Yatırımlar Holding A.Ş.and Çolakoğlu Group Joint Venture

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Success OUR SUCCESS IS BASED ON COMPLETE COMMITMENT TO OUR CUSTOMERS AT ALL TIMES, EARNING US THE TRUST AND LOYALTY OF OUR CUSTOMER BASE.

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TEB SH.A. 2014 ANNUAL REPORT 09 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

MACROECONOMIC OVERVIEW

THE MOMENTUM IN US GROWTH, NOTABLY, IS STRONGER THAN ENVISAGED, WHILE THE RECOVERY IN THE REMAINDER OF THE BIG ECONOMIES IS FALLING SHORT OF THE EXPECTATIONS.

Lower oil prices would support expectations. Against this backdrop, global growth in 2015, but growth the Fed is expected to embark on a divergences across major economies rate-hiking cycle possibly in September would remain evident. The negative but take only gradual steps during the factors, including investment course of policy normalization. weakness as adjustment to diminished The economic performance in all other expectations about medium-term major economies, on the other hand, growth continues in many advanced has been falling short of expectations. and emerging market economies. Economic activity in the euro area Sluggish medium-term growth would be supported by lower oil expectations continue in many prices, the ECB’s sizeable QE program, advanced and emerging market a weaker euro and a more neutral economies. fiscal stance. The expected fall in The momentum in US growth, notably, inflation from 0.2% y/y in Q4 to -0.6% is stronger than envisaged, while y/y in Q1 should lead to a 0.8pp gain the recovery in the remainder of the in real compensation growth in the big economies is falling short of the Eurozone from 2% y/y in H2 2014.

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Oil price-induced purchasing power inflation are still concerns in the euro gains are not permanent income area and in Japan. The slowdown in effects, as they will fade when inflation Chinese growth would also be a drag rebounds due to energy base effects, on emerging markets, particularly hence would provide only a temporary in Asia. With further EUR and JPY boost. Rebalancing in the Eurozone weakness likely, the tempo of policy also means that not all income gains easing across Asia is likely to pick up feed through to consumption. Yet, to offset real currency appreciation, weaker investment prospects and falling inflation and slowing growth. political risks could offset these factors. Furthermore, as the Fed hikes rates, The drop in the oil price has been a capital flows into emerging markets of godsend for Japan. However, for BoJ recent years could reverse course, and in its quest to rapidly reach the bank’s cause episodes of emerging-market 2% inflation target, it has not been volatility. so ideal, as the economic stimulus of low oil prices will come at the cost of lower inflation. Stagnation and low

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MESSAGE FROM THE CHAIRMAN

Dear Customers, Business Partners and have adopted a balanced approach that Shareholders, always takes into account the interaction of risk, return, capital and liquidity. In TEB Sh.A has the ambition to be the best terms of its financial structure, TEB Sh.A bank in Kosovo. In line with this ambition, has avoided aggressive growth policies the Bank has drawn on all the solidity, that would have a leveraged impact on experience and expertise of its parents its balance sheet. Instead, the Bank has to create considerable resources for the systematically displayed a more cautious Kosovo economy. approach than ever in risk management.

The reporting year, 2014, has been an In addition to a strong operational and active period in the global economy. financial performance, in 2014 TEB Sh.A Despite challenges, forecasts indicate has also continued and scaled up its the European economy will still continue activities based on our principle of “giving to grow. On the other hand, emerging back to society”. We will continue to do markets that, following the 2008 global our best in line with our motivation and financial crisis, had been drivers of global responsibility to contribute to education, growth, appear to have lost some dynamic the environment, culture, arts and sports momentum. to help move our society - in which we live and to which we owe much - a further step According to the European Central Bank forward. (ECB), the average inflation rate in the Eurozone in 2014 declined to 0.4 percent. TEB Sh.A also continues to combine Throughout 2014 and supported by lower competitive edge with corporate capability TEB SH.A - ONE oil prices, consumers regained confidence at an optimum scale to produce added OF THE MOST and the unemployment rate stopped rising value as we interpret and translate DEEP-ROOTED in the eurozone. As a result of stronger the banking and social needs of the domestic and external demand, we expect community. INSTITUTIONS IN that access to finance will accelerate. KOSOVO’S BANKING There is no doubt that the most important SECTOR CONTINUED From the perspective of Kosovo, in force behind the successful completion recent years continuation of economic of this year is the competence, loyalty ITS CONSISTENT growth enabled the country to maintain and dedicated efforts of our employees CUSTOMER-ORIENTED macroeconomic stability and has and managers. Finally, I would like to APPROACH IN 2014. generated an average GDP growth express my gratitude to my colleagues, our rate of 3.3%. However, in spite of many shareholders, our precious clients, partners investment opportunities, and the lack and all stakeholders. of strong competition in certain sectors, Kosovo’s business climate remains challenging.

TEB Sh.A was able to sustain its strong performance in 2014 through successful balance sheet management, high-quality Musa Erden asset structure, comfortable liquidity level Chairman of the Board of Directors and strong capital base. We, as TEB Sh.A,

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MESSAGE FROM THE CEO

Dear Customers, Business Partners and • Energy Efficiency Program that enabled Shareholders, many our retail and SME clients renew their energy efficient equipment thus This period of the year is the most suitable directly impact their energy bills, and time to look back to the year we have many other related activities that directly concluded and all the developments that impact the economic welfare in the featured it in local and global terms. The market. 2014 was undoubtedly a challenging year for us. Oil price volatility and the overall TEB Sh.A aims to become one of the most impact it had in global developments exemplary actors in the banking sector brought many economic uncertainties in through our successful financial results and our local markets as well. healthy growth performance, as well as through our socially responsible activities. Kosovo’s economy has shown significant TEB Sh.A ranks in the top three in terms progress in transitioning to a market-based of the loan outstanding portfolio. We are system and maintaining macroeconomic one of the best player in retail banking and stability, but it is also still dependent on have many acknowledged achievements the international community financial in the credit card business. In terms of and technical assistance and the diaspora business innovations, we have pioneered remittances. the market with the extensive range of products that have not only enhanced the Kosovo has recorded an average GDP business potential of SMEs but have also growth rate of 3.3% over the last few years, changed the behaviors and purchasing making it one of the few countries in the TEB SH. A’S power of individuals, thereby helping to region with positive growth in spite of the “CUSTOMER- grow Kosovo’s economy. Our corporate Eurozone crisis. I am delighted to say at this governance approach, which we preserve ORIENTED APPROACH particular moment that in spite of economic with utmost care, and our prudent risk TO BANKING” uncertainties, TEB SH.A demonstrated an management policies further contributed upsurge in its 2014 overall results proving CONTINUED AT FULL to a very successful year. itself as a bank with a sound base for SPEED DURING 2014; sustainable development. The point that OUR PRODUCT AND I would like to thank, first of all, our makes me feeling very delighted is that, employees, who are the greatest drivers SERVICES OFFERING the bank has achieved its extraordinary behind these successes; afterwards, our ENABLES THE BANK financial results not only through its core shareholders and our clients, who have commercial banking activities, but in given their trust to TEB Sh.A, and all our TO GROW EVER- addition brought several novelties in the CLOSER TO OUR social and economic stakeholders. Thank market such as; you for an inspiring year. CUSTOMERS. • Women Entrepreneurship Program that promotes access to finance for women in business,

• Business Academies for our SME clients that promotes our bank as an only non- Ayhan Albeyoglu financial services provider in the market, Managing Director

TEB SH.A. 2014 ANNUAL REPORT 013 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook Innovation WE ASPIRE TO INNOVATIONS THAT MATTER. TEB VALUES ENTHUSIASM COUPLED WITH INTELLECTUAL CURIOSITY IN OUR PEOPLE AS THEY CONTINUOUSLY SEEK TO CREATE PRODUCTS THAT WILL FACILITATE OUR CUSTOMERS’ SUCCESS.

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2014 AT A GLANCE

1) Green Loan launched Agro Card is the most recent bank product that backs Kosovar agribusinesses and TEB Sh.A sets high standards when it purchases by farmers of agricultural comes to the impact of its operations inputs and equipment. The card offers on the environment. In 2014, the Bank interest-free rates and up to a six-month expanded its cooperation with the grace period. The Agro Card successfully European Bank for Reconstruction and combines the three points in the sector’s Development (EBRD) by introducing the economic triangle: the farmers, the ‘Green Loan’. merchants and the Bank. By bringing all three together in a virtuous triangle, all TEB’s Green Loan is designed to financially enjoy benefits. At the peak of the season, it support individual (residential) and also provides farmers with the opportunity business clients in investments that to make purchases with a six-month grace contribute to increased energy efficiency. period and no interest. On the other side, We were the first to introduce this type the merchants guarantee their payments of product, in cooperation with the and by the effect of this, they increase EBRD. Borrowers can use the loan to sales. As being in the middle of these make energy-saving and environmentally processes, the Bank manages the cash flow friendly investments that will reduce within farmers and merchants. their energy bills and footprint. The loan can only be used for projects that 3) The Bank goes Hand-to-Hand will contribute to improved energy performance of residential buildings This project is an initiative of the Kosovo and promote the use of energy from Philanthropists, a non-profit organization renewable sources. This product also dedicated to helping orphans, children promotes the use of products with low with special needs and kids of all energy consumption that stimulate usage nationalities in Kosovo who live in poor of alternative energy sources. This product economic conditions. The organization is distinctive as it returns up to 20% of the aims to act as a voice for social issues loan amount to all clients that fulfill the in Kosovo. Hand-to-Hand therefore is criteria of each project. particularly apt as it is a song that has become the anthem of the summer camp Through this project, TEB aims to increase organized for needy children. It is in the awareness of proper energy usage and English in order to reach a larger number at the same time to inform them of the of (international) audiences with the aim benefits of using eco-friendly products. of setting up exchange programs and joint activities for the kids. Both the song 2) Agro Card and the accompanying video have been Kosovo’s first Agro Credit Card promoted across all media in Kosovo and via social networks. TEB, in partnership with USAID, has launched the first-ever Agro Credit Card, which is the newest banking product for agribusiness purposes.

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WITH THE GREEN LOAN PROJECT, TEB AIMS TO INCREASE THE AWARENESS OF PROPER ENERGY USAGE AND INFORM BENEFITS OF USING ECO-FRIENDLY PRODUCTS TO THEIR CUSTOMERS.

4) TEB and the Video Fest - prestigious 13th edition last year, but the incentives music video festival by the bank has boosted its value and professionalism. The aim of this festival is to promote and stimulate the development of artists 7) Celebrating international football and producers of music videos from all – TEB hosts teams from France and over the Albanian territories – Kosovo, Switzerland Albania, Macedonia and the diaspora. By sponsoring this prestigious festival, TEB In June, TEB hosted a reception to helps to bring together everyone with an welcome French and Swiss national interest in the arts and culture. football team players to Kosovo for an international match. Among the guests the 5) Cooperating with the Basketball General Director of TEB Bank – Mr. Ayhan Federation of Kosovo (sponsorship for Albeyoglu; French Ambassador to Kosovo, the youth categories) Ms. Maryse Daviet; and TEB Bank corporate clients. TEB has signed a Memorandum of Cooperation with the Basketball 8) Initiating the Women Federation of Kosovo (FBK), thus becoming Entrepreneurship Support Program its official sponsor for all categories, especially youth. We see this cooperation TEB strongly believes that valuable as a way to invest in the youth of today business ideas deserve support, especially while enabling the development of if they come from Kosovo women. That basketball programs for new generations. is why in cooperation with the Gjakova Our goal is to help young players to Innovation Center, TEB is supporting become leaders on the field and in women entrepreneurs to implement their life. We want to give them models to business ideas. We will be providing help follow by emphasizing the importance in organizing events for women with of teamwork and fair play and also to innovative ideas and ambitions to open stimulate education, build character and new businesses. And through the program, determination to achieve success in life. women entrepreneurs will have access to Agro cards to help them achieve their 6) Serving for the “Dielli TEB Open” goals. This is fully in line with our aim of tennis tournament providing services and products that best suit customer demand and needs. TEB’s commitment to Kosovar youth includes a healthy serving of sports 9) Business Academy sponsorship. In addition to basketball, TEB is also supporting tennis. There are The Business Academy is an all-day event a lot of talented players in Kosovo and comprised of lectures and workshops the new tournament gives young people for Bank guests. It covered various topics an opportunity to experience a top class to support corporate growth, with event. TEB has been supporting the “Dielli presentations from and interactions with TEB Open” tennis tournament for the last very well-known professionals from Turkey five years. This tournament marked its and Kosovo

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TEB IN FIGURES

TEB in Figures (‘000 Euro) 2014 2013 Increase/ Percentage (Decrease) Balance Sheet Indicators Total Assets 369,343 372,401 (3,058) -0.8% Total Loans (Gross) 312,421 283,094 29,327 10.4%

Deposits 314,353 327,232 (12,879) -3.9% Shareholders' Equity 35,655 26,394 9,261 35.1%

NPL / Total Loans 7.3% 6.5% 0.8% 12.1% Loans / Total Assets 84.6% 76.0% 8.6% 11.3% NPL Coverage Ratio 93.5% 80.5% 13.1% 16.2%

Income Statement Indicators Net Interest Income 28,360 20,889 7,471 35.8% Net Non-Interest Income 5,744 5,099 645 12.6% Cost / Income Ratio 46.2% 55.1% -8.9% -16.1% Net Banking Income 34,407 26,295 8,112 30.8% Net Profit for the Year 9,261 3,786 5,475 144.6% 84.6% 93.5% LOANS / TOTAL ASSETS in NPL COVERAGE RATIO in 2014 2014

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2014 2013 Increase/ Percentage (Decrease) Profitability Ratios Return on Equity 36.2% 17.7% 18.6% 105.1% Return on Assets 2.5% 1.0% 1.5% 146.6% Net Interest / Average Interest 9.5% 8.0% 1.5% 18.7% Earning Assets

Solvency & Liquidity Ratios Capital Adequacy Ratio 15.6% 13.4% 2.2% 16.0% Liquid Assets / Total Assets 20.4% 26.8% -6.4% -24.0% Risk Weighted Assets 321,590 287,140 34,450 12.0%

Other Indicators Branches 25 26 (1) -3.8% Employees 598 555 43 7.7%

36.2% 15.6% ROE in 2014 CAR in 2014

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KEY FINANCIAL INDICATORS

The combination of TEB’s commitment An agreement with the European Bank to prudent portfolio management, for Reconstruction and Development well-balanced risk management in line (EBRD) for sub-financing energy efficiency with a sound growth strategy, and our projects in the amount of €5 million was ongoing customer satisfaction resulted signed during 2013, of which €2.5 million in exceptional profits, a steady growth in was received from the EBRD during the the loan portfolio and a further increase in reporting year. market share in 2014. Shareholders’ equity increased from €26.4 At year-end 2014, the Bank’s total assets million in 2013 to €35.7 million in 2014, reached €369.3 million, decreasing by due to increased retained earnings during €3.1 million or 0.8% compared to 2013, the year. Altogether this represents a but in terms of asset size, remaining at the 35.1% increase in shareholders’ equity targeted level. The gross loan portfolio compared to 2013. increased to €312.4 million, an increase of 10.4% or a volume increase of €29.3 Income statement indicators also show million on the previous year’s performance significant improvement in performance and representing the highest loan growth compared to the previous year. Net in the banking sector in 2014. Gross loans interest income reached €28.4 million, now comprise 85% of total Bank assets in increasing €7.5 million or 35.8% compared TEB’s balance sheet. to 2013, despite the continuing decreasing trend in average interest rates on loans At the end of 2014, the Non-Performing and deposits during 2014. Net non- Loan (NPL) ratio (loans over 90 days in interest income amounted to €5.7 million, arrears) was 7.3% compared to 6.5% in an increase of €0.6 million or a 12.6% in 2013, an increase of 80 basis points. Total comparison with 2013. customers’ deposits at the end of 2014 reached €314.4 million, down by €12.9 million or 3.9% compared to the end of 2013.

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The cost-to-income ratio in 2014 comfortably exceeding the Central Bank decreased further to 46.2% from 55.1% of Kosovo (CBK) minimum requirement of €9.3 in 2013, showing the Bank’s increased 12%, and up from 13.44% at the end of efficiency and continuous prudent 2013 due to increased retained earnings management of operating expenses. Net during the year. banking income at year-end was €34.4 million million compared to the €26.3 million The Liquid Assets to Total Assets ratio stood at 20.4% at the end of 2014 THE BANK ENDED THE YEAR realized in 2013. compared to 26.8% in 2013, while Risk WITH €9.3 MILLION PROFIT The Bank ended the year with €9.3 million Weighted Assets (RWA) reached €321.6 AFTER TAX IN 2014. profit after tax compared to €3.8million in million, up from €287.1 million in the 2013 or an increase of 144.6%. previous year following growth in the loan portfolio during 2014. In terms of profitability indicators, at the end of 2014 the Bank generated a Return In 2014, the Bank closed one branch, on Equity (ROE) yield of 36.2% compared decreasing the total number to 25 (2013: to 17.7% in 2013, while Return on Assets 26) while the number of employees (ROA) stood at 2.5% compared to 1% in increased to 598 compared to 555 at the the previous year. The Net Interest over end of 2013. Average Interest Earning Assets ratio was 9.5% compared to 8.0% in the previous year. As for bank capital management at the end of 2014, the Bank’s Capital Adequacy Ratio (CAR) was 15.6%,

TEB SH.A. 2014 ANNUAL REPORT 021 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

INDIVIDUAL BANKING

Using our customer-oriented approach, Innovation – meeting real customer TEB Sh. A offers a full range of services needs and products that people need at Innovation has always played a central role different stages in their lives. at TEB and this is reflected in our slogan: Customers are the drivers behind Retail “The bank for a changing world”. In retail Banking’s primary mission - to support banking activities, innovating means and finance families and individual clients. understanding change and customer We aim to be genuine partners for our expectations and finding solutions in the retail customers and help them prosper face of new technology and new actors. because they are behind future growth Innovating also means planning and being and employment. We do that in part by proactive. In an environment marked by delivering excellent services, both in- crisis and growing inequality, companies branch and via our e-banking channels, and financial institutions can help drive and by winning and retaining customer progress through their commitment to loyalty and trust. and role in society. The many initiatives taken by Retail Banking in 2014 show Customer trust – our most valuable asset this commitment in action. Throughout the year, we have launched a number of Our customers’ trust and loyalty are our campaigns that offered advantageous most valuable assets. Their trust is not and competitive rates, tailor-made for random; we have and continue to invest customer needs. In partnership with heavily in building and maintaining schools and universities we launched that trust over the years. TEB seeks to an Education Loan for financing tuition gain the loyalty of clients who expect a fees at no interest for students. We now personalized relationship, recognition of offer mortgage loans at very affordable their loyalty and optimum access to the interest rates and with maturities adjusted Bank. It is also intended for customers to customer incomes. This means that who are building up their personal assets repayments do not overburden household and who potentially could become wealth budgets. In cooperation with the European management clients. In the current Bank for Reconstruction and Development banking environment, sector jargon and (EBRD) we have introduced a green terminology is usually the norm when loan product. The product is tailored communicating with a bank. We advocate to finance projects that will improve communicating through dialog based on energy efficiency. Interest rates are very transparency, honesty, unbiased advice affordable and customers taking out these and impartial and candid information. loans are eligible for a financial incentive We do that in equally straight forward from the EBRD. Retail customers were language, empowering the customer to offered consumer loans starting with no make informed decisions. This year, new interest and enabling them to finance laws and regulations became effective their personal needs, including home for banking activities. In addition to appliances, vehicles and other projects that responding to all new regulations, we contribute to their well-being. Moreover, have kept our customers informed on we continue to offer facilities such as changes and the practical consequences repayment holidays to selected customers. for banking activities. We believe all these innovations show we are a resolutely customer-oriented bank.

022 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB - TAKING SOUND STEPS TO INCREASE ITS SHARE FROM THE GROWTH OPPORTUNITIES OFFERED BY THE MARKET.

