BAMC ANNUAL REPORT 2019
JULY 2020 BAMC ANNUAL REPORT 2019
TABLE OF CONTENTS
HIGHLIGHTS AND SUMMARY OF 2019 ______1 LETTER FROM THE CEO ______6 REPORT OF THE BOARD OF DIRECTORS FOR 2019 ______8 PRESENTATION OF BAMC ______14
CORPORATE GOVERNANCE AND ORGANISATION ______15 NORMATIVE FRAMEWORK ______18 ORGANISATIONAL STRUCTURE ______18 ORIGIN OF ASSETS ______20 STATUS OF NPLS IN SLOVENIA ______21 BUSINESS REPORT ______22 CORPORATE GOVERNANCE STATEMENT ______22 BAMC’S MISSION AND STRATEGIC GOALS ______28 SIGNIFICANT EVENTS IN 2019 ______29
EVENTS AFTER THE ACCOUNTING PERIOD ______30 MANAGEMENT OF ASSETS ______32
CREDIT AND INVESTMENT DECISIONS ______32 LOAN PORTFOLIO MANAGEMENT ______34 MANAGEMENT OF EQUITY INVESTMENTS ______39 REAL ESTATE PORTFOLIO MANAGEMENT ______42 FINANCIAL OVERVIEW OF 2019 ______47
CASH GENERATED ______47 DEBT REPAYMENT ______49 KEY PERFORMANCE INDICATORS ______50 INCOME STATEMENT______53 BALANCE SHEET ______56 RISK MANAGEMENT ______59
THREE LINES OF DEFENSE ______59 RISK MANAGEMENT PROCESS ______61 INTERNAL AUDIT ______63 ORGANISATION AND ACCOMPANYING ACTIVITIES ______66
HUMAN RESOURCE MANAGEMENT ______66 INFORMATION TECHNOLOGY ______67 CORPORATE COMMUNICATIONS AND MARKETING ______68 INTEGRITY AND ETHICS ______68 ACCESS TO INFORMATION OF PUBLIC NATURE ______69 REPORTING ON SUSPICIONS OF CRIMINAL ACTIVITIES ______69 COURT OF AUDIT COOPERATION, PARLIAMENTARY INVESTIGATION COMMISSION AND OTHER REGULATORS ______70 BAMC SHARE ______71
BAMC ANNUAL REPORT 2019
STATEMENT OF MANAGEMENT’S RESPONSIBILITY ______73 INDEPENDENT AUDITOR’S REPORT ON FINANCIAL STATEMENTS ______74 FINANCIAL STATEMENTS ______81
BALANCE SHEET OF BAMC FOR YEAR ENDED AS AT 31 DECEMBER 2019 ______81 INCOME STATEMENT OF BAMC FOR THE PERIOD FROM 1 JANUARY TO 31 DECEMBER 2019 ______82 STATEMENT OF OTHER COMPREHENSIVE INCOME OF BAMC FOR THE PERIOD FROM 1 JANUARY TO 31 DECEMBER 2019 ____ 82 STATEMENT OF CHANGES IN EQUITY OF BAMC FOR THE PERIOD FROM 1 JANUARY TO 31 DECEMBER 2019 ______83 STATEMENT OF CASH FLOWS OF BAMC FOR THE PERIOD FROM 1 JANUARY TO 31 DECEMBER 2019 ______84 NOTES TO THE FINANCIAL STATEMENTS ______85 NOTES TO THE BALANCE SHEET ______105 NOTES TO THE INCOME STATEMENT ______122
BAMC ANNUAL REPORT 2019
LIST OF FIGURES FIGURE 1: CASH GENERATED BY HALF-YEARS ______1 FIGURE 2: ASSETS UNDER MANAGEMENT ______2 FIGURE 3: EQUITY EFFECTS AND ADDITIONAL RETURN SINCE INCEPTION ______3 FIGURE 4: FINANCING AND OPERATING COSTS ______3 FIGURE 5: PROGRESS IN RESTRUCTURING CASES ______4 FIGURE 6: SELECTED BENCHMARKING DATA ______5 FIGURE 7: ORGANISATIONAL STRUCTURE ______19 FIGURE 8: MOVEMENT OF THE SHARE OF NPLS IN THE SLOVENIAN BANKING SECTOR ______21 FIGURE 9: ASSETS UNDER MANAGEMENT ______32 FIGURE 10: BREAKDOWN OF DECISIONS TAKEN ______33 FIGURE 11: INDIVIDUALLY VALUATED CASES BY STRATEGY ______34 FIGURE 12: LOAN GROSS EXPOSURE AND FAIR VALUE BY INDUSTRY ______35 FIGURE 13: RESTRUCTURING CASES OVERVIEW ______36 FIGURE 14: RECOVERY CASES OVERVIEW ______37 FIGURE 15: EQUITY PORTFOLIO MOVEMENT ______41 FIGURE 16: REAL ESTATE PORTFOLIO MOVEMENT ______44 FIGURE 17: REAL ESTATE OWNERSHIP PORTFOLIO STRUCTURE ______45 FIGURE 18: REAL ESTATE COLLATERAL PORTFOLIO STRUCTURE ______45 FIGURE 19: REAL ESTATE MANAGEMENT COSTS ______46 FIGURE 20: CASH GENERATED ______47 FIGURE 21: MONTHLY CASH GENERATED ______48 FIGURE 22: CASH GENERATED BY PORTFOLIO AND SOURCE ______48 FIGURE 23: TOTAL NET DEBT REPAID AND FINANCING EXPENSES ______49 FIGURE 24: CLAIMS PORTFOLIO MOVEMENT ______56 FIGURE 25: THREE LINES OF DEFENCE ______60 FIGURE 26: RISK MANAGEMENT PROCESS ______61 FIGURE 27: RISK ASSESSMENT PROCESS ______62 FIGURE 28: IDENTIFIED RISK GROUPS ______63 FIGURE 29: EDUCATION AND WORK EXPERIENCE OF EMPLOYEES ______67
LIST OF TABLES TABLE 1: BAMC KPIS FOR 2019 ______1 TABLE 2: CORRECTIONS TO INITIALLY INVESTED CAPITAL SINCE INCEPTION ______2 TABLE 3: BASIC COMPANY DATA ON 28 JULY 2020 ______14 TABLE 4: DEBT TO EQUITY CONVERSIONS AND NEW ACQUISITIONS IN 2019 ______39 TABLE 5: EQUITY PORTFOLIO CHARACTERISTICS AS AT 31 DECEMBER 2019 ______40 TABLE 6: KEY PERFORMANCE INDICATORS ______51 TABLE 7: INCOME STATEMENT SUMMARY ______53 TABLE 8: COSTS EXCLUDED IN COST EFFICIENCY NO 2 KPI CALCULATION ______55 TABLE 9: BALANCE SHEET SUMMARY ______56 TABLE 10: FINANCIAL OBLIGATIONS AS AT 31 DECEMBER 2019 ______57 TABLE 11: NUMBER OF EMPLOYEES ______66 TABLE 12: BASIC INFORMATION ON BAMC’S SHARE ______71
BAMC ANNUAL REPORT 2019 INTRODUCTION
HIGHLIGHTS AND SUMMARY OF 2019 2019 was another successful year for BAMC. Cash generation in the amount of €220,8 million represented a surpassing the Financial plan for the year, while cost efficiency was also ensured by rational operations. Net profit in the amount of €40,2 million increased BAMC’s equity to €242,1 million, which is already more than the initial amount provided by the owner (the Republic of Slovenia) in 2013. All yearly key performance indicators, defined in the Guidelines on the operations of BAMC (hereinafter: the Guidelines) adopted by the Government of the Republic of Slovenia (hereinafter: the Government) on 18 April 2019 were met.
TABLE 1: BAMC KPIS FOR 2019 Key Performance Indicator Target 2019 Result 2019 Minimum cumulative cash generated (in € million) 1.078 1.743 Cash generated % 10,0% 10,7% EROE 8,0% 27,5% Cost efficiency no. 1 -1 2,42% Cost efficiency no. 2 2,06% 1,71% NOTE: 1The cost efficiency no. 1 indicator is not mandatory since 2019, but has to be presented by BAMC for the comparison purposes with past cost efficiency indicators. Definitions and additional KPI data can be found in Table 6.
As seen in the figure below, BAMC maintained the level of cash generated, almost exclusively with smaller-scale transactions. Cash generated in 2019 represents 10,7% of cumulative asset transfer value and is on the level of the previous year, despite a decrease in both the size and quality of portfolios available to be liquidated between the periods. Most of the inflows originated from the claims’ portfolio, followed by real estate and equity portfolios (breakdown presented in Figure 22). Since its inception and until the end of 2019 BAMC generated €1.743,3 million from its asset management.
FIGURE 1: CASH GENERATED BY HALF-YEARS € million € million 250 240,2 239,4 1.800
1.500 200 195,4 182,4 173,6 1.200 150 125,8 117,1 116,0 900 111,4 104,8 100 71,5 600 57,9 50 300 8,0 0 0 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019
Cash generated from Cash generated from Cumulative cash transactions over €10 million transactions under €10 million generated (right axis)
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BAMC portfolio size decreased by 16% in total in 2019, mostly in the portfolio of claims, where some D/RE conversions were also made, resulting in a smaller net reduction in the real estate portfolio despite over €30 million of real estate sales. A net increase of the equity portfolio is attributable to the conversion of claims into 100% ownership of the company Istrabenz turizem, d. d.
FIGURE 2: ASSETS UNDER MANAGEMENT € million
1.750 Equity 1.515,2 1.510,9 1.500 57,0 59,9 Real estate 51,3 97,2 Claims 1.242,7 1.250 1.196,1 36,3 96,9 68,8 961,2 197,7 953,4 -16% 1.000 14,2 99,0 830,1 194,2 89,9 696,8 750 1.406,9 1.353,7 180,5 114,6 1.091,0 500 947,0 948,1 175,1
660,2 559,7 250 407,1
0 31.12.2013 31.12.2014 31.12.2015 1.1.2016 31.12.2016 31.12.2017 31.12.2018 31.12.2019
NOTE: 1 January 2016 displays the fair value of the portfolio at the merger of Factor banka and Probanka into BAMC. Since the merger BAMC also manages a minor leasing portfolio which is presented together with “Claims”.
During its lifetime, BAMC recorded more than €200 million of capital adjustments due to decisions of the owner (the Republic of Slovenia) through various transactions as specified in the table and figure below. Including the result of 2019, the EROE indicator, which presents the average yearly return on equity with corrections (comparing current equity with the invested capital with corrections), remained at high 27,5% while the statutory requirement is set at 8%.
TABLE 2: CORRECTIONS TO INITIALLY INVESTED CAPITAL SINCE INCEPTION in € million Effect on BAMC equity
Capital invested by the Republic of Slovenia in 2013 203,6
Cumulative capital returned to the owner in the 2013-2019 period -200,6 Transfers of non-performing assets from NLB, NKBM, Abanka and Banka Celje in years 2013 and 2014 -110,1 Other transactions based on General Meeting decisions (in years 2014, 2015 and 2018) -9,7 Merger of Factor banka and Probanka into BAMC in the beginning of 2016 -79,4 Merger of five subsidiaries of Factor banka and Probanka in H1 2016 -1,4
Recapitalisations 53,1 Recapitalisation in May 2016 (booked in July 2016) *3,1 Recapitalisation in December 2016 50,0
Invested capital with corrections (returns to the owner and recapitalisations) at year-end 2019 56,2 NOTE: *The recapitalisation was made in the nominal amount of €4,6 million but also induced BAMC a €1,5 million day-one loss.
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FIGURE 3: EQUITY EFFECTS AND ADDITIONAL RETURN SINCE INCEPTION € million 350
300 State €242,1 million 70,9 guarantee equity at 250 fee 31.12.2019 (used in EROE 200 calculation)
150 110,1 185,8
100 203,6 9,7 50 80,7 53,1 0 2013 2013-2014 2014, 2015 2016 2016 2013-2019 2013-2019 invested ZUKSB asset and 2018 Factor recapita- cumulative additional capital transfers General banka, lisations return on return to from four Meeting Probanka equity the state banks (fair decisions and value subsidiaries adjustment) merger
While financing costs decreased by a quarter, comparable operating costs in 2019 were 15% lower than in 2018. Total operating costs were slightly higher than the costs of the previous year, but solely due to additional provisions made and lawsuit costs (details can be found in the note under the figure below and in the commentary to the income statement, page 53).
FIGURE 4: FINANCING AND OPERATING COSTS € million
70 68,5 State guarantee fees 60 57,1 19,3 Interest expenses Costs of provisions and lawsuits 48,5 50 13,7 Operating costs without costs of provisions and lawsuits 13,2 40
30 25,9 24,3 49,3 1,8 21,7 0,3 21,2 43,3 20,4 20 0,9 4,7 14,3 15,9 35,4 10,0 -15% 11,8 24,1 24,0 10 19,5 8,9 0,4 5,3 14,3 15,9 7,9 16,5 1,6 11,7 6,4 1,2 5,3 3,9 2,5 0 2013 2014 2015 2016 2017 2018 2019
NOTE: Costs of provisions and lawsuits are, in a large extent, related to legal disputes which BAMC took over as the legal successor following the merger of Factor banka and Probanka in 2016. In 2019 an additional provision was made, related to the surety given to the debtor, which already existed in the previous years but was recorded through the valuation process.
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Additional 10 restructuring cases were successfully closed in 2019, surpassing half of restructurings managed by BAMC on a cumulative level. Additionally to these 130 restructuring cases, BAMC also cumulatively manages 631 larger recovery cases, where the share of closed or cases with after-recovery procedures is as well 50%.
FIGURE 5: PROGRESS IN RESTRUCTURING CASES 150 Closed 131 131 131 130 130 Exit process 125 Execution Negotiation 57 56 60 100 66 67 Transfer and (re)study
75 5 6 9 4 2 50 64 65 47 57 55 25 4 4 4 5 1 0 1 0 13 1 0 Dec 2018 Mar 2019 Jun 2019 Sep 2019 Dec 2019
NOTE: Case progress is estimated monthly by case managers. The number of cases in restructuring or recovery may vary due to changed circumstances in the debtors’ positions or a change in BAMC strategy pursued towards a specific debtor and thus, due to different purpose and methodology, varies from the classification used for valuation purposes.
BAMC operations in H1 2019 were also marked by changes in leading positions, with two executive directors and one non-executive director resigning and one executive director being recalled. In this period BAMC was led by acting CEO, who was later appointed for a fixed term and was joined by two new executive directors in May. The new non-executive director was appointed in June and since then BAMC had fully operational management in place.
In April 2019 the Government adopted new Guidelines on the operations of BAMC, introducing changes in reporting, following transactions, notifications and consent from the owner with regard to decisions of strategic importance, further strengthening supervision and transparency of company’s operations.
To internationally compare BAMC’s performance, three peer organisations were selected for benchmarking: NAMA from Ireland, SAREB from Spain and REVERTA from Latvia. Benchmarking is done based on the relative time of operations, i.e. not comparing results of calendar years but of years after the set-up of the respective company.1
1 As first assets were transferred to BAMC in December 2013, it if effectively in operation for six complete years making 2019 results the “t+6” input for benchmarking.
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FIGURE 6: SELECTED BENCHMARKING DATA End-of-year t+6 Yearly costs as asset structure % of average assets Debt outstanding 100% 14 13,4%* 100 2% 2% 9% 1% 13% 8% 12 29% 1% 80% 14% 80 75% 49% 0% 10 66% 1% 35% 60% 60 21% 8
6 40% 40 68% 28% 4 49% 49% 48% 2,5% 18% 20% 2,0% 20 2 1% 0,8% 0% 0% 0 0 BAMC NAMA SAREB REVERTA t+6 t+6
Claims Equity Other BAMC NAMA SAREB REVERTA Real estate Cash
NOTE: NAMA was established in December 2009, SAREB was established in November 2012 and REVERTA was established in May 2012. “t+6” relates to respective company’s sixth year of operations. For comparability with other institutions the cost efficiency calculation is simplified and thus differs from the reported BAMC KPI version as prescribed in the Guidelines (Table 6).Debt outstanding compares financial liabilities in the respective year of operations to the total debt issued to finance acquired assets. *REVERTA was liquidated after six years of operation. In the process, the remaining claims portfolio was sold off, consequently substantially decreasing the ending balance, in turn lowering average assets under management and thus increasing yearly cost efficiency. Neutralising the decrease in the claims portfolio, the calculated cost efficiency would amount to 9,1%. SOURCE: Own calculations from companies’ annual reports.
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LETTER FROM THE CEO From the current perspective, when the world is battling the Covid-19 pandemic and a range of measures have been introduced to contain the spread of the coronavirus, which have drastically limited economic activity and are causing unpredictable consequences, the year 2019 appears to have been a quite peaceful and favourable financial year. The economic conditions in Slovenia were less constrained, and the levels of trust were improving in nearly all areas. Company expectations regarding production and orders were rising, which was also associated with improving conditions in the global economy. On the labour market, unemployment was slowly decreasing, and as a result of wage growth, social transfers and higher employment, increased household disposable income led to increased private consumption. Under these economic conditions, the Bank Asset Management Company (BAMC) performed well in 2019 and ended the year above planned targets.
Net profit for financial year 2019 amounted to €40,2 million. BAMC, 100% owned by the Republic of Slovenia, saw its equity increase to €242,1 million, which results in a 27,5% average annual return on invested capital with corrections (i.e. taking into account capital returned to the owner) or EROE, whose target value in the Guidelines is 8%. In 2019, BAMC generated €220,8 million in inflows from asset management, which amounts to 10,7% of cumulative transfer value of assets and, despite the increasingly smaller and more challenging portfolio, is above the 10% requirement set out in the Guidelines and ZUKSB. From the time of its establishment to the end of 2019, BAMC has already generated a total of €1.743,3 million in inflows from asset management, which amounts to 84,1% of the cumulative transfer value of the assets.
BAMC operated in a cost-effective manner in 2019. Regular operating costs (i.e. operating costs excluding costs of lawsuits and provisions) were nearly €3 million (15%) lower in 2019 relative to those costs in the previous year. The cost effectiveness KPI in 2019 stood at 1,71% and was significantly lower than the target value, which was set at 2,06% in the Guidelines. The headcount, based on hours worked, which stood at 127 at the end of 2019, was also below target.
BAMC concluded several major transactions in 2019. It found a strategic, financially stable and investment capable buyer for the company Tink, d. o. o. The buyer expanded and transferred part of its warehouse operations to the new location in the first year after the acquisition. Through the implementation of successful financial restructuring, BAMC made it possible for Hoteli Bernardin, d. d. to become once again an object of interest for the commercial banks that refinanced all of its liabilities towards BAMC. BAMC was also successful in the acquisition of pledged shares in Istrabenz Turizem, d. d., thereby securing one of the state’s important strategic investments, it consolidated the state’s participating interest in Thermana, d. d., assumed management of the Gjerkeš biogas plant and sorted out debtor-creditor relationships in Bulgaria. After the successful financial and business restructuring of PPS Pekarne Ptuj, d. o. o., BAMC sold the company to a strategic buyer, which will provide the opportunity for its continued growth and development. Sold minority holdings included RTC Kranjska Gora, d. d., P&S Growth Luxemburg SICAR SCA, Menina, d. d. and Talum, d. d. Last year, BAMC sold 15.000 shares in Petrol, d. d. to Slovenski državni holding, d. d. It acquired the aforementioned 100-percent interest in Istrabenz turizem, d. d. and established the special purpose entity Sklad turističnih naložb, d. o. o.
BAMC also achieved higher returns in the area of real estate management, due to the use of a combination of traditional and modern sales techniques, such as collection of binding bids and e-auctions. By the end of 2019, BAMC had sold nearly all of the 164 flats in the Koprska vrata residential and business complex. Another important project was the sale of land plot in Sežana, which is the largest individual parcel of industrial land in the country. In addition to the successful sale to an international investor, this is a major boost for the municipality of Sežana, since after years of searching for a solution for this land, the investor is intending to build
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a modern logistics centre, which will be the country’s largest, and according to the buyer’s plans will create many new jobs.
The exceeding of the targets set in BAMC’s annual financial plan for 2019 demonstrates that in these rapidly changing conditions, the employees, the management and the members of the Board of Directors are doing their jobs with enthusiasm, professionally and in accordance with BAMC’s mission statement. We carry out the management and sale of assets primarily with the objective of maximising returns for the owner, i.e. the state of Slovenia, and to the benefit of all stakeholders and citizens.
Matej Pirc CEO
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REPORT OF THE BOARD OF DIRECTORS FOR 2019 Under the second paragraph of Article 282 of the Companies Act (hereinafter: ZGD-1)2, the Board of Directors of BAMC (hereinafter: the Board) hereby submits the report on the management of the company during the financial year 2019, the audit of the annual report for 2019, and its position on the auditor’s report for 2019.
COMPOSITION OF THE BOARD OF THE BANK ASSETS MANAGEMENT COMPANY ZUKSB3 and the Articles of Association of BAMC stipulate that BAMC has a one-tier governance system, and that the Board consists of seven members, of which three are executive and four non-executive directors.
As per the end of 2019 the structure of the Board was as follows: . Tomaž Besek, non-executive director, Chairman of the Board; . Mitja Križaj, non-executive director, Deputy Chairman of the Board; . Marko Tišma, non-executive director; . Aleksander Lozej, non-executive director; . Matej Pirc, CEO; . Andraž Grum, executive director; . Bojan Gantar, executive director.
On 19 December 2018, the Chief Executive Officer, Imre Balogh, announced his resignation to the Board of Directors, which took note of it on the same day. The non-executive directors concluded that the withdrawal would take effect on 27 January 2019. The non-executive directors appointed Matej Pirc as Acting Chief Executive Officer for a period of three months. On 25 April 2019, after an international selection process, the non-executive directors appointed Matej Pirc as the Chief Executive Officer of BAMC with the mandate from 29 April 2019 until 31 December 2022.
On 26 March 2019, Andrej Prebil resigned as executive director on 31 March 2019.
On 31 March 2019, Juan Barba Silvela applied to the Government for a recall from his post as a member of the Board of Directors of BAMC. As of 21 June 2019, the Government, as the BAMC Assembly, dismissed Juan Barba Silvela from his position of non-executive director of the BAMC Board of Directors. The government then appointed Aleksander Lozej as the new non-executive director of BAMC in June 2019 for the period from 21 June to 31 December 2022.
On 16 April 2019, non-executive directors recalled Jože Jaklin from his position of executive director.
On 7 May 2019, non-executive directors appointed Andraž Grum and Bojan Gantar as BAMC's executive directors. Their term of office runs from 27 May 2019 to 31 December 2022.
REPORT ON THE ACTIVITIES OF THE BOARD In its activities, the Board was acting in accordance with the principles of transparency, adherence to the law and good professional conduct. The decisions of the Board contributed to the company’s development in 2019,
2 Official Gazette of the Republic of Slovenia No. 42/2006, as amended. 3 Official Gazette of the Republic of Slovenia No. 105/2012, as amended.
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ensured the upgrading of basic business functions, regulated all areas of operations and oversaw the adoption of relevant policies.
During 2019 the Board held altogether 34 meetings, 11 regular meetings, one extraordinary and 22 per capsulam sessions and adopted 319 decisions. All Board members have proactively taken part in the decision-making process and monitored how Board decisions were being implemented, in accordance with the BAMC Board Rules of Procedure.
KEY MATTERS COVERED IN 2019 In 2019, the Board of Directors gave the most attention to: . the adoption of the 2019-2022 Financial Plan and the 2018 Annual Report; . the conclusion of the KLI Logatec case; . the Court of Audit procedure; . monitoring the activities related to the transmission of documentation to the Investigation Commission on detecting abuse and mismanagement in the BAMC (Preiskovalna komisija o ugotavljanju zlorab in negospodarnega ravnanja v DUTB); . the acquisition of Avtotehna, d. o. o. and the termination of NPL Port, d. o. o.; . the division of areas of responsibility of CEOs; . managing conflicts of interest; . the abolition of OU Corporate security and the distribution of tasks; . briefing and reviewing reports and adopting the recommendations of all the committees of the Board of Directors; . reviewing and adopting internal acts; . familiarizing and reviewing (regular) reports of Executive Directors and the reports of other organizational units.
THE PROCESS OF EVALUATING THE EFFECTIVENESS OF THE WORK OF THE BOARD OF DIRECTORS Point 14 of the Corporate Governance Code stipulates that the Board of Directors annually evaluates its composition, functioning, potential conflicts of interest of individual members, and the functioning of the Supervisory Board, as well as cooperation with the Management Board. It also evaluates the work of the commissions of Boards of directors in this evaluation process.