Our performance this year to meet the specific lifestyle needs of this +37,000 client segment. We aim always to exceed The reporting year, 2014, was another their service quality expectations. IN 2014, WE EARNED THE successful period for our Retail Banking TRUST OF MORE THAN activities, with high-quality service playing Personal service, including advice and a key role in attracting new and retaining assistance, is key to building consistent 37,000 NEW CUSTOMERS, existing customers. We were able to relationships with all our retail clients. REPRESENTING 20% GROWTH increase customer loyalty by implementing We have a network of branches where COMPARED TO 2013. ground-breaking applications in Kosovo, customers can handle transactions and by enhancing customer satisfaction ‘over the counter’. But we also want to with our innovative and dynamic structure. make banking and managing finances convenient. We have invested heavily in Our mission in 2014 was to continue to e-banking options. There is no need to add innovative products and services visit a branch or stand in line to carry out to the retail banking sector. Our goal daily transactions. And our customers was to deliver user-friendly, leading like having choices. Compared to 2013, and innovative products to our retail 43% more customers used our e-banking consumers that help them achieve platform. New users of SMS top-up grew their ambitions – in the right way. Our by 7%, and SMS banking users grew by continued growth shows we have been 10%. successful. In 2014, we earned the trust of more than 37,000 new customers, What’s next? representing 20% growth compared to the previous year. By serving our customers In order to serve our customers with with creative products and ideas, we have innovative and complementary products achieved an outstanding loan portfolio and services and in order to sustain our of €15.9 million or a 21% increase on growth, in 2015 and beyond, we will 2013. The mortgage loan portfolio continue to systematically reassess digital actually increased by 66% and the Auto and mobile banking to utilize potential Loan portfolio almost doubled (up by in Kosovo’ s young demographics. New 98%). We introduced the Green Loan, in our Private Banking services will be Kosovo’s first-ever banking sector offer to our innovative approach in Individual enable customers to reduce their energy Banking. We will persist in delivering consumption, and therefore the related excellent customer experiences and laying costs. In cooperation with the European the groundwork for the future. We will Bank for Reconstruction and Development also continue to ramp up our reliable (ERBD), TEB has given customers the and innovative alternative distribution opportunity to invest in energy efficiency channels to serve customers’ day-to-day while earning a 20% incentive. In 2014, banking needs. At the same time, we will TEB issued a total of €1.6 million in Green be allocating more resources to the branch Loans. network for superior service quality and value-added advisory support. The Private Banking program launched in 2014 offers products and services to clients in the upper retail segment and their families based on the concept of ‘privileged’ service. Like all TEB services, the Private Banking program is designed

TEB SH.A. 2014 ANNUAL REPORT 023 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

CARD BUSINESS

We are wherever our customers are will improve energy performance. The fees and charges are the same as for any With over 20,000 new cards approved other purchase of goods and services on +140 during the 2014, StarCard remains an installment payment plan, but the the preferred and most used credit customer also receives a financial incentive OVER 63% OF STATEMENTS card in the market. Our position as the if these meet ‘green’ criteria. ARE NOW SENT VIA E-MAIL. customer’s first choice gives us an even THIS MEANS OVER 140 TREES greater responsibility to be wherever our As we care about the (financial) well-being WERE SAVED IN 2014. customers are and to listen actively to their of our customers, we want to make sure needs. that they are on top of their outgoings and can monitor their spending and due debts. Unrivalled competence, expertise, active We do this by enabling versatile channels listening, and implementation capabilities to access their credit card statements. In have once again proved to be the key to addition to monthly statements, access another banner year for our card business. through e-banking and through our call By blending customer needs and new center, we have also introduced the option technological developments, we have of printing out their statements through continued to introduce new products, the ATM network. expanded services and new utilization channels so that our customers can bank With a growing customer base, the need at their convenience, wherever they to guarantee ever better service is high are without the limitations imposed by priority for TEB. So we have expanded our traditional banking hours. direct sales team and activities. We are now even closer to customers and able to We introduced ATM Cash-in so that our respond faster and even more reliably to customers can deposit to their accounts their needs. The direct sales team is also using our ATM network. Rather than available to provide information on special queuing at a branch to conduct StarCard offers to which the customer may be payments, customers now can pay their entitled and on new products and services card bills at ATMs from their current made available by the Bank and which we accounts or make cash payments directly think may be of interest and benefit to the to repay their own or someone else’s card. customer.

One of our aims is to positively affect our Throughout the year and in partnership customers’ lives and at the same time with merchants, the Bank initiated protect the environment. So in cooperation numerous personalized campaigns, with the European Bank for Reconstruction offering various propositions that feature and Development, we have introduced additional installment plans, discounts, a simple way of financing projects that grace periods, and bonus products. We are

024 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

AS OF YEAR-END 2014, OUR BANK HAD ISSUED 82% OF ALL ACTIVE CREDIT CARDS IN KOSOVO.

grateful for customer loyalty and to thank In 2014 and as part of our social clients we again distributed over €500,000 responsibility, we continued to highly in bonus points on cards or as bonuses in recommend the e-statement option to other forms. In addition, as of this year, customers. This reduces the use of paper we have also introduced bonuses for and over 63% of statements are now sent payments using debit cards. electronically via e-mail. This means over 140 trees were saved in 2014. During 2014, we provided uninterrupted transaction capability through our What’s next? national network of 52 ATMs and 3,500 POS terminals, and via all ATM, POS or In 2015, we aim to maintain our position e-commerce networks worldwide. The as unrivalled leader in the card business. number of transactions through POS We will continue to build on our track terminals increased 26% compared to record of innovation, commitment the previous year and total POS turnover and partnership with our customers, increased 25%. We take pride in the fact generating strong financial performance. that customers are very satisfied with Our main objective will certainly remain to our services. This has led to even greater sustain and facilitate the ways the people market penetration and as of year-end wish to make and receive payments by 2014, our Bank had issued 82% of all introducing new and enhanced products active credit cards in Kosovo. and services for our business and individual customers. Our fees and commissions associated with the maintenance and use of cards An innovation planned for 2015 and in are highly competitive in the market and appreciation of our women customers, we also offer a variety of transactions free we are in the process of designing the She of charge, such as online payments and Card. This is a Visa-licensed revolving credit international credit-card purchases. card created specially and packed with additional conveniences for the woman of As technology becomes even more today. It will offer dedicated discounts and sophisticated, card fraud around the world other special offers in addition to standard is proliferating at a dynamic pace. TEB credit-card features. has invested heavily in advanced security for our infrastructure network. This is We are also working on an “installment managed by our highly vigilant real-time feature” for international payments and monitoring team. We believe the security e-commerce that will be added to all credit of transactions is one of our undoubted cards in 2015. successes, as attempted fraudulent transactions using our cards and in our network remains well under sector trends.

TEB SH.A. 2014 ANNUAL REPORT 025 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

SME BANKING

TEB facilitates operations for SMEs, very important for future growth. During farmers and agri-businesses 2014, 3,144 clients successfully applied for and received installment loans for the first 19.8% TEB serves SME (Small and Medium-Sized time. This accounted for a €26.7 million Enterprise) customers through a tailored in new limits. This is a strong indicator of NON–INTEREST INCOME approach and broad product offerings. the Bank’s sales efficiency and our brand’s INCREASED BY 19.8% DURING In 2014, our SME team built on years value in the market. 2014 COMPARED TO 2013. of experience in this crucial economic segment. However, compared to previous We were able to achieve this growth years, the team was working in a much through our core cross-selling approach. more difficult environment as we saw sales This is a client-centric approach that once and collection rates decline. Moreover, again proved very effective in offering other banks focused more in this segment, complete banking services to clients and making competition even more intense contributing significantly to the generation and driving up fluctuations in loan of non- interest income. As a result, non– prices. The combination of these factors interest income increased by 19.8% during contributed to a higher than anticipated 2014 compared to 2013 or, in real terms, number of non-performing loans (NPL) by €448,000. Again, this is an important and a decreasing trend in loan pricing. indicator as it shows that both existing Despite this, the SME team managed to and new clients value our services and are perform well and continued its growth willing to do their banking with TEB. and expansion in the segment through innovation and enhanced customer In terms of innovation, the SME team was relationships. highly active in 2014. We added a special focus - ‘’Women’s Entrepreneurship‘’ – that The accustomed growth that has become targets both established businesswomen something of a trademark for TEB’s SME and aspiring female entrepreneurs who banking continued in 2014 as the portfolio face financial constraints when it comes to increased by an additional €12 million or realizing their ambitions. The program is 12.3% in percentage terms. This growth specifically designed to empower a higher was achieved through a high level of pro- participation of women in business as activity in the market by the Bank’s sales it comprises financial and non–financial force and through the organization of elements, such as training and consultancy. general and niche campaigns. The Bank’s As it currently stands, it is only a matter sales efforts generated new business of time before we sign a cooperation with existing clients and also managed to agreement with the European Bank of attract new clients, an achievement that is Reconstruction and Development which

026 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

A FURTHER AND SIGNIFICANT INNOVATION WAS INTRODUCED TO THE BANK’S AGRO SEGMENT CLIENTS: THE AGRO CARD.

would further enhance the program and The event focused on best practices and the Bank’s offer to this niche market. management insights aimed at optimizing By adopting this business development business owners’ decision-making. approach, the Bank believes we will Our “Business Academy‘’ signals a new encourage the emergence of new business approach to our relationship with these ideas in the market as well as establish a clients and the Bank will strive to offer new bankable segment for the future. training and consultancy on a regular basis that will equip clients with the knowhow A further and significant innovation was needed to be more competitive. introduced to the Bank’s Agro segment clients: the Agro Card. The launch of the What’s next? Agro Card is something of a momentous event as it is the first credit card introduced Following a year of important events and specifically for this market segment and its milestones, the SME team aims to carrying features are tailored to the specifics of this forward this momentum into 2015. Even particular business. Due to its tailor-made though we anticipate a challenging features, the Agro Card proved an instant year and intensified competition, we are breakthrough in the market and the first confident in our abilities to adapt through 1,000 has been issued within three months innovation and premium customer after the launch. In parallel, with the card service. The SME segment holds a special the Bank further strengthened its presence importance for TEB as we consider it in agribusiness and made it clear that TEB has the highest potential for innovation intends to become a market leader in this and the creation of the much needed particular segment. employment. That is why the Bank we continue to work tirelessly for and support Another important development relating SME companies with financial and non– to our SME activities was the organization financial solutions to help unlock and of a tailored ‘’Business Academy‘’ event. advance their potential. Companies from both the micro and small segment were invited for a day of workshops on topics such as growth strategies and change management.

TEB SH.A. 2014 ANNUAL REPORT 027 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

COMMERCIAL AND CORPORATE BANKING

TEB’S CORPORATE BANKING STRATEGY IS STRUCTURED AROUND BUILDING UP LONG-TERM €77.2 COOPERATION AND DEEPENING OUR CURRENT RELATIONSHIPS WITH CUSTOMERS. million

Whatever your business, close client government and the country entered FOLLOWING A STRONG FIRST relationships are important. For our a period of crisis. This unprecedented HALF, WITH OUTSTANDING Commercial and Corporate Banking teams, situation lasted until the beginning of LOANS REACHING €77.2 they are vital. That is why we have fully December. Its effects on the economy MILLION. embraced and integrated our customer– were significant, especially among leading centric approach in all our corporate corporates. Investments were put on hold banking activities as we strive to offer until the situation stabilized. The year the best banking services available to would ultimately end on a positive note this crucial segment. This translates into and our corporate team was able to close the provision of sophisticated services the year with €2.6 million in new loans. using state-of-the-art technology and close communication through dedicated Despite the unsatisfactory performance portfolio officers. in terms of credit growth, the Commercial and Corporate teams continued to Any review of our Commercial & Corporate provide services that are both in demand teams’ performance in 2014 must and valued by the market. In this regard, provide context, especially on political we achieved an increase in non-interest developments in the country. Following income of 8.1%, ending the year with €2.7 a strong first half, with outstanding loans million in Income. reaching €77.2 million, and forecasts for the second half showing similar promise, The Bank is very well aware of the Kosovars went to the polls in June of 2014. importance of payment systems for After the elections, the political parties corporate clients and cash management were unable to reach consensus on a new and marketing solutions are central to our

028 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

future strategy and development. Efficient What’s next? payment transactions and the range of Business documentary business solutions supported Looking ahead to 2015, we have taken by our comprehensive range of cards into account the possibility of short- and POSs enabled our Commercial and term legacy fluctuations due to the Academy Corporate clients to conduct business with unprecedented political situation in the the Bank swiftly and efficiently. reporting year. However, we remain convinced that our approach and business A UNIQUE VALUE In our efforts to differentiate TEB from philosophy will keep us on the right track PROPOSITION, A DEDICATED the competition and offer a unique in terms of results. With this in mind, we “BUSINESS ACADEMY” value proposition, a dedicated “Business consider this is the right time to split our WAS CREATED FOR OUR Academy” was created for our corporate Commercial and Corporate department CORPORATE CLIENTS. clients. Clearly, one aim is to strengthen into dedicated units. This change will our business relationships with this crucial contribute to a more dynamic approach segment. But we also want to share to client service. At the same time, we knowledge. So this event raised topics aim to initiate the implementation of such as global business trends, growth more intense synergy between sales and change management. This event departments and we believe that the marks the beginning of integrating non– Commercial and Corporate teams need to financial services into our scope and in be at the forefront of this sales strategy. future they will play a significant role in the As a Bank we are convinced that these development of market relations. strategic developments in combination with our existing standard of service will enable a return to credit growth in the year ahead.

TEB SH.A. 2014 ANNUAL REPORT 029 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TRADE FINANCE

TEB Sh.A understands that international Like all TEB personnel, the trade finance Professionalism business in a globalized world is a team is engaged in permanent education, challenge - success demands extensive including the e-learning programs set and expertise professional knowledge and an effective up by the EBRD and the International network. TEB has both. Chamber of Commerce (ICC). The aim PROFESSIONALISM AND of these programs is to achieve best EXPERTISE WILL BE OUR In 2014, we continued to support our international practice in trade finance also GUIDELINES AS WE SEE THESE customers by creating and adapting trade through a thorough understanding of ICC AS DIFFERENTIATORS IN A finance solutions for their business needs. trade regulations. FAST-MOVING WORLD. Moreover, we worked consistently on expanding our networks, strengthening What’s next? relationships with other banks, and further enhancing our high standards In the coming year, we will continue of professionalism and competence. to support our clients by providing Supported by the BNP Paribas and TEB a safe bridge to new opportunities. A.Ş. global presence and expertise in Professionalism and expertise will international trade, we are continually be our guidelines as we see these as broadening our geographic cover and differentiators in a fast-moving world. product range. We are also aiming to add to our product range new international trade products in Trade Finance products for documentary 2015. operations include import and export letters of credit, discount on letters of credit, national and international guarantees, stand-by letters of credit and collections. The agreement signed in 2011 with the International Finance Corporation’s (IFC) trade facility program has provided us with a great opportunity and even more flexibility in responding to demand related to confirmed letters of credit and counter guarantees. During the reporting year, we also further expanded our relationships with new correspondent banks.

030 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

CASH MANAGEMENT AND PAYMENT SYSTEMS

Our vision is to be the best bank in bank account to make various monthly Kosovo. This is why we are investing payments to different public and private DDS heavily in alternative distribution companies. Only an authorization form channels by developing and upgrading (signed by the customer) is needed and TEB PIONEERED THE DIRECT our e-banking platform. the related transaction will be performed DEBITING SYSTEM (DDS), IT IS automatically. DDS customers are provided At a time of rapid technological advances, A UNIQUE PRODUCT IN THE with a dedicated credit line that facilitates TEB is more than keeping pace with and KOSOVO MARKET THAT IS payments to suppliers and guarantees anticipating progress in cash management DESIGNED TO SUPPORT B2B that invoice payment terms are fully and payment systems while continuing COMMERCIAL COOPERATION. respected. The next logical step was the to introduce new payment channels and introduction of DDS discounting that opportunities for better services. Our cash guarantees receivables. By applying DDS management and payments solutions discounting, the customer consolidates are tailor-made to offer to our business finances and benefits from early collection customers a range of products and services of receivables. Our vision is to be the that will enhance liquidity. We provide best bank in Kosovo. This is why we are the appropriate infrastructure for fast and investing heavily in alternative distribution reliable payments processing. Moreover, channels by developing and upgrading by utilizing our cutting-edge solutions our our e-banking platform. Our ultra-modern customers create cost advantages and online e-banking service employs the most benefit from more optimized operational advanced security systems and gives access direct and indirect costs. to secure, convenient and time-saving banking services 24 hours a day and 7 days TEB pioneered the Direct Debiting a week. Our customers can transfer funds System (DDS). DDS is a unique product electronically to beneficiaries worldwide in the Kosovo market that is designed to and process national payments, including support B2B commercial cooperation. Its utility and other regular debits, such core function is to improve our business energy, water and telephone). Moreover, customers’ financial liquidity by offering customers can also opt to make their Tax complete management of receivables Administration of Kosovo (TAK) payments and payables. It is considered the most automatically using e-banking. effective cash-flow management system as it is supported by cutting-edge Today, rapid and safe international money technology and interfaces to facilitate transfers are of paramount importance for complete and automatic invoice payment customers with cross-border ambitions. processing. This allows customers to That is why we provide a service that is authorize us to automatically debit the easiest, fastest and most reliable way (withdraw) funds directly from their to make international payments. Through

TEB SH.A. 2014 ANNUAL REPORT 031 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

CASH MANAGEMENT AND PAYMENT SYSTEMS

our extensive network of over 150 foreign consist of 20 alphanumeric characters. By THE GROWTH OF OUR correspondent relationships and 30 using this system, we – and our customers BUSINESS AND THE SPEED placement banks, outgoing international – will be able to significantly improve OF DEVELOPMENTS IN CASH payments can be executed to foreign the quality of STP payments, especially MANAGEMENT LED US TO beneficiaries worldwide. As a member incoming transactions. CREATE A SECOND CASH IN of SWIFT, the world’s largest payments TRANSIT UNIT IN 2014. network, our customers enjoy a clear The growth of our business and the speed advantage, especially in international of developments in cash management outgoing payments. International led us to create a second Cash In Transit incoming payments can be managed using Unit in 2014. Initially, we had worked with the same system. This means we are able one. Now, we believe the range of services to offer market-leading payment services, our clients need more than justifies the also through highly efficient internal bigger team. In 2014, we launched a new operations and the continual expansion of service whereby we collect and deliver our global network. cash from and to clients’ premises. We have considerable experience in arranging In 2014, we again received an award the such collections – the team already takes high quality of our International Outgoing care of managing and maintaining all Payments from Deutsche Bank AG off-site ATMs in and around Pristina. Germany. We achieved the extraordinary During 2014, we managed 1,292 trouble- rate of 100% STP. The award recognized shooting events successfully without transactions in 2013. inconveniencing customers.

In 2014, we began the implementation of What’s Next ? IBAN, completing the process and roll out in February 2015 IBAN – the International We remain committed to further Bank Account Number – is a standardized enhancing the customer experience by international format for bank account delivering superior cash management and numbers which has been established in payment solutions built on our advanced accordance with international payment technological infrastructure. So we will standards. It is used internationally to concentrate on developing and upgrading identify a client’s account at a specific alternative distribution channels as financial institution and to make payments solution-oriented and flexible service abroad. IBAN speeds up international platforms that will make life easier for our payment processing and reduces delays customers. in those processes. An IBAN in Kosovo will

032 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TREASURY

Prudent asset and liability management primary strengths. Furthermore, successful is essential for sustainable and secure Treasury performance is also due to our financial services to our customers. advanced technological infrastructure and database. At TEB we know only too well the importance of a strong, experienced and Once again, this reputation led to TEB’s full-service Treasury Department. Our selection as a primary dealer for the primary goal in treasury is to maximize issue of Government Treasury Bills with a risk-adjusted returns over the longer term. two-year tenor. As a result, the Ministry Within treasury, we create investment of Finance was able to raise total debt to and funding strategies based on market €259.52 million. conditions. The treasurers are also responsible for managing the Bank’s Managing risk liquidity, operational and structural We have strong risk awareness and liquidity risk, foreign-exchange risk and we constantly monitor and manage interest-rate risks in the balance sheet. As liquidity, counterparty, foreign currency, a part of liquidity management, the bank fixed income portfolio and interest-rate has defined the key liquidity risk indicators risks that could arise from our routine and monitors these consistently. operations. TEB Sh.A works closely with Moreover, in terms of risk management, TEB A.Ş., benefiting from accurate market our treasurers manage assets and liabilities projections, especially in interest-rate and by continually analyzing potential risks liquidity-gap management. Stringent and market opportunities within the internal control is key to all our treasury framework of rules established by the activities. We have developed and put Central Bank of Kosovo, the Board of in place prudent practices that reduce Directors and the Asset and Liability and mitigate risk in our asset and liability Committee (ALCO). management activities.