The board's self-assessment is a systematic process that involves evaluating the work of board members and its committees to improve their effectiveness. The self-assessment is conducted in accordance with the Guidelines for evaluating the effectiveness of the Board of Directors, so that each member completes the standard matrix.
In 2019, the Board of Directors paid special attention to its efficiency, focused on its composition, operation, proper management of potential conflicts of interest of individual members, appropriate cooperation with executive directors and in June 2020 conducted a self-assessment of its work for 2019. The average score of all responses on a four-point scale was 3,60. With minor exceptions to individual questions, members gave the same ratings to most questions. This indicates a good understanding of the issues of all board members and their similar assessment of the performance of the Board. In 2018, the Board carried out the procedure for the previous year (2017), the average score of all responses together was 3.41, which means that the Board improved its results.
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WORK OF THE BOARD’S COMMITTEES The work of the Board is supported by four committees: Audit Committee, Accreditation Committee, Remuneration Committee, and Credit and Investment Committee.
AUDIT COMMITTEE Audit Committee was in the following setting in 2019, Mitja Križaj as Chairman of the Audit Committee Chairman, Marko Tišma as a member and Tamara Jerman as an independent external member of the Commission.
The Audit Committee met on 11 regular meetings and held two correspondent meetings in 2019.
The topics that Audit Committee paid attention to on its meetings were: . Monitoring of the accounting policies and assessments and changes to them, monitoring of the financial reporting procedures, including the status of closed cases and reporting on them, monitoring the integrity and transparency of BAMC’s financial information, and reviewing and evaluating the disclosures in the semi-annual and annual reports. . Monitoring of the statutory audit of financial statements, including the planning phase of the audit and cooperation with the selected external auditor on the audit of the BAMC annual report, supervision of his independence through inquires to the audit team and obtaining and reviewing of their written statement on independence. In detail the Audit Committee monitored the extension of the audit procedures, due to the KLI Logatec case and with special care followed the status of the statutory audit extension and findings of these procedures. . In compliance with the adopted guidelines for the selection of the auditor of the financial statements, the control over his independence and the quality of the work performed, the members of the Audit Committee, monitored the current and potential future statutory auditors’ potential impairment of independence. The monitoring is done through quarterly reports to the members of the Audit Committee on the scope, content and expenses, of the by BAMC outsourced audit and non-audit services. . Regular reviews of all reporting to various external supervisory institutions (Commission for Prevention of Corruption, Ministry of Finance, various Parliamentary bodies of the RS, National Investigations Bureau and others) as well as all other regulatory reporting requirements (Securities Market Agency, Financial Administration of the Republic of Slovenia and others). . In 2019, the members of the Audit Committee paid special attention to monitoring and informing on the progress of cooperation with the Investigation Commission, appointed by the National Assembly of the Republic of Slovenia, on potential abuses and non-economical activities in BAMC. . Took note of the post-audit report issued by the Court of Auditors of the Republic of Slovenia and was active in introducing improvements based on the recommendations issued. In the time following the issue of the post-audit report, the members of the Audit Committee regularly monitored the state of cooperation with the state audit institution and the content and scope of their requests for clarifications and information. . Regular reviews of the efficiency and effectiveness of BAMC’s system of internal controls, compliance, internal auditing, risk management and corporate security, through regular meetings with responsible heads of mentioned functions and implementation and monitoring of their regular periodic reports on their activities and findings. . Among other things, the members of the Audit Committee took note of the progress in setting-up a whistle-blower line, improving internal controls in key business processes, improving corporate governance and risk management standards, the process of closing e-mail addresses of former
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employees, amending some of the key internal regulations. Sometime was dedicated to the information on the various tax treatments in sales of BAMC’s real estate inventory.
During 2019, the Rules of Procedure of the Audit Committee were updated and supplemented and a self- assessment of the Audit Committee’s work was carried out. At the end of year in December the work program of the Audit Committee in 2020, was discussed.
The Audit Committee regularly and closely monitors the work of the Internal Audit Function (hereinafter: IAF). The monitoring of the IAF’s work includes review, commenting and approval of the proposed IAF’s plan(s), reviews of individual internal audit assignment reports, with findings and recommendations for improvements, as well as review of regular quarterly IAF’s reports on activities, which includes follow-up report on the implementation of issued recommendations, as well as recommendations of other supervisory bodies.
In January 2019, the Audit Committee took note of the findings of the Special Audit on the Management of Individual Business of BAMC - Lot 3, which examined, in particular, the areas of independence, planning and reporting, and monitoring the internal audit recommendations. While in January 2020, it took note of an external service provider’s report on the quality assessment of the internal auditing in BAMC.
ACCREDITATION COMMITTEE The Accreditation Committee consisted of the following members as at 31 December 2019: Tomaž Besek as chairman of the Accreditation Committee, Matej Pirc, Bojan Gantar and Andraž Grum as committee members, and Sonja Šmuc, independent external member, as deputy chairman of the committee.
Tomaž Besek was appointed chairman of the Accreditation Committee on 25 January 2019. Andrej Prebil was member of the Accreditation Committee until 31 March 2019 and Jože Jaklin was member until 16 April 2019. Matej Pirc was appointed a member of the Accreditation Committee on 24 April 2019, Bojan Gantar on 28 May 2019 and Andraž Grum on 31 July 2019.
In 2019, the Accreditation Committee continued its core activities. The Commission draws up an expert opinion on the suitability of a candidate for appointment as a member of the Board of Directors (non-executive director) or member of the supervisory board for BAMC-owned companies. It also monitors and verifies the professionalism, suitability and activities of potential candidates as well as members already appointed.
In 2019, the Accreditation Committee met at seven regular meetings and two correspondent meetings.
REMUNERATION COMMITTEE The Remuneration Committee was composed of the following members as at 31 December 2019: Aleksander Lozej as chairman of the committee, Marko Tišma as a member and deputy chairman, and Irena Prijović as a member and independent external expert.
After Juan Barba Silvela left the position of non-executive director, Mitja Križaj was appointed chairman of the Remuneration Committee on 16 April 2019. Mitja Križaj was recalled from chairmanship of the Remuneration Committee on 31 July 2019 and Board of Directors appointed Alexander Lozej on 31 July 2019. Marko Tišma was appointed a member of the committee on 16 April 2019 and on 31 July 2019 he was appointed as deputy chairman of the committee.
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The topics that Remuneration Committee paid attention to on their meetings were: . ensuring the legality and appropriateness of the remuneration of the Board and members of the committees of the Board; . facilitating a uniform and transparent system for the remuneration of the Board and members of the committees of the Board; . to check the compliance of board members’ employment agreements with the Remuneration Policy adopted by the Government of the Republic of Slovenia; . remuneration packages being sufficiently attractive to enable the company to attract and retain staff of high professional competence and integrity; . BAMC’s organization and staffing being appropriate for the effective and efficient operation of the company and for fulfilling its objectives; . BAMC operating with the appropriate number of staff possessing the necessary skills to meet the company’s goals; . staff remuneration levels being broadly aligned with the market; . incentive structures contributing to efficient and target-driven results while maintaining the highest standards of professionalism and integrity.
The Remuneration Committee met in 14 meetings in 2019, of which seven were regular and seven correspondent meetings.
BOARD CREDIT AND INVESTMENT COMMITTEE The Board has the Executive Credit and Investment Committee (ECIC) and the Operative Credit and Investment Committee (OCIC) to decide on claims owned or managed by BAMC and to decide on matters related to acquisition of, investment into and disposal of individual assets, related to said exposures. The most important credit and investment decisions are taken by the ECIC, which has a Chairman and a Vice-chairman and at least three members appointed by the Management Board.The Board also has the Board Credit and Investment Committee (BCIC) in respect to give consent to the decisions/proposals of ECIC/BCIC if necessary.
In 2019 the president of the BCIC was Tomaž Besek, and deputy-president was Mitja Križaj. BCIC members are executive and non-executive directors.
Board Credit and Investment Committee and Executive Credit and Investment Committee have met on a weekly basis in 2019 and have adopted 567 (ECIC) and given consent to 238 (BCIC) credit and investment decisions.
EVALUATION OF THE WORK OF THE BOARD In accordance with its mandate stipulated in BAMC’s Articles of Association and the ZUKSB as well as applicable corporate law, and with consideration to the recommendations of the Public Limited Company Management Codex and good business practices, the Board was actively involved in guiding BAMC’s operations, supervising its business operations with the assistance of its Board committees. In the evaluation of its work, the Board finds that it has successfully completed all required procedures to allow the company to continue its successful operations and functioning.
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REVIEW OF THE ANNUAL REPORT Following the Audit Committee review, the Board discussed the proposed annual report during its sessions of 22 April 2020 and 29 July 2020. The certified auditor presented the audit observations during the Audit Committee meeting of 28 July 2020, delivering the final report on 28 July 2020.
The Board has reviewed the BAMC annual report and concluded that it is in compliance with the company’s Articles of Association, and the ZUKSB. The Board confirms that the financial statements, prepared in accordance with ZUKSB Article 4 (3) & (5), present fairly, in all material respects, the financial position of BAMC and of the outcomes of its operations for the period from 1 January 2019 to 31 December 2019.
BAMC prepared financial statements in accordance with the fifth paragraph of Article 4 of ZUKSB which defines that BAMC shall apply the International Financial Reporting Standards (hereinafter: IFRS) and the third paragraph of Article 4 of ZUKSB which stipulates that BAMC shall not include in its consolidated annual report the companies whose equity stakes or shares it had acquired by means of purchase/compensated acquisition of bank assets, or as part of corporate restructuring as per the first paragraph of Article 10a of this Act.
The Annual Report includes all essential information required for public disclosure and the audit. The Board also concluded that the financial statements and documents on which the financial statements for the year are based, as well as the completed annual report, was reviewed by a certified auditor, and an unqualified opinion was issued.
In light of the above, and with consideration of the fact that the Board has tracked and reviewed the company’s operations throughout the financial year and has reviewed the annual report after it was submitted and found that it accurately reflects the true and actual condition of BAMC, the Board has concluded that the annual report is satisfactory and has given its approval regarding its contents.
INFORMATION ON THE CERTIFIED AUDITOR’S REPORT The Board reviewed the audit report and concluded that the certified auditor had no objections regarding the work and conduct of the individuals responsible for the preparation of financial statements. Based on the above, the Board concludes that the responsible individuals are working in accordance with regulations, international accounting standards and the principles of honesty and credibility.
The Board has taken note of the unqualified opinion from the certified auditor dated 28 July 2020 and established that the auditor's report confirms that the financial statements for the year ended 31 December 2019 are prepared, in all material respects, in accordance with the accounting requirements of ZUSKB-A.
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PRESENTATION OF BAMC
TABLE 3: BASIC COMPANY DATA ON 28 JULY 2020 Družba za upravljanje terjatev bank, d. d. Full company name (Eng. Bank Assets Management Company) Short company name DUTB, d. d. (Eng. BAMC) Registered office Davčna ulica 1, 1000 Ljubljana Telephone +386 1 4293 877 E-mail [email protected] Website www.dutb.eu Core business Activities of collection agencies and credit bureaus Registration entry 2013/11708, District Court of Ljubljana Company ID number 6339620000 Tax number 41251482 VAT number SI41251482 Share capital €104.117.500,00 Number of shares 104.117.500 ordinary no-par value shares Owner of shares Republic of Slovenia
BOARD OF DIRECTORS TERM ENDING ON Boris Novak, Chairman of the Board 31 December 2022 Non-executive directors as at Marko Tišma, Deputy Chairman of the Board 31 December 2022 28 July 2020 Aleksander Lozej, Deputy Chairman of the Board 31 December 2022 Alenka Urnaut Ropoša 31 December 2022 Matej Pirc, CEO 31 December 2022 Executive directors as at Bojan Gantar 31 December 2022 28 July 2020 Andraž Grum 31 December 2022 NOTE: On 19 December 2018 Imre Balogh resigned as Chief Executive Officer with his resignation coming into effect on 27 January 2019. Matej Pirc was appointed as acting CEO from 28 January 2019 for a period of three months. On 26 March 2019 Andrej Prebil resigned from his position as executive director, the resignation being effective on 31 March 2019. On 31 March 2019 Juan Barba Silvela requested to be recalled as non-executive director. The Government, acting in the capacity of BAMC General Meeting, took note of the recall request on 20 June 2019 and recalled him from the position of non-executive director. On 16 April 2019 the non-executive directors recalled Jože Jaklin from his position as executive director. On 25 April 2019 the non-executive directors appointed Matej Pirc as the Chief Executive Officer of BAMC with the mandate from 29 April 2019 until 31 December 2022. On 7 May 2019 the non-executive directors appointed Andraž Grum and Bojan Gantar as executive directors with their mandate lasting from 27 May 2019 until 31 December 2022. On 20 June 2019 the Government, acting in the capacity of the BAMC General Meeting, appointed Aleksander Lozej to the position of non- executive director with his mandate lasting from 21 June 2019 to 31 December 2022. On 2 June 2020 the Government, acting in the capacity of the BAMC General Meeting, recalled Tomaž Besek and Mitja Križaj from their positions as non-executive directors and appointed Alenka Urnaut Ropoša and Boris Novak as non-executive directors with their mandate lasting from 3 June 2020 to 31 December 2022.
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CORPORATE GOVERNANCE AND ORGANISATION BAMC has a one-tier system of corporate governance, where the highest decision-making body is the Board of Directors. Following the provisions of ZUKSB and the Articles of Association, the Board comprises four non- executive directors and three executive directors. The Board has five permanent committees: the Audit Committee, the Accreditation Committee, the Remuneration Committee, Committee on Corporate Security and Compliance and the Board Credit and Investment Committee. For the Audit, Remuneration and Accreditation committees, the committee members comprise of non-executive directors and one external member with the relevant professional experience in Slovenia. Board Credit and Investment Committee is composed of all members of the Board of Directors. Until September 2019, the Committee on Corporate Security and Compliance was comprised of: Executive Directors, Corporate Security Expert and Head of OU Compliance. As of September 2019, the Committee on Corporate Security has ceased to exist, the decisions made by the Committee until September 2019 are since discussed at Executive Meetings in accordance with the Rules of Procedure of Executive Directors. The Board and its committees function in accordance with the relevant rules of procedure. Non-executive directors have the powers equivalent to those of the Supervisory Board according to the law governing commercial companies and do not manage BAMC. They select executive directors, overview operations, decide on strategies and regulations but are not involved in operative decisions (apart from giving/denying consent as members of the Board Credit and Investment Committee).
BAMC has an internal audit function reporting directly to the Board of Directors. In addition, Risk Management Committee is supporting the work of the executive directors and this committee’s reports are a standing item in each of BAMC’s Board meetings. Until September 2019, OU Compliance and OU Corporate Security were part of the Committee on Corporate Security and Compliance, which dealt with issues related to the scope of activities of those units. Due to the reorganization of the work of the OU Corporate Security, these topics have been discussed since September 2019 at the meetings of the Executive Directors, in accordance with the Rules of Procedure of the Executive Directors. OU Compliance also reports to the Board of Directors ensuring independent oversight of the activities of BAMC over all operative levels.
The Board established the Executive Credit and Investment Committee and the Operative Credit and Investment Committee to decide on claims owned or managed by BAMC. The Board also established the Board Credit and Investment Committee in respect to just give consent to the decisions/proposals of Executive Credit and Investment Committee if necessary. With such a decision-making committee structure responsibilities are clear with more responsibility delegated to operative level while even strengthening the depth of decision-making and control on high volume/high impact cases on the executive level.
NON-EXECUTIVE DIRECTORS AS AT 31 DECEMBER 2019 Tomaž Besek, Chairman of the Board of Directors, began his position as non-executive director at the BAMC on 8 December 2018. He holds a bachelor's degree in electrical and computer engineering. He has more than 20 years of managerial experience at commercial organizations, where he developed in-depth knowledge and experience in the areas of strategic and operational management, finance and the formulation of business solutions. Mr Besek began his career as a lecturer at the Jožef Stefan Institute, and continued at the company Gambit Trade as department head, advisor and project manager. He also served as the company's deputy director for four years. He then served as assistant executive director at the company SRC.SI, where he was head of the commercial sector and primarily focused on the formulation of that sector's development strategy. In 2007, Mr Besek established a company for comprehensive information management, 360ECM, d. o. o., where he serves as director. His primary responsibilities are for the company's financial and legal operations, and
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consultancy services for large customers. Mr Besek is completing his master's studies at the Faculty of Economics in Ljubljana. In addition to his supervisory function at an educational institution, he serves as the chairman of the supervisory board of the company HSE, d. o. o.
Mitja Križaj, Deputy Chairman of the Board of Directors, non-executive director since 28 January 2017, holds a bachelor’s degree in economics and has over 22 years of managerial experience in banking and finance, real estate and asset management operations, as well as corporate management of companies dealing with restructuring and turnaround situations as well as other financial organizations. He is currently employed in the consulting and investment company Fundament, d. o. o., which provides business and financial consultancy, real estate consultancy and management, and investment consultancy. Prior to his current position, he served as a director of Hypo Leasing, d. o. o., later Heta Asset Resolution, d. o. o., directly responsible for restructuring and managing nonperforming and nonstrategic assets of Hypo Alpe Adria group in Slovenia. He was also the chairman of the management board of Triglav Nepremičnine, d. d., a member of Zavarovalnica Triglav, d. d. group, and in his early years he was professionally involved in Bank Austria Creditanstalt and Hypo Alpe Adria. He is currently a member of the supervisory board of SIJ - Slovenska industrija jekla, d. d.
Marko Tišma holds a bachelor’s degree in Economics and was appointed to the post of non-executive director on 14 December 2018. In his professional career of over 25 years, he has accumulated knowledge and experience in management and finance, mostly in top or middle management positions in different companies, either as chairman of the management board, managing director or department manager in various fields, where he managed the work process and teams, which sometimes consisted of over 200 employees. He began his career path in the company Zdravilišče Rogaška, d. d., where he soon joined the executive staff. He headed the business consultancy in the company Hosting, d. o. o. and worked in the area of equity management at KBM INFOND. He served as director of marketing and corporate communications at NKBM, and as the executive director of the company ČZP Večer, d. o. o. As former liquidation and bankruptcy trustee and current member of the supervisory boards of Terme Olimia, d. d. and SID Banka, d. d., where he serves as vice chairman, he is very knowledgeable about all the corporate functions in various companies.
Aleksander Lozej took office as non-executive director on 21 June 2019. He holds a Bachelor’s degree in Laws and a Master’s degree in General Management. He has served in executive positions in both the public and private sector, and his background is mostly in the banking sector, as he served nine years as a member of the management board of Intesa Sanpaolo, d. d. Prior to this, he served as advisor to the management board of Banka Koper, d. d., director of Finor, d. o. o., and the director of the Institute of Urban Planning, Housing and Construction Affairs at the Municipality of Izola. Over the course of his 30-year career, he has developed a wealth of knowledge in management, human resources and operational organization, risk management, corporate governance, financial transactions and change management. Aleksander Lozej is an expert member of the supervisory board with a license from the Association of Supervisory Board Members, and also served as both member and chairman of supervisory boards of different companies. He also passed the national bar exam.
On 2 June 2020 the Government, acting in the capacity of the BAMC General Meeting, recalled Tomaž Besek and Mitja Križaj from their positions as non-executive directors and appointed Alenka Urnaut Ropoša and Boris Novak as non-executive directors with their mandate lasting from 3 June 2020 to 31 December 2022.
Boris Novak, Chairman of the BAMC Board of Directors, was appointed as a non-executive director of BAMC on 3 June 2020. Novak holds Master’s degree and bachelor’s degree in law. In his 37-year career he has acquired expertise in numerous professional fields, such as: business management and supervision, protection of
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competition in the conducting of business activities, strategy development and implementation of activities in the area of employee management, corporate risk management systems, development of corporate business strategies, preparation and implementation of public procurement procedures. He began his career with the Police, and worked as an undersecretary at the Ministry of the Interior of the Republic of Slovenia, in the Directorate for the Police and Other Security Tasks, after which he served as Deputy Director of the Criminal Police Directorate within the General Police Directorate. In January 2006 he became a consultant to the director of the company Elektronsko pismo Pošte Slovenije (Pošta Slovenije Electronic Letter), and in the same year became a consultant to Pošta Slovenije Executive Management, and in February 2008 became the director of Corporate Security and Control, and consultant to the executive management two years later. He has been General Manager of Pošta Slovenije since May 2012. He is the Chairman of the Supervisory Board of Intereuropa and a member of the Supervisory Board of Športna loterija.
Alenka Urnaut Ropoša, BS MSc Industrial Engineering, was appointed as a non-executive director on BAMC’s Board of Directors on 3 June 2020. Over her 20-year professional career she has worked in investment management, high-performance work teams, and the development of complex real-estate projects, during which she has gained work experience at construction, development and real-estate firms, and has also been a member of international real-estate funds, local governments and financial institutions. She is the owner and managing director of Renova Real d.o.o., a professional associate at BV Financial Group and Euroimmobilien Group, and is an authorised real-estate appraiser, a court appraiser for the construction industry in the field of real estate, and a certified professional engineer. She began her career as the deputy director at Sgp Kograd Igem Inženiring in Dravograd, and later became an investment manager at Probau g.i.z. in Velenje. Before starting her own company she was the managing director of Pilon ing in Velenje, where she also worked as a business and real-estate consultant and participated in the development of complex real-estate projects.
EXECUTIVE DIRECTORS AS AT 31 DECEMBER 2019 Matej Pirc took on the role of CEO of BAMC on 29 April 2019, after having served as acting CEO for three months and CFO for one-and-a-half years. He holds a bachelor’s degree in economics and has over 10 years of experience in management positions, both in privately-owned and state-owned companies. He developed his qualifications in Finance & Accounting, Controlling, Investment, R&D, IT, HR, Legal, Liquidity and Financial Risk Management. He graduated from the University of Ljubljana, Faculty of Economics. He spent a number of years working in executive positions in Mercator Group, both in the principal company and its subsidiaries in Slovenia and abroad. He was a management board of Slovenska odškodninska družba, d. d. and later the Slovenian Sovereign Holding. In April 2014, he became the chairman of the management board of the Slovenian Sovereign Holding, where he was responsible for corporate restructuring, asset management, and finance. Prior to his employment at BAMC, he served as one of the directors at the international consulting firm A.T. Kearney, d. o. o., where he was responsible for corporate governance projects, for infrastructural projects and for M&A projects.
Bojan Gantar, responsible for credit and equity operations, took over as BAMC’s executive director as of 27 May 2019. He has held a number of executive positions over the course of his 20-year career. He holds a bachelor’s degree in engineering, as well as an MBA title. He began his career as a technology project manager in Hidria Rotomatika, d. o. o. Over the course of his career serving in a number of companies, he has attained a wealth of expertise and experience, particularly in strategic planning and corporate governance, financial and operational restructuring and business process optimization. Over the course of his 16-year career with Hidria, he served as the head of technical engineering, director of the business unit and the CEO, followed by a 2-year term as a member of the management board of Trimo, d. o. o. Prior to his appointment as BAMC’s executive
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director, he served as the CEO of Alpina, d. o. o., where he managed and oversaw all key processes in Alpina Group and steered its financial and operational restructuring efforts.
Dr. Andraž Grum, executive director of BAMC, responsible for business analytics, legal matters, procurement, finance, accounting, controlling and IT, commenced his term on 27 May 2019. He has a 20-year executive background in various companies, mostly financial enterprises. He holds a PhD in Economic Science. Over the course of his career he has attained a wealth of experience and knowledge in financial analytics, asset valuation, corporate finance, distressed asset management, risk management, investment management and corporate governance. He began his career in Abanka’s capital markets analysis and portfolio management function. At Triglav Funds, he was responsible for managing mutual fund assets. He continued his career in companies such as Vipa Holding, d. d., Deželna banka Slovenije, d. d. and DBS Nepremičnine, d. o. o. He has also served as supervisory board member of a number of companies and financial institutions. He holds a stockbrokerage and asset manager license, as well as an insurance brokerage license.
NORMATIVE FRAMEWORK Besides ZUKSB, the regulation that defines the operations and organisational structure of BAMC consists of: . the Decree on the implementation of measures to strengthen the stability of banks; . the Guidelines on the operations of the Bank Assets Management Company; . the Articles of Association of the Bank Assets Management Company; . the BAMC’s Remuneration Policy.
BAMC fully complied with the provisions of the specific regulations governing its activity.
Operations in individual areas are also defined by internal bylaws adopted or refined by the Board. In 2019, the Board of Directors adopted three new internal acts, abolished four internal acts and adopted 25 amendments to existing internal acts. The most important among them were: . Process and decision-making powers of the committees; . Investment policy on the management of liquidity reserves; . Valuation Policy; . Remarketing of real estate – rules and procedures; . Sale of equity – rules and procedures; . Sale of claims – rules and procedures.
ORGANISATIONAL STRUCTURE Due to the changes in the portfolio structure during BAMC’s lifetime modifications in internal organization were crucial in order to manage assets in the most efficient and effective way, including horizontal controls built into the processes by a clear segregation of duties between case/real estate/equity management, financial analysis and valuation verification, mid-office and legal support.
Corporate defence lines are strengthened by enhanced functions of internal audit, compliance and anti-money laundering and risk management, all reporting to the Board. The internal organization, also fully corresponds to the amendments of ZUKSB regarding restricted role of non-executive directors, distinction of functions, and powers of BAMC.
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FIGURE 7: ORGANISATIONAL STRUCTURE
Board
Compliance Internal audit
Legal counsel to the Board
CEO Executive director Executive director
Finance, Real estate Credit Equity Other departments Other departments accounting, management management management controlling and IT
Real estate Marketing, PR and Restructuring of Business analytics Finance and management - investor relations major clients and valuations accounting residential
Real estate Restructuring of Controlling and risk management - HR Legal SME's management industrial
Real estate Purchasing and IT, organization Collection and management Administration public and business workout support procurement processes
Credit & Equity support
NOTE: Organisational structure as at 31 December 2019.
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ORIGIN OF ASSETS In late 2013 the Government completed the recapitalisation of the two largest Slovenian banks, Nova Ljubljanska banka, d. d., Ljubljana (hereinafter: NLB) and Nova Kreditna banka Maribor, d. d., Maribor (hereinafter: NKBM). The aforementioned banks transferred €3,3 billion in non-performing assets, primarily claims, to BAMC at a transfer value of €1.008,4 million in exchange for bonds issued by BAMC. BAMC’s first step was to determine the initial fair value of acquired assets. The valuation process was completed in June 2014 and, through €175,6 million downward and €145,7 million upward adjustment to transfer values for claims received together with €9,9 million initial loss in equity received, resulted in a total initial loss recognition of €39,9 million.
In H1 2014, real estate with a transfer value of €11,6 million was received form NKBM and in H2 2014 BAMC received additional non-performing assets from Abanka Vipa, d. d., Ljubljana (hereinafter: Abanka) and Banka Celje, d. d., Celje (hereinafter: Banka Celje) in exchange for additional issued bonds. Thus, €1.142,4 million of non-performing assets were transferred to BAMC from Abanka in October 2014 at a transfer value of €423,8 million and additional €392,2 million from Banka Celje in December 2014 at a transfer value of €125,7 million. After 2014 asset transfers from NKBM, Abanka and Banka Celje BAMC estimated their initial fair values, following the valuation methodology used for the first transfers as well. Claims towards 173 debtors were assessed at €165,3 million below transfer values while in 89 cases the fair value was €96,8 million above transfer values. Together with €0,9 million loss from equity and €1,4 million gain from bonds the total fair value of assets taken over was thus €68,0 million or 12,1% lower than the transfer prices which again resulted in initial loss recognition by BAMC.
BAMC PAID €623 MILLION MORE FOR THE ASSETS THAN THE ESTIMATED MARKET VALUE Before the transfers of the assets and before approval of the state aid to banks transferring NPL’s, the EU estimated the market value of the assets transferred under legislative directions, i.e. the price at which the banks could have sold the assets in a “fire sale” process to a buyer other than BAMC. The difference between these market values and the transfer values is documented in EU state aid decisions regarding the four banks. The market values were estimated to be €623 million less than the transfer prices.
In order to complement its exposures to certain debtors, in 2014 BAMC purchased claims totalling €172,9 million from Factor banka and Probanka in the amount of €38,6 million in arm’s length transactions at negotiated prices.
At the beginning of 2016, based on Government decision, BAMC merged Factor banka and Probanka. By absorbing the two former banks, BAMC effectively became the direct owner of all assets of the two merged companies in the amount of €417,0 million and took over all of their outstanding liabilities, including five subsidiaries registered in Slovenia. BAMC assessed the value of the merged assets upon initial recognition to fair value. The fair values of merged assets according to BAMC methodology were €67,0 million lower than their book values according to bank valuation methodology. Together with the cumulative negative net equity of the two companies of €8,6 million and provisions for lawsuits in the amount of €3,8 million, the total negative difference of €79,4 million in the BAMC financial statements was disclosed as a return of capital to the owner. All the above mentioned effects are part of the corrections to initially invested capital as presented in Table 2.
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STATUS OF NPLS IN SLOVENIA The share of corporate NPLs in the Slovenian banking sector is still decreasing from its peak at 18,1% (28,0% for corporate debt) in late 2013, just before the transfers of first assets to BAMC. At the end of 2019 total claims over 90 days in arrears amounted to €466 million (1,1% of all claims) with NPLs’ in corporate debt making up just over 40% of total in value (1,4% of claims towards corporates). Industry-wise, the share of NPLs was still the highest in construction industry (5,0%), followed by accommodation and food service activities (4,1%) and professional and other business activities (2,4%). For all other industries the share of NPLs at the end of 2019 is 1,5% or less.4
FIGURE 8: MOVEMENT OF THE SHARE OF NPLS IN THE SLOVENIAN BANKING SECTOR % of NPLs 30
25
20
15
10
5 Corporate debt Total debt 0 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
NOTE: NPLs as claims overdue over 90 days. The Bank of Slovenia also publishes non-profitable exposures according to the amended EBA definition from 2015, but the former measure is taken for presentation purposes due to the data time series adequacy. SOURCE: Banka Slovenije: Mesečna informacija o poslovanju bank, August 2010 – February 2020. Total debt % data not available prior to December 2011.
4 All data and calculations (except for 2013) from publication Mesečna informacija o poslovanju bank, Bank of Slovenia, February 2020.
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BUSINESS REPORT
CORPORATE GOVERNANCE STATEMENT In accordance with the provisions of the fifth paragraph of Article 70 of the ZGD-1 and the Corporate Governance Code (hereinafter: the Code), the Bank Assets Management Company hereby issues the following corporate governance statement as part of the annual report.
STATEMENT OF COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE The BAMC’s Board of Directors hereby declares that it complied with the Corporate Governance Code, as amended on 27 October 2016, to the maximum extent possible in 2019, with the exception of specific provisions based on BAMC’s unique status (its sole shareholder being the Slovenian government), provisions that are governed by the law (ZUKSB) and provisions that the company has otherwise adopted in its Articles of Association and bylaws, as well as provisions of the Code in cases where non-binding actions are not specified in its bylaws or where specific actions are not defined as legal obligations.
In 2019 BAMC also complied with the Corporate Governance Policy of BAMC adopted by the Board on 20 February 2015 and amended on 29 November 2016.
In companies where BAMC, has a direct or indirect stake in the share capital or in the voting rights in the company to a large extent (and depending on the legislation and organizational options in companies), BAMC follows the principles and recommendations of the Code of corporate governance. BAMC’s goal is to establish a clear and transparent governance system that restores the trust of both domestic and international investors, employees and the general public in the Slovenian corporate governance system. The full text of the Corporate Governance Code is available on the website of the Ljubljana Stock Exchange (http://www.ljse.si/cgi-bin/jve.cgi?doc=8377) and the Corporate Governance Policy of BAMC is available on the BAMC website (http://www.dutb.eu/en/equity.aspx).
INFORMATION REGARDING THE FUNCTIONING AND KEY COMPETENCES OF THE COMPANY’S GENERAL MEETING AND DESCRIPTION OF SHAREHOLDER RIGHTS5 Key elements of BAMC’s corporate governance structure are defined by ZUKSB and Articles of Association. BAMC has a one-tier corporate governance system consisting of a General Meeting and a Board.
ZUKSB changed some provisions regulating the role of the Board, General Assembly and gave some additional supervisory powers to the Ministry of Finance, but strictly excludes its right to interfere with individual cases and business decisions. BAMC reports monthly to the Ministry of Finance on the basis of the Guidelines. Furthermore, the Ministry has the power to request of BAMC any and all documents and information required for supervision, with the exception of documents and information related to confidential relations.
5 Information regarding the functioning and key competences of the company’s General Meeting and description of shareholder rights relate to ZUKSB and Articles of Association valid in 2019.
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GENERAL MEETING The tasks and competences of the BAMC’s General Meeting are vested in the Government as the sole shareholder.
The General Meeting makes decisions on basic matters concerning BAMC, in particular: . the adoption of the company’s Articles of Association and amendments thereto; . the adoption of the annual report; . decisions regarding the use of distributable profits; . decisions regarding the appointment and dismissal of non-executive members of the Board; . decisions regarding the granting of discharge to the members of the Board; . decisions regarding measures to increase and decrease capital; . decisions regarding the appointment of an auditor.
The General Meeting is convened by the Board through a simple majority vote. The convening of the General Meeting must be published minimum 30 days prior to the meeting. The shareholder duly entered in the central register of book-entry securities at the end of the fourth day prior to the scheduled date of the General Meeting is entitled to participate at the General Meeting and exercise voting rights. The Government of Republic Slovenia, in the capacity of the General Meeting of BAMC, carries out General Meetings, even if the General Meeting is not convened by the Board, or if provisions of the law governing companies have not been complied with the content of the meeting, the published agenda or the referenced periods.
The General Meeting was convened five times in 2019.
INFORMATION REGARDING THE COMPOSITION AND ACTIVITIES OF MANAGEMENT OR SUPERVISORY BODIES AND THE COMMITTEES THEREOF6
BOARD OF DIRECTORS OF BAMC BAMC’s Board comprises seven members, four of whom are non-executive directors7 and three of whom are executive directors8. The non-executive directors are appointed and recalled by the Government, where three non-executive directors are proposed by the ministry responsible for finance and one is proposed by the ministry responsible for the economy.
6 Information regarding key competences of the Board relate to ZUKSB and Articles of Association valid in 2019. 7 On 31 March 2019 Juan Barba Silvela requested to be recalled as non-executive director. The Government, acting in the capacity of BAMC General Meeting, took note of the recall request on 20 June 2019 and recalled him from the position of non-executive director. On 20 June 2019 the Government, acting in the capacity of the BAMC General Meeting, appointed Aleksander Lozej to the position of non- executive director with his mandate lasting from 21 June 2019 to 31 December 2022. On 2 June 2020 the Government, acting in the capacity of the BAMC General Meeting, recalled Tomaž Besek and Mitja Križaj from their positions as non-executive directors and appointed Alenka Urnaut Ropoša and Boris Novak as non-executive directors with their mandate lasting from 3 June 2020 to 31 December 2022. 8 On 19 December 2018, the Chief Executive Officer, Imre Balogh, announced his resignation to the Board of Directors, which took note of it on the same day. The non-executive directors concluded that the withdrawal would take effect on 27 January 2019. The non-executive directors appointed Matej Pirc as Acting Chief Executive Officer for a period of three months. On 26 March 2019 Andrej Prebil resigned from his position as executive director, the resignation being effective on 31 March 2019. On 16 April 2019 the non-executive directors recalled Jože Jaklin from his position as executive director. On 25 April 2019 the non-executive directors appointed Matej Pirc as the Chief Executive Officer of BAMC with the mandate from 29 April 2019 until 31 December 2022. On 7 May 2019 the non-executive directors appointed Andraž Grum and Bojan Gantar as executive directors with their mandate lasting from 27 May 2019 until 31 December 2022.
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In selecting the candidates for non-executive directors, a special BAMC committee consisting from four independent members (one from the ministry responsible for finance, one from the ministry responsible for the economy, one external expert from banking, financial or economic field, proposed by the Bank Association of Slovenia and one HR expert from BAMC) carries out the assessment procedure as prescribed in the Articles of Association of BAMC. Executive directors are selected on the basis of a public call for applications. Executive directors are appointed and dismissed by the non-executive directors. With the recall of the executive director shall cease his/her membership in the Board. Each member of the Board is appointed individually. Members of the Board who are not executive directors, shall have the powers of the Supervisory Board according to the law governing commercial companies and shall not manage BAMC.
All members of the Board are appointed for the period until 31 December 2022. Executive directors serve on a full-time basis as employees of BAMC.
The main competences of the Board include: . management of and control over the company’s operations; . the appointment and recall of the Chairman and Deputy Chairman of the Board from among its non- executive members; . the approval of the Rules of Procedure for the Board and Executive Directors; . representation of the company in the conclusion of contracts with individual members; . the appointment of members of the Audit Committee, Remuneration Committee and other committees established by the Board; . approving the financial plan; . giving consent to the decisions/proposal of credit committees; . the formulation of a proposal for use of distributable profit; . verification of the annual report (approval of the annual report is at the discretion of the General Meeting); . compilation of a report on the review of the annual report for the General Meeting; . submission of a proposal to the General Meeting regarding the appointment of an auditor based on the Audit Committee’s recommendation; . convening of the General Meeting; . the appointment and recall of the company’s procurators; . other competences in accordance with the law, Articles of Association and resolutions of the General Meeting; . the adoption of the business strategy and policy in accordance with Article 10a of the ZUKSB.
Executive directors represent the company and act on its behalf. Executive directors represent the company individually and without limitations for the relevant area or areas of operations assigned in accordance with the Board resolution. The Board may pass a resolution to define specific legal transactions in which executive directors must represent the company jointly.
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Executive directors are competent and responsible for the following: . managing the company’s day-to-day operations; . compiling the annual report; . preparing the financial plan; . drawing up the business strategy; . registering subscriptions and submitting documents to the court register; . maintaining the books of account; . executing transactions in line with the Articles of Association.
BOARD COMMITTEES Board constituted Audit Committee, Remuneration Committee, Accreditation Committee and Committee on Corporate Security and Compliance9 to assist and advice the Board in decision-making and in its supervisory function.
All Board members are members of the Board Credit and Investment Committee as well.
AUDIT COMMITTEE The Audit Committee (hereinafter: AC) is appointed by the Board. All members of the AC except the independent expert (or experts) are members of the Board. The AC consists of a minimum of three members, while two members represent the quorum. The Board appoints a chair of the AC from among its ranks. At least one AC member should be an independent expert in accounting or auditing.
The AC should meet at least four times per year. The practice at BAMC is that AC meetings are convened before each regular Board meetings. The CEO, CAO, CFO, Head of internal audit and representatives of external auditors, and other persons may attend the meeting by invitation extended by the AC. Each year, the AC meets at least once with external and internal auditors without the management team present.
The Board mandated the AC to: . investigate every activity within its purview; . request all information it requires from any employee, while all employees are under instructions to accommodate any request made by the AC; . procure external legal and independent professional advice at the company’s cost, and ensure the presence of external associates with appropriate experience and in-depth knowledge, if they feel it necessary.
Key scope of work and responsibilities of the AC relate to financial reporting, internal controls and risk management, internal audit, compliance and external audit.
Additionally, the AC also deals with reports of violations against executive directors, related to the management of BAMC operations.
9 Committee on Corporate Security and Compliance was operational until September 2019.
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REMUNERATION COMMITTEE The Remuneration Committee is an internal BAMC body and its function is part of the corporate governance structure of BAMC itself. The scope of the Remuneration Committee’s responsibilities is to set up an appropriate remuneration policy for BAMC staff in the first phase and to help prepare the framework for tracking employee performance. In general, the Remuneration Committee is responsible for preparing the decisions related to remuneration.
The Committee has at least three members, appointed by the Board: . two non-executive directors of BAMC; . external member(s), who is/are expert(s) in management performance evaluation and remuneration outside of BAMC.
ACCREDITATION COMMITTEE The Accreditation Committee is an internal BAMC body which selects possible candidates for supervisory board membership in other companies. It is therefore not a committee as certain similar bodies envisaged by ZGD-1 (e.g., the Audit Committee) whose function would be part of corporate governance of BAMC itself. The Accreditation Committee selects suitable internal or external candidates, based on the internal criteria and conditions as well as the needs of the company's supervisory board, given the challenges the company is faced with.
The Committee has at least three members appointed by the Board. At least one of the members of the Accreditation Committee is an expert or has special knowledge in the field of human resources and at least one member is an expert or has special knowledge in the field of corporate governance.
COMMITTEE ON CORPORATE SECURITY AND COMPLIANCE By September 2019, the Committee on Corporate Security and Compliance (CCSC) was functioning, ensuring that the most important topics and violations relating to Corporate Security, Compliance and Human Resources were evaluated in even closer detail and examined. The Committee reviewed and passed decisions on matters related to the Rules on the Employee Accountability in regards to Corporate Integrity Violations. It informed the Audit Committee and the Management Board of its findings and proposals.
The Committee had, until September 2019, the following members: . three executive directors; . corporate security expert; . compliance officer.
Following the reorganization of OU Corporate Security, its tasks were assumed by OU Compliance, OU Internal Audit and OU Legal Advisor to the Board of Directors. Due to the termination of the post of Corporate Security Specialist, two internal acts were amended and three internal acts were abolished.
THE BOARD CREDIT AND INVESTMENT COMMITTEES The Board established the Executive Credit and Investment Committee (ECIC) and the Operative Credit and Investment Committee (OCIC) to decide on claims owned or managed by BAMC and to decide on matters related to acquisition of, investment into and disposal of individual assets, related to said exposures. A Board Credit and Investment Committee (BCIC) operates on the Board level.
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In order to increase the efficiency of work, the Board transferred decisions on the loan portfolio and the real estate and equity investments owned by BAMC to the executive and operational levels. BCIC only gives consent to decisions/suggestions of ECIC on taking the decisions which are complex, have significant value or policy impact, are precedential, strategic, high risk or have a high public sensitivity. Such decisions are firstly taken on the executive level and a (non-)consent is given on BCIC level. Other decisions are normally taken in executive and operational level committees.
The delegation and decision powers of BAMC's case committee structures is clearly defined in BAMC's policy Process and decision-making powers of the committees. This policy was approved by BAMC’s owner, the government of the Republic of Slovenia and is valid, with amendments, from 16 March 2016. The last version of Process and decision-making powers of the committees policy was adopted in September 2019.
KEY FEATURES OF THE COMPANY’S INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS IN CONNECTION WITH THE FINANCIAL REPORTING PROCESS Internal control mechanisms help the company achieve its objectives and are an integral part of the values and principles formulated by the management. They are applied in everyday operations in the form of policies, guidelines, processes, procedures and activities with the aim of managing risks within acceptable limits. All employees are involved in the internal control system, with specific groups of employees holding special roles and responsibilities. The Board promotes and monitors the functioning of the internal control system, while executive directors are responsible for developing and updating the internal control system. Operational managers formulate, implement and monitor internal controls in their areas of responsibility, while other employees carry out their responsibilities as agreed. A number of central registers for follow-up and reporting on functioning of specific controls are managed by compliance, internal audit and controlling and risk units. The internal control system is an integral part of all processes, while a transparent mechanism of control points facilitates regular reviews of processes and the assessment exposure to risks. The risk management and control mechanisms are presented in detail in the Risk management chapter (page 59).
EXTERNAL AUDIT BAMC’s financial statements for 2019 were audited by KPMG Slovenija, d. o. o. As part of its audit of the financial statements, the external auditor reports its findings to the Board and the Audit Committee.
Audit costs are disclosed in Note 34 to the financial statements.
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BAMC’S MISSION AND STRATEGIC GOALS
MISSION OF BAMC AS DEFINED IN THE GUIDELINES BAMC’s mission is defined in the Guidelines and in line with the mission the Board of BAMC has adopted BAMC’s key objectives and strategic goals. . Implement the measures to strengthen the stability of banks, adopted by the Government of the Republic of Slovenia. . Promote trust in the financial system and operate by the rules of the business-financial profession and the highest ethical management standards, avoiding any conflict of interest. . Implement a proactive, cooperative and holistic approach to the restructuring of companies. . Being an active asset owner. . Manage the assets in a way that would allow exiting at the best possible price.
BAMC BUSINESS STRATEGY 2019-2022 BAMC Business Strategy 2019-2022, adopted by the Board and approved by the Government in April 2019, is a key corporate document defining the following key objectives and strategic goals of BAMC:
BAMC’s financial goal is to maximize the return to state and ultimately to the taxpayer and in this respect: . (1) Redeem the state guaranteed bonds (i.e. the liabilities from their refinancing) issued to pay for the transferred assets, and (2) in addition, generate the required return on the invested equity by the Republic of Slovenia. . Consistent with the previous objective, act in the way which will aim to restructure companies when economically justifiable and to contribute to a renewal of sustainable activities in the property and other asset markets in Slovenia. . Manage assets intensively and invest in them so as to optimise their income-producing potential and disposal value.
Claims will constitute the bulk of BAMC’s assets throughout its lifetime. However, as repayments and refinancing of debt of successfully restructured companies will reduce the share of restructuring cases in the portfolio, the active management of own (repossessed) and collateralised real estate gains importance over time. BAMC’s own financing will closely follow the cash flows from managing its assets and will minimise financing costs through tight liquidity management. In accordance with ZUKSB (Article 36) the lifespan of BAMC is limited to the end of 2022, when its assets, rights and liabilities are transferred to Slovenski državni holding, d. d.
For effective strategic planning, monitoring and reporting, the Government and BAMC have defined a set of Key Performance Indicators, i.e. KPIs, as presented in the financial overview section (page 51).
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SIGNIFICANT EVENTS IN 2019 On 14 February 2019 the Government, acting as the General Meeting of BAMC, decided that BAMC stops the sale process of the Istrabenz Turizem, d. d. shares, pledged as collateral to secure the claims of BAMC against Istrabenz Holding, d. d., in keeping with the Master Restructuring Agreement and in keeping with the Strategy for Sustainable Growth of Slovenian Tourism 2017-2021. As a result, BAMC is to liquidate the collateral, in the form of pledged shares of Istrabenz Turizem, d. d., through out-of-court foreclosure on pledged collateral. On 19 February 2019 BAMC sent its debtor and other MRA signatories a letter, in which BAMC terminated the MRA and called for immediate repayment due to an event of default.
The pledging member made the execution of the transfer of shares contingent on the consent of other creditors of Istrabenz Holding, d. d. All other creditors demanded that the claims secured by a pledge of Istrabenz Turizem, d. d. shares are purchased collectively rather than individually. The process continued with negotiations with the creditors and buyouts of their claims, which was carried out in March and April 2019. In the interim, a valuation of Istrabenz Turizem, d. d. shares was carried out by a consensually appointed certified valuator, in accordance with the Financial Collateral Agreement.
On 15 April 2019, after buying out the claims from other creditors, BAMC became the owner of 908.413 shares of Istrabenz Turizem, d. d., representing 100% ownership stake in the company.
On 19 December 2018 Imre Balogh resigned as Chief Executive Officer with his resignation coming into effect on 27 January 2019. Matej Pirc was appointed as acting CEO from 28 January 2019 for a period of three months.
On 25 February 2019 the Board of Directors adopted the new BAMC Business Strategy 2019-2022. The Government, acting in the capacity of the BAMC General Meeting, gave consent to the strategy on its meeting on 18 April 2019.
On 15 March 2019 BAMC repaid €26,2 million of long-term loans according to the amortisation plans.
On 26 March 2019 Andrej Prebil resigned from his position as executive director, the resignation being effective on 31 March 2019.
On 31 March 2019 Juan Barba Silvela requested to be recalled as non-executive director. The Government, acting in the capacity of BAMC General Meeting, took note of the recall request on 20 June 2019 and recalled him from the position of non-executive director.
On 16 April 2019 the non-executive directors recalled Jože Jaklin from his position as executive director.
On 18 April 2019 the Government set new Guidelines on the operations of BAMC with changes in the reporting, notification and giving consent in decisions of strategic importance, further strengthening supervision and transparency of the company’s operations.
On 25 April 2019 the non-executive directors appointed Matej Pirc as the Chief Executive Officer of BAMC with the mandate from 29 April 2019 until 31 December 2022.
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On 7 May 2019 the non-executive directors appointed Andraž Grum and Bojan Gantar as executive directors with their mandate lasting from 27 May 2019 until 31 December 2022.
On 13 June 2019 the Government, acting in the capacity of the BAMC General Meeting, decided that it is essential from the perspective of implementing the Resolution on the National Housing Program 2015–2025 that BAMC transfers the most suitable real estate assets to the Housing Fund of the Republic of Slovenia (hereinafter: SSRS). The transfer shall be done at the estimated market value calculated by an independent real estate valuator in accordance with the International Valuation Standards. The valuator was to be selected jointly by BAMC and SSRS. Three land plots intended for residential construction were selected, located in Ljubljana, Novo mesto and Nova Gorica. The selling price for all three plots amounted to €10,2 million, excluding tax. Selling contracts were signed on 24 October 2019, the whole purchase price was paid on 23 December 2019 and was followed by the handover of land on 9 and 10 January 2020.