Our Treasury and ALM teams play a What’s next? significant role in ensuring confidence Looking ahead to 2015, the expectation and enable us to stand strong, even is that the Ministry of Finance will be in challenging times. The combined introducing longer maturity Bonds (from experience, theoretical and technical three to five years). TEB aims to participate know-how, the broad range of products, as a Primary Dealer in these auctions. and tailored innovative solutions are its

TEB SH.A. 2014 ANNUAL REPORT 033 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

HUMAN RESOURCES

It is all about people to speak frankly with their managers. Regular meetings are held to communicate The role of TEB’s human resources team on the Bank’s mission, vision, strategies 598 is to attract, retain and motivate the and objectives, and to affirm our people’s best people while enabling the whole importance for achieving our goals. That AT YEAR-END 2014, THE FULL organization to continually adjust and importance is also expressed in how we TEB TEAM HAD GROWN TO adapt to a rapidly changing economic invest in training and development. 598 EMPLOYEES. environment. It is a challenging task as we are looking for the top young and dynamic Training and education talents in the markets whose energy and commitment to customer service fits In line with our vision “to be the best with our business culture. All our people bank in Kosovo”, we have established a contribute to the Bank’s ongoing growth. number of dedicated training programs for So want the best. That is why we offer a different groups within the organization. competitive benefits package, including All are provided by well-known and health insurance and career opportunities. highly respected external training experts. With this in mind, we have developed a Our senior managers participate in the human resources policy based on internal Executive Strategic Leadership Program,, mobility and active development of receiving individual coaching and working our people’s skills as we promote and with colleagues using role plays and stimulate diversity within the Bank. interactive group studies. Each executive also has an individual development At year-end 2014, the full TEB team plans. Middle management has its own had grown to 598 employees. This is an dedicated Program aimed at improving increase of 136 banking and financial managerial competencies and leadership services professionals. In terms of mobility, skills. This Management and Leadership 103 TEB people were promoted or given Development Program include classroom new challenges during 2014. Close to 20 work, interviews, individual coaching more were able to take up new challenges sessions, presentations and “homework”. in different locations. The focus is on Strategic Management, People Management, Operational Open communication Excellence and Time Management. Our new and less experienced managers Since TEB opened its doors in 2008, attend the Manager Development we have pursued an open-door policy Program, focusing on effective people designed to create a comfortable working management, situational leadership, environment. Employees are encouraged

034 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

IN 2014, IN TOTAL 85 DIFFERENT COURSES WERE ORGANIZED TO TRAIN 687 STAFF IN-HOUSE AND 563 STAFF ATTENDED EXTERNAL COURSES.

coaching, delegation performance Istanbul, Turkey. During 2014, our first management and feedback. The Manager ‘students’ were admitted to the BNP Development Program also includes Paribas Campus in Paris, France. This is classroom work personal surveys, case a prestigious training institution that studies and “homework”. benefits from BNPP’s global expertise. Through attendance at the Campus, our In 2014, continuous training programs people will not only benefit from top level were organized, both in-house and training but will also facilitate synergies externally. In total, 85 different courses between TEB and our parent. Throughout were organized to train 687 staff (and the reporting year we continued our interns) in-house and 563 staff (and cooperation with the Kosovo and Turkish interns) attended external courses. In order Banking Associations. This cooperation to ensure our people’s development is supports our technical training needs and in line with global changes in economics increases awareness of development, and technology, many of our staff changes and challenges in the banking travelled outside the country to different sector in Kosovo and around the world. European countries, including Turkey, the Czech Republic, Luxembourg, the United What’s Next? Kingdom, Germany, France, Albania, Macedonia and Montenegro, for courses. In 2015, the Human Resources team will continue working on recruiting the best Managing mobility talent. Our training ambitions will remain just as high as in 2014 as we further pursue Internal mobility is a key component and create opportunities so that our of TEB’s HR strategy. In addition to people can focus on their hands-on skills to helping our people develop their skills equip them for internal mobility. and competences, we aim to give them opportunities to further their career. In By living our values and ethics, we 2014, we launched a specifically designed recognize that our employees are the Assessment Centre and Development foundation on which we build the Bank Centre Program (AC/DC Program) to we want to be, a place where talented create a pool of high-potential and high- and dynamic people want to work in an performing managers with the potential to environment where our colleagues want move up the organization. 17 participants develop their careers and contribute to were assessed by the Assessment Center TEB’s shared objectives. and later joined the Development Center. This Program was developed and is given in cooperation with the TEB Academy in

TEB SH.A. 2014 ANNUAL REPORT 035 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

ORGANIZATION AND PROCESS DEVELOPMENT

The world and its dynamics are changing Building on its core values, the bank has TEB SH.A. CONTINUES TO constantly and so are our customers and continued to adopt its organizational DIFFERENTIATE ITSELF AND their ambitions and aspirations. At TEB, structure to support its never-ending MAKE A DIFFERENCE IN we see our role as more than merely an passion to improve itself. The redesigned CUSTOMER EXPERIENCE ALSO observer or follower in a dynamic world. organizational structure serves as WITH SMART AND DYNAMIC We are right at the center of that world, a cornerstone to further enhance BUSINESS MODELS. as our efforts to meet the challenges of a organizational efficiency and growth rapidly shifting environment prove. TEB has strategy. been at the forefront through numerous ‘firsts’ and innovative products and services With the process infrastructure to help our customers manage and take developments, the bank is embracing new advantage of changes. We do this through methods of business conduct aiming to smart and dynamic business models that present customers with a swift, easy and create an organizational structure that is effective banking environment designed both fit-for-purpose and flexible enough around their needs in view of the future to anticipate change and the ensuing dynamics and anticipated sector trends. shifts in customer needs. For example, we Paving the way for changes and building have significantly improved our process for the future, the business processes are efficiency so that in a world that depends continuously analyzed to identify any on rapid responses, our customers’ overburdens, unevenness, cost, and non- transactions are faster and more efficient. value adding tasks. A great importance With a vision to always remain in a is given to the increased efficiency of the pioneering position with innovative process which will shorten transaction time products and services, TEB Sh.A. continues and become agile to the customers’ needs. to differentiate itself and make a difference Understanding and planning for the in customer experience also with smart future and dynamic business models. We are visionary believers that we can Smart and dynamic business models make our customer’s life easier and be In another dynamic and productive the foundation for their endless endeavor year, the bank successfully carried out for progress and aspiration to build a actions and projects aimed at designing brighter future for themselves and for the the necessary organizational structure, society. As such, in the coming year, we evolving its process infrastructure and shall continue to proactively listen to even increasing efficiency across its business and better understand, think ahead, become operational activities. leaner, and optimize our business model.

036 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

INFORMATION TECHNOLOGY

Technological Improvements and A year of innovation Enhancements in Security In 2014, we continued to introduce new During 2014, as the leading technology services to our customers. Now, our bank in Kosovo, we moved our cardholders gain bonuses for debit-card critical systems to more powerful and payments made using a TEB POS terminal. secure hardware. In addition to this These clients can also take advantage of comprehensive migration project, our the new Cash In feature available at our systems, capacity and disaster recovery ATMs. This enables them to make deposits were upgraded. This ensures longer-term, directly into their accounts using an ATM rapid and more reliable, uninterrupted – so no more standing in line at a branch. services to our customers. TEB’s ATMs further offer the option of balancing credit-card accounts through Security is one of the key features of cash deposits. We also implemented a new any information system. That is why we feature for debit-card holders that enables systematically enhance the security of our them to withdraw money quickly using the systems by introducing the latest advances ‘Fast Funds’ service. and adopting best-in-class solutions in compliance with international security standards.

TEB SH.A. 2014 ANNUAL REPORT 037 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

INFORMATION SECURITY AND DATA PERSONAL DATA PROTECTION

Information security Accountability-based information governance Today, all business activities are increasingly reliant on the availability To ensure confidentially, integrity and the of information and the security of availability of information and information information systems to store and process systems, the Bank has embraced sensitive and valuable data. That is why accountability-based information adequate protection and the accuracy governance. Under this program, we strive of information owned by or entrusted to balance information protection, security to the Bank in the normal course of our and business while conforming with and work is a prerequisite and a top priority for adhering to all legislative and regulatory TEB. Bank has implemented a robust and requirements and the highest international continuously evolving information security standards. program to keep pace with the evolving threats. The Bank continues to actively We have put in place comprehensive monitor risks, external threats, internal internal regulations to protect information monitoring, reviewing best practices and have embedded information and implementing additional controls as protection in all work processes that required, to mitigate security risks. During directly or indirectly require collection, 2014, several projects were implemented processing, accessing, parsing, disclosing to ensure end-to-end availability, resilience or destruction of any information. Access and the ability to restore data with a to information is strictly on a business minimum of disruption to business need-to-know basis while disclosing activities. and dissemination of data is regulated according to legal requirements and The Bank’s training programs include individual consent and authorizations. mandatory Information Security training and notifications which ensure employees are aware and equipped to safeguard our customers’ and the Bank’s assets.

038 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

WE HAVE PUT IN PLACE METICULOUS CONTROLS TO PROTECT THE INDIVIDUAL’S RIGHT TO PRIVACY, DIGNITY AND SAFETY.

Personal data protection During 2014, we implemented a direct marketing process that empowers A vast amount of information in our customers to reject marketing offers custody is our customers’ personal data. It via SMS, if they so desire. This has been is collected, processed and stored as part implemented under the Electronic of the Bank’s contractual agreement with Communication Act, Article 92, Unsolicited the customer to offer and use banking Communications. The National Agency products and services. We are zealous in for Protection of Personal Data concluded protecting all our data and have put in that the Bank is in compliance with this place meticulous controls to protect the legislation. individual’s right to privacy, dignity and safety. The Bank’s training programs include mandatory Data Protection training. The We protect personal data with all available aim of the training is to provide a basic means and have every intention to do so understanding of the Data Protection Law as long as data are under our custody. so that we can exercise our responsibility However, we may divulge data if and in protecting the rights and privacy of when required by law, or with the consent individuals when handling personal data. of the individual but not beyond what is During 2014, 521 employees participated necessary to provide a product or service. in this training. Individual customers can also authorize delegation of information to another individual.

TEB SH.A. 2014 ANNUAL REPORT 039 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

BOARD OF DIRECTORS

MUSA ERDEN ALP YILMAZ AYSE ASARDAG TUGBAY KUMOGLU Chairman Vice-Chairman Board Member Board Member

Born in Hatay, Turkey in 1950, Born in Istanbul, Turkey Born in Ankara, Turkey in 1964, Born in Antalya, Turkey in Musa Erden graduated from in 1965, Alp Yılmaz Ayşe Aşardağ graduated from 1974, Tugbay Kumoglu the Ankara Academy of graduated from the the Business Administration graduated from the Economics Economic and Commercial Business Administration Department of Bogazici and Administrative Sciences Sciences, Banking Department. Faculty of Dokuz Eylul University in 1987. She was Faculty of Gazi University. He started his career at Yapi University, and received certified as a chartered He started his professional Kredi Bank in 1972. He joined his MA from the Faculty accountant by the Institute career at Garanti Bank as Osmanli Bank in 1973 where of Administrative Science of Chartered Accountants of Management Trainee in 1998. he held various posts until (Business Administration) England and Wales, ACCA, After holding several positions 2001, including Assistant at Istanbul University. He in 1992. She started her in branches and regional General Manager, Deputy started his professional career professional career at Price organizations at Garanti, he General Manager (BD/CM), at the Turkish Industrial Waterhouse and worked at has appointed as SME Banking and Coordinator. He served Development Bank as financial the Audit Unit of both the Strategic Planning Manager. as Arbitration Committee analyst in 1991. He served as Istanbul and London offices His last position in Garanti Member of the Turkish Auditor in Kocbank A.Ş. from between 1987 and 1994. Ms. Bank was branch manager. He Banking Association from 1992 to 1995. He joined TEB Aşardağ was a Lecturer in joined the TEB Group in 2006 2002 to 2003; as Director A.Ş. in 1997 and worked in Accounting at the University as Europe 2 Regional Sales of MNG Bank in 2003; as various departments, including of Glamorgan from 1994 to Manager. In 2007, he was Chairman of all four Ottoman Sales & Marketing, Budget 1995. In 1995, she joined the promoted to TEB Individual Structure Construction and Financial Control and TEB Budget and Financial Banking Sales Management Tourism’s companies; and Cash Management. From Control Unit until 2001. Since Director. From 2011, he is also as Director of the Ottoman 2007 to 2012, he served as then, she has been the TEB responsible for performance Fund Ltd between 2006 Board member and Chief Group Chief Financial Officer management of Individual and 2008. He joined TEB Executive Officer of TEB Sh.A, at TEB Holding. Ms. Aşardağ and Star Banking, Consumer Group in 2005 as Auditor of and during his tenure was currently also serves as Board Finance, the Direct Sales Team TEB A.Ş. and TEB Financial also Deputy-Chairman of the member of TEB A.Ş., Board and Salary Payments. From Investments and served as Kosovo & Turkish Chamber of member and Audit Committee February 2013, Mr. Kumoglu consultant from 2006 until Commerce, Board Member member of TEB NV, TEB was appointed as Board his current appointment as of the Kosovo & French Factoring and TEB Investment, member of TEB Sh.A. Executive Board Member of Chamber of Commerce and and is a Board Member of TEB A.Ş. in 2008. Mr. Erden Board Member of the Kosovo TEB Asset Management. was appointed Chairman Bankers` Association. In She was appointed as Vice- of the Board of Directors of January 2013, he stepped Chairman of TEB Sh.A in 2007. TEB Sh.A in December 2010. down as CEO of TEB Sh.A to From December 2007, Ms. From March 2011, he is also take up an appointment as Aşardağ is a Board Member Acting Chairman of TEB Advisor to the CEO of TEB A.S and Chairman of the Audit Factoring and, from 2010, a (Turkey). As of 11 April 2013, Committee of TEB Sh.A. Board Member of BNP Paribas he was appointed as Vice- Leasing. Chairman of TEB Sh.A and Chairman of the Remuneration Committee of TEB Sh.A.

040 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

Dr. MEHMET OZKAYA SABRİ DAVAZ PASCAL ALFRED J. GILLIARD Board Member Board Member Board Member

Born in Konya, Turkey in 1969, Born in Bandirma, Turkey in Born in Leuven, Belgium, in Dr. Mehmet Ozkaya earned his 1963, Sabri Davaz graduated 1967, Pascal Gilliard graduated PhD in International Finance from the Faculty of Political in Business Engineering at the (1999) and MBA degree in Sciences of Ankara University University of Brussels. Financial Decision Making and received his MA in (1994) from The George Financial Economics from He started his professional Washington University in Boston University in 2000. career as Management Trainee the US, and his BSc degree in He started his professional at Generale Bank in 1990. Computer Engineering (1992) career in 1985 at the Under- He held several positions, from Bogazici University in secretariat of Treasury in including Branch Manager, Turkey. Turkey where he served in Corporate Senior Relationship several positions until 2004, Manager, and Structured Mr. Ozkaya spent the early including Chief Sworn Bank Finance Officer until part of his career at the World Auditor, Vice-Chairman of the merger with Fortis. Bank Treasury in the US. the Board of Sworn Bank Thereafter, Mr. Gilliard served During his tenure there from Auditors, Sworn Bank Auditor.. as Fixed Income Sales and 1995 to 2006, he held various From 2004 to 2009, he was Senior Banker for Financial positions, including Head of Vice-Chairman of the Banking İnstitutions. He moved to Global Fixed Income in Pension Regulations and Supervision Hong Kong as Head of the Fund Investments (2003-2006), Agency of Turkey, also acting Financial Instıtutions Group Senior Financial Officer in as a consultant until 2011 Asia in 2006 and became Capital Markets (2000-2002), when he joined the TEB Global Head of Non-Banks Financial Officer in Structured Group as Chief Advisor to the Financial Institutions in 2008. Finance and Derivatives (1998- Chairman at TEB Holding A.Ş. 1999), and financial analyst in As a consequence of the Asset & Liability Management From March 2012, he is a merger with BNP Paribas, (1995-1997). Board member of TEB A.Ş. and he joined Group Risk from February 2013 serves as Management in Paris in 2010 Mr. Ozkaya joined the TEB Audit Committee Member of where he acted as Senior Group in early 2006 as the TEB A.Ş. In April 2013, he was Credit Officer for French CIB Chief Investment Officer of appointed as Board member customers. He currently holds TEB Asset Management where and Vice-Chairman of the the position of Group Chief he also advised the Chairman Audit Committee of TEB Sh.A. and CEO of the TEB Group on Risk Officer of TEB in Turkey. global markets, international He has been a Board member economics and management and Audit Committee member of TEB’s investment portfolio. of TEB since 2014, and In 2011, he was appointed as chairs the Risk Management the Chief Investment Officer Committee. of TEB A.Ş. Effective April 2013, Mr. Ozkaya has been serving as a Board member and Chairman of the ALM Committee of TEB Sh.A. TEB SH.A. 2014 ANNUAL REPORT 041 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

COMMITTEES

TEB Sh.A. Board of Directors also tasked with the supervision of senior management activities. The Board of Directors determines and Chairman : Musa Erden establishes the Bank’s banking structure and exposure Vice-Chairman: Alp Yılmaz levels, reviews and approves necessary adjustments and Member : Ayşe Aşardağ measures. Furthermore, the Board is responsible for Member : Pascal Alfred J. Gilliard adopting the report of senior management on business Member : Sabri Davaz operations based on the semi-annual balance sheet, profit Member : Tugbay Kumoglu and loss statement, annual balance sheet and internal Member: Mehmet Ozkaya and external audit reports. Decisions taken by the Board Member: Ayhan Albeyoğlu (ex-officio) require a majority vote from members who are either present or voting by proxy. Governance Committees of the TEB Sh.A Board TEB Sh.A (the Bank/TEB) has a Board of Directors currently comprising eight members, all with extensive banking In line with its charter and regulations, our Board has experience (please see biographies of members). The appointed an audit committee, a risk management Board carries out its duties and responsibilities according committee, an asset and liability committee, a to requirements set out in the Bank’s charter and Board of remuneration committee and other permanent Directors’ By-laws and in line with all relevant legislation committees comprising members of the Board and and requirements imposed by the Central Bank of Kosovo external experts. The Remuneration committee and Risk (CBK) and regulators. The Board meets at least quarterly. management committee were appointed at the Board of Directors’ meetings on November 2 and December 20, The role of the Board of Directors 2012, respectively. The Board can also establish ad hoc The Board’s primary task is to supervise the financial and commissions and determine their composition and tasks, business activities of the Bank. It is responsible for defining where relevant and appropriate. the Bank’s organizational and administrative structure, its business policy including operational and administrative units, their sub-units and functions, supervisory positions and reporting relationships. Moreover, the Board is

042 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

Audit Committee Credit Risk Management Committee (CRECOM)

Chairman : Ayşe Aşardağ Chairman : Jean-Milan Givadinovitch Vice-Chairmen : Sabri Davaz Vice-Chairman : Murat Akşam Member : Pascal Alfred J. Gilliard Member :Alp Yılmaz Member : Nexhat Kryeziu (external expert member) Member :Haluk Kırcalı Member :Ali İhsan Arıdaşır Duties and Responsibilities: Duties and Responsibilities: The audit committee has clear duties and responsibilities that are defined in the audit committee by-laws and are This committee is authorized to take credit decisions on in line with relevant legislation and regulations. Its tasks amounts between €500,000 and €2.5 million. include: Asset and Liability Management Committee (ALM) • Recommending appropriate accounting, operational and administrative internal controls; Chairman: Mehmet Ozkaya Vice-Chairman: Ayhan Albeyoglu • Supervising the Bank’s compliance with policies and Member : Alp Yilmaz procedures; Member: Pascal Alfred J. Gilliard Member: Tolga Gürdem • Requesting and reviewing reports from the Bank’s head Member : Arif Bibioglu of internal audit; Duties and Responsibilities: • Recommending compensation for the head of the internal audit department; • Monitoring financial markets, checking the situation, movements and changes in the Bank’s balance sheet • Monitoring compliance with relevant banking and taking decisions, all in accordance with the Bank’s legislation and applicable regulations or requirements; Policy and Procedures;

• Recommending the appointment of an external auditor; • Guiding and monitoring the Treasury and ALM Department’s operations on an on-going basis and • Monitoring the performance of the external auditor, acting as the decision-making body as defined in the reviewing the external auditor’s report on the Bank’s ALM committee by-laws; financial statements and reporting any findings to the Board of Directors; • Supervising asset & liability management by the Treasury and ALM Department in terms of the following • Delivering opinions to the Board of Directors on any criteria: matters submitted to it by the Board of Directors, or that the committee wishes to address; and • Ensuring the observance of external (regulatory) ratios set by the CBK and internal rules set by the Board or • Approving the external and internal audit plan of TEB ALCO; Sh.A. • Monitoring minimum requirement reserves set by the The Audit Committee meets at least quarterly. CBK.

The Asset & Liability Committee meets at least quarterly.

TEB SH.A. 2014 ANNUAL REPORT 043 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

COMMITTEES

Risk Management Committee (RMC) Remuneration Committee

Chairman: Pascal Alfred J. Gilliard Chairman: Alp Yılmaz Vice-Chairman: Alp Yilmaz Vice-Chairman: Ayşe Aşardağ Member: Musa Erden Duties and Responsibilities: Duties and Responsibilities: This Committee’s responsibilities include the following The Risk Management Committee is responsible for tasks: monitoring all risk-related components and functions involved in credit, market, liquidity, operational, • Proposals on the implementation of the Bank’s compliance, reputation, legal, insolvency, the Bank’s Remuneration Policy to the Board; capital adequacy and other risks. • Proposing a policy/system to the Board relating to The Risk Management Committee meets at least quarterly. performance evaluation and target setting for senior management;

• Proposing to the Board the annual and long-term performance evaluation criteria and targets for senior management;

• At least once a year (preferably in the first quarter of any year) reviewing and approving summarized performance evaluations, target settings and remuneration package proposals for senior management;

• Making proposals to the Board on the actual remuneration package for Executives; and

• Providing remuneration reports to the Board of Directors annually or upon request.

The Remuneration Committee meets once a year.

044 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

INTERNAL AUDIT

Internal Audit the Internal Audit Department according to the audit plan, which is prepared at least on an annual basis using The Board of Directors of TEB Sh.A established the Internal a risk-based approach consistent with the Bank’s goals Audit Department in February 2013 as one of the key and objectives. Each audit plan is approved by the Bank’s factors in the Bank’s governance structure. Prior to that Audit Committee. The plan is updated regularly to reflect date, the Bank had outsourced its internal audit function changes inherent to the internal control system and to to Turk Ekonomi Bankası (TEB) A.Ş. based on a Service integrate new business lines. In the same manner, the Level Agreement (SLA) signed in 2008. The Bank continues responsible internal auditor develops and records a to receive audit support from TEB A.Ş. through audit risk-focused plan for each audit task, which analyzes the advice to the Internal Audit Department. Moreover, TEB inherent risk items and includes objectives, scope, timing A.Ş. carries out specific audits on selected activities based and resource allocation. on pre-prepared audit plans. The Bank’s Internal Audit Department is independent and as such reports directly to The work of the Internal Audit Department is performed the Board of Directors through the Audit Committee and in compliance with the International Standards for the on its own initiative if deemed necessary or appropriate. Professional Practice of Internal Auditing developed by The Institute of Internal Auditors, which is the governing The Internal Audit Department has an assurance function, body for the internal audit profession worldwide, and TEB helping the Bank to accomplish its objectives by bringing A.Ş. audit practices. a systematic and disciplined approach to evaluating and improving the effectiveness of the control environment, including risk management, control and governance processes. It is the responsibility of the Internal Audit to assess whether the control environment ensures that the risks could arise from the Bank’s operations are managed in the manner that enables an acceptable level of mitigation. Audit activities are carried out by

TEB SH.A. 2014 ANNUAL REPORT 045 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

RISK MANAGEMENT

TEB Sh.A has a comprehensive and prudent approach strategies, TEB Sh.A’s Assets and Liabilities Committee to risk, its identification and management. TEB Sh.A manages maturity incongruity and adopts the principle of measures and monitors market, credit, liquidity, interest- working with positive balance-sheet margins as its pricing rate, operational and other related (financial) risks using policy. methods in line with international standards. The risk management process is organized within the framework Market Risk of TEB and BNP Paribas risk management methodologies Market risk involves possible losses a bank may incur as a (GRM and IRB, respectively) and favors a common risk result of the exposure of its balance sheet and off-balance management culture. The process is composed of risk sheet accounts to interest-rate risk, equity-position risk definition and measurement, establishing risk policies or exchange-rate risk resulting from fluctuations in the and procedures, risk analysis and monitoring, reporting, financial markets. and auditing phases. Group Risk Management (GRM) supervises the overall risk management process within Mitigation: TEB Sh.A.’s market risk management is the TEB Group. TEB Sh.A’s Risk Management Department designed to manage and control market-risk exposures works in cooperation with executive management in order to optimize returns while maintaining the Bank’s to ensure that the risks assumed by TEB Sh.A. are in conservative risk profile. accordance with the TEB A.Ş.’s GRM and BNPP’s RISK IRB policies and are compatible with its profitability Liquidity Risk and credit-rating objectives. The Risk Management Liquidity risk occurs when there is insufficient cash or cash Department reports to the Board of Directors through inflows to meet net funding requirements when due. the Risk Management Committee on a regular basis on Liquidity risk may also occur when open positions cannot all relevant financial risks. Here follows an overview of the be closed quickly at suitable prices. most important risks and what we do to mitigate them. Mitigation: The Bank’s policy is to establish an asset Interest-Rate Risk structure that is sufficiently liquid to meet all kinds Interest-rate risk arises from the possibility that changes of liabilities as they fall due. The Board of Directors in interest rates will affect future profitability or the value regularly monitors and determines liquidity ratios and of financial instruments. Protection against fluctuations in the relevant standards for maintaining high liquidity at interest rates is a top priority for TEB Sh.A. all times. TEB Sh.A has in place an effective system for the timely reporting of the liquidity position to the Board of Mitigation: Interest-rate risk is determined by measuring Directors, senior management and all related units. the rate of sensitivity of assets, liabilities and off-balance sheet items. It is monitored closely through GAP and Credit Risk Duration analyses. Simulations on interest income are Credit risk is the loss that may be incurred if the carried out based on the forecasted economic indicators counterparty in a loan relationship fails, partially or used in the Bank’s budget. Possible negative effects entirely, to fulfill its obligations on time. TEB Sh.A is of interest-rate fluctuations on financial position and exposed to credit risk through its lending, trade finance, cash flow are minimized by means of prompt decisions. and treasury activities but credit risk may arise in other When determining short, medium and long-term pricing circumstances.

046 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

Mitigation: The Board of Directors has the final authority in by the Board of Directors are regularly monitored and the allocation of loan facilities. This power is delegated to reported. The Credit Allocation and Monitoring Division the Credit Committee and the Chief Executive Officer on make assessments of the loan portfolio for the Credit certain conditions. The exercise of these delegated powers and Risk Management Committees, reporting high-risk is regularly monitored and reported by internal audit and cases and non-performing loans. After a loan facility is risk management. TEB Sh.A’s primary exposure to credit offered, the Credit Monitoring Department monitors the risk arises through its loans and advances to customers. customer’s repayment capability and the sufficiency and The amount of credit exposure in this regard is a function adequacy of the collateral. In this way, any problematic of carrying assets on the consolidated balance sheet. loan is identified at an early stage. Should the credit rating Concentrations of credit risk can arise when a number of and/or the quality of the collateral raise any doubts, the customers are engaged in similar business activities, or customer will then be closely reviewed. activities in the same geographical region, or have similar economic features that would cause their ability to meet Exchange-Rate Risk contractual obligations to be similarly affected by changes Exchange-rate risk is defined as a possible loss that a bank in economic, political or other conditions. Branch officers may incur with all of its currency assets and liabilities in the visit loan applicants and obtain financial statements and event of changes in exchange rates. information related to the potential customer’s activities and plans. A loan proposal is prepared containing a Mitigation: Position limits determined by the Board of commentary on the company’s financial position, an Directors are monitored on a daily basis and possible industry analysis, information about the partners and changes in the Bank’s monetary positions that may come managers, as well as references from other banks and about as a result of routine foreign currency transactions companies with which the applicant is doing business. are also examined. This information is then submitted to the Credit Allocation and Monitoring Division that assesses the applicant’s Capital Adequacy creditworthiness and sends its report to the Credit The Bank’s aim is to continuously ensure it has sufficient Committee for approval. capital to cover the risks involved in its business. The Risk The Risk Management Department assesses and manages Management Department monitors and reports adequacy all financial risks, including credit risk, on a continuous ratios to executive management and to the Board of basis. It executes Bank and business-unit level internal risk Directors through the Risk Management Committee. assessments at least twice a year. The Bank-level analysis As per the Banking Law and Central Bank of Kosovo has to be revised whenever there is a significant change regulations, there are three adequacy ratios that must be in the operating environment that can affect TEB Sh.A. met at all times: Tier 1 capital over risk weighted assets of Developments in the marketplace are closely monitored at least 8%; total capital over risk weighted assets of at to minimize credit risk. As a result of the prudent policy least 12%; and total equity over total assets of at least 7%. adopted by the Bank, the maximum loan that can be granted to a customer is kept below legal limits, thus minimizing the risk of loan concentration. Limits set

TEB SH.A. 2014 ANNUAL REPORT 047 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

COMPLIANCE, INTERNAL CONTROL AND OPERATIONAL RISK

Compliance such purposes. To this end, we apply meticulous measures supported by automated monitoring systems and the We are committed to responsible banking and acting ‘know your customer’ (KYC) process. Our KYC process acts with integrity and responsibility in everything we do. At as the basis for how we manage risks that may arise from TEB, we believe that in creating value for our customers, entering into a relationship with a new customer or from shareholders, employees and society, how we do business serving an existing customer. The process starts with a is just as important as the sustainability of our business pre-acceptance assessment of any potential new customer growth. It goes without saying that conformity with and continues in the form of regular reviews according to laws and adherence to regulations and the highest defined procedures and including assessment of people or international standards and guidelines is part of our entities that are ultimate beneficiary owners. identity and forms the foundation for how we do business. At the same time, we set high standards of business Preventive measures and implementation of thorough integrity and ethical conduct aimed at increasing the controls help us maintain strict adherence to laws and effectiveness of the compliance framework. regulations. Therefore, in 2014, we implemented several crucial projects to reinforce our IT infrastructure and cross- In recent years, there has been a constant increase functional approaches to work ethics, money laundering in regulatory environment requirements in Kosovo and conflict of interest, and will continue with similar where compliance management is becoming a top projects into the future. priority. This year, 2014, we faced a lot of challenges but we appreciate increased government scrutiny and In order to promote our compliance program and to regulatory changes. Our team spirit, commitment and the ensure awareness and adherence by our employees, sustainable improvement of our efficiency are all aimed at we have expanded our training program to include safeguarding the integrity of our financial institution. e-learning and special modules on key compliance topics. The modules are available to all employees and can be We expect our employees to act honestly, responsibly, adapted to the needs of our business lines according to fairly and professionally, to serve the best interests of job-specific requirements. They also complement the customers and to respect the integrity of the markets. wide range of on-site training programs that address Our code of conduct, comprising our values, ethical compliance topics. Most of the disciplines covered by the business conduct and requirements, forms the basis for professional modules are based on common notions of how our employees should behave with colleagues and transparency. our customers, business partners, shareholders and the authorities. TEB’s code of conduct includes ethical business Our Compliance Department reports directly to the Board provisions that are aimed at managing conflict of interest, of Directors through the Audit Committee. Its purpose is preventing market abuse, fighting terrorism and other to manage compliance risk in an appropriate manner to economic crimes. ensure that banking activities comply with relevant laws, rules and regulations. We are committed to adhering to strict laws, regulations and guidelines to combat money laundering, the finance Anticipating the impact of today’s financial challenges and of terrorism and other criminal acts. We scrutinize our unpredictable situations that may arise, our Compliance customers and their transactions to prevent our name Department is continually and proactively planning, and our products and services from being misused for improving and identifying risk prevention measures.

048 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

Internal Control Operational Risk and Business Continuity

The Internal Control Department ensures that a sound Operational risk is defined as the risk of loss that may internal control environment is in place at TEB Sh.A. It result from Inadequate or failed internal processes, people handles essential coordination and guarantees related and systems or from certain external events. activities are performed regularly, efficiently, effectively and in line with the management strategy and policies of The Operational Risk Management department at TEB the Bank, as well as with applicable rules and regulations. is responsible for monitoring operational risk. We have Following organizational changes during the year, the in place a system appropriate to the nature, extent and Internal Control and Operational Risk functions are now complexity of the Bank’s business in order to effectively structured separately. Within the scope of internal control, identify, assess, monitor and control/mitigate related daily, weekly, monthly and quarterly controls of critical risk. The team is also responsible for assisting other activities at branches and head-office departments are departments to identify, assess, monitor and control/ carried out by the Branch Control Unit and Central Control mitigate operational risk; implementing methods for Unit. the purpose of identification, assessment, reduction (including internal controls) and monitoring of operational A controller performs his/her controls in accordance with risk; organizing operational risk training for all staff, check-lists that are prepared in advance and in compliance especially those responsible for reporting incidents to the with internal and external rules and regulations. The operational risk and business continuity unit; and assessing check-lists are revised if any changes occur in internal and/ all processes in terms of operational risk and identifying or external rules and regulations. any risky processes.

Control points in check-lists are used for: Business Continuity Management, regardless of its type and reason, consists entirely of plans ensuring the • Verifying proper adherence to internal rules and continuity of the Bank’s critical business functions in case procedures and the consistency of internal rules with of any business interruption or calamity. The Operational legal regulations and compliance with them; Risk and Business Continuity Unit is continually engaged defining, measuring and reporting risk to the Internal • Contributing to safeguarding assets; Control Department. The results of Operational Risk • Assessing the adequacy, effectiveness and efficiency of and Business Continuity Unit activities are periodically daily operations; and reviewed and assessed by TEB’s Risk Management Committee on behalf of the Board of Directors. • Contributing to the identification and assessment of risks related to the organization’s current and proposed The results of Operational Risk and Business Continuity future business activities, including new products. Unit activities are periodically reviewed and assessed by TEB’s Risk Management Committee and the unit reports • The Internal Control Department reports directly to the quarterly to the Board of Directors through the Audit Board of Directors through the Audit Committee on a Committee. quarterly basis.

TEB SH.A. 2014 ANNUAL REPORT 049 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS FOR THE YEAR ENDED DECEMBER 31, 2014

50 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A.

CONTENTS

PAGE independent auditor’s report 52-53 sTATEMENT OF FINANCIAL POSITION 54 STATEMENT OF COMPREHENSIVE INCOME 55 Statement of changesa in equity 56 STATEMENT OF CASH FLOWS 57 Notes to the financial statements 58-123

TEB SH.A. 2014 ANNUAL REPORT 51 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. INDEPENDENT AUDITOR’S REPORT

To the Shareholders and Board of Directors of TEB Sh. a.

We have audited the accompanying financial statements of TEB sh.a which comprise the statement of financial position as of 31 December 2014 and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended and a summary of significant accounting policies and other explanatory notes.

Management’s responsibility for the financial statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

52 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

Opinion

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of TEB Sh.a as of 31 December 2014 and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

PricewaterhouseCoopers Kosovo sh.p.k

Prishtina,

2 April 2015

TEB SH.A. 2014 ANNUAL REPORT 53 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. STATEMENT OF FINANCIAL POSITION For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

Note December 31, 2014 December 31, 2013 ASSETS Cash on hand and balances with banks 4 67,893 81,152 Loans and advances to banks 5 - 17,749 Loans and advances to customers 6 287,025 266,060 Financial assets available for sale 8 7,277 825 Property, plant and equipment 11 4,274 4,453 Intangible assets 12 830 675 Other financial assets 9 1,569 1,345 Deferred tax assets 24 71 - Other assets 10 404 142

Total assets 369,343 372,401

LIABILITIES Due to customers 13 314,353 327,232 Other financial liabilities 14 2,380 1,456 Other liabilities 15 1,102 997 Borrowings 16 15,853 16,322

Total liabilities 333,688 346,007

SHAREHOLDERS’ EQUITY Share capital 17 24,000 24,000 Retained earnings 11,655 2,394

Total shareholders’ equity 35,655 26,394

Total liabilities and shareholders’ equity 369,343 372,401

These financial statements have been approved by the Executive Management of the bank on 18 February 2015 and signed on their behalf by:

Mr. Ayhan Albeyoğlu Mr. Dukagjin Shylemaja Managing Director Deputy Managing Director

The accompanying notes from 1 to 28 form an integral part of these financial statements.

54 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. STATEMENT OF COMPREHENSIVE INCOME For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

Year ended Year ended Note December 31, 2014 December 31, 2013

Interest income 18 34,106 30,549 Interest expense 19 (5,746) (9,660) Net interest income 28,360 20,889

Fee and commission income 20 7,602 6,328 Fee and commission expense 21 (1,858) (1,229) Net fee and commission income 5,744 5,099

Net foreign exchange gain 250 209 Other operating income 53 98 Impairment losses on loans to customers 6 (8,396) (7,387) Other impairment losses and provisions 7 217 (223) Staff costs 22 (6,908) (6,102) Depreciation and amortisation (1,819) (1,844) Administrative and other operating expenses 23 (7,170) (6,535) Profit before tax 10,331 4,204

Income tax expense 24 (1,141) (418) Deferred income tax 71 - Net profit for the year 9,261 3,786

Other comprehensive income - -

Total comprehensive income 9,261 3,786

The accompanying notes from 1 to 28 form an integral part of these financial statements.

TEB SH.A. 2014 ANNUAL REPORT 55 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. STATEMENT OF CHANGES IN EQUITY For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

(Accumulated loss)/ Share capital Retained earnings Total

Balance as at January 1, 2013 23,000 (1,392) 21,608

Capital subscribed 1,000 - 1,000 Net profit for the year - 3,786 3,786 Other comprehensive income - - - Total comprehensive income - 3,786 3,786

Balance as at December 31, 2013 24,000 2,394 26,394

Capital subscribed - - - Net profit for the year - 9,261 9,261 Other comprehensive income - - - - 9,261 9,261

Balance as at December 31, 2014 24,000 11,655 35,655

The accompanying notes from 1 to 28 form an integral part of these financial statements.

56 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. STATEMENT OF CASH FLOWS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

Year ended Year ended Notes December 31, 2014 December 31, 2013 Cash flows from operating activities Profit for the year before taxation 10,331 4,204 Depreciation 11 1,280 1,382 Amortization 12 539 462 Impairment losses on loans to customers 6,7 8,178 7,610 Loss from sale of assets 33 26 Write off of property, plant and equipment (33) (25) Interest income 18 (34,106) (30,549) Interest expense 19 5,746 9,660 (8,032) (7,230) Decrease/(Increase) in balance with CBK 531 (6,090) Increase in loans and advances to customers (29,432) (50,269) Increase in other financial assets (224) (361) (Increase)/Decrease in other assets (262) 107 (Decrease)/Increase in due to customers (14,195) 58,119 Increase in other financial liabilities 924 302 Increase in other liabilities 106 380 (50,584) (5,042) Interest received 34,211 29,959 Interest paid (4,429) (10,917) Income tax paid (926) (426) Cash (outflows)/inflows from operating activities (21,728) 13,574

Cash flows from investing activities Purchases of property and equipment (1,134) (3,025) Purchases of intangible assets (694) (611) Purchases of financial assets available for sale (6,452) (217)

Net cash used in investing activities (8,280) (3,853)

Cash flows from financing activities Proceeds from borrowings (469) 9,898 New capital subscribed - 1,000 Cash (outflows)/inflows from financing activities (469) 10,898

(Decrease)/Increase in cash and cash equivalents (30,477) 20,619

Cash and cash equivalents at January 1 69,568 48,949 Cash and cash equivalents at December 31 4.1 39,091 69,568

The accompanying notes from 1 to 28 form an integral part of these financial statements.

TEB SH.A. 2014 ANNUAL REPORT 57 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

1. GENERAL

In accordance with the Central Bank of Kosovo (“CBK”) regulations, TEB Sh.a. (The “Bank”) obtained a license for banking activities on December 19, 2007 and commenced operations during January 2008. The Bank’s registered head office is located in Prishtina, Kosovo. The Bank operates as a commercial and savings bank to all categories of customers within Kosovo, through its network of 25 (2013: 26) branches in Prishtina, Gjakova, Peja, Prizren, Ferizaj, Mitrovica and Gjilan.

The Bank is controlled by TEB Holding incorporated in Turkey (Parent), which owns 100% of the ordinary shares as at 31 December 2014 (31 December 2013: 100% ordinary shares). The shareholders of TEB Holding are BNP Paribas and Çolakoğlu Group, each of them owning 50% of shares.

The Bank’s registered head office is located at street. Agim Ramadani, No. 15, 10000 Prishtina, Kosovo.

The financial statements of the Bank for the year ended 31 December 2014 were approved by the Executive Management of the bank on 18 February 2015.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2.1 Statement of compliance

The Bank prepares its financial statements according to International Financial Reporting Standards (IFRS). The Bank’s financial statements for the year ended December 31, 2014 are prepared in accordance with IFRS as issued by the IASB and its predecessor body. Additionally, the interpretations issued by the International Financial Reporting Standards Interpretations Committee (IFRSIC) and its predecessor body have been applied.

The Bank’s IFRS financial statements comprise the statement of financial position, statement of comprehensive income, the statement of changes in equity, the statement of cash flows, significant accounting policies and the notes to the financial statements

2.2 Basis of preparation

The financial statements have been prepared on the historical cost basis except for the revaluation of financial instruments. The principal accounting policies are set out below.

2.3 Functional Currency

In accordance with IAS 21 the Bank’s functional currency is EUR as it is the currency of the primary economic environment in which the Bank operates and it reflects the economic substance of the underlying events.

2.4 Interest income and expense

Interest income and expense are recognised in the profit and loss for all interest bearing instruments on an accrual basis using the effective yield method.

58 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.5 Fee and commission

The fee and commission income and expenses arisen from providing, i.e. using of banking services are recorded in the profit and loss as incurred, i.e. at the moment the services are provided, i.e. used.

Loan management fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the loan.

Fee and commission income and expenses also include fees from letters of guarantees and letters of credit issued by the Bank in favour of the clients, fees arising from domestic and international bank charges, and other services provided by the Bank.

2.6 Financial instruments i. Classification

Financial assets are classified in the following categories: financial assets available-for-sale and loans and receivables. The classification of financial assets is determined at their initial recognition, depends on the instrument’s characteristics and management’s intention.