On 17 June 2019 BAMC repaid €41,2 million of long-term loans according to the amortisation plans. Next to that it also made an additional €15,0 million early repayment of its debt.
On 20 June 2019 the Government, acting in the capacity of the BAMC General Meeting, appointed Aleksander Lozej to the position of non-executive director with his mandate lasting from 21 June 2019 to 31 December 2022.
On 15 July 2019 BAMC published its 2018 Annual report, receiving an unqualified auditor’s opinion. The Government, acting in the capacity of the BAMC General Meeting, approved the BAMC 2018 Annual report on 25 July 2019.
On 16 September 2019 BAMC repaid €26,2 million of long-term loans according to the amortisation plans.
On 30 September 2019 BAMC decided to close the company NPL Port, d. o. o. according to the shortened procedure without liquidation, whereby all assets of the company were transferred to BAMC as the universal legal successor. In the process, BAMC also took over all 14 employees of the said company. NPL Port, d. o. o. provided back office accounting and IT services to BAMC – activities which employees taken over now perform within BAMC. NPL Port, d. o. o. was erased from the Court register on 29 November 2019.
On 16 December 2019 BAMC repaid €38,2 million of long-term loans according to the amortisation plans.
EVENTS AFTER THE ACCOUNTING PERIOD On 16 March 2020 BAMC repaid €26,2 million of long-term loans according to the amortisation plans.
With the occurrence of Covid-19 pandemic at the beginning of 2020 and pronouncement of an epidemic in Slovenia in March 2020, the conditions of business changed dramatically for BAMC as well. BAMC anticipates lower inflows than planned from both debtors and tenants, it will also have to follow activities of other creditor banks and the measures adopted by the Government that relate to the reprogramming financial liabilities of debtors. In companies where BAMC is the owner, participation in the form of providing additional liquidity for normalisation of operations and/or investments was already necessary. Additionally, lower real estate and equity prices are expected due to the fall of economic activity accompanied with a lower number of purchase transactions, all resulting in lower inflows from asset management. This will have a direct effect on BAMC liquidity position. The company’s cash reserved are high enough to cover its operating and financial liabilities in
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the short-term, while the mid-term liquidity assessment was performed in May 2020 and was included in the amendment of the company’s yearly financial plan.
On 2 June 2020 the Government, acting in the capacity of the BAMC General Meeting, recalled Tomaž Besek and Mitja Križaj from their positions as non-executive directors and appointed Alenka Urnaut Ropoša and Boris Novak as non-executive directors with their mandate lasting from 3 June 2020 to 31 December 2022.
On 15 June 2020 BAMC repaid €38,2 million of long-term loans according to the amortisation plans.
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MANAGEMENT OF ASSETS BAMC’s assets are mostly managed individually, at the level of a claim towards a specific debtor, equity investment in a specific company or individual item of real estate. Where BAMC owns both claims and equity in the company, the maximization of enterprise value is targeted, applying different strategies. In some cases, claims/stakes in a group of companies are being managed as a whole, due to ownership or other significant intertwined characteristics.
ALL ASSETS ARE AVAILABLE FOR SALE Assets under BAMC's management are available for sale at any time. This means BAMC is willing to sell every asset if it estimates an adequate price has been offered. BAMC is selling assets through competitive and transparent procedures which maximize their value.
As at 31 December 2019 BAMC had €696,8 million of assets at fair value under its management, a reduction of 16% compared to the previous year-end. The majority of the portfolio (58%) was represented by claims, followed by real estate (25%) and equity holdings (17%).
FIGURE 9: ASSETS UNDER MANAGEMENT € million
1.750 Equity 1.515,2 1.510,9 1.500 57,0 59,9 Real estate 51,3 97,2 Claims 1.242,7 1.250 1.196,1 36,3 96,9 68,8 961,2 197,7 953,4 -16% 1.000 14,2 99,0 830,1 194,2 89,9 696,8 750 1.406,9 1.353,7 180,5 114,6 1.091,0 500 947,0 948,1 175,1
660,2 559,7 250 407,1
0 31.12.2013 31.12.2014 31.12.2015 1.1.2016 31.12.2016 31.12.2017 31.12.2018 31.12.2019
NOTE: 1 January 2016 displays the fair value of the portfolio at the merger of Factor banka and Probanka into BAMC. Since the merger BAMC also manages a minor leasing portfolio which is presented together with “Claims”.
CREDIT AND INVESTMENT DECISIONS Asset management requires the adoption of numerous credit and investment decisions that relate to claims against debtors, equity holdings and real estate. The basis for adopting a credit or investment decisions is an action plan prepared by the case manager or asset manager (equity, real estate). The action plan includes strategies for maximising the value of a case, as well as detailed data on the debtor, BAMC’s exposure towards it, reasons that led to its illiquidity or insolvency and clear justifications of the decision proposal. Credit and investment decisions are adopted by credit and investment committees at different organizational levels based on size, complexity or reputational implications of the exposure.
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Based on prepared action plans BAMC took 1.465 credit and investment decisions on operational, executive and board levels in 2019.
FIGURE 10: BREAKDOWN OF DECISIONS TAKEN 2.083 decisions in 2018 1.465 decisions in 2019
Q1 Q2 Q3 Q4 Board level Executive level Operational level
1.079
630 692 660 527 502 567 424 440 381 345 312 299 238
By quarter in 2018 By quarter in 2019 By committee By committee level in 2018 level in 2019
222 152 171 143 134 133 159 58 68 53 113 59
By committee By committee By committee By committee level in Q1 2019 level in Q2 2019 level in Q3 2019 level in Q4 2019
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LOAN PORTFOLIO MANAGEMENT BAMC manages debtors of various exposures in its loan portfolio. 473 cases with smaller exposures were valued on a group level and 561 debtors were valued individually. These larger cases are presented in more detail below.
Out of 561 individually valued claims at year-end 2019, 39 were having a predominant restructuring strategy and 522 cases a recovery one, for valuation purposes.10 While the number of cases compared to the end of 2018 decreased by 8%, the value of the portfolio decreased by 27%, displaying a trend of faster liquidation of larger cases while a number of smaller-value cases remain in BAMC’s portfolio. The presented loan cases’ estimated fair value of €404,0 million corresponds to 12% of the total gross exposure of almost €3,4 billion.11
FIGURE 11: INDIVIDUALLY VALUATED CASES BY STRATEGY Cases by number Cases by value 700 600 Restructuring 552,6 609 600 57 Recovery 561 500 (9%) 39 (7%) 500 255,8 404,0 400 (46%) 400 300 215,7
million (53%)
300 € 552 522 (91%) (93%) 200 200 296,8 (54%) 100 188,4 100 (47%)
0 0 31.12.2018 31.12.2019 31.12.2018 31.12.2019
NOTE: The value of cases reported differs from total claims’ value reported in Figure 9 and elsewhere. This and the following figures present breakdowns of individual valuations while smaller exposures are valued as well but are not reported here.
10 For valuation purposes the strategies are defined as follows: The restructuring strategy is defined as a case, where BAMC is pursuing a restructuring scenario which has at least 50% probability of success. Nevertheless, these cases have two different value scenarios estimated depending on the success or failure of the restructuring. The recovery strategy is defined as a case, where the value for BAMC depends solely on the value of the collateral and BAMC’s cash flows are related to selling the underlying assets, pledged as collateral. This category clearly includes the companies in bankruptcy. In addition to these, it includes all the other cases where the repayment is solely dependent on the asset values, regardless of the procedure used. For example, this includes enforcement proceedings, voluntary divestment plans etc. Note that BAMC may, conditioned on not worsening its creditor position, pursue a restructuring strategy also in cases termed as recovery for valuation purposes, see Progress in restructuring cases (page 4). 11 It has to be noted that the main reason for the apparent deterioration in the ratio of net to gross exposure is BAMC’s no partial write-off policy under which the whole remaining gross exposure of the case is being recorded until the end of all formal proceedings also in cases where there is no collateral or other repayment prospects left.
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INDUSTRY CHARACTERISTICS Almost a quarter of all gross exposure is related to the construction industry, but in terms of fair value (net exposure) it is surpassed by manufacturing industry with the latter accounting for more than a quarter of total claims’ portfolio fair value. The two are also represented with the highest number of debtors and are followed, in fair value, by tourism and wholesale and retail. Within the tourism industry the claims are estimated to hold more than 40% of fair value compared to gross exposure in a small number of cases.
FIGURE 12: LOAN GROSS EXPOSURE AND FAIR VALUE BY INDUSTRY € million Number 1.136 1.200 296 300
1.000 250
800 781 200
600 150 512
400 371 100 67 57 250 45 38 200 172 24 26 50 80 8 97
0 0 110 67 32 25 23 20 17 110 (30%) (9%) (40%) (10%) (13%) (21%) (3%) (10%) Manufacturing Construction Tourism Wholesale Professional Real estate Financial Other and retail activities activities activities
Gross exposure Fair value number of cases (right axis)
NOTE: Industry classification follows Standard Classification of Activities (2008). Industries are ranked by fair value. Those presenting a notable share in the portfolio are displayed separately while the remaining cases, including foreign ones, are grouped into the “Other” category. It has to be noted that the main reason for the apparent deterioration in the ratio of net to gross exposure is BAMC’s no partial write-off policy under which the whole remaining gross exposure of the case is being recorded until the end of all formal proceedings also in cases where there is no collateral or other repayment prospects left.
PURCHASES OF CLAIMS AND SHORT-TERM FINANCING In 2019, following economically-sound analyses optimising the value of its exposure and creditor positions, BAMC acquired additional claims towards four existing debtors in total value of €7,8 million (€17,1 million gross) and provided justified shot-term credit financing towards six companies in the value of €7,8 million.
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CORPORATE RESTRUCTURING BAMC’s objective in the restructuring of companies is to ensure long-term efficiency and viability of the debtors’ operations and their competitiveness, and to maximise the repayment of debt with cash flows from operations. BAMC is also attempting to reduce the indebtedness of the debtor to a sustainable level with the goal to refinance company’s debts towards BAMC with commercial banks. Financial restructuring is a precondition for operational restructuring, which can be actively pursued by BAMC mostly in companies, where BAMC owns a predominant or majority stake.
BAMC implements financial restructuring measures in cooperation with other creditors. These measures include allowing debtors to extend deadlines for the repayment of liabilities, lower their interest rates, apply standstills, make partial debt repayments, improve their capital structure and secure additional liquidity. BAMC may convert its claims into equity, take over other claims and equity stakes or increase the capital of respective debtors with cash or in-kind injections.
At the end of 2019, BAMC evaluated the fair value of claims towards 39 companies as restructuring cases. With an outstanding gross debt to BAMC in the amount of €362,7 million, the estimated fair value of the aforementioned claims was €215,7 million. Thus, a portfolio value difference to gross claims of 41% suggests much more value can be extracted from the management of restructuring cases than from the recovery cases (which have an estimated portfolio value haircut to gross claims of 94%).
FIGURE 13: RESTRUCTURING CASES OVERVIEW € million
400 Gross exposure 2 (5%) Estimated value 3 (8%) 300 41%
200 362,7
100 215,7 Operating Preventive restructuring 34 (87%) Compulsory settlement 0 31.12.2019 39 restructuring cases
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LOAN MANAGEMENT USING THE RECOVERY STRATEGY In case of negative cash-flows-making companies against which BAMC holds claims, when it is clear that it would be impossible to create greater value even through financial and operational restructuring than through recovery of collateral, BAMC’s actions as a prudent and diligent manager dictate that it opts for the recovery strategy. A recovery strategy is also used in the case of companies against which bankruptcy proceedings had already been initiated before their transfer to BAMC. On the other hand, cashing of collateral may also be executed in agreement with the debtor, without enforcement and insolvency procedures.
At the end of 2019, BAMC was valuing 522 claims as recovery cases, against which it held €3,0 billion in gross claims, the fair value of which was estimated at €188,4 million. Compared with companies in restructuring, recovery companies as a group proved to have a substantially lower potential of repayment as the fair value of claims towards them was estimated at 6% of gross exposure while this estimate amounted to 59% of gross exposure in restructurings.
FIGURE 14: RECOVERY CASES OVERVIEW € million 3.500 Gross exposure 72 3.000 Estimated value (14%) 2 157 (0%) 2.500 (30%) 5 (1%) 2.000
94% 1.500 3.036,0 Operating 1.000 Preventive restructuring Compulsory settlement 286 500 Bankruptcy 188,4 (55%) Deleted 0 31.12.2019 522 recovery cases
NOTE: It has to be noted that the main reason for the apparent deterioration in the ratio of net to gross exposure is BAMC’s no partial write-off policy under which the whole remaining gross exposure of the case is being recorded until the end of all formal proceedings also in cases where there is no collateral or other repayment prospects left.
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NOTABLE PROGRESS IN BOTH RESTRUCTURING AND RECOVERY CASES Out of 130 cases with a pursued (effective) restructuring strategy, 67 (52%) were closed by the end of 2019, 10 successfully completed in the last year (see Figure 5 for details). BAMC has also closed 34 recovery cases in 2019, bringing the total number of closed recovery cases to 156. Together with 158 cases in after-bankruptcy procedures (meaning that the bankruptcy proceedings of the original debtors have been completed) this represents 50% of all 631 individual recovery cases.
ISTRABENZ HOLDING BAMC seized all shares of Istrabenz Turizem, d. d., pledged to BAMC as collateral for unpaid debt, and became its 100% owner on 15 April 2019. The remaining assets of Istrabenz holding, d. d. are being sold within the out-of-court agreement and lately within creditors’ compulsory settlement, which started at the end of 2019.
HOTELI BERNARDIN After deleveraging in 2018, the company repaid its debts to BAMC in full after obtaining loans from commercial banks in 2019. BAMC also sold its ownership stake to Sava, d. d. and thus successfully closed this restructuring case.
FOREIGN EXPOSURES In bankruptcy proceedings in Bulgaria, Park hotel Oasis at Black Sea coast was sold and in Bansko, also in Bulgaria, apartment buildings with the associated land were sold. In both cases BAMC was repaid based on valid mortgage.
REFINANCED CASES In 2019 there were 22 larger cases closed with debtors either refinanced with the loans from commercial banks or otherwise fully repaid their obligations in the total amount of €21,4 million, out of which there were nine natural persons (€1,9 million) and 13 corporates (€19,5 million).
CASES WITHOUT EXPECTED REPAYMENTS In 2019 a total amount of €4,6 million was received from 98 cases where as at 31 December 2018 there were no expected repayments anymore. The received repayments were the consequence of strict enforcement procedures within BAMC mostly from general bankruptcy estates, legal acts and other forms of execution and enforcement procedures.
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MANAGEMENT OF EQUITY INVESTMENTS BAMC obtains equity stakes through a debt to equity conversion (D/E swap) as part of restructuring of the debtor, whereby BAMC regardless of the form of its original financial investment (debt or equity) always follows the principle of enterprise value maximisation. BAMC also acquires equity holdings via recovery measures (D/A Swap). Additionally, a substantial equity portfolio was received when Factor banka and Probanka were merged to BAMC.
By acquiring or increasing its equity holding in a debtor, BAMC temporarily assumes or increases its control over a debtor as it reduces the risks relating to debtor’s cash flows and thus increases the value of its assets via the appointment of supervisory board members or directors of limited liability companies.
Owing to the capital inadequacy and over-indebtedness of companies, the conversion of claims into equity was an essential measure in many restructuring cases whereby BAMC, as the biggest creditor, entered into ownership of these companies. The aim or strategy of BAMC is not long-term ownership of these companies but an improvement in their operations with the aim of maximising their cash flow generation and increasing their value up to the point of sale. The sale procedures of equity holdings are public, transparent and oriented towards finding the highest number of potential investors in order to achieve the highest possible sales proceeds.
TABLE 4: DEBT TO EQUITY CONVERSIONS AND NEW ACQUISITIONS IN 2019 (in € million) Nominal value of conversion into New acquisitions Company other company’s equity Istrabenz, d. d. 42,6 0,02 Papir servis, d. o. o. - v stečaju 2,2 Finetol, d. d. - v stečaju 0,2 Razvojna družba, d. d.* 0,00 AT Zagreb, d. o. o.* 0,04 AT Varaždin, d. o. o.* 0,00 AT Croatia, d. o. o.* 0,00 AT Beograd, d. o. o.* 0,00 Kompas RAC, d. o. o.* 0,00 Sklad turističnih naložb, d. o. o.** 0,00 Total 45,0 0,06 NOTE: *Acquired in the process of the liquidation of Avtotehna, d. d, **New company established.
In 2019 BAMC's equity management department was engaged in the following activities regarding majority equity holdings: . active monitoring of the business results and the execution of financial and business restructurings plans; . assessing the quality and viability of business plans and the achievement of the predefined goals; . monitoring corporate governance risk and implementing consequential reaction to the findings; . assessing the work of directors, supervisory board members and procurators; . executing selection of candidates for supervisory boards and management; . implementation of the Act Governing the Remuneration of Managers in Companies with Majority Ownership held by the Republic of Slovenia regarding remuneration of management and if needed
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implementation of amendments to the company’s acts based on strategic guidelines and company’s goals; . preparing companies for the start of sales processes and executing activities in cases where the sale process has been initiated (M&A activities).
Activities regarding the management of minority ownerships included monitoring of business results, attending general meetings of shareholders, executing ownership rights in line with ZGD-1 and proactive search for possible exit strategies and execution of sales procedures. BAMC’s equity management department also managed BAMC’s equity holdings abroad, which entail the complexity of a foreign legal system and the specifics of local environments.
In cases where BAMC, in addition to equity holdings, also has a credit exposure, the above mentioned activities have been carried out in cooperation with the credit department, and in cases of real estate SPV’s companies with the real estate department. In 2019, emphasis was placed on corporate governance practices in both BAMC-owned companies as well as within the equity management department.
TABLE 5: EQUITY PORTFOLIO CHARACTERISTICS AS AT 31 DECEMBER 2019 Ownership Count Type of holding Count Domestic/foreign Count Majority (over 50%) 17 Important (over 20%) 6 Shares 21 Domestic 30 Minority (under 20%) 17 Ownership stake 19 Foreign 10 Total 40 Total 40 Total 40 NOTE: BAMC had equity stakes in 60 companies on 31 December 2019. 20 companies in bankruptcy procedures or in liquidation are excluded from the table.
In 2019 BAMC divested some minority and majority equity holdings. Divested majority holdings include Tink, d. o. o. and PPS Pekarne Ptuj, d. o. o. and minority holdings include Hoteli Bernardin, d. d., RTC Kranjska Gora, d. d., P&S Growth Luxemburg SICAR SCA, Menina, d. d. and Talum, d. d. Additionally, BAMC transferred 15.000 shares of Petrol, d. d. to Slovenski državni holding, d. d, according to the SPA.
In 2019 BAMC obtained the equity holdings of Salomon, d. o. o., Istrabenz, d. d., Istrabenz turizem, d. d. and preferred shares of HIT, d. d. With the winding-down of NPL Port, d. o. o. and Avtotehna, d. o. o. (in line with ZGD-1) BAMC acquired all of their assets and obligations. From the latter, BAMC obtained the following equity holdings: Avtotehna Beograd, d. o. o., Avtotehna Croatia, d. o. o., Avtotehna Varaždin, d. o. o., Avtotehna Zagreb, d. o. o., preferred shares of Kompas RAC, d. d. – in liquidation and shares of Razvojna družba, d. d. In 2019 BAMC, following the General Meeting decision, established a new company, Sklad turističnih naložb, d. o. o.
In 2019 BAMC generated €27,7 million from the sale of equity holdings (2018: €21,9 million) and received €3,8 million from dividends (2018: €7,0 million). At the end the year the value of its equity portfolio amounted to €114,6 million (2018: €89,9 million).
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FIGURE 15: EQUITY PORTFOLIO MOVEMENT Equity portfolio movement (value) Equity portfolio movement (number)
160 70 9 8 150 60 60
140 45,0 7,1 50 130 0,1
27,3 40 axisbreak) ( 120 30 114,6 59 44,9
million 110
€ 20 100 89,9 10 90 0 0 Opening Acquisitions Revaluations Sales Opening Acquisitions Exits balance balance
Other Net conversions
NOTE: “Other” category includes capital increases and additional purchases. “Sales” represent the book value reduction relating to sold assets and thus usually differs from cash generation data which represents actual sales figures. “Exits” include sold, deleted or otherwise exited equity positions. The number data reported includes companies in bankruptcy and presents only complete transaction count (e.g., a partly sold holding is not counted as a sale in number terms).
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REAL ESTATE PORTFOLIO MANAGEMENT Real estate accounts for the largest amount of collateral for claims transferred to the BAMC. Because the quality of the claims transferred to the BAMC was poor, and a recovery strategy is therefore the most rational approach for the majority of corporate debtors, the majority of the real estate collateral will also be subject to redemption on the market by official receivers and by the corporate debtors themselves. In such cases the BAMC is repaid by means of the proceeds, minus the costs of the sale procedures. Pursuing the maximization of its stake vale, BAMC may also choose to take over real estate assets for the purpose of selling them at a later date.
MANAGEMENT OF PLEDGED REAL ESTATE BAMC actively supports sales of claims backed by real estate collateral. BAMC assesses the fair value of each item of real estate, and approves each sale transaction when the offered price is close to or higher than the set fair value.
TAKEOVER OF REAL ESTATE When appropriate selling prices cannot be obtained in (real estate) collateral redemption procedures, the BAMC decides to participate in the real estate collateral sale processes itself and to purchase the real estate by offsetting the claim held against the debtor. The basic criterion that the BAMC upholds in taking the decision to assume direct ownership of a collateral asset is an assessment of whether direct ownership and management of the real estate, which can also require the development of the real estate and/or the repair of defects, will allow the BAMC to yield more for the real estate than the selling price achieved in the real estate collateral redemption procedure by the official receiver or the corporate debtor itself. The BAMC’s assessment also takes account of the management costs and financing costs that it will incur. Similarly, BAMC opts to acquire real estate when there is no demand on the market in bankruptcy proceedings and it is impossible to sell it, having assessed that the real estate is not encumbered with contingent liabilities, for example owing to environmental contamination.
BAMC’S REAL ESTATE SALES In 2019, BAMC real estate sales generated revenues in the amount of €34,4 million, with over 200 complete, or, in majority partial sales of real estate (where only an individual part of a real estate is sold). The share of real estate sales was proportionally spread between the residential and commercial segments. Apartments in the “Koprska vrata” residential-commercial complex made up the largest share of residential sales, while the Sežana land plots and industrial hall made up the largest share of commercial/industrial sales. BAMC real estate was selling units in the “Koprska vrata” complex through a real estate agency, which was chosen in a public tendering procedure specifically to support sales in this project.
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KOPRSKA VRATA BAMC acquired the “Koprska vrata” project, consisting of 164 residential units and over 2.000 m2 of commercial premises, in the bankruptcy procedure of ES Gorica, d. o. o, and took over ownership on 26 October 2017. The entire project as a whole has been for sale since the takeover. After thoroughly refurbishing the apartments, BAMC switched its sales strategy in the beginning of 2019 from selling the entire project to selling individual units. By the end of 2019, BAMC had successfully sold almost all apartment units using various sales methods tailored to each phase with carefully-planned advertising (123 apartments taken over, generating a cumulative cash flow of €14,1 million), and as at the preparation of this report, only three apartment units remained for sale.
In Q4 2019, BAMC signed €15 million worth of sales contracts for land plots zoned for residential use (the Glince land plot in Ljubljana, the Domnovo land plot in Novo mesto, and the Rožna dolina land plot in Nova Gorica were sold to the Housing Fund of the Republic of Slovenia, and contracts were signed for the Kozolci land plot in Kranj, and the Lada land plot in Nova Gorica), in addition to approximately €17 million for a land plot zoned for commercial use (Vilharjeva land plot in Ljubljana) and an office building in Belgrade, however the sales were not yet final at year-end.
COMMERCIAL PREMISES WITH A LAND PLOT IN TPC TERMINAL SEŽANA BAMC acquired the property with the merger of Factor banka in 2016. The complex consists of buildings with a total floor area of 7,474 m2, with the appurtenant land plot stretching over 16,499 m2. In the context of the last bidding process, BAMC entered into direct negotiations with bidders in order to ensure maximum recovery value. In the end, the tenant invoked its pre-emption purchase right.