Loans and receivables are non-derivative financial instruments with fixed or determinable payments that are not quoted on active markets.

Available for sale financial assets are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. ii. Measurement

Financial assets are measured initially at its fair value plus transaction costs, if any. Loans and receivables are initially recognized at fair value plus transaction costs, if any. After initial recognition these are subsequently measured at amortized costs using the effective interest rate method. Amortized cost is calculated using the effective interest rate method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument, when applicable.

The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period.

TEB SH.A. 2014 ANNUAL REPORT 59 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.6 Financial instruments (continued) iii. Specific instruments

Cash and cash equivalents

Cash and cash equivalents are items which can be converted into cash at short notice (with less than three months original maturity) and which are subject to an insignificant risk of changes in value. Amounts which relate to funds that are of a restricted nature are excluded from cash and cash equivalents. Cash and cash equivalent are carried at amortized cost.

Mandatory liquidity reserves

In accordance with the CBK rules, the Bank should meet the minimum average liquidity requirement. The liquidity requirement is calculated on a weekly basis as 10% of the deposit base, defined as the average total deposit liabilities to the non-banking public in EUR and other currencies, over the business days of the maintenance period. The assets with which the Bank may satisfy its liquidity requirement are the EUR deposits with the CBK and 50% of the EUR equivalent of cash denominated in readily convertible currencies. Deposits with the CBK must not be less than 5% of the applicable deposit base. As the respective liquid assets are not available to finance the Bank’s day to day operations, they have been excluded from cash and cash equivalents for the purposes of the cash flow statement.

Financial assets available for sale

At initial recognition, available-for-sale financial assets are recorded at fair value plus transaction costs, if any. Subsequently they are carried at fair value. The fair values reported are either observable market prices or values calculated with a valuation technique based on current observable market. Gains and losses arising from changes in fair value of available- for-sale financial assets are recognized through other comprehensive income in the position “revaluation reserve from available-for-sale financial instruments”, until the financial asset is derecognized or impaired. At this time, the cumulative gain or loss previously recognized in other comprehensive income is transferred to profit or loss through reclassification. Interest calculated using the effective interest rate method and foreign currency gains and losses on monetary assets classified as available-for-sale are recognized in the profit or loss.

Loans and advances

Loans and advances are classified as loans and receivables. Loans and receivables are measured at amortized cost. The amortized cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount, and minus any reduction (through the use of an allowance account) for impairment or un-collectability. Loans and advances are reported net of allowances for loans impairment to reflect the estimated recoverable amounts.

60 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.6 Financial instruments (continued) iv. Derecognition

Financial assets are derecognized when the contractual rights to the cash flows from the financial assets expire or financial assets are transferred and transfer qualifies for derecognition. The transaction is treated as a transfer of a financial asset, where substantially all risks and rewards of ownership are transferred. When the bank neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, it shall determine whether it has retained control of the financial asset. A financial liability is derecognized from statement of financial position when, and only when, it is extinguished. When the obligation specified in the contract is discharged or cancelled or expires, i.e. when the obligation specified in the contract is discharged, cancelled or expires. v. Impairment of financial assets

An assessment is made at each balance sheet date to determine whether there is objective evidence that a financial asset or group of financial assets may be impaired. If such evidence exists, the estimated recoverable amount and any impairment loss of that asset is determined, based on the net present value of future anticipated cash flows, and is recognized for the difference between the recoverable amount and the carrying amount as follows:

Loans and advances to customers are reported at amortized cost net of provision (allowances) to reflect the estimated recoverable amounts.

A credit risk provision for loan impairment is established if there is objective evidence that the Bank will not be able to collect the amounts due according to original contractual terms. The amount of the provision is the difference between the carrying amount and estimated recoverable amount, calculated as the present value of expected cash flows including amounts recoverable from guarantees and collateral, discounted at the instrument’s original effective interest rate.

The allowances are made against the carrying amount of loans and advances that are identified as being impaired based on regular reviews of outstanding balances to reduce these loans and advances to their recoverable amounts. The allowance for loan impairment also covers losses where there is objective evidence that probable losses are present in components of the loan portfolio at the balance sheet date. These have been estimated based upon historical patterns of losses in each component and the credit ratings assigned to the borrowers reflect the current economic environment in which the borrowers operate.

Classification of loans is based upon a review of all factors attended to the credit, contain the weaknesses that are inherent in a credit, or if there is a probability that a portion of the loan amount will not be paid. The detailed criteria for each classification will be explained in the below stated points. In cases when a customer has different products in the Bank with different classifications, the worst classification will be applied to all products of that customer except for the loan exposures that meet the “split” classification criteria.

TEB SH.A. 2014 ANNUAL REPORT 61 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.6 Financial instruments (continued) v. Impairment of financial assets (continued)

In situations when a customer has loan exposures towards different financial institutions, and has different classifications, the loan exposures are not be classified better than one category from the worst classification, except for the loan exposures that meet the “split” classification criteria. This applies for customers with total risk amount greater than EUR 50,000 at our Bank and that are individually assessed by the Bank. This is applied only to in cases where a borrower’s exposure in other banks is above EUR 5,000.

In cases when loan exposure is classified to a better category must be taken into consideration the sustained performance of the borrower, while in case of classification of loan exposure of the borrower in another category must be taken into consideration the weaker classification in another financial institution.

As a general rule, classification of customers’ total exposure is determined based on maximal delay of all customer products except special cases where the Bank decides to make split classification which means that one product can be classified differently from the other product of the same customer.

Classification of loans corresponds with the Regulation of the Central Bank of Kosovo (CBK) on Credit Risk Management (“CRM”).

Ranking of categories is as follows:

Category A- Standard

Includes all credit risk exposures, including off-balance sheet exposures that carry normal credit risk. Available information concerning the credit exposure, the performance of the customer’s account, and the financial data all indicate that the settlement of the exposure is reasonably certain without difficulties, (or the obligation is fully secured by eligible collateral. The loan is current, or delinquency is less than thirty (30) days from the date of due payment or maturity. Overdraft facilities are standard loans that are within established limits or only temporarily exceed the limit by less than 5% (five percent) or are for less than thirty (30) days, and cash flow into the account is sufficient to liquidate the overdraft balance within thirty (30) days of the expiration date of the facility.

Category B- Watch

Special Attention (or Watch) - This classification should be used to identify and monitor exposures which contain weaknesses or potential weaknesses that, at the time of review, do not jeopardize the repayment of the credit or reflect a potential for loss, but which, if not addressed or corrected, could result in the deterioration of the credit to a substandard or more severe classification. Absent any documented evidence to the contrary, Banks must classify as “special attention” those exposures that are overdue from thirty-one to sixty (31 - 60) days or those with continuous indebtedness in excess of 5% (five percent) of approved lines from thirty-one to sixty (31-60) days overdue. This category of classification is intended for banks to identify and address potentially weak relationships at an early stage. This classification may also be used for credits or groups of credits that are poorly structured as a result of insufficient analysis or technical knowledge by the lending officer(s). This category should not be used for exposures that have documentation weaknesses that do not affect adversely the repayment potential of the exposure.

62 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.6 Financial instruments (continued) v. Impairment of financial assets (continued)

Category C-Substandard

Substandard - Includes exposures which, based upon a review of all factors attendant to the credit, have well defined credit weaknesses that jeopardize repayment of the credit in the normal course. A substandard credit is one which, by an analysis of financial data and other respective factors, is not currently protected by the sound worth and paying capacity of the borrower or guarantors or the value of the eligible collateral, if any. Recourse to a responsible and able guarantor for repayment that would involve prolonged negotiations before liquidation of the credit would invoke a substandard classification. The need for recourse to the collateral as the means of satisfying the obligation also would be the basis for a substandard classification.

Absent any documented evidence to the contrary, an exposure must be classified at least substandard if any of the following criteria apply:

(a) Deposits/cash flows into the customer’s overdraft account are insufficient to liquidate the outstanding balance from sixty-one to ninety (61-90) days. (b) The customer exceeded the authorized limit of loan exposure by 5% (five percent) or more, for sixty-one to ninety (61- 90) days without paying this excess or without the banks management formally raising the authorized limit. (c) the customer is overdue in repaying contractual instalments (including interest) for sixty-one to ninety (61-90) days. (d) The maturity/expiration date of the loan or other loan exposures is sixty-one to ninety (61-90) days past due without repayment.

Category D-Doubtful

Doubtful - Includes exposures which, based upon a review of all factors attendant to the credit, contain all the weaknesses that are inherent in a substandard credit, but which are so pronounced that there is a strong probability that a significant portion of the principal amount will not be paid. There is a likelihood of loss, but the exact amount cannot be clearly defined at the time of review or is dependent upon the occurrence of a future act or event. Although the possibility of loss is thus extremely high, because of significant pending factors, reasonably specific, which could be expected to work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until more exact status may be determined. Examples of such pending factors include but are not limited to mergers, acquisitions, capital restructuring, furnishing new collateral or realistic refinancing plans. Uncooperative guarantors or those who are in weak financial condition should not be considered as being able to provide strength to the credit.

Recourse to any available collateral that would not be sufficient to cover the amount owing may also justify a doubtful classification.

TEB SH.A. 2014 ANNUAL REPORT 63 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.6 Financial instruments (continued) v. Impairment of financial assets (continued)

Category D-Doubtful (continued)

Absent any documented evidence to the contrary, an exposure is classified at least doubtful if any of the following criteria apply:

(a) Deposits/cash flows into the customer’s overdraft account are insufficient to liquidate the outstanding balance from ninety-one to one hundred eighty (91-180) days; The customer exceeded the authorized limit of loan exposures by 5% (five percent) or more for ninety-one to one hundred eighty (91- 180) days without paying this excess or without Banks’ management formally raising the authorized limit; (b) The customer is overdue in repaying any contractual instalment (including interest) for ninety-one to one hundred eighty (91-180) days; (c) there are deficiencies in the customer’s financial condition that have caused negative equity; (d) The maturity/expiration date of the loan other loan exposures is ninety-one to one hundred eighty (91-180) days past due without repayment.

Category E- Loss

Bad (Loss) - Include exposures which, based upon a review of all factors attendant to the credit, are of such little value or will require such an extended period to realize any value.

An exposure must be classified as bad (loss) if any of the following criteria apply:

(a) deposits/cash flows into the customer’s overdraft account are insufficient to liquidate the balance of the outstanding overdraft over one hundred eighty (180) days; The customer exceeded the authorized limit of loan exposures by 5% (five percent) or more for over one hundred eighty (180) days without paying the excess or without Banks’ management formally raising the authorized limit; (b) The customer fails to repay a contractual instalment (including interest) for over one hundred eighty (180) days; (c) The maturity/expiration date of the loan or other loan exposures is over one hundred eighty (180) days past due without repayment.

When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been carried out and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to the profit and loss.

If the amount of the provision for loan impairment subsequently decreases due to an event occurring after the write- down, the decrease of the provision is credited to the provision for loan impairment in the income statement.

64 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.6 Financial instruments (continued) v. Impairment of financial assets (continued)

Rescheduled Loans

Rescheduled loan exposures are classified at the minimum substandard (“C”) category or worse and will continue to be classified at the same category until sustained performance is observed. After the completion of each period of sustained performance, the bank may classify reschedule loan exposures for one category better.

The detailed list of all rescheduled exposures containing information regarding customer, loan (product) type, collateral type, classification history, and sustained performance and exposure amounts is kept by Credit Monitoring and Reporting Department of the Credit Allocation and Monitoring Division and provided to the Risk Management Department on regular basis to be used in calculating the Bank’s loan loss provisions.

Split Classification

When the factors surrounding a particular exposure (value and liquidity of collateral security, partial guarantees, and different sources of repayment) can result in situations where a portion of the exposure is adequately protected or better protected than other portions. In such situations, where the credit factors are documented and assured, the split classifications and the corresponding provisioning requirements can be applied, in order to portray more appropriately the actual credit risk.

If the amount of the provision for loan impairment subsequently decreases due to an event occurring after the write down, the release of the provision is credited to the profit of loss.

Financial assets available for sale - the Bank assesses at each balance sheet date whether there is objective evidence that financial assets available for sale are impaired. In case of equity investments classified as available for sale, significant or prolonged decline in the fair value of the security below its cost is considered an objective evidence of impairment. If any such evidence exists, the cumulative loss is removed from other comprehensive income and recognised in the profit and loss. Impairment losses recognised in the profit and loss on equity instruments are not reversed through the profit and loss; subsequent increases in fair value after impairment are recognized in other comprehensive income.

If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the profit and loss, the impairment loss is reversed through the profit and loss.

TEB SH.A. 2014 ANNUAL REPORT 65 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.6 Financial instruments (continued) v. Impairment of financial assets (continued)

The following factors are considered in determining impairment losses on debt instruments:

• Default or delinquency in interest or principal payments; • Liquidity difficulties of the issuer; • Breach of contract covenants or conditions; • Bankruptcy of the issuer; • Deterioration of economic and market conditions; and • Deterioration in the credit rating of the issuer below the acceptable level.

Impairment losses recognized in the profit and loss are measured as the difference between the carrying amount of the financial asset and its current fair value. The current fair value of the instrument is its market price or discounted future cash flows, when the market price is not obtainable.

2.7 Foreign currencies

Transactions denominated in currencies other than Euro are translated in the functional currency at the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognized in the profit and loss (as net foreign exchange gain or loss).

Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

2.8 Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment loss, where required. Each year, the Bank assesses whether there are indications that assets may be impaired. If any such indication exists, the recoverable amounts are estimated. The estimated recoverable amount is the higher of an asset’s fair value less costs to sell and its value-in-use. When the carrying amount of an asset is greater than its estimated recoverable amount, it is written down to its recoverable amount and the difference is charged to the profit and loss.

Gains and losses on disposal of property, plant and equipment are determined by reference to their carrying amount and are taken into account in determining the operating result for the period. Repairs and maintenance are charged to the profit or loss when the expenditures are incurred.

Depreciation is charged using the straight line method, over the estimated useful lives of each part of an item of property and equipment. For additions depreciation is charged subsequent to the month of purchase while for disposals up to the month of disposal. Depreciation does not begin until the assets are available for use.

66 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.8 Property, plant and equipment (continued)

The annual depreciation rates used for each category of property, plant and equipment are as follows:

Category of assets Depreciation rates used

Leasehold improvements 5 years or lease term, whichever is shorter Furniture, fixtures and equipment 3-5 years Computers and related equipment 3-5 years Motor vehicles 5 years

2.9 Intangible assets

Intangible assets acquired by the Bank are stated at cost less accumulated amortisation and impairment losses, when required. Amortisation is provided on a straight-line basis at an annual rate of 20%.

Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific assets to which it relates. All other expenditure is expensed as incurred. Amortization does not begin until the assets are available for use.

2.10 Seized assets

Seized assets represent financial and non-financial assets acquired by the Bank in settlement of overdue loans. The assets are initially recognised at fair value when acquired and included in premises and equipment, other financial assets or inventories within other assets depending on their nature and the Bank’s intention in respect of recovery of these assets, and are subsequently re-measured and accounted for in accordance with the accounting policies for these categories of assets.

2.11 Impairment of non-financial assets

An impairment loss is recognised whenever the carrying value of an asset exceeds its recoverable amount. Recoverable amount of an asset is the higher of its fair value less costs to sell and value in use. Value in use of an asset is the present value of estimated future cash flows expected from the continuing use of an asset and from its disposal.

2.12 Due to banks

Due to banks are recorded when money or other assets are advanced to the bank by counterparty banks. The non- derivative liability is carried at amortised cost.

2.13 Due to customers

Due to customers are non-derivative liabilities to individuals, state or corporate customers and are carried at amortized cost.

TEB SH.A. 2014 ANNUAL REPORT 67 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.14 Borrowings

Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost. Any interest or fee related to the borrowed funds is expensed using the effective interest method and presented in the profit and loss for the period.

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are recognised as part of the cost of that asset. All other borrowing costs are recognised as an expense in the period in which they were incurred.

2.15 Taxation

Current income tax is calculated based on the income tax regulations applicable in Kosovo, using tax rates enacted at the balance sheet date. Effective from January 1, 2010, the tax rate on corporate income is set at 10% in accordance with Kosovo tax regulations currently in force, Law no. 03/L-162 “On Corporate Income Tax”.

The income tax charge in the profit and loss for the year comprises current tax and changes in deferred tax. Current tax is calculated on the basis of the expected taxable profit for the year using the tax rates enforced or substantially enacted at the balance sheet date. Taxable profit differs from profit as reported in the profit and loss because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. Taxes other than income taxes are recorded within operating expenses.

Deferred income tax is accounted for using the balance sheet liability method for temporary differences arising between the tax base of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realised or the liability is settled based on tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are offset when there is legally enforceable right to set off current tax assets against tax liabilities and when they relate to income taxes levied by the same taxation authority.

2.16 Off-balance sheet commitments and contingencies

In the ordinary course of its business, the Bank has entered into off-balance sheet commitments such as guarantees, commitments to extend credit and letters of credit and transactions with financial instruments. The provision for losses on commitments and contingent liabilities is maintained at a level adequate to absorb probable future losses. Management determines the adequacy of the provision based upon reviews of individual items, recent loss experience, current economic conditions, the risk characteristics of the various categories of transactions and other pertinent factors.

68 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.16 Off-balance sheet commitments and contingencies (continued)

Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities.

Financial guarantees at the date of issue are recognised at fair value which is equal to the amount of the fee received. The fee is amortized to the profit and loss during the contract period using the straight line method. The Bank’s liabilities under guarantees are subsequently measured at the greater of: the initial measurement, less amortization calculated to recognize fee income over the period of guarantee; or the best estimate of the expenditure required settling the obligation.

Guarantee for completion - are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to complete the work when due, in accordance with the terms of contract.

Guarantees at the date of issue are recognised at fair value which is equal to the amount of the fee received. The fee is amortized to the profit and loss during the contract period using the straight-line method. The Bank’s liabilities under guarantees are subsequently measured at the greater of:

• The initial measurement, less amortization calculated to recognize fee income over the period of guarantee; or • The best estimate of the expenditure required to settle the obligation

2.17 Provisions

Provisions are recorded when the Bank has a present legal or constructive obligation as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Provisions are measured at the management’s best estimate of the expenditure required to settle the obligation at the balance sheet date and are discounted to present value where the effect is material.

2.18 Employee benefits

The Bank pays contributions to the publicly administered pension plan (KPST) on a mandatory basis. The Bank has no further payment obligations once the contributions have been paid. The contributions are recognized as employee benefit expense when they are due.

2.19 Operating leases

Payments made under operating leases are charged to expenses on a straight-line basis over the term of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognized as an expense in the period in which termination takes place.

TEB SH.A. 2014 ANNUAL REPORT 69 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

3. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS

The following new standards and interpretations became effective for the Bank from 1 January 2014:

“Offsetting Financial Assets and Financial Liabilities” - Amendments to IAS 32 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2014). The amendment added application guidance to IAS 32 to address inconsistencies identified in applying some of the offsetting criteria. This includes clarifying the meaning of ‘currently has a legally enforceable right of set-off’ and that some gross settlement systems may be considered equivalent to net settlement. The standard clarified that a qualifying right of set off (a) must not be contingent on a future event and (b) must be legally enforceable in all of the following circumstances: (i) in the normal course of business, (ii) the event of default and (iii) the event of insolvency or bankruptcy. The amended standard did not have a material impact on the Bank’s financial statements.

“Amendments to IFRS 10, IFRS 12 and IAS 27 - Investment entities” (issued on 31 October 2012 and effective for annual periods beginning 1 January 2014). The amendment introduced a definition of an investment entity as an entity that (i) obtains funds from investors for the purpose of providing them with investment management services, (ii) commits to its investors that its business purpose is to invest funds solely for capital appreciation or investment income and (iii) measures and evaluates its investments on a fair value basis. An investment entity is required to account for its subsidiaries at fair value through profit or loss, and to consolidate only those subsidiaries that provide services that are related to the entity’s investment activities. IFRS 12 was amended to introduce new disclosures, including any significant judgements made in determining whether an entity is an investment entity and information about financial or other support to an unconsolidated subsidiary, whether intended or already provided to the subsidiary. The amended standard did not have a material impact on the Bank’s financial statements.

IFRIC 21 - “Levies” (issued on 20 May 2013 and effective for annual periods beginning 1 January 2014). The interpretation clarifies the accounting for an obligation to pay a levy that is not income tax. The obligating event that gives rise to a liability is the event identified by the legislation that triggers the obligation to pay the levy. The fact that an entity is economically compelled to continue operating in a future period, or prepares its financial statements under the going concern assumption, does not create an obligation. The same recognition principles apply in interim and annual financial statements. The application of the interpretation to liabilities arising from emissions trading schemes is optional. The interpretation did not have a material impact on the Bank’s financial statements.