Another notable development is the successful sale of some commercial premises in Ljubljana (located at Trdinova ulica and Šmartinska cesta), Kranj (former Probanka premises), Nova Gorica, and other smaller units across Slovenia. In the tourism segment, 11 tourist villas were sold in Bašanija, Croatia. In addition to BAMC’s sales activities, a great deal of effort was also placed in renting out available properties to tenants, where 180 rent agreements were signed.
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LAND PLOT ZONE FOR CONSTRUCTION IN SEŽANA BAMC took over a dispersed land plot with a combined floor area of 334,297 m2 in the bankruptcy proceedings of Pragma Trade and Climasol, as non-redeemable properties. BAMC intensively advertised the land plot on both the domestic market and on international real estate trade shows (MIPIM Cannes, Expo Real Munich), where the first contact was made with the subsequent buyer. Two international companies placed their bids in the binding bid collection process, aiming to develop the plot for a known investor. At the public opening of bids and after direct negotiations, the bidders greatly increased their initial offers, allowing BAMC to maximize the recovery value of the property.
BAMC’S REAL ESTATE PORTFOLIO In 2019 BAMC took over several real estate assets through debt-to-asset swaps, with a total book value of €26,7 million. Larger real estate projects taken over include: . land plot near the airport in Sofia, Bulgaria; . trgoavto warehouse in Kozina; . buildable land plot at the foot of Ljubljana’s Šmarna gora; . commercial and shopping facility in Ormož; . land plot for residential development in Domnovo, Novo mesto; . residential land plot in Kozarje, Ljubljana; . land plot with unfinished houses, Byala, Varna District, Bulgaria.
FIGURE 16: REAL ESTATE PORTFOLIO MOVEMENT Real estate portfolio movement (value) Real estate portfolio movement (number) 26,7 200 350
6,5 23 195 300 48 6 298 12,8
190 250 break) 185 200
24,9 150
180 14,0 279 million million (axis
€ 175 100
170 173,0 50 168,4 0 0 Opening Acquisitions Revaluations Sales Opening Acquisitions RE ID Sales balance balance split/merge
Direct D/RE conversion Purchase on auction
NOTE: “Revaluations” also include increase in value due to investments (in case of negative value the downward revaluations outweighed the effect). Only real estate that has been entirely taken over by BAMC is presented in this figure. The difference to the balance sheet real estate value of €175,1 million is in the latter including real estate in the process of repossession, advance payments and minor equipment assets.
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“Sales” value in the figure realte to the book value reduction of the real estate portfolio (book value presents the lower from either the purchase value or real estate fair value). Actual inflows received for these sales amounted to €34,4 million. Only completely sold real estate units are reported in sales number, while many more units were partly sold (e.g., some of the apratments in an apartment buliding) but the unsold part of the unit is still in BAMC ownership.
As at the end of 2019, BAMC owned 298 real estate units in a total book value of €168,4 million. Most of the owned real estate portfolio is comprised of land plots and residential buildings, followed by commercial and industrial real estate. The land plots are mostly zoned for residential development, while industrial real estate is mostly not in use.
FIGURE 17: REAL ESTATE OWNERSHIP PORTFOLIO STRUCTURE Real estate portfolio by number Real estate portfolio by book value 100% 100% 9% 9% Industrial 12% 8% Land 80% Office 80% 41% 41% Other 38% 42% 60% Residential 60% Retail 11% 11% Tourism 40% 40% 16% 17% 5% 4% 3% 3% 23% 24% 31 December 2019: 20% 20% 24% 22% 298 units of real 3% 4% 6% 7% estate in the value of 5% 4% 5% 4% 0% €168,4 million 0% 31. 12. 2018 31. 12. 2019 31. 12. 2018 31. 12. 2019
NOTE: Only real estate that has been entirely taken over by BAMC is presented in this figure. The difference to the balance sheet real estate value of €175,1 million is in the latter including real estate in the process of repossession, advance payments and minor equipment assets.
FIGURE 18: REAL ESTATE COLLATERAL PORTFOLIO STRUCTURE Real estate portfolio by number Real estate portfolio by value 100% 100% Industrial 18% 17% Land 27% 32% 80% Office 80% 22% 23% Other 14% 60% Residential 60% 13% 9% 8% 8% Retail 6% 3% 4% 1% 1% Tourism 11% 40% 40% 13% 8% 31% 31% 9% 31 December 2019: 20% 20% 699 units of collateralised 30% 10% 11% real estate in the value of 26% 7% 6% €401,3 million 0% 0% 31. 12. 2018 31. 12. 2019 31. 12. 2018 31. 12. 2019
REAL ESTATE FACILITY MANAGEMENT After taking over direct ownership of real estate, if foreseen in the specific asset management strategy pursuing maximal economic effects, BAMC takes a number of measures to ensure the property is properly maintained so
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as to retain value. This includes cleaning, waste disposal, building surveillance, roof and window repairs, changing locks, landscaping etc. In addition to this, some cases require addressing legal issues and technical defects: obtaining the missing documentation and permits, resolving disputes with neighbors and some subcontractors, etc. In individual cases, further investments are also necessary: finishing works, purchasing missing parts of properties, etc. All real estate assets must be fit for sale.
In following with the principle of good stewardship, BAMC ensures proper insurance for all its owned properties, and damaged buildings are repaired in order to prevent any further deterioration. Numerous rent agreements have been extended and new ones signed.
BAMC spent a total of €3,6 million on real estate management in 2019, mainly on owned real estate, and a minor part on properties pledged as collateral for loans. Most of the costs were associated with maintenance (which includes various repairs) in the amount of €1,0 million, followed by taxes (NUSZ – compensation for the use of building sites) and public utilities, each in the amount of €0,9 million.
FIGURE 19: REAL ESTATE MANAGEMENT COSTS € million
5 -19% 0,0 4,5 Real estate 0,3 Maintenance transaction costs (1%) 0,4 (8%) Taxes 4 Other (representative*) 1,0 Public utilities 3,6 0,4 real estate (28%) 0,2 (11%) Security management costs Insurance 3 Other
2 4,1 3,4 0,9 Distribution of (26%) 1 €3,4 million of representative* real 0,9 (26%) estate management costs in 2019 0 2018 2019
NOTE: *For additional information purposes the distribution of representative real estate management costs is presented, i.e. remaining costs without transaction costs.
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FINANCIAL OVERVIEW OF 2019 CASH GENERATED12 BAMC generated €220,8 million of inflows in 2019 from the management of its assets, which represents 10,7% of cumulative asset transfer value13. Since its inception until year-end 2019, BAMC generated €1.743,3 million in inflows from the management of acquired assets. BAMC thus ended the year with 84,1% of assets’ transfer value cashed in six years.
FIGURE 20: CASH GENERATED € million € million 1.743,3 500 1.522,6 1.800 434,8 859,3 1.294,1 1.500 400 356,0 366,0 1.200 300
228,5 220,8 900 200 493,3 600 129,4 100 137,3 55,3 60,7 52,6 52,1 300 8,0 0 0 2013 2014 2015 2016 2017 2018 2019 Q1 2019 Q2 2019 Q3 2019 Q4 2019
Cash generated from Cash generated from Cumulative cash transactions over €10 million transactions under €10 million generated (right axis)
12 Cash generated data presented here and elsewhere in the document is retrieved through “pure cash flow” principle which differs from accounting recognition of events in both timing and scope. Not all inflows may count as cash generated for the calculation of the statutory KPI. 13 Cash generated in proportion to acquired assets KPI in the amount of 10,7% is calculated as the ratio of inflows generated to the time- weighted transfer value of the portfolio, where the date of transfer to BAMC is used as the weight. The same reasoning is applied to the purchases of additional exposures BAMC makes when such action is considered economically justifiable. E.g., a hypothetical additional purchase of an exposure in the amount of €2,0 million on 30 June 2019 would be given a weight of 0,5 (effectively adding €1,0 million to the weighted value of the portfolio) for the 2019 denominator calculation as BAMC would only have half a year available for the liquidation of acquired assets (by 31 December 2019). In all subsequent years following the acquisition the transfers/purchases are included in the KPI denominator in their full value. The last considerable increase of the denominator of the respective KPI was recorded with the merger of Factor Banka and Probanka into BAMC as the book values of merged claims, real estate and equity were taken as “transfer values” of additional assets acquired.
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FIGURE 21: MONTHLY CASH GENERATED € million € million 40 250 220,8
31,9 200 30 27,9
23,0 22,5 23,5 150 20 18,9 15,2 15,4 100 12,6 10,8 9,8 10 9,4 50
0 0 Jan 19 Feb 19 Mar 19 Apr 19 May 19 Jun 19 Jul 19 Aug 19 Sep 19 Oct 19 Nov 19 Dec 19
Cash generated from Cumulative cash generated transactions under €10 million in 2019 (right axis)
Portfolio-wise, the majority of inflows came from the loan portfolio, but these included considerable sales of real estate and other assets in insolvency proceedings, resulting in real estate-dominated partition of inflows by underlying source.
FIGURE 22: CASH GENERATED BY PORTFOLIO AND SOURCE Cash generated by portfolio (in € million) Cash generated by source (in € million)
0,2 Claims portfolio (0,1%) 31,5 Real estate portfolio (14,3%) Equity portfolio Leasing portfolio 78,4 (35,5%) 36,8 €220,8 €220,8 (16,7%) 107,4 million million (48,7%) in total in total
152,2 (69,0%) RE sales 35,0 Claims and equity sales (15,8%) Operating cash
NOTE: Left-hand side real estate portfolio inflows also include rents and equity portfolio inflows also include dividends received. Right-hand side “RE sales” next to sales of owned real estate also include sales of other physical assets from cashed collateral. Similarly, “claim and equity sales” include cash generated both from ownership as well as from cashed collateral. “Operating cash” includes regular payments from debtors and sureties, refinancings, rents, dividends, leasing and other inflows.
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DEBT REPAYMENT BAMC did not obtain any new loans in 2019. BAMC executed the last bidding process in 2017, when it took out three long-term loans in a total amount of €710 million (€100 million from a commercial bank in Slovenia, €50 million from a commercial bank abroad, and €560 million from a syndicated loan). The loans are amortizing with a smaller balloon due in mid-December 2022. Early repayment option gives BAMC flexibility in managing its liquidity until the end of its lifetime. The loans are secured with a state guarantee, subject to a 1,0% guarantee fee payable to the Republic of Slovenia. The interest rates for the refinancing loans are significantly lower than the interest rates on the last matured bonds. BAMC’s cost of financing was thus reduced considerably and amounted to €8,9 million in 2019.
BAMC repaid €132 million of principal in accordance with applicable loan repayment schedules, and also made an early repayment of an additional €15 million worth of loan principal for a total of €147 million debt repayment in 2019. Partial repayment of state-backed financial liabilities is an important step in the fulfilment of BAMC’s mission, as defined by the ZUKSB. BAMC thus reduced its future costs of financing, reduced its debt leverage and recovered invested funds, reducing the burden on the Republic of Slovenia and the taxpayers.
Since its inception, BAMC already repaid €1,4 billion of all liabilities related to asset transfers. BAMC also paid €147,2 million of interest on its debt since 2013 until year-end 2019, as well as €70,9 million of guarantee fees.
FIGURE 23: TOTAL NET DEBT REPAID AND FINANCING EXPENSES Total net debt repaid Financing and guarantee expenses
2.000 1.971,1 70 68,5 38,9 Commercial loans 369,0 Ministry of Finance loan 60 57,1 19,3 Bonds 1.500 48,5 50 13,7 0,1 1.422,3 13,2 40
1.000 million
million 5,1 € € 30 1.563,2 49,2 21,7 43,3 State guarantee fees 20 500 10,0 30,2 11,8 Refinancing and other 1,6 10 3,8 8,9 548,7 interest expense 0,4 7,9 1,2 7,9 6,4 Interest expense from bonds 3,9 2,5 0 0 Total liabilities Current debt 2013 2014 2015 2016 2017 2018 2019 related to outstanding asset transfers (31.12.2019)
NOTE: Principal values without interest are reported as debt repaid.
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KEY PERFORMANCE INDICATORS The Guidelines, adopted by the Government in 2016 (with amendments in the following years)14 set the target values for key performance indicators, attainment of which is considered to represent economical, efficient and successful operations of BAMC. In addition to these, BAMC monitors additional indicators with the aim of providing a more complete picture of its operations throughout the life span of the company.
The Guidelines (in chapter 5) also require an accompanying explanation on the fulfilment of set indicators: . Cumulative cash generated – due to successful over-proportional liquidation of assets in the past years of BAMC operation, the value of the indicator is much higher than required in the Guidelines. . Cash generated % – as in all previous years, also in 2019 BAMC exceeded the statutory threshold of liquidating at least 10% of assets. This and the surpluses of previous years result in the above indicator of cumulative cash generated significantly exceeding the minimum level. . EROE – the average economic return on equity (invested, with corrections) is maintained at a very high level, even higher than planned. Given the limited portfolio and management options it offers, it is expected that in the time to BAMC's termination this indicator will gradually fall, nevertheless being far above the required 8% at all times. . Cost efficiency no. 1 – the value of the indicator increased in comparison to last year, which is expected as the volume of assets under management is reducing, while not all costs are variable and related to portfolio movements (in the last version of the Guidelines, this indicator was replaced with the indicator “Cost efficiency no. 2”, but the former is still to be calculated due to past benchmarking). . Cost efficiency no. 2 – the value of the indicator is below planned, reflecting (relevant) costs were lower than planned in comparison to the average assets under management.
14 Currently valid Guidelines were adopted on 18 April 2019.
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TABLE 6: KEY PERFORMANCE INDICATORS Since inception (by EOY 2019) KPI Definition 2019 2018 Cumulative Yearly average
Guidelines-defined KPIs Cumulative cash generated Absolute amount (in € million) - - 1.743 1.523 Cash generated % Cash generated / NPAs transfer value 84,1% 14,0% (a) 10,7% 11,1% EROE Equity / invested capital with corrections - 1 330,1% 27,5% (g) - Cost efficiency no. 1 Operating costs1 / average total assets - 1,70% (a) 2,42% 1,99% Cost efficiency no. 2 Operating costs2 / average total assets - - 1,71% -
Additional BAMC-followed KPIs ROE Net income (loss) / average equity 83,3% 10,6% (g) 18,5% 36,4% Funds returned to RS Payback / RS invested assets 78,2% - 0,0% 1,7% Gross funds returned to RS Gross payback / RS invested assets 115,1% - 5,6% 10,6% Debt outstanding Debt / initial debt - - 27,9% 35,3% Guaranteed debt outstanding Guaranteed debt / initial guaranteed debt - - 28,4% 36,0%
Basic data (in € million) Cash generated 1.743 291 (a) 221 228 RS invested assets Cumulative invested capital - - 258 258 Debt Balance sheet debt value - - 549 697 Equity Balance sheet equity value - - 242 200 Invested capital with corrections - - 56 56
GENERAL NOTES: KPIs required by the Guidelines and presented in Table 1 are marked in grey. Cumulative values represent the calculations of respective items since the inception of BAMC where applicable and where the respective KPI is not a cumulative indicator by itself. As first assets were transferred to BAMC in December 2013, 2014 is considered the first year of actual operation for BAMC. Thus, the calculation of averages takes six full years of operation into account. (a) = arithmetic average, (g) = geometric average. The following abbreviations are used in the table: NPAs = non-performing assets, EROE = economic return on equity, ROE = return on equity, RS = Republic of Slovenia.
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NOTES TO THE KPIS’ DEFINITIONS: . »Invested capital with corrections« is corrected for day-one losses and other corrections of capital due to the decisions of the owner as well as recapitalizations. See Table 2 for details. . 1As defined in the Guidelines, operating costs used in the calculation of “cost efficiency no. 1” KPI exclude transaction costs. Transaction costs are costs, incurred in assets’ sales processes and are recorded on separate accounts by BAMC. . 2As defined in the Guidelines, operating costs used in the calculation of “cost efficiency no. 2” KPI exclude transaction costs, litigation costs and therewith related provisions, other extraordinary costs and real estate management costs which are all recorded on separate accounts by BAMC. . “Payback” includes all corrections to invested capital. A low value of “Funds returned to RS” indicator thus means that there were no corrections to company’s equity in a given year. . “Gross payback” includes “payback”, total taxes (income tax, net VAT, tax on financial services, compensation for use of building sites [Slo. nadomestilo za uporabo stavbnega zemljišča] and real estate transaction tax [Slo. davek na promet nepremičnin]) and state guarantee fees paid. . “Initial debt” includes all debt initially raised/acquired with assets transfers. Specifically, these are the four bond issues for primary bank assets’ transfers as well as liabilities towards the Ministry of Finance and some commercial banks taken over with the merger of Factor banka and Probanka into BAMC. . “Initial guaranteed debt” excludes liabilities towards commercial banks from “initial debt”.
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INCOME STATEMENT The core business of BAMC is managing non-performing assets, predominantly non-performing claims, therefore BAMC’s operating and financial expenses have to be covered by realised capital gains and revaluation income to generate profit. In order to better present business operations BAMC is using a changed format of its income statement15.
TABLE 7: INCOME STATEMENT SUMMARY 1 Jan 2019 to 1 Jan 2018 to Index in € thousand 31 Dec 2019 31 Dec 2018 2019/2018
Income from loans 50.257 73.075 69 Capital gains/losses 41.032 33.058 124 Net revaluation result 7.252 37.943 19 Other income from loans 1.973 2.074 95
Income from equity investments 14.534 5.838 249 Capital gains/losses 3.606 2.833 127 Net revaluation result 7.081 -4.040 -175 Dividends 3.847 7.045 55
Income from inventories 5.113 15.597 33 Income from rents 2.275 2.154 106 Income from inventories sold 34.483 46.222 75 Cost of inventories sold -25.141 -31.477 80 Net revaluation from inventories -6.505 -1.302 500
Financial expenses -8.896 -11.805 75 Interest expenses -2.489 -3.862 64 Guarantee fees -6.408 -7.943 81
Operating costs -21.247 -20.417 104 Costs of material -114 -89 128 Costs of services -8.103 -10.998 74 Payroll costs -7.442 -8.076 92 Depreciation -442 -117 377 Other operating costs -5.145 -1.137 452
Other 1.283 813 158 Other income 2.532 1.132 224 Other expenses 1.250 319 392
Net profit/loss before tax 41.043 63.101 65
BAMC’s net profit before tax for 2019 amounted to €41,0 million, with the largest impact again attributable to the result from loans at €50,3 million. Unlike the previous period, in 2019 most of the positive result from loans came from the realized transactions, while the result from revaluation contributed only a small share (14%). 147 debtors were revalued upwards and 143 debtors downward (out of 561 individually assessed cases).
15 ZGD-1 allows a format that differs from prescribed. The changed format is in line with IFRS.
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Result from equity investments in 2019 was more than twice as high as the result in 2018, mainly due to the revaluation result, where 12 equity investments were revalued upwards and eight downwards (out of 60 owned by BAMC). Higher dividends received in 2018 were solely the result of the payment of dividends by Avtotehna, d. d., which was (until its liquidation in mid-2019) 100% owned by BAMC. Disregarding this payout, the 2019 dividends received even exceeded the ones from 2018.
Most of the proceeds from the sale of inventories of property and equipment were related to inventory of real estate. With these sales, BAMC generated a price difference of €9,3 million in 2019, which reflects the consequence of the real estate collateral takeover, effective value addition and its successful sale. Revenues from renting real estate also increased by 6%, while the remaining portfolio was revalued downwards significantly more than in the previous year.
By repaying and reducing the amount of debt, BAMC’s financing expenses were further reduced and were a quarter lower in 2019 than in 2018. For the second consecutive year, government guarantee costs, which are revenue of the Republic of Slovenia, represented more than twice the interest cost paid by BAMC to the banks.
The operating costs of 2019 were higher than the costs of 2018 in total, but this was solely due to other operating costs, which included €2,0 million provisions for lawsuits, remedy of defects and other potential liabilities, €1,7 million provision due to the potential realization of BAMC guarantee given for a debtor (the provision has been in existence for several years and has been taken into account as a deduction in the valuation of assets in the past, but is booked as a provision in 2019) and €1,0 million cost of the lost lawsuit, which BAMC managed as the legal successor of Probanka. Without this combined €4,7 million charge, the costs in 2019 were 15% lower than comparable costs in 2018 (the effect is also shown in Figure 4).
More than a quarterly decrease in the costs of services in 2019 compared to the previous year was due to both lower real estate management costs (-19%) and significantly lower costs of consulting, attorney and notary services (-46%). A 26% reduction in back office and accounting services was due to the liquidation of the company NPL Port, d. o. o. at the beginning of Q4 2019 – the services previously provided and charged by the said company have since been performed by its former employees taken over by BAMC.
Throughout 2019, BAMC operated with a shortage of staff according to the HR plan and consequently 2019 labour costs were 8% lower than in the previous year, despite the fact that they additionally included complete Q4 2019 labour costs of employees taken over by BAMC after the said liquidation of NPL Port, d. o. o. (these employees exceed last year's comparable headcount, and were not even included in the 2019 labour cost plan).
Amortisation in 2019 has increased multiple times compared to 2018 as a result of the implementation of the new standard (IFRS 16), according to which the right to use leased assets is amortised. Previously, prior to the adoption of IFRS 16, leases were recognized as costs of services.
The largest item among other income was revenue from the cancellation of provisions for legal disputes of €1,8 million (as the provisions are formed for a specific outcome of an individual lawsuit, they also must be released accordingly and cannot be offset by newly formed provisions for other lawsuits), while among other expenses the largest items were default interest on other liabilities (in 2019 lost lawsuit taken over from Probanka) and impairment of accounts receivable.
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In the process of asset management BAMC incurs costs, which are directly related to maintaining the value or sale of assets, as well as the costs associated with lawsuits taken over by BAMC with the acquisition of Factor banka and Probanka or provisions formed for this purpose and as a result of other asset management procedures. These costs are part of the income statement, but are, in accordance with the Guidelines, excluded when assessing the effectiveness of BAMC's regular operations. Thus, the cost efficiency no. 2 indicator is calculated without the costs presented in the table below.
TABLE 8: COSTS EXCLUDED IN COST EFFICIENCY NO 2 KPI CALCULATION 1 Jan 2019 to 1 Jan 2018 to Index in € thousand 31 Dec 2019 31 Dec 2018 2019/2018 Real estate transaction costs 220 375 59 Equity transaction costs 9 531 2 Litigation costs/provisions 3.014 949 318 Extraordinary costs 0 0 - Real estate management costs (without real estate 3.397 4.088 83 transaction costs) Total 6.641 5.943 112
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BALANCE SHEET
TABLE 9: BALANCE SHEET SUMMARY Index in € million 31. 12. 2019 31. 12. 2018 2019/2018
Assets 823,7 910,0 91 Claims 407,1 559,7 73 Real estate 175,1 180,5 97 Equity 114,6 89,9 128 Cash and equivalents 109,7 66,7 164 Other 17,3 13,2 131
Liabilities 581,6 710,1 82 Borrowings 549,2 696,6 79 Other 32,4 13,5 241
Equity 242,1 199,9 121 NOTE: “Claims” category also includes minor leasing holdings.
BAMC’s total assets decreased by €86,2 million (9%) in 2019 and stood at €823,7 million at the end of the year. The movement was driven by a reduction in the claims’ portfolio, which accounted for the highest proportion of BAMC’s assets. The value of claims totalled €407,1 million at the end of 2019, a decrease of 27% relative to the balance at the end of the previous year. Repayments of claims in 2019 amounted to €225,7 million and included cash repayments in the amount of €165,9 million, sales of claims (€4,4 million), debt to real estate conversions (€12,7 million) and debt to equity conversions (€44,9 million). On the other hand, BAMC granted some new and purchased other related claims from other creditors in the joint value of €16,8 million.
FIGURE 24: CLAIMS PORTFOLIO MOVEMENT € million (axis break)
600 Conversion to claims 2,2 16,8 Conversion to equity 44,9 550 Conversion to real estate 12,7 Claims sold 4,4 500 Cash
450 559,7 165,9 8,0 7,3 400 407,1 41,0 350 -225,7 0 Opening balance Increase in Repayments Capital Revaluation Other claims portfolio gains
BAMC discloses all real estate that it holds, except fixed assets, as inventory of real estate, representing the predominant part of inventories. In accordance with IFRS, the stock of real estate is disclosed at the lower of net
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realisable value or its historical cost. As at 31 December 2019, BAMC disclosed a carrying amount of real estate stock of €175,1 million while the estimated net realizable value of all inventory of real estate was €208,6 million.
The fair value of equity investments in BAMC’s ownership amounted to €114,6 million as at 31 December 2019 and increased by 28% compared to the end of 2018, predominantly due to the conversion of claims towards Istrabenz, d. d. into the equity of Istrabenz turizem, d. d.
In accordance with the investment policy adopted by the Board, BAMC manages liquidity with the aim of settling all of its obligations at maturity. When managing its liquid assets, BAMC takes into account the principles of security, liquidity and profitability, in the order specified. BAMC had €109,7 million in cash and cash equivalents at its disposal at the end of 2019.
LIABILITIES BAMC financed its assets at 31 December 2019 mainly through debt sources, more precisely via borrowings in the amount of €549,2 million. All liabilities relate to loans taken up with various banks for which the Republic of Slovenia provides an explicit guarantee. With regular and early repayments BAMC decreased its liabilities exposure by €147,4 million in 2019.
TABLE 10: FINANCIAL OBLIGATIONS AS AT 31 DECEMBER 2019 Amount Interest Financial instrument Amount issued Issued Maturity outstanding payment (in € million) Commercial loan 150,0 48,0 Dec 2016 Half-yearly Dec 2021 Commercial loan 560,0 394,9 Dec 2017 Quarterly Dec 2022 Commercial loan 50,0 35,3 Dec 2017 Quarterly Dec 2022 Commercial loan 100,0 70,5 Dec 2017 Quarterly Dec 2022 NOTE: Nominal amounts without accrued interest reported in the table. All financial obligations are guaranteed by the Republic of Slovenia.
Other liabilities and provisions amounted to €32,4 million at 31 December 2019, up €19,0 million from year-end 2018. Of the total, €17,4 million was related to advance payments received for real estate purchases (more than half for land plots intended for the Housing Fund of the Republic of Slovenia), while other larger items included provisions for legal disputes and sureties given in the amount of €7,1 million and liabilities for VAT in the amount of €2,6 million.
EQUITY BAMC’s equity totalled €242,1 million at 31 December 2019 which is €42,2 million (21%) more than at the end of 2018.
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VALUATION OF ASSETS BAMC assesses the fair value of assets using an internal asset valuation methodology.
Most of the value in BAMC’s portfolio is driven by the value of the underlying assets that is mainly pledged real estate and equity. The valuation of these assets is done based on the valuation methods which are also widely used by external valuators, i.e. mainly income and market approach. The discount rates used in this context reflect the estimated cost of capital for an average market investor.
The valuation of loans with a restructuring strategy is based on the binominal real option pricing model. In addition to the main restructuring scenario, collateral values are also considered as an exit option. These represent the lowest outcome in case of restructuring failure. The riskiness of the loan is taken into account through the probabilities of the two scenarios, which is built up through the use of the default probability scorecard, instead of the discount rate. As the risk is accounted for separately, the discount rate in this context represents only the time value of money for BAMC.
For small credit exposures (lower than €300 thousand gross) the Expected loss model is used. Expected loss is influenced by the estimated probability of default and the value of the potential fall-back scenario in case the default occurs. The latter represents the value of the collateral pledged for loans of each borrower.
BAMC discloses changes to the fair value of loans and equity investments through profit and loss as revaluation. Changes in net realizable value of real estate stock and equipment are disclosed through profit and loss in cases, where the net realizable value does not exceed the cost. The assessed fair values of assets represent one of the key quantitative information inputs that BAMC takes into account when adopting decisions.
For more details on the valuation methodology see Note 4 in the financial part of the annual report.
The asset valuation process is extensively supported with established internal controls for all types of valued assets. These controls are performed within the organizational unit controlling and risk and are done separately from organizational units which value BAMC’s assets. Internal controls in asset valuations are preventative controls and are proactive in the sense of ensuring stabile and sound underlying assumptions used as inputs for asset valuation. They include control of provided traceability, consistency and argumentation of used inputs for valuation of all types of assets. Complementary to the review of the owner of asset valuation process, internal controls serve as an early comprehensive overview of the changes of the fair value, measured through profit or loss.
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RISK MANAGEMENT Risk-taking is an integral part of doing business. BAMC is exposed to numerous risks, both financial and non- financial, which can impact the financial or operational efficiency and have a negative effect on the value of capital. Financial risks are fundamental risks that BAMC is exposed to when recovering debt from borrowers or executing financing agreements. Conversely, non-financial risks are risks associated with failures in BAMC’s processes and failures to comply with the laws and regulations. The ability to understand these risks and successfully manage them therefore directly impacts BAMC’s stability and results.
BAMC puts a great deal of effort into understanding, measuring and managing risks, and has set up an effective risk management framework and a solid risk management culture. This allows BAMC to lower and limit the impact of risks in order to fulfil its strategic goals. The risk management system is implemented across management and decision-making processes, at all levels.
As part of risk management’s policy of actively responding to changes constantly taking place in terms of the business environment, processes or key projects, BAMC continued using its risk management system, which was completely overhauled in 2018. In the coming years, BAMC will also have to address the risk of potential fire sale situations at the end of its mandate. The main focus of the new risk management system is on tackling these challenges in a way that will be able to support BAMC in resolving all or the majority of its assets and terminating its activities and operations in an orderly manner.
BAMC’s overall risk capacity is set out in the Risk Management Policy, which defines the competences and responsibilities, the risk management process, the main risk categories, and provides a risk measurement tool with general treatment of each risk category.
The Risk Management Committee is an advisory committee on an executive level, which deals with the area of risk management. It consists of responsible and competent persons from the fields of risk management and main business units. The committee performs business activities of risk management and supports identifying, monitoring, assessment and mitigation of risks, within acceptable risk levels.
Credit risk is the risk which BAMC is most exposed to. BAMC measures its loans and receivables at fair value through profit and loss, according to expected future cash flows by borrowers. Great attention has been dedicated to effective credit risk management, both in the process of assessment of the borrowers’ creditworthiness and approving their exposures and in the process of monitoring, managing and recovery of credit collateral.
In terms of operational risks, BAMC continued with regular preventive activities to reduce the likelihood of loss events occurring. According to the database of loss events, most of the loss events in 2019 resulted from human error, therefore BAMC placed most attention on the causes of these most relevant operational risks.
THREE LINES OF DEFENSE BAMC follows the principle of three lines of defense to ensure systematic and effective approach to identified risks.
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Asset management departments (and departments with supporting function) form the first line of defense. They are accountable for identifying and addressing the risks that occur in conducting their day-to-day operations, when collecting debt or managing assets within applicable frameworks.
BAMC recognized the importance of an effective risk management system and strengthened the system of internal controls, which provides a solid second line of defense. The Risk and Compliance functions work independently from asset management lines to ensure management of all types of identified risks.
As the third line of defense, the Internal Auditing Function provides independent and objective monitoring of the effectiveness of implemented internal controls.
FIGURE 25: THREE LINES OF DEFENCE
Controlling and risk provides a comprehensive overview of all risk exposures (market, liquidity, operational, among other). The unit prepares regular reports for different parties, is custodian to Risk Management Committee and prepares regular risk reports for Audit and Board Committees. Organizational unit includes risk management function, which is responsible for the risk management system as a whole, its management, mitigation and monitoring. An important priority of risk management function is raising the level of risk awareness in the Company.
Compliance advises senior management on Compliance laws, Compliance rules and standards and keeping them informed of developments in this area; informing employees of changes in the relevant legislation, in internal regulations and also in internal procedures, cooperating and reporting to several government bodies e.g.: Ministry of finance, Court of Audit, Commission for Prevention of Corruption, law enforcement agencies, Information Commissioner, Stock Exchange, etc.; preparing an integrity plan and measures for identification and prevention of corruption and the risk of other wrongdoing or unethical conduct.
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Internal audit is the BAMC’s third line of defense, which tests and evaluates the risk governance and management system as a whole, estimates the effectiveness of performed internal controls and revises the management of key risks.
RISK MANAGEMENT PROCESS BAMC’s risk management process follows the feedback principle, resulting in constant monitoring of efficient risk identification, reporting and implementation of adopted mitigations.
FIGURE 26: RISK MANAGEMENT PROCESS
ESTABLISHED FRAMEWORK Board of Directors of BAMC defines and manages risks and implements the risk management system in a structured, consistent and coordinated way. The Audit Committee assists the Board of Directors in fulfilling its supervisory responsibilities. The Audit Committee is independent from the executive management in order to ensure that the owners’ interests are suitably protected in terms of financial reporting, internal controls, risk management auditing activities and compliance. The Audit Committee is accountable for keeping itself informed about the statutory audit of the annual accounts and monitoring the impartiality of the statutory auditors. The Risk Management Committee, on the other hand, supports identifying, monitoring, assessment and mitigation of risks, within acceptable risk levels.
RISK ASSESSMENT BAMC assesses risks through risk identification, analysis and measurements in line with risk assessment model.
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FIGURE 27: RISK ASSESSMENT PROCESS
RISK IDENTIFICATION All business units are actively involved in the process of identifying risks relevant for their business unit, as well as risks relevant for BAMC as a whole. The risk identification process is performed through risk reviews (comprehensive review of specific process or part of the process, supporting documentation or projects). The process of risk management is based on business processes, where risk owners and owners of business processes are actively involved in monitoring and estimating risk (bottom-up approach). The role of risk management is to prepare a model and methodology and to associate all risk mitigation activities with business owners. The management of BAMC adopts a “risk appetite” and shows guidelines with adoption of strategic and business decisions both for Controlling and risk department and for process owners (top-down approach). All identified risks are listed in the Risk Catalogue, which serves as a roadmap for risk management activities.
RISK ANALYSIS Risk analysis is usually in-depth analysis of causes that exposed BAMC to certain risk. It is crucial in understanding the nature and impact of risk, which serves as base ground for adoption of relevant risk measurements. Essential part of risk analysis is review of existing internal controls that are already established and test of their capacity and their robustness.
RISK MEASUREMENT Measurement of risks is important in order to provide relevant priority list of risks that should be addressed first. BAMC performs evaluation and classification of risks according to the probability of realization of each risk and according to the impact that realization of such risk would have on BAMC’s operations. Probability of occurrence is estimated based on historic data or frequency of such event to realize. Value of such risk is estimated according to the impact on BAMC operations, financial impact or any distress in business processes or to BAMC’s reputation. Both, probability and value of risk, are estimated on a five-point scale and the total estimation of risk is a product of probability estimation and value estimation. Such approach allows clear and objective measurement of risks. In that way, risks are mitigated and monitored as a result of an objective analysis and not as a subjective opinion.
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FIGURE 28: IDENTIFIED RISK GROUPS 5 A - Financial risks B - Operational risks C - Strategic risks D - External environment risks 4 D E - Sales activity risks F F - Asset management risks E G - Risks of fraud and other wrong-doings H - Legislation and regulation risks 3 G C A B H
average estimate of impact estimate average 2
1 1 2 3 4 5 average estimate of probability
NOTE: Risks are assessed on a pre-defined five-level scale according to the probability of risk realisation and impact at risk realisation.
RISK REPORTING, MITIGATION AND MONITORING Identified and assessed risks are presented to the Risk Management Committee, to the Audit Committee and to the Board of Directors during its regular sessions. BAMC identified reporting on risk topics as a crucial component in the risk management process and provided guidelines for accurate and timely risk management reporting in the Risk Management policy.
The Risk Management Committee adopts a risk mitigation strategy for each case. Strategies to mitigate identified risks are as it follows: (i) risk acceptance, (ii) risk transfer, (iii) risk reduction and (iv) risk avoidance.
Once the risk is identified, measured and introduced to the Risk Management Committee, is evaluated and risk mitigation strategies are set, risk monitoring comes in place. Mitigations that were determined as a response to certain risk should be monitored whether or not they contribute to the achieving of desired results. The purpose of these reassessments is to examine the likelihood of any new risks.
INTERNAL CONTROL SYSTEM The Controlling and risk organizational unit is involved in regular reporting system and has provided additional four-eye principle in key business processes, such as valuation of assets, and several risk reviews in decision- making process.
INTERNAL AUDIT The internal audit by definition is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and
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governance processes. Following this definition, the objective of BAMC’s internal audit function is to represent a value adding activity to the company and helping the company achieve its goals. The internal audit function is reporting directly to the Board, which approves its audit charter, audit plan as well as budget and resource plan. The work of internal audit function adheres to the mandatory guidance of The Institute of Internal Auditors and The Slovenian Institute of Auditors.
The key focus of internal audit function is to contribute to the effectiveness and efficiency of the internal control system of BAMC through audit and advisory assignments. Besides following the accepted plan, the internal audit function is involved in day-to-day operations of BAMC through open discussions with employees who are seeking advice, wish to discuss the internal control and risk management issues or are trying to test their ideas with someone who can respond to informed questions and suggest workable solutions.
The 2019 internal auditing function’s plan was prepared on the basis of its own risk assessment using a revised BAMC’s risk management methodology and a new risk catalogue. In addition the work plan included internal audits of the process of preventing money laundering and fraud and corruption risk management, in accordance with BAMC's internal rules, which require periodic audits of the two processes. 2019 marks the full five years from establishing an internal audit function in BAMC, and for that reason the internal audit plan for 2019, included a comprehensive external assessment of compliance with International Standards for the Professional Practice of Internal Auditing.
Internal auditing function assessed as a key BAMC’s process the decision-making process on credit and investment committees, assets’ (claims, real estate and equity) sale processes, including customer vetting and anti-money laundering and assets valuation processes. The internal audit assignments conducted and completed in 2019 (and at the beginning of 2020) included also audits of all mentioned key processes.
A total of seventeen (17) internal audit assignments were completed in 2019, of which four (4) were outsourced to external service providers. A total of seventeen (17) reports were issued, of which three (3) were completed in early 2020. Thirteen (13) completed internal audit assignments were part of the 2019 Internal audit function’s plan, while four (4) assignments were extraordinary; one (1) was started following the initiative of the Board of Directors, while the rest were initiated on the basis of the Executive Directors decisions.
The internal audit reports and the Letter to the Management prepared by the external auditor after the audit of the financial statements was completed, included recommendations for improvements. In total in 2019, over a hundred new recommendations were added to the so called Recommendations’ Log. Approximately a tenth of all the recommendations were graded as very important, one third as important, while the remaining were rated as good practice recommendations.
All recommendations from the internal audit reports are collected in recommendations’ Log. The status of implementation of the recommendations is quarterly communicated to the BAMC's management, as part of regular reporting on internal audit activities.
Internal auditing reports on assignments include an opinion, a summary of key findings, and recommendations for improvements. The reports are always presented to the Executive Directors, the Audit Committee, the Management Board and the Ministry of Finance as the supervisory authority. Although the process of reviewing internal audit reports may be lengthy, the purpose of these reviews and endorsements is to review the correctness of the findings, their acceptance and the acceptance of the recommendations made by all
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stakeholders in the process. The mentioned approach was also supported by the auditors performing an external quality assessment of the BAMC’s Internal audit function, who further stated in their report that the Internal audit function is appreciated in BAMC and operates independently.
The external quality assessment of BAMC’s Internal audit function was made in accordance with the International Standards for the Professional Practice of Internal Auditing, issued by the Institute of Internal Auditors IIA and directly adopted by the Slovenian Institute of Auditors for use in Slovenia, the Code of Ethics, The Code of Professional Ethics of the Internal Auditor, the Code of Internal Audit Principles (Slovenian Institute of Auditors) and the Definition of Internal Auditing. The focus of the audit was on the activities of the internal audit function years in 2018 and 2019.
The external quality assessor stated in its report that overall compliance with professional standards was achieved, but there were minor discrepancies with standards, and areas for improvement were listed. The report further stated that BAMC's internal audit function is of the small size and as such according to The IIA, i.e. an organization that issues professional standards, full compliance with all professional standards is very difficult to achieve.
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ORGANISATION AND ACCOMPANYING ACTIVITIES HUMAN RESOURCE MANAGEMENT One of the objectives of BAMC has been to run a company with highly professional, motivated, highly ethical staff who show a high degree of self-initiative and independence. High professionalism and solid corporate governance lead to the realization of strategic goals and help to maximize overall value to the Republic of Slovenia. BAMC staff is selected to comply with high professional standards. Furthermore, BAMC seeks to employ, train and develop the best Slovenian team in all of its important functions. Teamwork, openness and aptitude to take action are critical to hiring and developing a highly motivated and professional team and ensuring their loyalty to BAMC.
In accordance with the third paragraph of Article 70 of the ZGD-1, BAMC explicitly states that it does not have a diversity policy in place. Regardless of this, the share of women in managerial positions (directors and unit heads) is 40%.
TABLE 11: NUMBER OF EMPLOYEES Working area 31. 12. 2019 31. 12. 2018 Credit management 18 25 Real estate & equity management 24 24 Asset management support 35 37 General support functions 55 48 Top management 3 3 Total 135 137
The increase of the number of employees in general support functions (as well as apparently low reduction of the total number of employees) is a consequence of BAMC taking over 14 employees of the company NPL Port, d. o. o. in October 2019. Without this takeover, the comparable number of employees in both the said working area and BAMC as a whole would be 14 less than reported.
As BAMC is essentially a project-based company with winding-down planned at the end of 2022 there is an ever-increasing risk of its employees being offered opportunities in the labour market and leaving the company. With the consideration of its temporary nature, the company implements different tools, within the limitations of strongly regulated framework, with the aim of retaining key employees to lower operational risk and disproportionate costs in the event of their premature departure. Significant attention was dedicated to creating a motivational and competitive work environment. The ones who stay also get their carrier development opportunities enhanced as they can take over new work areas, more demanding tasks or even leadership positions. Employee turnover rate amounted to 18% in 2019.
Despite its young age and limited lifespan, BAMC’s knowledge, experience and operational results are making it an increasingly recognized and important player in both the domestic and international professional community, restructuring and NPL management arena.
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FIGURE 29: EDUCATION AND WORK EXPERIENCE OF EMPLOYEES Employee educational structure Employee work experience
2 11 11 14 (1%) (8%) (8%) (10%) 9 17 (7%) (13%) 48 (36%)
135 employees 13 at year-end 2019 (10%) 35 (26%)
78 (58%) 32 (24%) V (secondary school) Less than 5 years VI/1 (higher vocational education) From 5 to 10 years VI/2 (pre-Bologna degree, Bologna 1st cycle degree) From 10 to 15 years VII (pre-Bologna university deg., Bologna 2nd cycle deg.) From 15 to 20 years VIII/1 (MSc, pre-Bologna specialization) More than 20 years VIII/2 (PhD, Bologna 3rd cycle degree)
Acquiring and sharing knowledge and employee development is a major focus for BAMC. In 2019, this was seen through the contributions and participations at numerous industry forums, conferences and internal training events. Based on indicators which measure employee development and knowledge transfer, BAMC is ranked among companies in Slovenia which dedicate the most attention to these areas. BAMC organized two all-day and one afternoon employee training seminars for all employees, with emphasis on interactive employee participation and inclusion. BAMC employees attended 92 educational events, where each employee attended at least one, and as many as four on average. Each employee took an average of 36 hours of training.
INFORMATION TECHNOLOGY In 2019, BAMC absorbed its subsidiary NPL Port, d. o. o., which provided IT services for software suites formerly belonging to Probanka. These are now managed by BAMC IT department. Optimization and consolidation of all IT systems continued.
In terms of application management, BAMC continued the development of proprietary solutions in this way supporting and optimizing its processes. Proprietary solutions were upgraded with additional functionalities, and many other additional applications were introduced to support BAMC’s business processes, in addition to a number of improvements to existing applications.
In terms of IT infrastructure, the focus in 2019 was on improving IT security and reliability. An IT system overhaul plan was prepared, a high-availability server infrastructure system was introduced (virtualization) with a secondary location in Maribor, where key IT system services are replicated. A number of smaller solutions were also implemented, contributing to improved system reliability and security.
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CORPORATE COMMUNICATIONS AND MARKETING The goal of the Corporate Communications function is to support BAMC in achieving its strategic goals, as well as to support specific activities and projects related to BAMC’s asset management activities (real estate, claims and equity). By following the media space and addressing the public’s need to be informed and by maintaining quality relations with key audiences, the Corporate Communications function’s role is to make it easier for BAMC to accomplish its mission.
In 2019, BAMC’s communication activities were primarily focused on strengthening the company’s internal and external reputation. BAMC, which is by its very nature subject to regular external evaluations, has built its reputation on maintaining a proactive and open communications policy, both vis-a-vis its owner, the decision- makers, business partners, investors, experts, opinion leaders, the media and Slovenian taxpayers, as well as vis- à-vis its employees, who are its best ambassadors and most important outward voice.
BAMC’s Corporate Communications function has strived to raise the external, internal and financial publics’ awareness about its role and mission. BAMC has reported its business results transparently and fairly, educated the public about the processes involved in the resolution of non-performing assets, and maintained responsive and timely media relations, as well as open communication with the internal audience. 2019 has been a dynamic year from the communications perspective, a year characterized by a number of high-profile business cases and changes in the management structure.
Through conducting its marketing activities and investor relations, BAMC’s Corporate Communications function has also actively assisted the company in achieving its sales targets. Through carefully thought-out marketing communications, BAMC harnessed synergies with other communication activities in order to target potential investors and provide them with relevant information about assets available for purchase. BAMC’s management team and experts presented their experience and specialist knowledge at numerous local and international industry events. BAMC’s experts were frequently invited to share their experience and knowledge with other similar non-performing asset management companies from other countries, including those still being established.
INTEGRITY AND ETHICS BAMC is committed to observing applicable laws and regulations and employing highly ethical business practices. BAMC seeks to ensure that clear rules and guidance for ethical practices are in place and easily accessible to all its employees and subcontractors. All employees are expected to understand the rules and report any violations. BAMC hired an external expert who examined the reporting lines and wrote a proposal for reporting and reporting violations. On the basis of the above, BAMC has adequately supplemented the internal acts.
BAMC applies the zero tolerance principle to unlawful and unethical conduct of employees and business partners, which is reflected in the provisions of internal acts and employment contracts.
BAMC continually strives to ensure compliance and eliminate corruption risks and places great emphasis on education of employees. OU Compliance, together with an external expert in order to ensure compliance with best practice recommendations and the highest business standards in the area of managing conflicts of interests, prepared amendments to internal acts, and Board of Directors at its meeting on 31 July 2019 adopted suggested changes of internal acts.
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ACCESS TO INFORMATION OF PUBLIC NATURE In accordance with the Access to Public Information Act (ZDIJZ) BAMC publishes detailed information directly related to defaulters’ loans as risk items administered as impairments in the balance sheets of a bank that were transferred to BAMC from the bank.
BAMC also publishes information of public nature in connection with donations, sponsorships, consultancy and other intellectual property services, and information of a public nature in connection with the statutory representatives of the business entity, the type of statutory representative and an indication of membership in corporate governance bodies, and details of their remuneration and related benefits on its website.
BAMC received 12 requests for access to information of public nature in 2019, which related mainly to individual sales of assets managed by BAMC. BAMC reviews each such request in detail and with the requisite expertise, and decides on the request in accordance with law.
REPORTING ON SUSPICIONS OF CRIMINAL ACTIVITIES In accordance with the ZUKSB and the Guidelines, BAMC is duty-bound to determine the liability for the creation of loans and investments that have been transferred from banks to BAMC as risk-bearing items, for the transfer of risk-bearing items offers BAMC an insight into the loan files of individual bank debtors. In addition, BAMC also notes the liability for possible irregularities in loans and investments, which BAMC manages from the merger of Factor banka and Probanka. Where there is a suspicion that risk-bearing items have been created as a result of a criminal act in connection with the actions of the members of bank management and supervisory bodies, bank supervisory bodies themselves or borrowers, Article 7 of the Guidelines requires BAMC to report this to the competent authorities.
BAMC is making efforts to successfully and comprehensively collaborate with law enforcement bodies and therefore cooperates with the National Investigation Bureau (hereinafter: NPU) and the Specialized State Prosecutor’s Office of the Republic of Slovenia. BAMC has registered three additional irregularities in 2019, bringing the total number of irregularities to 96 until end of 2019. In accordance with the agreed and established way of communication, BAMC frequently requests additional information from NPU regarding the name of cases/matters where criminal investigation was already initiated. BAMC has prepared six criminal incidents in 2019 (38 in total since inception), which were reported to the Criminal Police Directorate for further investigation.
Until September 2019, there was an OU Corporate Security operating within BAMC, the main tasks of which were (i) investigating all irregularities or suspected criminal activities except those which are reported through “whistleblowing” and (ii) reinforcement of internal security of BAMC. Following the termination of the unit, the tasks were allocated between OU Compliance, OU Internal Audit and Legal Advisor to the Board of Directors. OU Compliance has taken over some of the tasks and, since September 2019, has been cooperating with the police and other law enforcement agencies at all levels, issuing and forwarding instructions on (non-)participation in judicial (criminal) procedures and preparing formal criminal complaints to the authorities in line with its jurisdiction.