Amendments to IAS 36 - “Recoverable amount disclosures for non-financial assets” (issued in May 2013 and effective for annual periods beginning 1 January 2014; earlier application is permitted if IFRS 13 is applied for the same accounting and comparative period). The amendments remove the requirement to disclose the recoverable amount when a CGU contains goodwill or indefinite lived intangible assets but there has been no impairment. The amended standard did not have a material impact on the Bank’s financial statements.

Amendments to IAS 39 - “Novation of Derivatives and Continuation of Hedge Accounting” (issued in June 2013 and effective for annual periods beginning 1 January 2014).The amendments allow hedge accounting to continue in a situation where a derivative, which has been designated as a hedging instrument, is novated (i.e parties have agreed to replace their original counterparty with a new one) to effect clearing with a central counterparty as a result of laws or regulation, if specific conditions are met. The amended standard did not have any material impact on the Bank’s financial statements.

70 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

3. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS (continued)

3.1 New Accounting Pronouncements

Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2015 or later, and which the Bank has not early adopted.

IFRS 9 “Financial Instruments: Classification and Measurement” (amended in July 2014 and effective for annual periods beginning on or after 1 January 2018). Key features of the new standard are:

• Financial assets are required to be classified into three measurement categories: those to be measured subsequently at amortised cost, those to be measured subsequently at fair value through other comprehensive income (FVOCI) and those to be measured subsequently at fair value through profit or loss (FVPL). • Classification for debt instruments is driven by the entity’s business model for managing the financial assets and whether the contractual cash flows represent solely payments of principal and interest (SPPI). If a debt instrument is held to collect, it may be carried at amortised cost if it also meets the SPPI requirement. Debt instruments that meet the SPPI requirement that are held in a portfolio where an entity both holds to collect assets’ cash flows and sells assets may be classified as FVOCI. Financial assets that do not contain cash flows that are SPPI must be measured at FVPL (for example, derivatives). Embedded derivatives are no longer separated from financial assets but will be included in assessing the SPPI condition. • Investments in equity instruments are always measured at fair value. However, management can make an irrevocable election to present changes in fair value in other comprehensive income, provided the instrument is not held for trading. If the equity instrument is held for trading, changes in fair value are presented in profit or loss. • Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income. • IFRS 9 introduces a new model for the recognition of impairment losses - the expected credit losses (ECL) model. There is a ‘three stage’ approach which is based on the change in credit quality of financial assets since initial recognition. In practice, the new rules mean that entities will have to record an immediate loss equal to the 12-month ECL on initial recognition of financial assets that are not credit impaired (or lifetime ECL for trade receivables). Where there has been a significant increase in credit risk, impairment is measured using lifetime ECL rather than 12-month ECL. The model includes operational simplifications for lease and trade receivables. • Hedge accounting requirements were amended to align accounting more closely with risk management. The standard provides entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 and continuing to apply IAS 39 to all hedges because the standard currently does not address accounting for macro hedging.

The Bank is currently assessing the impact of the new standard on its financial statements.

TEB SH.A. 2014 ANNUAL REPORT 71 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

3. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS (continued)

3.1 New Accounting Pronouncements (continued)

Amendments to IAS 19 - “Defined benefit plans: Employee contributions” (issued in November 2013 and effective for annual periods beginning 1 July 2014). The amendment allows entities to recognise employee contributions as a reduction in the service cost in the period in which the related employee service is rendered, instead of attributing the contributions to the periods of service, if the amount of the employee contributions is independent of the number of years of service. The amendment is not expected to have any material impact on the Bank’s financial statements.

Annual Improvements to IFRSs 2012 (issued in December 2013 and effective for annual periods beginning on or after 1 July 2014, unless otherwise stated below). The improvements consist of changes to seven standards. IFRS 2 was amended to clarify the definition of a ‘vesting condition’ and to define separately ‘performance condition’ and ‘service condition’; The amendment is effective for share-based payment transactions for which the grant date is on or after 1 July 2014. IFRS 3 was amended to clarify that (1) an obligation to pay contingent consideration which meets the definition of a financial instrument is classified as a financial liability or as equity, on the basis of the definitions in IAS 32, and (2) all non-equity contingent consideration, both financial and non-financial, is measured at fair value at each reporting date, with changes in fair value recognised in profit and loss. Amendments to IFRS 3 are effective for business combinations where the acquisition date is on or after 1 July 2014. IFRS 8 was amended to require (1) disclosure of the judgements made by management in aggregating operating segments, including a description of the segments which have been aggregated and the economic indicators which have been assessed in determining that the aggregated segments share similar economic characteristics, and (2) a reconciliation of segment assets to the entity’s assets when segment assets are reported. The basis for conclusions on IFRS 13 was amended to clarify that deletion of certain paragraphs in IAS 39 upon publishing of IFRS 13 was not made with an intention to remove the ability to measure short-term receivables and payables at invoice amount where the impact of discounting is immaterial. IAS 16 and IAS 38 were amended to clarify how the gross carrying amount and the accumulated depreciation are treated where an entity uses the revaluation model. IAS 24 was amended to include, as a related party, an entity that provides key management personnel services to the reporting entity or to the parent of the reporting entity (‘the management entity’), and to require to disclose the amounts charged to the reporting entity by the management entity for services provided. The Bank is currently assessing the impact of the amendments on its financial statements.

Annual Improvements to IFRSs 2013 (issued in December 2013 and effective for annual periods beginning on or after 1 July 2014). The improvements consist of changes to four standards. The basis for conclusions on IFRS 1 is amended to clarify that, where a new version of a standard is not yet mandatory but is available for early adoption; a first-time adopter can use either the old or the new version, provided the same standard is applied in all periods presented. IFRS 3 was amended to clarify that it does not apply to the accounting for the formation of any joint arrangement under IFRS 11. The amendment also clarifies that the scope exemption only applies in the financial statements of the joint arrangement itself. The amendment of IFRS 13 clarifies that the portfolio exception in IFRS 13, which allows an entity to measure the fair value of a group of financial assets and financial liabilities on a net basis, applies to all contracts (including contracts to buy or sell non-financial items) that are within the scope of IAS 39 or IFRS 9. IAS 40 was amended to clarify that IAS 40 and IFRS 3 are not mutually exclusive. The guidance in IAS 40 assists preparers to distinguish between investment property and owner-occupied property. Preparers also need to refer to the guidance in IFRS 3 to determine whether the acquisition of an investment property is a business combination. The Bank is currently assessing the impact of the amendments on its financial statements.

72 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

3. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS (continued)

3.1 New Accounting Pronouncements (continued)

IFRS 14, Regulatory deferral accounts (issued in January 2014 and effective for annual periods beginning on or after 1 January 2016). IFRS 14 permits first-time adopters to continue to recognise amounts related to rate regulation in accordance with their previous GAAP requirements when they adopt IFRS. However, to enhance comparability with entities that already apply IFRS and do not recognise such amounts, the standard requires that the effect of rate regulation must be presented separately from other items. An entity that already presents IFRS financial statements is not eligible to apply the standard. Description of the impact (only applicable in a first-time adopter’s first financial statements under IFRS).

Accounting for Acquisitions of Interests in Joint Operations - Amendments to IFRS 11 (issued on 6 May 2014 and effective for the periods beginning on or after 1 January 2016). This amendment adds new guidance on how to account for the acquisition of an interest in a joint operation that constitutes a business. The Bank is currently assessing the impact of the amendments on its financial statements.

Clarification of Acceptable Methods of Depreciation and Amortisation - Amendments to IAS 16 and IAS 38 (issued on 12 May 2014 and effective for the periods beginning on or after 1 January 2016). In this amendment, the IASB has clarified that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset. The Bank is currently assessing the impact of the amendments on its financial statements.

IFRS 15, Revenue from Contracts with Customers (issued on 28 May 2014 and effective for the periods beginning on or after 1 January 2017). The new standard introduces the core principle that revenue must be recognized when the goods or services are transferred to the customer, at the transaction price. Any bundled goods or services that are distinct must be separately recognised, and any discounts or rebates on the contract price must generally be allocated to the separate elements. When the consideration varies for any reason, minimum amounts must be recognised if they are not at significant risk of reversal. Costs incurred to secure contracts with customers have to be capitalised and amortized over the period when the benefits of the contract are consumed. The Bank is currently assessing the impact of the new standard on its financial statements.

Agriculture: Bearer plants - Amendments to IAS 16 and IAS 41 (issued on 30 June 2014 and effective for annual periods beginning 1 January 2016). The amendments change the financial reporting for bearer plants, such as grape vines, rubber trees and oil palms, which now should be accounted for in the same way as property, plant and equipment because their operation is similar to that of manufacturing. Consequently, the amendments include them within the scope of IAS 16, instead of IAS 41. The produce growing on bearer plants will remain within the scope of IAS 41. The Bank is currently assessing the impact of the amendments on its financial statements.

Equity Method in Separate Financial Statements - Amendments to IAS 27 (issued on 12 August 2014 and effective for annual periods beginning 1 January 2016). The amendments will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. The Bank is currently assessing the impact of the amendments on its separate financial statements.

TEB SH.A. 2014 ANNUAL REPORT 73 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

3. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS (continued)

3.1 New Accounting Pronouncements (continued)

Sale or Contribution of Assets between an Investor and its Associate or Joint Venture - Amendments to IFRS 10 and IAS 28 (issued on 11 September 2014 and effective for annual periods beginning on or after 1 January 2016). These amendments address an 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. A partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if these assets are held by a subsidiary. The Bank is currently assessing the impact of the amendments on its financial statements.

Annual Improvements to IFRSs 2014 (issued on 25 September 2014 and effective for annual periods beginning on or after 1 January 2016). The amendments impact 4 standards. IFRS 5 was amended to clarify that change in the manner of disposal (reclassification from “held for sale” to “held for distribution” or vice versa) does not constitute a change to a plan of sale or distribution, and does not have to be accounted for as such. The amendment to IFRS 7 adds guidance to help management determine whether the terms of an arrangement to service a financial asset which has been transferred constitute continuing involvement, for the purposes of disclosures required by IFRS 7. The amendment also clarifies that the offsetting disclosures of IFRS 7 are not specifically required for all interim periods, unless required by IAS 34. The amendment to IAS 19 clarifies that for post-employment benefit obligations, the decisions regarding discount rate, existence of deep market in high-quality corporate bonds, or which government bonds to use as a basis, should be based on the currency that the liabilities are denominated in, and not the country where they arise. IAS 34 will require a cross reference from the interim financial statements to the location of “information disclosed elsewhere in the interim financial report”. The Bank is currently assessing the impact of the amendments on its financial statements.

Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Bank’s financial statements.

4. CASH AND BALANCES WITH THE CENTRAL BANK

December 31, 2014 December 31, 2013

Cash on hand 13,837 17,289 Current accounts with banks 3,910 2,212 Overnight deposits 3,459 - Treasury bills with Central Bank - 140

Amounts held at the CBK Current account 17,885 32,178 Statutory reserve account 28,802 29,333

Cash and balances with the Central Bank 67,893 81,152

74 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

4. CASH AND BALANCES WITH THE CENTRAL BANK (continued)

4.1 Cash and cash Equivalents

Cash and cash equivalents in the statement of cash flows comprise:

December 31, 2014 December 31, 2013

Cash on hand and at banks 21,206 19,641 Unrestricted balance with CBK 17,885 32,178 Deposits with maturity with less than 3 months (note 5) - 17,749

Cash and cash equivalents 39,091 69,568

5. LOANS AND ADVANCES TO BANKS

December 31, 2014 December 31, 2013

Term deposits - 17,749

Total loans and advances to banks - 17,749

Current - 17,749

Term deposits earned annual interest at the following rates varying between:

2014 2013

for EUR 0.00% to 0.75% for EUR 0.10% to 1.50% for USD 0.03% to 0.14% for USD 0.3% to 1.25%

TEB SH.A. 2014 ANNUAL REPORT 75 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

6. LOANS AND ADVANCES TO CUSTOMERS

December 31, 2014 December 31, 2013

Loans to customers 233,467 209,128 Overdrafts 46,595 47,073 Credit cards 32,359 26,893 312,421 283,094

Provision for impairment on loans to customers (25,396) (17,034)

Total loans to customers 287,025 266,060

Current 89,035 80,290 Non-current 197,990 185,770

Overdraft facilities represent short term revolving facility and consumer loans.

As at December 31, 2014 loans and advances to customers include accrued interest income of EUR 1,991 thousand (2013: EUR 2,096 thousand).

The movement in the provision for impairment on loans to customers is as follows:

December 31, 2014 December 31, 2013

Provision for loan impairment at January 1 17,034 9,667 Charge during the year 8,396 7,387 Loans written-off (34) (20)

Provision for loan impairment at December 31 25,396 17,034

Impairment charge to profit and loss is detailed below:

December 31, 2014 December 31, 2013

Impairment charge for the year 8,396 7,387

Charge to profit and loss 8,396 7,387

76 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

6. LOANS AND ADVANCES TO CUSTOMERS (continued)

December 31, 2014 December 31, 2013

Provision charged to individuals: 5,651 4,145 Loans to customers 3,032 2,255 Overdrafts 114 72 Credit Cards 2,505 1,818 Provision charged to legal entities: 19,745 12,889 Loans to customers 15,642 10,147 Overdrafts 3,827 2,720 Credit Cards 276 22 Total 25,396 17,034

An industry analysis of the gross portfolio of loans to legal entities before provisions is as follows:

December 31, 2014 December 31, 2013 % age % age

Commercial Wholesale 23.91% 24.86% Manufacturing 6.34% 7.39% Consumption 5.62% 7.88% Service 2.13% 2.25% Hotels and restaurants 1.69% 1.87% Agriculture 0.81% 0.57% Construction 2.93% 3.4% Other 56.57% 51.78%

100.00% 100.00%

As at December 31, 2014 the ten major borrowers accounted for 5.38% (2013: 8.8%) of the total loan portfolio.

Included in the loans to customers are individually impaired loans to customers with a balance of EUR 22,908 thousand as at December 31, 2014 (2013: EUR 18,520 thousand).

TEB SH.A. 2014 ANNUAL REPORT 77 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

7. OTHER IMPAIRMENT LOSSES AND PROVISIONS

Impairment charge to profit and loss is detailed below.

December 31, 2014 December 31, 2013

Provision for guarantees 217 (205) Provision for unused vacation - (15) Provision for litigation cases - (3)

Charge to profit and loss 217 (223)

8. FINANCIAL ASSETS AVAILABLE FOR SALE

Financial assets available for sale of EUR 7,277 thousand as at December 31, 2014 (2013: EUR 825 thousand) represent government T-bills and Bonds from Central Bank of Kosovo. The government treasury discount bills have maturities ranging from January 14, 2015 to June 30, 2016 with yields ranging from 0.03% to 2.30%.

9. OTHER FINANCIAL ASSETS

December 31, 2014 December 31, 2013 - Accrued account maintenance and credit card fees 1,316 1,088 Other financial assets 130 174 Receivable from other financial institutions 123 83

Total other financial assets 1,569 1,345

Current 1,569 1,345

10. OTHER ASSETS

December 31, 2014 December 31, 2013

Prepaid expenses 75 67 Other receivable 82 63 Seized collateral on irrecoverable loans 247 12

Total other assets 404 142

Current 404 142

78 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

11. PROPERTY, PLANT AND EQUIPMENT

Furniture, Computers Leasehold fixtures and and related Motor Land improvements equipment equipment vehicles Total Cost:

As at January 1, 2013 - 3,064 166 4,931 750 8,911 Additions during the year 1,200 505 82 1,023 215 3,025 Write offs/disposals - - (3) (7) (41) (51) As at December 31, 2013 1,200 3,569 245 5,947 924 11,885

Additions during the year - 199 37 804 94 1,134 Write offs/disposals - (18) (1) (15) (70) (104) As at December 31, 2014 1,200 3,750 281 6,736 948 12,915

Accumulated depreciation: As at January 1, 2013 - 2,251 129 3,234 462 6,076 Charge for the year - 425 34 797 126 1,382 Write offs - - - (7) (19) (26) As at December 31, 2013 - 2,676 163 4,024 569 7,432 Charge for the year - 309 40 810 121 1,280 Write offs - (13) - (10) (48) (71) As at December 31, 2014 - 2,972 203 4,824 642 8,641

Net book value:

As at December 31, 2014 1,200 778 78 1,912 306 4,274

As at December 31, 2013 1,200 893 82 1,923 355 4,453

TEB SH.A. 2014 ANNUAL REPORT 79 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

12. INTANGIBLE ASSETS

Software

Cost: As at January 1, 2013 1,885 Additions 611 As at December 31, 2013 2,496

Additions 694

As at December 31, 2014 3,190

Accumulated amortization: As at January 1, 2013 1,359 Charge for the year 462

As at December 31, 2013 1,821

Charge for the year 539

As at December 31, 2014 2,360

Net book value:

As at December 31, 2013 675

As at December 31, 2014 830

All intangible assets are acquired assets and are amortized during its useful life.

80 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

13. DUE TO CUSTOMERS

December 31, 2014 December 31, 2013 Demand Deposits Individual 136,314 93,360 SME 50,438 41,396 Corporate & Commercial 36,530 29,219 223,282 163,975

Term Deposits Individual 58,047 109,458 SME 17,767 31,915 Corporate & Commercial 15,257 21,884 91,071 163,257

Total due to customers 314,353 327,232

Current 293,071 290,970 Non-Current 21,282 36,262

As at 31 December 2014, customer accounts include accrued interest expense of EUR 2,342 thousand (31 December 2013: EUR 3,659 thousand).

Analysis by class of business for term deposits and current accounts is as follows:

December 31, 2014 December 31, 2013 % of total due to % of total due to Sector customers customers

Individuals 62% 62% Enterprises and other legal entities 38% 38%

100% 100%

TEB SH.A. 2014 ANNUAL REPORT 81 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

14. OTHER FINANCIAL LIABILITIES

December 31, 2014 December 31, 2013

Pending clients transfers 1,176 336 Payables for credit cards bonus 583 524 Due to suppliers 514 496 SMS banking-mobile 69 83 Prepayment for credit cards 38 17

Total other financial liabilities 2,380 1,456 Current 2,380 1,456

Pending client’s transfers represents the payments collected on behalf of third parties through the clearing system, which remained unpaid to the intended recipients at the year end. In this amount is included amount of EUR 464 thousands (2013: EUR 291 thousands) payable to customs authorities, which was transferred on January 01, 2014 to the customs authorities bank account. The remaining balance represents amounts payable to other recipients.

15. OTHER LIABILITIES

December 31, 2014 December 31, 2013

Current income tax liability 596 216 Provisions for guarantees 185 403 Withholding tax payable 39 71 Deferred fee 63 87 Pension payable on salaries 46 44 Personnel income tax 34 32 VAT and other tax payable 47 33 Provision for unused holiday 15 15 Provision for legal cases 13 3 Other payables 64 93

Total other liabilities 1,102 997

Current 1,103 997

82 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

16. BORROWINGS

December 31, 2014 December 31, 2013

Subordinated borrowings 11,000 11,000 Other funds borrowed 5,000 5,500 Deferred front-end-fees (191) (213) Interest accrued 44 35

Total borrowings 15,853 16,322

Current 716 3,000 Non-current 15,137 13,322

Subordinated borrowings

(i) Loan 1 from IFC

During the year 2010 TEB Sh.a entered into a loan agreement with International Finance Corporation (the “IFC”) in amount of EUR 6,500 thousand. The purpose of the Loan is to provide Bank with Tier 2 Capital, and enable to use the proceeds for financing its general lending activities. The loan will be repaid in one bullet payment on the 10-th anniversary from the date of the disbursement. Interest will be paid semi-annually. The balance outstanding as at December 31, 2014 was EUR 6,457 thousand (December 31, 2013: EUR 6,452 thousand). The guarantor for this subordinated loan is TEB Holding A.S.

(ii) Loan 2 from IFC

During the year 2013 TEB Sh.a entered into a loan agreement with International Finance Corporation (the “IFC”) in amount of EUR 4,500 thousand. The purpose of the Loan is to provide the Bank with Tier 2 Capital, and enable the bank to use the proceeds for financing its general lending activities. The loan will be repaid in one bullet payment on the 10-th anniversary from the date of the disbursement. Interest will be paid semi-annually. The balance outstanding as at December 31, 2014 was EUR 4,425 thousand (December 31, 2013: EUR 4,416 thousand). The guarantor is TEB Holding A.S.

TEB SH.A. 2014 ANNUAL REPORT 83 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

16. BORROWINGS (continued)

Other funds borrowed

(i) Loan 1 from EBRD

During the year 2013 the bank entered into a borrowing agreement with EBRD in amount of EUR 2,500 thousand. The purpose of the borrowing is financing loans to customers for energy efficiency. The balance outstanding as at December 31, 2014 was EUR 2,462 thousand (December 31, 2013: EUR 2,454 thousand).

(ii) Loan 2 from EBRD

During the year 2014 the bank entered into a borrowing agreement with EBRD in amount of EUR 2,500 thousand. The purpose of the borrowing is financing loans to customers for energy efficiency. The balance outstanding as at December 31, 2014 was EUR 2,509 thousand.

17. SHARE CAPITAL

The authorised and paid up share capital of the Bank as at December 31, 2014 comprises 2,400 thousand ordinary shares with par value of EUR 10 each (2013: 2,400 thousand ordinary shares).

A summary of share ownership of the Bank is as follows:

Shareholder As at December 31, 2014 As at December 31, 2013

Percentage Percentage ownership amount ownership amount

TEB Holding A.S. 100% 24,000 100% 24,000

100% 24,000 100% 24,000

The shares are ordinary in nature and have no rights, preferences or restrictions attached thereto.

84 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

18. INTEREST INCOME

Year ended Year ended December 31, 2014 December 31, 2013

Income from loans and advances to customers 34,058 30,504 Income from available for sale financial assets 32 12 Income on loans and advances to banks 16 33

Total interest income 34,106 30,549

Interest income for accrued on impaired financial assets in 2014 is nil EUR (2013: EUR 254 thousand).

19. Interest Expense

Year ended Year ended December 31, 2014 December 31, 2013

Interest on term deposits 4,902 7,441 Interest on borrowed funds 767 539 Interest on saving deposits 77 1,680

Total interest expense 5,746 9,660

20. Fee and commission income

Year ended Year ended December 31, 2014 December 31, 2013

Credit cards 3,806 3,128 Account service fees 1,227 867 International payments 1,141 877 Domestic payments 599 478 Guarantees and letters of credit 476 559 SMS Banking 189 165 Others 164 254

Total fee and commission income 7,602 6,328

TEB SH.A. 2014 ANNUAL REPORT 85 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

21. Fee and commission EXPENSES

Year ended Year ended December 31, 2014 December 31, 2013

Credit card fees 692 442 Central bank fees 311 166 International payments 212 205 Domestic payments 93 32 Guarantees and letters of credit 48 52 Other fees 502 332

Total fee and commission expenses 1,858 1,229

22. staff costs

Year ended Year ended December 31, 2014 December 31, 2013

Salaries and wages 5,733 5,343 Bonuses 600 302 Mandatory staff pension contributions 273 262 Health insurance 141 145 Staff training 130 43 Other costs 31 7

Total staff costs 6,908 6,102

86 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

23. Administrative and Other operating expenses

Year ended Year ended December 31, 2014 December 31, 2013

Operating lease expenses 1,358 1,271 Telecommunications 817 739 Security and insurance costs 827 662 Marketing and sponsorship 827 638 Service expenses, credit cards 497 442 Travelling expenses 331 310 Consultancy and professional fees 304 261 Office supplies 315 354 Other banking expenses 233 327 Public utilities (heating and electricity) 342 323 Repair and maintenance 220 241 Cleaning expenses 165 210 Business taxes and licenses 159 146 Representation 97 164 Legal and audit fees 139 116 Software maintenance fee 113 60 Other 373 126 Taxes and commissions 4 89 POS expenses 17 30 Loss on sale or disposal of fixed assets 32 26

Total administrative and other operating expense 7,170 6,535

TEB SH.A. 2014 ANNUAL REPORT 87 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

24. INCOME Tax EXPENSE

Year ended Year ended December 31, 2014 December 31, 2013

Current income tax expense (1,141) (418) Deferred tax movement 71 -

Tax expense (1,070) (418)

Detailed below is the calculation of current income tax expense.

Year ended Year ended December 31, 2014 December 31, 2013

Profit before taxation 10,329 4,204

Add: expenses not deductible for tax purposes - - Less: Add back non-deductible expenses 1,081 (25) Deferred tax movement (711) -

Taxable profit for the year 10,699 4,179

Profit tax expense at 10% 1,070 418

Effective from January 1, 2010, the tax rate on corporate income is set at 10% in accordance with Kosovo tax regulations currently in force, Law no. 03/L-162 “On Corporate Income Tax”.

Following is the deferred tax asset arising from unused accumulated tax losses.

Deferred tax movement

Year ended Year ended December 31, 2014 December 31, 2013

Opening balance as of January 1, - - Charge for the year 71 -

Total deferred tax asset 71 -

88 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

25. RELATED PARTY DISCLOSURES

In determination of related parties Bank applies IAS 24 requirements. Related parties include:

• The parties which directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with the entity, • Parties in which the Bank has an interest that gives it significant influence or joint control over the entity, • private individuals who directly or indirectly have voting power in the Bank that gives them significant influence over the Bank, and entities controlled or jointly controlled by such individuals, members of the key management personnel, i.e. individuals with authority and responsibilities for planning, managing and controlling the Bank’s operations, including directors. • When taking into account each possible transaction with a related party, attention is focused on the substance of the relationship not just the legal form.

The Bank is controlled by TEB Holding A.S incorporated in Turkey (Parent), which owns 100% of the ordinary shares as at 31 December 2014 (2013: 100% ordinary shares).

The Bank performs a number of related party transactions in the course of its regular operations. The transactions include deposits, borrowings, and foreign currency transactions. These transactions were carried out on normal commercial terms and market prices.

TEB SH.A. 2014 ANNUAL REPORT 89 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

25. RELATED PARTY DISCLOSURES (continued)

The following table summarizes the scope of related party transactions, balances of assets and liabilities at 31 December 2014 and related income and expenses for the year then ended.

(parent) BNP Paribas TEB BNP SA Sucursal Findomestic December 31, 2014 TEB A.S Holding Paribas BNL en Espana Bank AD Total Receivables

Loans and advances to banks 11 - 2 2 - - 15 Other receivables 443 - - - - - 443

Total Receivables 454 - 2 2 - - 458

Liabilities

Other liabilities - 24 - - - - 24 Total Liabilities - 24 - - - - 24

Net Receivables/(Liabilities) 454 (24) 2 2 - - 434

Confirmed guarantees 3,175 - 250 60 210 75 3,770

Income Interest income ------Total Income ------

Expenses Interest expenses 2 - - - - - 2 Salaries rents and other expenses 7 67 1 4 3 82 Total Expenses 9 67 1 - 4 3 84

Net income/(expense) (9) (67) (1) - (4) (3) (84)

90 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

25. RELATED PARTY DISCLOSURES (continued)

The following table summarizes the scope of related party transactions, balances of assets and liabilities at 31 December 2013 and related income and expenses for the year then ended.

BNP (parent) Paribas TEB BNP Sofia BNL gruppo December 31, 2013 TEB A.S Holding Paribas Branch BNP Paribas Total Receivables

Loans and advances to banks 25 - 2 - 7 34 Other receivables 384 - - - - 384

Total Receivables 409 - 2 - 7 418

Liabilities

Other liabilities - 39 - - - 39 Total Liabilities - 39 - - - 39

Net Receivables/(Liabilities) 409 (39) 2 - 7 379

Confirmed guarantees 2,155 - 312 1,000 60 3,527

Income Interest income ------Total Income ------

Expenses Interest expenses 4 - - - - 4 Salaries rents and other expenses - 148 - - - 148 Total Expenses 4 148 - - - 152

Net income/(expense) (4) (148) - - - (152)

TEB SH.A. 2014 ANNUAL REPORT 91 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

25. RELATED PARTY DISCLOSURES (continued)

Key management Compensation

Year ended Year Ended December 31, 2014 December 31, 2013

Executive Executive Management Management Salaries 315 413 Bonus 116 116

Total 431 529

26. OFF BALANCE SHEET, COMMITMENTS AND CONTINGENCIES a. Guarantees and letters of credit

Credit related commitments include commitments to extend credit, letters of credit and guarantees given, which are designed to meet the requirements of the Bank’s customers. Letters of credit and guarantees given to customers commit the Bank to make payments on behalf of customers contingent upon the failure of the customer to perform under the terms of the contract. Commitments to extend credit represent contractual commitments to make loans and revolving credits. Commitments generally have fixed expiration dates, or other termination clauses. Since commitments may expire without being drawn upon, the total amounts do not necessarily represent cash requirements.

The aggregate outstanding amount of guarantees and letters of credit issued by the Bank are as follows:

December 31, 2014 December 31, 2013

Guarantees for payments 13,788 17,362 Letters of credit 658 1,318 Other guarantees and indemnities 664 590

15,110 19,270

Committed loans to customers not yet issued 61,411 56,500

Total 76,521 75,770

92 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

26. OFF BALANCE SHEET, COMMITMENTS AND CONTINGENCIES a. Guarantees and letters of credit (continued)

December 31, 2014 December 31, 2013 Guarantees:

Secured

Secured by cash deposits 980 3,020 Secured by other collateral 75,541 72,750 76,521 75,770

Unsecured - -

Total 76,521 75,770 b. Legal cases

From time to time and in the normal course of business, claims against the Bank may be received. On the basis of its own estimates and both internal and external professional advice, management is of the opinion that no material losses will be incurred in respect of claims, and accordingly no provision has been made in these financial statements. c. Operating lease commitments

The Bank has outstanding commitments under non-cancellable rental contracts which fall due as follows:

December 31, 2014 December 31, 2013

Within one year 1,433 1,231 Within two to five years 3,074 3,245

Total 4,507 4,476

27. EVENTS AFTER THE END OF THE REPORTING PERIOD

No material events subsequent to the date of the statement of financial position have occurred which require disclosure in the financial statements.

TEB SH.A. 2014 ANNUAL REPORT 93 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. Fair values AND RISK MANAGEMENT a. Capital Risk Management

The Bank’s objectives when managing capital are: (i) to comply with the capital requirements set by the CBK; (ii) to safeguard the Bank’s ability to continue as a going concern so that it can continue to provide returns for shareholders and (iii) to maintain a strong capital base to support the development of its business.

Capital adequacy and the use of regulatory capital are monitored monthly by the Bank’s management, employing techniques based on the guidelines of the CBK. The required information is provided to the CBK on a quarterly basis.

The risk-weighted assets are measured by means of a hierarchy of five risk weights classified according to the nature of and reflecting an estimate of credit, market and other risks associated with each asset is adopted for off-balance sheet exposure, with some adjustments to reflect the more contingent nature of the potential losses.

The regulation requires banks to hold the minimum level of the regulatory capital of EUR 7,000 thousand, to maintain a ratio of Tier I capital to the risk-weighted asset at or above the minimum of 8%, to maintain a total regulatory capital to risk -weighted assets at or above the minimum 12% and to maintain a total equity to total assets ratio (leverage ratio) at or above the minimum 7%.

94 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) a. Capital Risk Management (continued)

Minimum Risk-Based Capital Ratios

As of reporting period the bank capital levels, risk weighted assets and the capital adequacy ratios as per CBK regulations are as follows:

December 31, 2014 December 31, 2013 Tier 1 capital Share capital 24,000 24,000 Retained earnings 12,295 2,394 less: Intangible assets (830) (675) Credits to bank related persons (61) (132) Total qualifying Tier 1 capital 35,404 25,587 Tier 2 capital Subordinated liability 11,000 11,000 Provisions for loan losses (limited to 1.25% of RWA) 3,682 1,955 Total qualifying Tier 2 capital 14,682 12,955 Total regulatory capital 50,086 38,542

Risk-weighted assets: On balance sheet 280,536 250,113 Off balance sheet 14,021 16,466 Risk assets for operational risk 27,033 20,561 Total risk-weighted assets 321,590 287,140

Tier I capital to risk- weighted asset ratio 11.01% 8.91% Total capital to risk-weighted asset ratio 15.57% 13.42% Total equity to total assets ratio 9.81% 7.09%

TEB SH.A. 2014 ANNUAL REPORT 95 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) b. Categories of Financial Instruments

The table below is reconciliation of financial instruments classes to IAS39 measurement categories. As at the year end the Bank has the following financial instruments:

December 31, 2014 December 31, 2013

Loans and advances

Cash and balances with the Central Bank 67,893 81,152 Loans and advances to banks - 17,749 Loans and advances to customers 287,025 266,060 Financial assets available for sale 7,277 825 Other financial assets 1,569 1,345

Total financial assets 363,764 367,131

Financial liabilities at amortized cost

Due to customers 314,353 327,232 Borrowings from banks 4,971 5,455 Borrowing from other financial institutions 10,882 10,867 Other financial liabilities 2,380 1,456

Total financial liabilities 332,586 345,010 c. Financial Risk Management Objectives

The Bank’s corporate treasury function provides services to the business, coordinates access to domestic and international financial markets, monitors and manages the financial risks relating to the operations of the Bank through internal risk reports which analyse exposures by degree and magnitude of risks. These risks include market risk (including currency risk, interest rate risk), credit risk and liquidity risk.

Compliance with policies and exposure limits is reviewed by the management committees and internal auditors on a continuous basis. The Bank does not enter into or trade significant derivative financial instruments. d. Market Risk

The Bank’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The market risk is not concentrated to currency risk or interest rate risk, as major transactions of the Bank are in local currency and majority of the interest rates are fixed.

96 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) e. Foreign Currency Risk

The Policy on Management of the currency risk of TEB Sh.a, defines the methods of currency risk management in the bank. The purpose of currency risk management policy is the management and limitation of the potential loss, which is created as a result of changes on the foreign currency rates and, reflected on the business results and capital adequacy of the bank. The currency risk presents the probability of realizing the losses as per on balance and off balance sheet items, as a result of changes on the currency rates and/or non-harmonization on the level of assets, liabilities and off balance items in the same currency. The Bank manages foreign currency risk through managing currency structure of assets and liabilities in line with expected changes in foreign currency rates. Foreign exchange rate risk is managed and governed according to the policies of the TEB group. As such TEB Sh.a continuously monitors exchange rate movements and foreign currency markets, and determines its currency positions on a daily basis. Any exception to the policy shall be subject of approval by the Supervisory Board of TEB Sh.a and the Risk Management Department of TEB group. The bank and group policy forbids the bank to maintain open currency position for speculative purposes. Nevertheless, foreign exchange derivatives may be used for hedging purposes to close certain positions, in which case they are closely monitored at both local and group level.

The Bank undertakes transactions in both EUR and foreign currencies. The Bank has not entered into significant forward exchange or any embedded derivative transactions during the year ended December 31, 2014 and 2013.

The Bank is exposed to currency risk through transactions in foreign currencies. As the currency in which the Bank presents its financial statements is Euro, the Bank’s financial statements are effected by movements in the exchange rates between the Euro and other currencies.

The Bank’s transactional exposures give rise to foreign currency gains and losses that are recognized in the profit and loss. These exposures comprise the monetary assets and monetary liabilities of the Bank that are not denominated in the functional currency of the Bank.

Foreign currency sensitivity analysis

The Bank is mainly exposed to US Dollar (USD) and Swiss Franc (CHF). The following table details the Bank’s sensitivity to the respective increase and decrease in the value of Euro against the foreign currencies. The percentage used is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a respective change in foreign currency rates. The Bank has applied a 10% increase or decrease to the current currency exchange rates. A positive number below indicates an increase in profit and other equity where the EUR strengthens with respective percentages against the relevant currency.

TEB SH.A. 2014 ANNUAL REPORT 97 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) e. Foreign Currency Risk (continued)

+10% Euro -10% Euro December 31, 2014

Assets: 748 915 Impact on cash and due from banks

Liabilities: Impact on due to banks and customers 733 896

Net impact on profit and loss and equity 15 19

December 31, 2013

Assets: Impact on cash and due from banks 1,092 990

Liabilities: Impact on due to banks and customers 994 915

Net impact on profit and loss and equity 98 75

98 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) e. Foreign Currency Risk (continued)

The following table summarises the bank’s currency position as at December 31, 2014:

EURO USD CHF Others Total Financial assets Cash and balances with the Central Bank 59,660 4,946 2,580 707 67,893 Due from banks - - - - - Loans to customers - net 287,025 - - - 287,025 Financial assets available for sale 7,277 - - - 7,277 Other financial assets 1,569 - - - 1,569

Total assets 355,531 4,946 2,580 707 363,764

Financial liabilities Due to customers 306,285 4,910 2,577 581 314,353 Borrowings 15,853 - - - 15,853 Other financial liabilities 2,380 - - - 2,380

Total liabilities 324,518 4,910 2,577 581 332,586

Net currency position as at December 31, 2014 31,013 36 3 126 31,178

TEB SH.A. 2014 ANNUAL REPORT 99 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) e. Foreign Currency Risk (continued)

The following table summarises the bank’s currency position as at December 31, 2013:

EURO USD CHF Others Total Financial assets Cash and balances with the Central Bank 77,190 1,071 2,505 386 81,152 Due from banks 9,700 8,049 - - 17,749 Loans to customers - net 266,060 - - - 266,060 Financial assets available for sale 825 - - - 825 Other financial assets 1,345 - - - 1,345

Total assets 355,120 9,120 2,505 386 367,131

Financial liabilities Due to customers 316,272 8,516 2,095 348 327,231 Borrowings 16,322 - - - 16,322 Other financial liabilities 1,456 - - - 1,456 Shareholder’s equity

Total liabilities 334,050 8,516 2,095 348 345,009

Net currency position as at December 31, 2013 21,070 604 410 38 22,122

100 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) e. Foreign Currency Risk (continued)

The table below summarizes the gross open currency position of the Bank as at December 31, 2014. As per TEB group policies, individual open currency position should not be more than 5% of equity at any specific point of time, while as per CBK requirements, open currency position for any single currency should not be more than 20% of equity.

December 31, 2014 Spot position Total Assets in Liabilities Total position Limit original in original position % of (% of Currency currency currency Net in EUR capital capital)

USD 6,005 5,961 44 37 - 5 CHF 3,102 3,098 4 3 - 5 Others 550 453 97 125 - 5

9,657 9,512 145 165 - 15

December 31, 2013 Spot position Total Assets in Liabilities Total position Limit original in original position % of (% of Currency currency currency Net in EUR capital capital)

USD 12,577 11,711 866 628 3 5 CHF 3,075 2,573 502 409 2 5 Others 322 290 32 38 - 5

15,974 14,574 1,400 1,075 5 15

The exchange rates applied for principal currencies against the Euro were as follows:

December 31, 2014 December 31, 2013

United States Dollar (USD) 1.2141 1.3791 British Pound (GBP) 0.7789 0.8337 Swiss Franc (CHF) 1.2024 1.2276

TEB SH.A. 2014 ANNUAL REPORT 101 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) f. Interest rate risk

Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates and the risk that the maturities of interest bearing assets differ from the maturities of the interest bearing liabilities used to fund those assets (re-pricing risk). The length of time for which the rate of interest is fixed on a financial instrument therefore indicates to what extent it is exposed to interest rate risk. The assets and customer term deposits of the bank carry fixed interest rates while borrowings are at variable interest rate. The interest rates applicable to financial assets and liabilities are disclosed in relevant note to these financial statements. Interest rate risk management policy of the bank defines the method of identification, measurement, following up and controlling the risk in the event of interest rate modification. The purpose of policy is management on the exposure to interest rate risk and limitation of potential loss, which is created as a result of modification of levels of interest rates in the market and the effect of those changes on business results and the market value of bank capital.

The risk management department monitors exposure to interest-rate risk using the interest-rate gap analysis methodology. To that end, TEB Sh.a defines a set of input data that are based on cash flows by individual time interval. The principle of residual maturity is applied to agreements with a fixed interest rate, while the interest rate re-pricing date is taken into account for agreements with a variable interest rate.

All balance sheet and off balance sheet positions which are sensitive to interest rate risk are classified in the banking book and trading book. Positions are observed pursuant to these segments:

• Interest rate sensitive positions in Euros • Interest rate sensitive positions in other currencies (aggregate base and as per each currency severally)

Management believes that the Bank is not exposed to interest rate risk on its financial instruments except borrowings which are at variable interest rates. Funds and obligations which do not have defined maturity (such as deposits due on demand) or which have variable maturities in relation with original achievement specified with contract, are classified in the category as demand to deposits for the purpose of gap analysis.

102 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) f. Interest rate risk (continued)

Sensitivity analysis

Interest rate risk management is supplemented by monitoring the sensitivity of the Banks profit or loss and equity to various floating interest rate scenarios. The interest rate sensitivity analysis has been determined based on the exposure to interest rate risk at the reporting date. The analysis assumes a parallel increase of interest rates of 100 basis points (±1%) on the level of net profit and equity.

Exposure to interest rate risk and its impact on the bank’s statement of changes in equity and profit and loss is measured through Basis Point Value methodology. Results presented bellow represent the changes in profit and loss and equity, which would occur if interest rates will increase or decrease by 100 basis points.

Analysis of the sensitivity of profit or loss and equity to changes in interest rates is as follows:

Sensitivity of the profit and loss Interest rate sensitivity 2014 2013 Increase in basic points 776 25 +100 bps parallel shift Sensitivity of the profit and loss Interest rate sensitivity 2014 2013 Decrease in basic points 97 36 -100 bps parallel shift

TEB SH.A. 2014 ANNUAL REPORT 103 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) g. Credit risk

The Bank is subject to credit risk through its lending activities and in cases where it acts as an intermediary on behalf of customers or other third parties or issues guarantees. In this respect, the credit risk for the Bank stems from the possibility that different counterparties might default on their contractual obligations. The management of the credit risk exposures to borrowers is conducted through regular analysis of the borrowers’ credit worthiness. Exposure to credit risk is also managed in part by obtaining collateral and guarantees.