In June 2019, a contract was signed with an external contractor to set up a specific external channel for reporting irregularities (i.e. whistleblowing line), which has been published on the BAMC website since the beginning of 2020.
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COURT OF AUDIT COOPERATION, PARLIAMENTARY INVESTIGATION COMMISSION AND OTHER REGULATORS In March 2019, the Court of Audit issued a post-audit report in which it found that all measures following its audit were not implemented satisfactorily, and therefore issued a call for action addressed to the Board of Directors. On the basis of the call BAMC prepared a report on the actions taken and submitted it to the Court of Audit. Therewith the respective audit of the Court of Audit was concluded.
In H2 2019 BAMC, following a request by the Court of Audit, provided information on the remuneration of executives in companies that are majority owned by the Republic of Slovenia and/or self-governing local communities in years 2016 and 2017 for BAMC, Avtotehna, d. o. o., BR89, d. o. o., Tink, d. o. o., Argolina, d. o. o. in the form of an online questionnaire.
On its 30 January 2019 session, the National Assembly of the Republic of Slovenia ordered a parliamentary inquiry to establish and assess the actual situation for establishing political responsibility of public office holders on suspicion that they directly or indirectly influenced the allegedly uneconomic or unlawful decisions of BAMC regarding the transfer, management and the sale of claims of banks or other assets, other measures within its jurisdiction and the management of BAMC, influenced the decisions of the Bank of Slovenia, the Government, the National Assembly, other state entities, and the decisions of other domestic and foreign legal entities related to the transfer, purchase, sale and management of banks’ claims or other assets.
On 13 March 2019, the Investigation commission on detection of abuse and non-economic behaviour in BAMC (hereinafter: the Commission) abiding by the BAMC Parliamentary Inquiry Act (Official Gazette RS, 7/2019 of 1 February 2019) passed a Decision on the conduct of preparatory inquiries and defined the scope of documents that will be examined within the parliamentary inquiry and are stored at BAMC. On this basis, BAMC cooperates with the Commission and, upon receipt of the requests, submits all documents at its disposal.
On 15 March 2019, BAMC received the first request for documentation from the Commission, which was followed by further requests. Based on the requests received, BAMC submitted 32.467 files totalling 21,0 GB to the Commission in 2019 and January 2020.
At the end of December 2018 The Office of the Republic of Slovenia for the Prevention of Money Laundering (hereinafter: OPML) within its control over the measures taken for the prevention and detection of money laundering and terrorist financing at BAMC, issued a directive under which BAMC was obliged to ensure implementation of the relevant law and other regulations governing prevention of money laundering and terrorist financing. BAMC amended its internal rules governing the field in accordance with the directive and submitted a report on the implementation of the directive to The OPML in February 2019
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BAMC SHARE As at 31 December 2019 BAMC had share capital in the amount of €104.117.500 recorded in the companies register, comprising 104.117.500 ordinary, freely transferable, no-par-value registered shares. Each no-par value share has the same holding, and the same corresponding amount in the share capital. All the issued shares were paid up in full.
TABLE 12: BASIC INFORMATION ON BAMC’S SHARE Ticker symbol DUTR Class ordinary, freely transferable, no-par value registered shares Exchange quotation not quoted Share capital €104.117.500 Number of shares 104.117.500 Number of shareholders 1 Owner Republic of Slovenia NOTE: Data as at 31 December 2019.
There were no changes in the ownership structure in 2019.
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FINANCIAL STATEMENTS OF BAMC FOR THE PERIOD 1 JANUARY 2019 TO 31 DECEMBER 2019
TRANSLATION OF THE ORIGINAL FINANCIAL STATEMENTS PREPARED IN SLOVENIAN LANGUAGE.
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STATEMENT OF MANAGEMENT’S RESPONSIBILITY The management hereby confirms that the financial statements, including all their components, have been prepared in accordance with the Companies Act and amendments of the Measures of the Republic of Slovenia to Strengthen the Stability of Banks Act (ZUKSB-A). BAMC is, according to Article 4. (3) of ZUKSB-A, exempt from consolidating or equity accounting the companies whose assets were acquired by means of purchase / compensated acquisition of bank assets, or as part of corporate restructuring. Therefore consolidated financial statements were not prepared and equity accounting was not used for investments in associates. As per article 4. (5) of ZUKSB-A, BAMC in its financial accounting and reporting follows requirements of International Financial Reporting Standards.
The management hereby confirms that the relevant accounting policies were consistently applied in the compilation of the financial statements, except for changes of accounting standards (IFRS 16), which became effective as of 1 January 2019. The accounting estimates were made according to the principle of prudence and the diligence of a good manager. The management confirms that the financial statements, prepared in accordance with ZUKSB-A Article 4 (3) & (5), present fairly, in all material respects, the financial position of BAMC and of the outcomes of its operations for the period from 1 January 2019 to 31 December 2019.
The financial statements, together with the notes, have been prepared on an ongoing concern basis, and in accordance with the current Slovenian legislation, all assets and liabilities are valued in accordance with ZUKSB- A.
The tax authorities may audit the operations of BAMC at any time from the day of the tax declaration, which could result in an additional tax liability, default interest and fines for corporate income tax or for other taxes or levies. The management is not aware of any circumstances that could give rise to a potential material liability in this respect.
Ljubljana, 28 July 2020
Bojan Gantar Andraž Grum Matej Pirc Executive director Executive director Chief executive officer
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INDEPENDENT AUDITOR’S REPORT ON FINANCIAL STATEMENTS
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FINANCIAL STATEMENTS BALANCE SHEET OF BAMC FOR YEAR ENDED AS AT 31 DECEMBER 2019
31 Dec 2019 31 Dec 2018 in € thousand Note (restated)
Intangible fixed assets 492 63 Property, plant and equipment 1.091 98 Bank deposits 5 24.523 3.521 Financial assets measured at fair value through profit or loss 521.702 649.589 Loans 6 407.083 559.715 Equity investments 7 114.620 89.874 Inventories of property and equipment 8 175.094 180.464 Trade and other operating receivables 9 7.218 6.498 Contract assets from contracts with customers 10 1.716 2.328 Receivables for income tax 1.434 243 Deferred tax assets 11 2.638 0 Other current assets 12 2.693 449 Cash and cash equivalents 13 85.135 66.739 Total assets 823.735 909.991
Total Equity 14 242.085 199.860 Share capital 14 104.118 104.118 Statutory reserves 14 2.008 0 Retained earnings 14 135.959 95.742
Total liabilities 581.650 710.131 Financial liabilities measured at amortised costs 15 550.177 696.646 Trade and other operating payables 16 6.774 5.745 Contract liabilities from contracts with customers 17 15.575 477 Provisions 18 7.122 6.042 Other liabilities 19 2.002 1.221 Total equity and liabilities 823.735 909.991
The notes to the financial statements on pages 85-162 are an integral part of the financial statements.
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INCOME STATEMENT OF BAMC FOR THE PERIOD FROM 1 JANUARY TO 31 DECEMBER 2019 1 Jan to 1 Jan to in € thousand Note 31 Dec 2019 31 Dec 2018
Income from loans 20 50.257 73.075 Income from equity instruments 21 14.534 5.838 Income from inventories of property and equipment 22 5.113 15.597
Financial expenses 23 -8.896 -11.805
Other income 24 2.532 1.132 Cost of material -114 -89 Cost of services 25 -8.103 -10.998 Payroll costs 26 -7.442 -8.076 Depreciation -442 -117 Other expenses 27 -6.395 -1.457
Profit / Loss before tax 41.043 63.101 Current income tax expense 28 -884 -5.401
Net profit / loss for the period 28 40.159 57.700 Attributable to owners 40.159 57.700 Basic and diluted earnings per share 0,38 0,55
The notes to the financial statements on pages 85-162 are an integral part of the financial statements.
STATEMENT OF OTHER COMPREHENSIVE INCOME OF BAMC FOR THE PERIOD FROM 1 JANUARY TO 31 DECEMBER 2019
1 Jan to 1 Jan to in € thousand 31 Dec 2019 31 Dec 2018
Net profit / loss for the period 40.159 57.700 Total comprehensive income for the period attributable to owners 40.159 57.700
The notes to the financial statements on pages 85-162 are an integral part of the financial statements.
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STATEMENT OF CHANGES IN EQUITY OF BAMC FOR THE PERIOD FROM 1 JANUARY TO 31 DECEMBER 2019
Share Statutory Retained in € thousand Note Total Equity Capital reserves earnings
Balance as at 1 January 2019 14 104.118 0 95.742 199.860
Total comprehensive income for the period 14 0 0 40.159 40.159 Net profit / loss for the period 14 0 0 40.159 40.159 Other comprehensive income for the period 14 0 0 0 0
Transactions with owners 14 0 0 2.066 2.066 Effect of dissolved subsidiaries 14 0 0 2.066 2.066
Equity movements 14 0 2.008 -2.008 0 Allocation of part of net profit to statutory reserves 14 0 2.008 -2.008 0
Balance as at 31 December 2019 14 104.118 2.008 135.959 242.085
Share Retained in € thousand Note Total Equity Capital earnings
Balance as at 1 January 2018 14 104.118 42.311 146.429 Restated opening balance under IFRS 9 as at 1 January 2018 104.118 42.311 146.429
Total comprehensive income for the period 14 0 57.700 57.700 Net profit / loss for the period 14 0 57.700 57.700 Other comprehensive income for the period 14 0 0 0
Transactions with owners 14 0 -4.268 -4.268 Disposal of equity investment 14 0 -4.268 -4.268
Balance as at 31 December 2018 14 104.118 95.742 199.860
The notes to the financial statements on pages 85-162 are an integral part of the financial statements.
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STATEMENT OF CASH FLOWS OF BAMC FOR THE PERIOD FROM 1 JANUARY TO 31 DECEMBER 2019
1 Jan to 1 Jan to in € thousand Note 31 Dec 2019 31 Dec 2018 (restated) Cash flow from operating activities Profit before tax 41.043 63.101 Income tax paid -4.713 -11.702 Adjustments for: Amortization and depreciation 422 117 Write down of inventories 6.522 1.302 Foreign exchange differences -784 -1.866 Interest expense and other financial expense 8.896 11.805 51.386 62.757
Changes in working capital: Loans and receivables 6 153.416 102.388 Equity investments 7 -38.924 4.863 Inventories of property and equipment 8 -1.152 12.397 Trade and other operating receivables 9 2.873 -998 Contract assets from contracts with customers 10 612 -2.328 Other current assets 12 -2.238 193 Trade and other operating payables 16 953 -2.761 Contract liabilities from contracts with customers 17 15.098 477 Provisions 18 -2.433 -42 Other liabilities 19 781 -1.911 Net cash from operating activities 180.372 175.035
Cash flow from investing activities Cash acquired 15.639 0 Purchases of tangible fixed assets and intangible fixed assets 58 -77 Increase in bank deposits 5 -21.002 -3.521 Net cash flow from investing activities -5.305 -3.598
Cash flow from financing activities Payment of financial obligations 15 -146.631 -184.292 Payment of lease contracts -344 0 Interest and guarantee fee paid 15 -9.697 -11.042 Net cash flow from financing activities -156.672 -195.334
Net decrease in cash and cash equivalents 18.395 -23.897 Cash and cash equivalents at the beginning of year 13 66.739 90.636 Cash and cash equivalents at the end of year 13 85.134 66.739 The notes to the financial statements on pages 85-162 are an integral part of the financial statements.
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NOTES TO THE FINANCIAL STATEMENTS
NOTE 1: GENERAL INFORMATION
TABLE: BASIC COMPANY DATA ON 31 DECEMBER 2019 Družba za upravljanje terjatev, d. d. Full company name Bank Assets Management Company DUTB, d.d. Short company name BAMC Registered office Davčna ulica 1, 1000 Ljubljana Telephone +386 820 542 35 Fax +386 1 429 38 59 E-mail [email protected] Website www.dutb.eu Core business Activities of collection agencies and credit bureaus Registration entry 2013/11708, District Court of Ljubljana Company ID number 6339620000 Tax number 41251482 VAT number SI41251482 Share capital €104.117.500,00 Number of shares 104.117.500 ordinary no-par value shares Tomaž Besek, Chairman of the Board of Directors Non-executive directors as at Mitja Križaj, Deputy Chairman of the Board of Directors 31 December 2019 Marko Tišma Aleksander Lozej Matej Pirc, CEO Executive directors as at Bojan Gantar, CAM 31 December 2019 Andraž Grum, CAO
The Act Regulating Measures of the Republic of Slovenia to Strengthen the Stability of Banks (ZUKSB), which entered into force at the end of 2012, provides the legal basis for BAMC’s operations. The BAMC was established with a specific statutory mandate until the end of December 2017, extended until the end of 2022 by virtue of the amended ZUKSB
The Bank Assets Management Company (“the Company”) was established by the Republic of Slovenia as the key institution to promote the stability of the Slovenian financial system and restore trust in its functioning. This was one of the measures the Republic of Slovenia government’s implemented to strengthen the financial capacity and sustainability of the banking system, and consequently promote economic growth.
The first task of the BAMC was to relieve distressed banks by taking over the non-performing assets, predominantly non-performing loans (NPLs). These were mainly loans granted in the past by these banks that were not being serviced by the debtors due to the economic crisis and other reasons. As a consequence, the banks made impairments for expected losses, which eroded their respective capital bases. This was reflected in the lack of capital for normal operations. In accordance with the government’s decision, in 2013 and 2014, BAMC acquired non-performing assets from four distressed banks (NLB, NKBM, Abanka, Banka Celje) in order to maximize the recovery value of the asset and exit from assets at the best achievable price. The ZUSKB requires BAMC to collect at least 10% of the transfer value of the transferred assets each year.
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MERGER OF FACTOR BANKA AND PROBANKA On 19 February 2016, Factor banka, d. d., Ljubljana and Probanka, d. d., Maribor were merged into BAMC, the effective date was 1 January 2016. The transactions was accounted for as asset acquisitions in which the cost of acquisition was allocated between the individual identifiable assets and liabilities in the group based on their relative fair values at the date of acquisition. Consequently, BAMC re-measured all transferred assets and liabilities at their respective fair values. Hereinafter, the term “merger” is used for the transaction.
Both banks were in an orderly winding-down procedure since September 2013. By merging Factor banka and Probanka, BAMC effectively became the direct owner of five subsidiaries registered in Slovenia, as well. In May and June 2016, BAMC absorbed all five subsidiaries as of the effective date of 31 March 2016, effectively simplifying the process of managing the merged assets.
VALUATION OF ASSETS AT INITIAL RECOGNITION According to the ZUKSB and the Decree on the Implementation of Measures to Strengthen the Stability of Banks (the Decree), the acquisition price of loans and receivables transferred in 2013 and 2014 from four banks of systemic importance (NLB, NKBM, Abanka and Banka Celje) was determined by the State and the European Commission. BAMC was not involved in the process of determination of the acquisition prices. BAMC was informed only that the transfer value (acquisition price) was determined according to the first bullet of paragraph one of Article 26, as set out in the Decree, which states that the transfer value comprises the value of the assets as determined by the European Commission and that the result of the asset valuation includes the management and financing costs. BAMC followed the guidance of IAS 39 and IFRS 13 which requires all financial assets to be recognized initially at fair value. All transferred assets were valued at fair value using an internal asset valuation methodology. The differences between the transfer values (acquisition prices) and fair values were recognized in retained earnings as a transactions with the owner.
FINANCING OF ASSET ACQUISITION BAMC issued four series of state-guaranteed bonds for each exchange of the NPLs transferred from banks (NLB, NKBM, Abanka, Banka Celje) in 2013 and 2014. The bonds were at their issuance listed on the Ljubljana Stock Exchange and were also accepted as collateral for the Eurosystem liquidity operations.
On 23 August 2016 BAMC listed DUT03 and DUT04 bonds on the non-regulated Third market of the Vienna Stock Exchange. Following the decisions of bondholders’ general meetings, Ljubljana Stock Exchange delisted the DUT02 bond on 1 September 2016 and DUT03 and DUT04 bonds on 9 September 2016.
In December 2016, BAMC redeemed the matured bond DUT02 and settled all financial liabilities assumed in the merger of Factor banka and Probanka, which the BAMC partially refinanced by state-guaranteed borrowings from two commercial banks.
In December 2017, BAMC refinanced and repaid its obligations stemming from the remaining bonds DUT03 and DUT04. As at 31 December 2017, BAMC therefore had no liabilities stemming from issued bonds.
NOTE 2: BASIS OF PREPARATION OF FINANCIAL STATEMENTS
2.1) GENERAL The financial statements have been prepared in accordance with the ZUKSB and the Slovenian Companies Act. The financial statements were approved by the Company’s management on 28 July 2020.
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In December 2015, the ZUKSB-A (hereinafter: ZUKSB) was amended to exempt BAMC from consolidating and accounting following the equity method for all entities, over which it has control, joint control or significant influence, and were acquired during the initial asset transfer and / or restructuring process as envisaged by the ZUKSB. Therefore, in line with ZUKSB consolidation exemption, BAMC has not prepared consolidated accounts and has not used the equity method for investments in associates. For these reasons these financial statements are not prepared in full compliance with IFRS. Apart from equity stakes acquired in terms of the ZUKSB measures BAMC does not own any other material equity stakes.
Notwithstanding the above consolidation exemption, the ZUKSB sets out the basis of preparation of financial statements by incorporating, through cross-reference, all other pronouncements of the International Accounting Standards Board, referred to collectively as International Financial Reporting Standards (IFRS), which have been endorsed by European Union (EU) and are effective at the reporting date. For this reason, the notes to the financial statements may, at certain points, make reference to specific pronouncements of the IASB; however, it is important to emphasise that the consolidation exemption described above, overrides the requirements for consolidation under IFRS 10.
Details of the Company’s accounting policies, are included in notes 3.1. to 3.10. These policies have been applied consistently in all years presented, unless otherwise stated. The same accounting policies were used for 2019 as for 2018, except for changes of accounting standards, which became effective as of 1 January 2018 or 1 January 2019.
The financial statements were prepared on a going concern basis. Management estimates that BAMC’s lifespan, which is limited to the end of 2022, is sufficient to achieve the mission set under the ZUKSB i.e. to recover value from transferred asset without forced sale of assets and to fully repay all its liabilities.
According to the ZUKSB stipulations, the Government of Republic of Slovenia, as the only shareholder, represents the BAMC's General Assembly and in accordance with the ZGD-1 may accept or reject the annual report.
This financial statements are presented for the year starting 1 January 2019 and ending 31 December 2019.
Financial statements are prepared as separate financial statements of BAMC, Ljubljana.
Changes in presentations of financial statements Balance sheet items and items of cash flow statements were with a view to improved presentation changed in 2019. Consequently were changed also comparative date for financial year 2018, but changes did not have any impact on net profit or capital.
Changes compared with 2018 are in following items: . Balance sheet: o Trade and other operating receivables were split in two items - contract assets from contracts with customers and trade and other operating receivables; o Trade and other operating payables are split in two items - contract liabilities from contracts with customers and trade and other operating payables); o Deferred costs ware renamed in other assets.
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. Cash flow statement: o Cash flow statement starts in accordance with new presentation with cash flow from operating activities before income tax. This item is further below completed with income tax paid. In the previous presentation cash flow statement started with net profit of the period, change in tax receivables and liabilities was presented in changes in working capital; o Paid guarantee fee for bank loans is in accordance with improved cash flow statement presentation included in cash flows from financing; o Changes in trade and other operating receivables were split in two items – changes in contract assets from contracts with customers and changes in trade and other operating receivables; o Changes in trade and other operating payables were split in two items – changes in contract liabilities from contracts with customers and changes in trade and other operating payables; o Income tax paid is shown at the beginning of the cash flow statement and not in changes in income tax liabilities; o Changes in deferred costs were renamed in changes in other assets.
2.2) BASIS OF MEASUREMENT The financial statements have been prepared on a cost basis, except for financial assets which are measured at fair value as described in note 4. Critical accounting estimates and judgments.
Fair value measurement of financial assets was required by ZUKSB or elected to better reflect the values of the transferred non-performing loans over the limited life-span of the Company as prescribed by ZUKSB.
2.3) FUNCTIONAL AND PRESENTATION CURRENCY The financial statements have been prepared and are presented in euro, which is BAMC’s functional currency. All financial information is presented in thousands EUR, unless stated otherwise.
All transactions are translated to EUR on the date of the transaction, while the monetary balances are translated to EUR on the reporting date of the financial statements.
2.4) USE OF ESTIMATES AND JUDGMENTS Preparing financial statements requires the application of estimates, judgements and assumptions which affect the application of accounting policies and the value of reported assets and liabilities, the disclosure of contingent assets and liabilities as at the reporting date, and the amount of revenues and expenditure in the period then ended.
The estimates, judgments and assumptions are subject to regular review. As the assessments are subject to subjective evaluation and a certain degree of uncertainty, later actual results may vary from previous estimates. The changes in accounting estimates are recognized in the period in which they were changed if the change affects that period only, or in the period of the change and in future periods, if the change affects future periods.
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Estimates and judgements are especially present in the following considerations: . fair value of loans and equity investments (note 4A and 4B); . net realizable value of inventories of property and equipment and write-down of inventories (note 4C); . provisions for obligations towards employees and provisions for liabilities arising from legal disputes (note 3.6.); . valuation of deferred tax assets (note 3.9.); . the appropriateness of applying the going-concern assumption in preparing the financial statements (note 15); . determination of current and non-current part of loans, due and not due (note 28).
2.5) NEW STANDARDS, EFFECTIVE FOR ANNUAL PERIODS BEGINNING ON 1 JANUARY 2018 In these financial statements, BAMC has applied IFRS 16, effective for annual periods beginning on or after 1 January 2019, for the first time. BAMC has not adopted early any other standard, interpretation or amendment that has been issued but is not yet effective.
2.5.1) IFRS 16 – LEASES BAMC adopted IFRS 16 with the effective date as at 1 January 2019. Previously, BAMC applied IAS 17 for the accounting treatment of leases.
Related to IFRS 16, BAMC recognized right-of-use assets (business premises and equipment) as at 1 January 2019. Disclosing right-of-use assets, BAMC disclosed long-term/short-term financial lease liabilities.
In the table below, impact of adoption of IFRS 16 is presented. With IFRS 16 adoption, BAMC recognized right- of-use assets and financial lease liabilities.
INITIAL RECOGNITION AS AT 1. 1. 2019 in € thousand 1 Jan 2019 Right-of-use assets – business premises 1.222 Right-of-use assets – equipment 184 Financial lease liabilities 1.406
More about the new accounting rules in accordance with IFRS is disclosed in the presentation of the accounting policy related to leased assets.