The Bank’s primary exposure to credit risk arises through its loans and advances to customers. The amount of credit exposure in this regard is represented by the carrying amounts of the assets on the balance sheet. In addition, the Bank is exposed to off-balance sheet credit risk through guarantees issued.

Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The major concentrations of credit risk arise by type of customer in relation to the Bank’s loans and advances, and guarantees issued.

For subsequent measurement and impairment of assets the bank assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

104 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) g. Credit risk (continued) a) Maximum exposure to credit risk:

As at December 31, 2014

Gross maximum Impairment Net maximum Fair value of exposure provision exposure collateral Cash and balances with the central bank 67,893 - 67,893 - Loans and advances to banks - - - - Loans to individuals 119,590 (5,651) 113,939 88,686 Loans to customers 92,966 (3,032) 89,934 88,443 Overdrafts 1,687 (114) 1,573 243 Credit cards 24,937 (2,505) 22,432 - Loans to legal entities 192,831 (19,745) 173,086 969,904 Loans to large entities 140,500 (15,642) 124,858 326,088 Overdrafts 44,908 (3,827) 41,081 643,816 Credit Cards 7,423 (276) 7,147 Total loans and advances to customers 312,421 (25,396) 287,025 1,058,590

Financial assets available for sale 7,277 - - -

Letters of credit 658 - 658 - Letters of guarantees 13,788 - 13,123 - Other guarantees and indemnities 664 - 664 - Loan commitments 61,411 - 61,411 - Contingent liabilities 76,521 - 75,856 -

The fair value of collateral is generally assessed on origination of the loan and the value is determined internally by their own appraisers. The values of collateral in the table are presented with values as the bank initially assessed their market value when the loan was granted. Subsequently, the bank did not perform re-assessment of the value of collateral. The banks consider that the value of collateral might be much different from the fair market value.

TEB SH.A. 2014 ANNUAL REPORT 105 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) g. Credit risk (continued) a) Maximum exposure to credit risk: (continued)

As at December 31, 2013

Gross maximum Impairment Net maximum Fair value of exposure provision exposure collateral Cash and balances with central bank 81,152 - 81,152 - Loans and advances to banks 17,749 - 17,749 - Loans to individuals 102,541 (4,145) 98,396 88,949 Loans to customers 78,620 (2,255) 76,365 88,481 Overdrafts 1,316 (72) 1,244 468 Credit Cards 22,605 (1,818) 20,787 - Loans to legal entities 180,553 (12,889) 167,664 936,764 Loans to large entities 129,089 (10,147) 118,942 563,063 Overdrafts 45,758 (2,720) 43,038 373,701 Credit Cards 5,706 (22) 5,684 - Total loans and advances to customers 283,094 (17,034) 266,060 1,025,713

Financial assets available for sale 825 - - -

Letters of credit 1,318 - 1,318 - Letters of guarantees 17,362 - 17,362 - Other guarantees and indemnities 590 - 590 - Loan commitments 56,500 - 56,500 - Contingent liabilities 75,770 - 75,770 -

106 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) g. Credit risk (continued) i. Loans and advances

Loans and advances are summarized as follows:

31 December 2014 31 December 2013 Loans and Loans and advances to Loans and advances to Loans and customers advances to banks customers advances to banks

Neither past due nor impaired 272,410 - 249,207 17,749 Past due but not impaired 17,103 - 15,367 - Individually impaired 22,908 - 18,520 -

Gross loans 312,421 - 283,094 17,749

Less: Allowances for impairment (25,396) - (17,034) -

Net loans 287,025 - 266,060 17,749

TEB SH.A. 2014 ANNUAL REPORT 107 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) g. Credit risk (continued) i. Loans and advances (continued) a) Loans and advances neither past due nor impaired:

As at December 31, 2014 Internal rating system

Fair value of A Total collateral Loans to banks - - - Loans to individuals 130,504 130,504 84,823 Loans to customers 103,399 103,399 84,580 Overdrafts 1,841 1,841 243 Credit cards 25,264 25,264 - Loans to legal entities 141,906 141,906 856,617 Loans to customers 96,260 96,260 549,505 Overdrafts 42,809 42,809 307,112 Credit cards 2,837 2,837 -

Total loans and advances to customers 272,410 272,410 941,440

Financial assets available for sale 7,277 7,277 -

Total 279,687 279,687 941,440

108 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) g. Credit risk (continued) i. Loans and advances (continued) a) Loans and advances neither past due nor impaired: (continued)

As at December 31, 2013 Internal rating system

Fair value of A Total collateral Loans to banks 17,749 17,749 - Loans to individuals 95,233 95,233 84,352 Loans to customers 74,259 74,259 83,921 Overdrafts 1,235 1,235 431 Credit cards 19,739 19,738 - Loans to legal entities 153,974 153,974 880,621 Loans to customers 106,291 106,291 528,574 Overdrafts 42,429 42429 352,047 Credit cards 5,254 5,254 -

Total loans and advances to customers 249,207 249,207 964,973

Financial assets available for sale 825 825 -

Total 267,782 267,782 964,973

TEB SH.A. 2014 ANNUAL REPORT 109 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) g. Credit risk (continued) i. Loans and advances (continued) b) Loans and advances past due but not impaired:

As at December 31, 2014

Up to Up to Fair value of 30 days 60 days Total collateral Loans to individuals 2,256 758 3,014 2,799 Loans to customers 1,632 317 1,949 2,799 Overdrafts - 25 25 - Credit Cards 624 416 1,040 - Loans to legal entities 11,162 2,927 14,089 74,310 Loans to customers 10,346 2,319 12,665 67,881 Overdrafts 517 441 958 6,429 Credit Cards 299 167 466 -

Total loans and advances to customers 13,418 3,685 17,103 77,109

As at December 31, 2013

Fair value of A B Total collateral Loans to individuals 2,868 490 3,358 4,199 Loans to customers 2,044 278 2,322 4,169 Overdrafts 5 37 42 30 Credit Cards 819 175 994 - Loans to legal entities 9,808 2,201 12,009 66,577 Loans to customers 8,650 1,506 10,156 58,305 Overdrafts 814 643 1,457 8,272 Credit Cards 344 52 396 -

Total loans and advances to customers 12,676 2,691 15,367 70,776

110 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) g. Credit risk (continued) i. Loans and advances (continued) c) Loans and advances individually impaired

The breakdown of the gross amount of individually impaired loans and advances by class, are as follows:

Gross loans and advances Net loans and advances individually impaired Impairment individually impaired December 31, 2014

Loans to individuals 5,280 (4,932) 348 Loans to customers 2,672 (2,535) 137 Overdrafts 114 (107) 7 Credit Cards 2,494 (2,290) 204 Loans to legal entities 17,628 (16,494) 854 Loans to customers 14,049 (13,062) 802 Overdrafts 3,322 (3,192) 36 Credit Cards 257 (240) 16 Loans and advances to customers 22,908 (21,426) 1,202

Gross loans and advances Net loans and advances individually impaired Impairment individually impaired December 31, 2013

Loans to individuals 4,009 (3,236) 773 Loans to customers 2,028 (1,595) 433 Overdrafts 74 (61) 13 Credit Cards 1,907 (1,580) 327 Loans to legal entities 14,511 (11,667) 2,844 Loans to customers 11,743 (9,211) 2,532 Overdrafts 2,745 (2,434) 311 Credit Cards 23 (22) 1 Loans and advances to customers 18,520 (14,903) 3,617

TEB SH.A. 2014 ANNUAL REPORT 111 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) g. Credit risk (continued) i. Loans and advances (continued) c) Loans and advances individually impaired (continued)

The financial effect of collateral as of 31 December 2014 is presented below:

Allocated to: Loans to individuals Loans to legal entities Loans to Loans to customers Overdraft customers Overdraft Total

Type of Collateral: Mortgages 19,553 - 288,671 96,511 404,735 Cash collateral 4,338 216 7,323 3,682 15,559 Goods pledge 57,901 27 304,001 206,611 568,540 Car pledge 6,651 - 42,409 19,284 68,344

Total 88,443 243 642,404 326,088 1,057,178

The financial effect of collateral as of 31 December 2013 is presented below:

Allocated to: Loans to individuals Loans to legal entities Loans to Loans to customers Overdraft customers Overdraft Total

Type of Collateral: Mortgages 20,244 - 264,994 121,593 406,831 Cash collateral 4,875 455 4,945 3,689 13,964 Goods pledge 55,142 13 289,204 225,330 569,689 Car pledge 8,219 - 37,507 23,091 68,817

Total 88,480 468 596,650 373,703 1,059,301

112 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) g. Credit risk (continued) i. Loans and advances (continued) c) Loans and advances individually impaired (continued)

The effect of collateral at 31 December 2014:

Over-collateralized Under-collateralized Assets Assets Carrying value of Fair value of Carrying value of Fair value of the assets collateral the assets collateral

Loans to individuals 47,277 87,989 66,944 697 Loans to customers 47,148 87,746 44,328 697 Overdrafts 129 243 1,366 - Credit cards - - 21,250 - Loans to legal entities 175,287 966,561 22,343 3,343 Loans to customers 131,421 640,755 12,242 3,061 Overdrafts 43,866 325,806 876 282 Credit cards - - 9,225 -

Total 222,564 1,054,550 89,287 4,040

TEB SH.A. 2014 ANNUAL REPORT 113 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) g. Credit risk (continued) i. Loans and advances (continued) c) Loans and advances individually impaired (continued)

The effect of collateral at 31 December 2013:

Over-collateralized Under-collateralized Assets Assets Carrying value of Fair value of Carrying value of Fair value of the assets collateral the assets collateral

Loans to individuals 45,046 88,123 60,200 826 Loans to customers 44,870 87,655 38,008 826 Overdrafts 176 468 1,107 - Credit cards - - 21,085 - Loans to legal entities 160,579 968,412 16,694 3,352 Loans to customers 116,641 595,243 9,510 2,821 Overdrafts 43,938 373,169 1,398 531 Credit cards - - 5,786 -

Total 205,625 1,056,535 76,894 4,178

The collaterals taken in consideration for the mitigation of the credit risk consists of immoveable properties such as land and buildings and pledge on moveable properties such as stocks and any other moveable property which could be converted in to liquid assets on an arm’s length transaction. As prescribed by the credit policy the exposure of the Bank should be covered at least 100% in correlation with the market value of the collateral. Risk free items include loans covered by cash or any other easily converted asset into liquid assets in an arms’ length transaction, as defined by the Credit risk management policy of the Bank and the CBK Rule on large exposures.

Collateral security is taken into consideration in the impairment loss calculation process. The fair market and liquidation values of the collateral are documented by a current appraisal made by a competent party. The Bank’s ability to access and liquidate the collateral within a reasonable period also is considered. Within the collaterals are included movable and immovable properties of the counterparties, in order to cover the exposure towards the credit risk and the risk of failure to repay the loan.

114 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) h. Financial assets available for sale

The Central Bank of Kosovo does not possess external credit rating.

December 31, 2014 December 31, 2013 Available for sale Available for sale financial assets Total financial assets Total

Not-rated 7,277 7,277 825 825

Total 7,277 7,277 825 825 i. Loans and advances to banks

Loans and advances to banks are neither past due not impaired and are granted without collateral. Table below presents current account and time deposits with corresponding banks (also refer to note 4 and note 6).The table below presents credit grade assigned by Moody’s, Fitch and Standard and Poor’s credit rating agencies:

December 31, 2014

Ratings Current accounts Deposits with banks Long term Ratings

Fitch A - - A- 724 - A+ 279 - A2 809 - AAA 2,074 - BBB 12 - 3,898 - Not rated 12 -

Total 3,910 -

TEB SH.A. 2014 ANNUAL REPORT 115 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) i. Loans and advances to banks (continued)

December 31, 2013

Ratings Current accounts Deposits with banks Long term Ratings

Fitch A - 6,038 A- 57 3,200 A+ 113 3,336 A2 117 2,175 AAA 1,869 - BBB 24 3,000

2,180 17,749 Not rated 32 - 32 - Total 2,212 17,749

116 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) i. Loans and advances to banks (continued)

Not rated - December 31, 2014 Current accounts Deposits with banks Long term Ratings Local bank 12 - Other bank (International banks) - - Total 12 -

Not rated - December 31, 2013 Current accounts Deposits with banks Long term Ratings Local bank 4 - Other bank (International banks) 28 - Total 32 - j. Concentrations

The following table breaks down the Bank’s main credit exposure at their net amounts, as categorized by the industry sectors of our counterparties.

As of December 31, 2014 and 2013, an analysis of loans to customers and banks by industry sectors was as follows:

Industry concentration

December 31, 2014 December 31, 2013 Net loans % Net loans %

Banks - 0.00% 17,749 6.25% Individuals 122,183 42.57% 104,081 36.67% Electricity, gas, water 448 0.16% 74,789 26.35% Industry 10,045 3.50% 12,091 4.26% Agriculture 2,461 0.86% 1,600 0.56% Services 80,953 28.20% 493 0.17% Hospitality 4,032 1.40% 3,930 1.40% Transport and communications 2,241 0.78% 2,290 0.812% Trading 64,662 22.53% 66,786 23.53%

Total 287,025 100.00% 283,809 100.00%

TEB SH.A. 2014 ANNUAL REPORT 117 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) k. Liquidity risk

Liquidity risk arises in the general funding of the Bank’s activities and in the management of positions. It includes both the risk of being unable to fund assets at appropriate maturity and rates and the risk of being unable to liquidate an asset at a reasonable price and in an appropriate time frame to meet the liability obligations. The Bank monitors its liquidity on a daily basis in order to manage its obligations as and when they fall due. The Bank controls its existing negative liquidity gap and has put in place a limit of cumulative negative liquidity gap over capital of 400%. Funding limits of EUR 31.5 million are available from TEB AS and EUR 15 million from TEB NV to cover the Bank’s liquidity needs.

Funds are raised using a broad range of instruments including deposits, borrowings and share capital. This enhances funding flexibility, limits dependence on any one source of funds and generally lowers the cost of funds. The Bank makes its best efforts to maintain a balance between continuity of funding and flexibility through the use of liabilities with a range of maturities. The Bank continually assesses liquidity risk by identifying and monitoring changes in funding required for meeting business goals and targets set in terms of the overall Bank strategy. In addition the Bank holds a portfolio of liquid assets as part of its liquidity risk management strategy. The amount disclosed in tables below is contractual undiscounted cash flows.

December 31, 2014 On demand Three and less One month months Five than one to three to twelve One year to years month months months five years onward Total Financial assets Cash and balances with the Central Bank 67,893 67,893 Due from other banks ------Loans to customers net 65,096 27,751 104,067 142,495 11,590 350,999 Financial assets available for sale 1,641 120 5,316 200 - 7,277 Other financial assets 1,439 130 1,569

Total financial assets 136,069 28,001 109,383 142,695 11,590 427,738

Financial liabilities Due to customers 227,078 7,529 58,914 23,421 5 316,947 Borrowings - - 44 4,953 10,856 15,853 Other financial liabilities 2,380 - - - - 2,380 Loan Commitments 2,433 4,073 27,473 20,976 6,456 61,411 Financial guarantees 1,181 855 11,470 939 - 14,445

Total financial liabilities 233,072 12,457 97,901 50,289 17,317 411,036

Liquidity gap as at December 31, 2014 (97,003) 15,544 11,482 92,406 (5,727) 16,702

118 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) k. Liquidity risk (continued)

December 31, 2013

On demand Three and less One month months Five than one to three to twelve One year to years month months months five years onward Total Financial assets Cash and balances with the Central Bank 81,152 - - - - 81,152 Due from other banks 17,749 - - - - 17,749 Loans to customers net 53,566 27,434 99,245 131,543 7,463 319,251 Financial assets available for sale 89 258 478 - - 825 Other financial assets 1,171 174 - - - 1,345

Total financial assets 153,727 27,866 99,723 131,543 7,463 420,322

Financial liabilities Due to customers 174,086 17,411 101,580 41,185 37 334,299 Borrowings - - 3,058 5,689 7,575 16,322 Other financial liabilities 1,456 - - - - 1,456 Loan Commitments 1,782 6,606 32,202 15,765 145 56,500 Financial guarantees 1,797 5,811 10,021 1,641 - 19,270

Total financial liabilities 179,121 29,828 146,861 64,280 7,757 427,847

Liquidity gap as at December 31, 2013 (25,394) (1,962) (47,138) 67,263 (294) (7,525)

TEB SH.A. 2014 ANNUAL REPORT 119 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) l. Fair value of financial instruments

(a) Fair values of financial instruments carried at amortised cost

Fair value represents the amount at which an asset could be replaced or a liability settled on an arm’s length basis. Fair values have been based on management assumptions according to the profile of the asset and liability base.

The following table summarizes the carrying amounts and fair values to those financial assets and liabilities not presented on the statement of financial position at their fair value.

31 December 2014 31 December 2013 Carrying Carrying amount Fair value amount Fair value

Loans and advances to banks - - 17,749 17,749 Loans and advances to customers 287,025 286,738 266,060 259,849 Due to customers 314,353 321,352 327,232 335,872 Borrowing 15,853 19,638 16,322 16,322 Other financial liabilities 2,380 2,380 1,456 1,456

Loans to banks

Loans and advances to other banks comprise inter-bank placements. The fair value of placements and overnight deposits is their carrying amount due to their short-term nature.

120 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) l. Fair value of financial instruments (continued)

Loans to customers

Loans to customers in the balance sheet are presented in net amount, i.e. net of allowances for impairment. For the purpose of calculating the fair value, the Bank used discounted cash flow method. Thus, the calculation is based on contractual cash flows. Credit risk of individual clients is taken into consideration through the expected impairment.

Deposits and borrowings

The estimated fair value of deposits and borrowings is based on discounted contractual cash flows, taking into consideration market interest rates, which would have been payable by the Bank in need of replacing the old sources with the new ones of equal remaining maturity. b) Analysis by fair value hierarchy of financial instruments carried at fair value

The Bank measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements: a) Level 1: Quoted market price (unadjusted) in an active market for an identical instrument b) Level 2: Valuation techniques based on observable inputs other than quoted prices, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data. c) Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

The following table shows the distribution of fair values over the different fair value hierarchies.

TEB SH.A. 2014 ANNUAL REPORT 121 About TEB SH.A. 2014 Overview and 2015 TEB SH.A. in 2014 Outlook

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) l. Fair value of financial instruments (continued)

December 31, 2014:

Total Fair Value Level 1 Level 2 Level 3 Financial Assets

Cash and balances with the Central Bank 67,893 - 67,893 - Loans and advances to banks - - - - Loans and advances to customers 287,025 - - 287,025 Financial assets available for sale 7,277 - 7,277 - Other financial assets 1,569 - - 1,569

Total 363,764 - 75,170 288,594

Due to customers 314,353 - - 314,353 Borrowings from banks 4,971 - - 4,971 Borrowing from other financial institutions 10,882 - - 10,882 Other financial liabilities 2,380 - - 2,380

Total financial liabilities 332,586 - - 332,586

122 TEB SH.A. 2014 ANNUAL REPORT Activities and Projections Management / Corporate Financial Reports Governance

TEB SH.A. NOTES TO THE IFRS FINANCIAL STATEMENTS For the year ended December 31, 2014 (All amounts expressed in EUR thousand, unless otherwise stated)

28. FAIR VALUES AND RISK MANAGEMENT (continued) l. Fair value of financial instruments (continued) b) Analysis by fair value hierarchy of financial instruments carried at fair value (continued)

December 31, 2013:

Total Fair Value Level 1 Level 2 Level 3 Financial Assets

Cash and balances with the Central Bank 81,152 - 81,152 - Loans and advances to banks 17,749 - 17,749 Loans and advances to customers 266,060 - - 266,060 Financial assets available for sale 825 - 825 - Other financial assets 1,345 - - 1,345

Total 367,131 - 81,977 285,154

Due to customers 327,232 - - 327,232 Borrowings from banks 5,455 - - 5,455 Borrowing from other financial institutions 10,867 - - 10,867 Other financial liabilities 1,456 - - 1,456

Total financial liabilities 345,010 - - 345,010-

The availability of observable market prices and model inputs reduces the need for management judgment and estimation and also reduces the uncertainty associated with determination of fair values. The availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the future markets.

TEB SH.A. 2014 ANNUAL REPORT 123 CONTACTS

TEB Sh. A. Head Quarter Str. Agim Ramadani, No. 15, 10000 Prishtina Tel: +381 (0) 38 230 123 Fax: +381 (0) 38 224 699 E-mail: [email protected] E-mail: [email protected] Web: www.teb-kos.com

TEB Sh. A. Contact Center Tel: +381 (0) 38 230 000

To contact the TEB Sh. A. Data Protection Unit Tel: +381 (0) 38 555 665 (ext.: 211) E-mail: [email protected]

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