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2.6) STANDARDS, INTERPRETATIONS AND AMENDMENTS TO PUBLISHED STANDARDS AS ADOPTED BY THE EU THAT ARE NOT YET EFFECTIVE FOR ANNUAL PERIODS BEGINNING ON 1 JANUARY 2019 Standard/Interpretation Nature of impending change in accounting policy Possible impact on financial statements [IAS 8.31 (a), 8.31(c)] [IAS 8.31 (b)] [IAS 8.30 (b); 31 (e)] Amendments to IAS 1 The amendments clarify and align the definition of ‘material’ BAMC does not expect the Presentation of Financial and provide guidance to help improve consistency in the Amendments to have a Statements and IAS 8 application of that concept whenever it is used in IFRS material impact on its Accounting Policies, Standards. financial statements when Changes in Accounting initially applied. Estimates and Errors (Effective for annual periods beginning on or after 1 January 2020) These amendments are not yet endorsed by the EU. Amendments to IFRS 10 The Amendments clarify that in a transaction involving an BAMC does not expect that and IAS 28 Sale or associate or joint venture, the extent of gain or loss the amendments, when contribution of assets recognition depends on whether the assets sold or initially applied, will have between an investor and contributed constitute a business, such that: material impact on the its associate or joint a full gain or loss is recognised when a transaction between financial statements. venture an investor and its associate or joint venture involves the transfer of an asset or assets which constitute a business (The European (whether it is housed in a subsidiary or not), while Commission decided to a partial gain or loss is recognised when a transaction defer the endorsement between an investor and its associate or joint venture indefinitely.) involves assets that do not constitute a business, even if these assets are housed in a subsidiary. IFRS 17 Insurance IFRS 17 replaces IFRS 4, which was brought in as an interim BAMC believes that the Contracts Standard in 2004. IFRS 4 has given companies dispensation to amendments, when initially (Effective for annual carry on accounting for insurance contracts using national applied, will not have a periods beginning on or accounting standards, resulting in a multitude of different material impact on the after 1 January 2021; to approaches. presentation of its financial be applied IFRS 17 solves the comparison problems created by IFRS 4 by statements because its prospectively. Early requiring all insurance contracts to be accounted for in a does not operate in the application is consistent manner, benefiting both investors and insurance insurance industry. permitted.) companies. Insurance obligations will be accounted for using current values, instead of historical cost. Amendments to IFRS 3 The amendments narrowed and clarified the definition of a BAMC does not expect the Business Combinations business. They also permit a simplified assessment of whether Amendments to have a (Effective for annual an acquired set of activities and assets is a group of assets material impact on its periods beginning on or rather than a business. financial statements when after 1 January 2020) initially applied. These amendments are not yet endorsed by the EU. Amendments to IFRS 9 The amendments are mandatory and apply to all hedging BACM does not expect the Financial Instruments, relationships directly affected by uncertainties related to the amendments to have a IAS 39 Financial IBOR reform. The amendments provide temporary relief from material impact on its Instruments and IFRS 7 applying specific hedge accounting requirements to the
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Standard/Interpretation Nature of impending change in accounting policy Possible impact on financial statements [IAS 8.31 (a), 8.31(c)] [IAS 8.31 (b)] [IAS 8.30 (b); 31 (e)] Financial Instruments: hedging relationships with the effect that IBOR reform should financial statements when Disclosures not generally cause hedge accounting to terminate. The key initially applied (Effective for annual reliefs provided by the amendments relate to: periods beginning on or ‘Highly probable’ requirement, after 1 January 2020) isk components prospective assessments These amendments are retrospective effectiveness test (for IAS 39) not yet endorsed by the recycling of the cash flow hedging reserve. EU. The amendments also require companies to provide additional information to investors about their hedging relationships which are directly affected by these uncertainties.
NOTE 3: ACCOUNTING POLICIES OF SIGNIFICANT ACCOUNTING ITEMS
3.1) FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS Measurement of categories of financial assets From 1 January 2018, BAMC classifies all of its financial assets, except cash and cash equivalents, bank deposit and receivables at fair value through profit or loss, based on the business model for managing the assets and the asset’s contractual terms.
Before 1 January 2018, BAMC classified its' financial assets as financial assets at fair value through profit or loss as well.
Business model assessment BAMC determines its business model at the level that best reflects how it manages groups of financial assets to achieve its business objective. BAMC's business model is not assessed on an instrument-by-instrument basis, but at a higher level of aggregated portfolios and is based on observable factors, namely: . limited life-span of BAMC and minimum required cash flow; . portfolio overview as at 31 December 2017; . regulatory requirements on asset management; . assessment of remuneration policy of BAMC, d.d.; . strategy of managing the portfolio of financial assets; . risk management; . historic movements of portfolios, measured at fair value.
The first assessment which BAMC made for the purpose of assessing the effects of the transition to IFRS 9 showed that BAMC uses model 3 of IFRS 9, which requires valuation at fair value through profit or loss.
SPPI test As a second step of its classification process BAMC assesses the contractual terms of financial asset to identify whether they meet the SPPI test.
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BAMC simulates the results of SPPI test on portfolio segments, which are defined according to the characteristics of financial assets. The SPPI test is not performed on an individual contract basis, since all financial assets are valued at fair value through profit or loss (either as a result of the failed SPPI test or as a result of the business model test).
A) LOANS Loans are non-derivative financial assets with fixed or determinable payments not listed on an active market. With regard to expected cash flows, loans are classified as current (expected cash flows within 12 months of the date of the statement of financial position) and non-current (expected cash flow in the period of more than 12 months from the date of the statement of financial position).
Initial recognition Loans are recognised on the day when and only when the Company becomes party to the contractual provisions in the financial instrument.
Loans are originally recognised at fair value. The transfer of non-performing loans from financial institutions to BAMC, in accordance with the ZUKSB, was carried out between banks under the 100% ownership of the Slovenian government, which is also the 100% owner of BAMC. For this reason the aforementioned transaction was regarded as a transaction between undertakings under common control. All the effects of this transfer are recognised directly in equity as a transaction with the owner.
Upon the takeover of non-performing loans in accordance with the ZUKSB, which was carried out in 2013 and 2014, all the loans were reviewed (legal and economic due diligence) and evaluated at fair value in line with the BAMC’s guidance for the valuation of loans presented in Note 4. Critical accounting estimates and judgments. Differences between the transfer and estimated fair values, on the day of transfer, are recognised in retained earnings as transactions with the owner.
The same accounting policies as in the takeover of loan and receivables from banks were applied by BAMC in the absorption of the portfolios of loans and receivables of the two banks under 100% government ownership. Loans were measured at fair value in line with the valuation policy, and differences between the transfer value and estimated fair values were recognised in retained earnings as transactions with the owner.
Loans bought on the market, under market conditions and loans granted to companies, representing BAMC's restructuring cases, are initially recognized at fair value. Granting new loans represent one of the restructuring instruments under ZUKSB. BAMC buys loans on the market only in order to round off its exposure vis-a-vis its existing debtors. The additional purchase constitutes one of the restructuring instruments, such as granting new loans.
Subsequent measurement Loans are valued at least once a year on the basis of the adopted valuation policy, and the effects of the valuations are recognised in profit or loss as revaluation revenues/expenses. The effects are presented within the line item income from loans in the income statement. The fair value of loans are calculated based on the Binominal Option Pricing Model (BOPM) except for loans smaller than €300 thousand gross; see Note 4A for further explanations.
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Derecognition BAMC derecognises a financial asset when and only when the contractual rights to receive cash flow from the financial asset expire or when the Company transfers such rights together with all risks and rewards associated with ownership of the financial asset.
B) EQUITY INVESTMENTS Initial recognition Investments are measured at fair value upon initial recognition. On the day of the merger of the two banks all merged equity investments were measured at fair value, in accordance with BAMC's valuation methodology regarding equity investments, presented in the Note 4B.
Positive and negative differences between measured equities fair values and merged equities values, were recognised in retained earnings as transactions with the owner, as at the day of the merger.
Subsequent measurement The fair value of equity investments are determined using the valuation method on enterprise value level e.g. FCFF (free cash flows to firm) or quoted prices for the equity instruments listed on active markets.
When shares owned by the BAMC are traded on the prime market of Ljubljana Stock Exchange, the price at the close of trading on the valuation date is used in valuation. If it is determined that the market price and/or volume of trading does not reflect the attainable levels with regard to the size of the BAMC’s holding, another method and/or discounting may be used, with appropriate arguments.
The effects of valuation are assessed at least once a year, recognised directly through a reduction/increase in the carrying value and recognised in profit or loss as revaluation income/expenses. The effects are presented within the line item income from equity instruments in the income statement.
Derecognition The Company derecognises a financial asset when and only when the contractual rights to receive cash flow from the financial asset expire or when the Company transfers such rights together with all risks and rewards associated with ownership of the financial asset.
C) CONVERSIONS OF LOANS In the process of recovery of loans, these may be settled through the transfer of the underlying collateral. Loans may effectively be converted into an equity investment, a property or even equipment.
The value of the asset subject to conversion is measured at the amount corresponding to the converted loan, which stems from the debtor's final bankruptcy estate distribution plan. Any difference between conversion value and carrying value of converted loan is at revaluation recognized as income from loans or / and income from inventories of property in the income statement.
3.2) TRADE RECEIVABLES The Company considers trade receivables to be receivables on account of sold loans/equity/real estate assets, receivables for advance deposits in real estate asset purchases, receivables from paid security deposits for participation at auctions, receivables for rent, claims against the state and other minor receivables.
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The Company categorizes trade receivables as financial assets, within the category measured at amortized cost. In terms of essence, this includes receivables, which are set to be repaid sooner than within one year. From the perspective of assessment of impairment, receivables are considered individually, and the amount of the impairment is recognized in the income statement, as a revaluation expense.
3.3) LEASED ASSETS According to IFRS 16, the Company assesses whether the contract contains a lease while concluding a contract. A contracts is a lease or contains a lease if it transfers the right to control the use of a specific asset for a specified period in exchange for compensation. The Company reassesses whether the contract is a lease or whether the contract contains a lease only in case of changed contractual terms.
In applying IFRS 16, the Company takes into account the terms of the lease agreements and all relevant information and circumstances. The Company consistently applies the standard to contracts with similar characteristics and in similar circumstances. The standard applies to all leases, BAMC does not sublet its assets.
The standard introduces limited exceptions for disclosing leases that relate to leases with a term of less than 12 months and do not include purchase option, and for low value assets (assets with a value of $5.000 (approximately €4.200) or less when new).
The assessment of a low value lease is made at an individual leased asset level. A short-term lease is as lease of up to 1 year, whereby the lease contract clearly shows that it is not renewed after the end of the year and that the renewal of the contract is not economically justified. In both cases, lease payments are recognized as an expense (within cost of rent) on a straight-line basis over the entire term of the lease.
Initial recognition The Company (hereinafter the lessee) recognizes an asset that represents the right-of-use asset and a financial lease liability at the commencement date of the lease.
Subsequent measurement The lessee measures the right-of-use asset at the cost value. The lessee measures lease liabilities at the commencement date of the lease at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate at the date of initial application, if such interest rate could be determined. The lessee uses the lessee’s assumed borrinwg rate, it the stated interest rate cannot be determined immediately. For lease liabilities, which were recognized as an operating leases, the Company applied interest rate of 3% for business premises, and 5% for vehicles. The interest rates are not determined in lease contracts, but represents interests rates, that would apply to the Company, borrowing a bank loan for a similar term under similar conditions.
The cost model The Company uses the cost model – the right to use assets is valued at the cost model: . reduced for the accumulated amortisation and accumulated impairment losses and . adjusted for subsequent measurement of a lease liabilities.
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The Company applies IAS 16 – Property, Plant and Equipment for right-of-use assets amortization. The standard determines that the right-of-use assets are depreciated over the useful life or until the end of the lease, if shorter than the useful life. The Company used a depreciation rate of a 25% in 2019, as a consequence of a limited life- span of the BAMC.
3.4) BANK DEPOSITS The Company discloses times deposits with the maturity over three months among bank deposits. Bank deposit are initially recognized at the fair value and are subsequently measured at the amortized cost, using the effective interest method.
3.5) CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash in bank and term deposits maturing in less than 3 months, and other short-term and readily convertible instruments.
3.6) FINANCIAL LIABILITIES Initial recognition The Company recognises loans as non-derivative financial liabilities. Such financial liabilities are originally recognised at fair value, plus all directly attributable transaction costs.
All financial liabilities are originally recognised on the trading date, i.e. when the Company becomes party to the contractual provisions in the financial instrument.
Subsequent measurement They are subsequently measured at amortised cost using the effective interest method.
The fair value of non-derivative financial liabilities is calculated for disclosure purposes as the present value of future payments of principal and interest discounted at the market interest rate at the reporting date.
Derecognition The Company derecognises a financial liability when the commitments stipulated in the contract have been discharged, cancelled or have expired. Financial assets and liabilities are netted and the net amount is disclosed in the balance sheet, if and only if the Company has a legally enforceable right to net the recognised amounts, or intends to redeem the asset and simultaneously settle the liability.
3.7) INVENTORIES OF PROPERTY AND EQUIPMENT Initial recognition The BAMC executes purchases and acquisitions of property in various insolvency proceedings for the sole purpose of realising transferred non-performing loans or optimizing the return on existing properties (see also note 3.1.C). Both acquired and purchased property are measured at cost at initial recognition.
On the day of the merger of the two banks, inventories of the banks were measured at net realizable value, in accordance with BAMC's valuation methodology regarding real estate, presented in Note 4C.
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Subsequent measurement Inventories are valued at the lower of cost and net realisable value. Net realizable value is estimated as the fair value less the selling costs of the inventory.
At least once a year the Company reviews the criteria, based on which the inventories are valued, to determine whether there is any objective evidence requiring the recognition of a write-down up to a lower net realizable value i.e. whether there has been a reduction in the expected future cash flow from the asset owing to one or more events.
The amount of the reduction of the inventories to net realisable value is recognised as a write-down in the period the valuation of the inventories is reassessed. The amount deriving from an increase in the net realisable value of inventories is recognised to the extent that it is a reversal of an earlier write-down. The amount of reversal is limited to the amount of the original write-down, such that the new carrying amount is the lower of cost and the revised net realisable value.
Derecognition When inventories are sold, their carrying amount is recognised as an expense in the period in which the income from the sale of the inventories is recognised.
3.8) PROVISIONS Initial recognition Provisions are recognised if, as a result of a past event, the Company has a present legal or contractual obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.
The Company discloses the most important provisions: . provisions for lawsuits; . provisions for severance payments; . provisions for bank guarantees issued; . provisions for guarantees given to borrowers.
Subsequent measurement The Company regularly checks the probability that an outflow of funds will be required to settle the obligation. In the event that an outflow becomes probable, the contingent liability is reallocated by forming a provision in to the debit of the profit or loss, or the raised provision is eliminated for the revenue when the outflow is no longer probable.
3.9) INCOME Income is disclosed for three types of assets: loans, equity investments and inventories of real estate and equipment.
Income from loans includes capital gains on surpluses of payments received in excess of the carrying amount of non-performing loans, and gains and losses on conversion of assets, gains and losses of the measurement of financial assets at fair value through profit or loss, exchange rate difference and other income / expenses from loans.
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Income from equity investments include capital gains / losses from sale, dividend receipts and gains and losses on the remeasurement of financial assets at fair value through profit or loss.
Income from inventory of property and equipment includes revenues from short-term leases, revenues from the sale of inventories, the cost of inventories sold and the effects of the valuation of inventories. Revenue from the sale of inventories is recognized when the goods are transferred to the buyer.
3.10) FINANCE EXPENSES Finance expenses include borrowing costs (interest and costs of guarantee fees paid to the Republic of Slovenia). Finance expenses (except costs of guarantee fees paid to the Republic of Slovenia) are recognised in the income statement using the effective interest rate method.
3.11) CORPORATE INCOME TAX Corporate income tax is recognised in the financial statements in accordance with the regulations applicable to the end of the reporting period. Corporate income tax comprises current taxes and deferred taxes. Corporate income tax is included in net profit, except when it relates to items recognised in other comprehensive income or directly in equity.
Current tax liabilities are calculated on the basis of the taxable income for the year. The taxable income differs from the net profit reported in profit or loss insofar as it excludes revenues and expenses that are taxable or deductible in other years, and items that are never taxable or deductible.
Deferred tax assets are recognized for unused tax losses, which are carried forward to the next period.
3.12) DETERMINATION OF FAIR VALUE In numerous cases BAMC’s accounting policies and disclosures require the determination of fair value for both financial and non-financial assets and liabilities.
The fair value is the amount for which an asset could be sold or a liability exchanged between knowledgeable, willing parties in an arm’s length transaction. BAMC determines the fair value of financial instruments by taking into account the following fair value hierarchy: . Level 1 - Fair value of financial assets and liabilities whose values are based on unadjusted, quoted prices for identical assets or liabilities in an active market; . Level 2 - Fair value of financial assets and liabilities whose values are based on their quoted prices in inactive markets, or whose values are based on models for which the inputs to those models are observable either directly or indirectly for substantially the full term of the asset or liability; . Level 3 - Fair value of financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.
The BAMC uses quoted prices as the basis for the fair value of financial instruments. If a financial instrument is not quoted on a regulated market or the market is considered inactive, BAMC uses inputs of Level 2 and mostly Level 3 for determining the fair value of financial instrument. Where applicable, further information about
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assumptions made in determining fair values is disclosed in the notes specific to that asset or liability of the BAMC.
3.13) STATEMENT OF CASH FLOWS The cash flow statement is prepared using the indirect method from the data of the Company’s balance sheet data as at 31 December 2018 and 2019, and from the income statement for the period January – December 2019
NOTE 4: CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS The preparation of financial statements in accordance with the ZUKSB requires the use of estimates and judgements that affect the reported amounts of assets, liabilities, incomes and expenses. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. As management judgment involves an assessment of the likelihood of future events, actual results could differ from those assessments, which could affect the future reported amounts of assets and liabilities.
A) METHODOLOGY FOR VALUATION OF LOANS Individual valuations of loans are performed at borrower level for exposures higher than €300 thousand, while collective valuations at borrower level are performed for smaller exposures. These valuations are Level 3 in the fair value hierarchy and have features of unobservable inputs, which reflect assumptions using the best information available in the circumstances, and include the entity’s own data, taking into account all information about market participant assumptions that is reasonably available.
Individual valuation on borrower basis Individual valuations of loans are based on the Binominal Option Pricing Model (“BOPM”). For each borrower two possible scenarios, restructuring and recovery, are considered and the cash flows forecasted.
A key unobservable input in the valuation process is the estimate of the probability of realization: either restructuring or recovery scenario. If and when it is estimated that the recovery strategy is to prevail, then the recovery scenario, which reflects the collateral value, is assigned a 100% probability (see Note 4B and 4C for more details on valuation of equity and real estate collateral). In the event that the restructuring scenario is considered more likely, the BAMC uses the Default Probability Scorecard (“DPS”) to establish the probabilities of the restructuring and recovery scenarios. DPS probabilities can be overruled by a decision of the case manager, subject to review and subject to appropriate argumentation regarding different case-specific risk factors and real options provided. This approach enables compliance with IFRS and International Valuation Standards regarding: . usability and theoretical consistency; . the repeatability of the process of valuation; . comparability of the valuation process regardless the valuator; . identification of specific key business risks, connected with the probability of realization of the restructuring scenario, which are not considered in the discount factor.
The DPS model is a scoring model classifying up to 13 different business risk elements on a 7-point scale from low to high risk. If some elements include higher risk, the probability of the restructuring scenario decreases. The risk factors are determined according to the case manager’s company-specific observations. According to the assigned risk classes, an average risk profile (“avgP”) of the restructuring scenario is set.
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The probability of the recovery scenario is calculated as (1 – probability of restructuring scenario).
Once the probabilities of restructuring and recovery scenarios are set with the use of the DPS model, the lender are assigned to strategy profiles. If the restructuring scenario is considered more likely, the BOPM model is applied. BOPM is a discrete model, which is based on the use of probability distribution and recognises that the BAMC may decide to change strategy – in essence it can switch to the recovery strategy if the restructuring strategy fails. Key inputs for the BOPM are: . Probability of the restructuring scenario (determined with the use of the DPS model); . Probability of the recovery scenario (determined with the use of the DPS model); . Time to switch from restructuring to recovery strategy. BAMC assumes a switch to a lower value recovery strategy with immediate effect in order to recognise the prudence principle. The model considers the failure risk and does not allow this risk to be underestimated by means of postponing the failure. Furthermore, due to the early restructuring phase and turnaround nature of the restructuring projects, it is fair to assume that if a failure occurs at all, it occurs sooner than later; . Value of cash flows according to each (restructuring and recovery) scenario. For the restructuring scenario, the borrower’s cash flow forecast and debt servicing capability is taken into account. For the recovery scenario, the realistic outcome of realizing collateral is taken into account; . The risk-free rate of return in the framework is not accounted for separately and is not a standalone key input of the BOPM model. It is already considered in the weighted average cost of capital (“WACC”) of the BAMC and therefore is part of the present values of forecasted cash flows in both scenarios.
The WACC of the BAMC was calculated at the level of 3,28% as at 31 December 2019 (WACC as at 31 December 2018 was 2,62%). The main reason for the increasing WACC in relation to year end 2018 was lower relative share of debt financing in the total financing structure, as a result of debt repayment.
In essence, the BAMC calculated the probability-weighted average of the present values of forecasted cash flows for both scenarios. Effectively this reduces the present value of loans from the higher restructuring values towards lower recovery values, while considering both the probability of failure and the collateral value provided by the recovery scenario. This is equivalent of the BOPM model with the assumption of a real option of the worse recovery scenario, applying with immediate effect and without delay.
Valuation process and controls applied The BAMC performs individual valuations of loans on a borrower basis as per 31 December every year.
The respective case manager is responsible for estimating expected cash flows and probabilities for both scenarios (restructuring and recovery), which are additionally confirmed by the business analyst For the recovery scenario, the input for the value of the underlying collateral is based from the collateral valuations performed by the internal real estate valuation experts, external valuators and/or the business analysis department.
The head of Business analysis department is responsible for monitoring the valuation process and review all valuations for technical and logical correctness. Valuation reports, compliant with International Valuation Standards, are prepared by the respective case manager, co-signed by the relevant business analyst and countersigned by a reviewer who reviewed the respective loan valuation.
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This process, among others, includes the review of inputs such as: In the restructuring strategy: . reasoning for the factors used in determining the restructuring probability (DPS); . sustainability of the projected cash flows; . potential adjustment of cash flows and argumentation; . attributing cash flows to the correct source (operations, divestment, refinancing etc.).
In the recovery strategies: . use of appropriate inputs as collateral values and reasoning if deviations are assumed; . assumptions used for estimated repossessions and time to sell; . attribution of cost factors to the relevant asset.
Additional logical and technical controls are performed and documented by the Controlling and risk department.
The Executive Credit and Investment Committee is acquainted with valuations and approves their recognition in the financial statements, subject to additional consent from the Board Credit and Investment Committee.
The effects of these valuations are recognised in the financial statements on an annual basis.
Collective valuation on borrower basis Collective valuation is based on the Expected loss model. The expected loss is influenced by the estimated probability of default and the value of the potential fall-back scenario in the event that default occurs. The latter represents the value of collateral pledged for the loans of each borrower.
Exposures belonging to this class of loans are allocated into five groups based on the days in delinquency (days of delay in settlement of outstanding debt) and for each group, the probability of default is assessed.
The difference between collateral value and gross value of the loan determines the loss given default value (LGD). The loss given default is the value that the creditor would lose under the assumption the default had already occurred and the collateral had been realized.
The expected loss is therefore calculated as a product of the probability of default (predefined by the days in delay) and the loss given default, which is then applied to determine the impairment of each loan. The carrying amount of such loans is therefore calculated as the gross value of the loan less the expected loss.
Valuation process and controls applied The BAMC performs collective valuations of loans and receivables on a borrower basis as per 31 December every year.
The Head of Business analysis department monitors the valuation process and reviews the valuations process for technical and logical correctness. This process, among others, includes the review of inputs such as: . correct classification of borrowers in specific groups based on days in delinquency; . use of appropriate inputs as collateral values.
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The Executive Credit and Investment Committee (“ECIC”) is acquainted with valuations and approves their recognition in the financial statements, subject to additional consent from the Board Credit and Investment Committee (“BCIC”).
The effects of these valuations are presented in the financial statements on an annual basis.
B) METHODOLOGY FOR VALUATION OF EQUITY INVESTMENTS The valuation methodology for equity investments and equity collateral with a Level 3 valuation in the fair value hierarchy has features of unobservable inputs, which reflect assumptions using the best information available in the circumstances, and include the entity’s own data, taking into account all information about market participant assumptions that is reasonably available.
Key unobservable inputs in the valuation process are revenue growth, gross profit margin, capex, working capital and terminal growth of FCF.
The valuation methods on enterprise value level (eg FCFF for discounted cash flow method and EV/EBITDA for comparative method) are always preferred to those at the equity level or those based on dividends or book values.
Equity investments representing more than a 20% interest or carrying value above €5.000.000 are valued applying an in-depth valuation process mainly relying on discounted cash flows analysis. For lower percentage shareholdings and carrying values, the FCFF method is still preferred if the data quality is sufficient. Alternatively, the comparative method, based on European average multiples in the same industry, is acceptable for these types of holdings. For listed holdings in primary quotation, the market price is used where available and sufficient transactions occur to ensure liquidity.
Valuation process and controls applied The BAMC performs valuations of equity investments as at 31 December every year.
The respective analyst is responsible for the valuation of equity investments (as well as equity collateral).
The Head of business analysis and valuations monitors the valuation process and reviews all valuations for technical and logical correctness. This process includes a review of inputs such as: . WACC of the underlying investment; . discounts applied to the equity value; . assumptions used in the projected periods (regarding revenue, costs, capex, working capital etc.); . reasoning of the underlying assumptions used (majority/minority stakeholder, consolidated or individual financial statements etc.); . whether treasury shares are considered; . whether the chosen industry reflects the Company’s operations; . whether the discounts are applied and commented correctly.
The valuation report is signed by the responsible analyst who performed the equity valuation and the reviewer who reviewed the specific equity valuation.
Additional logical and process controls are performed and documented by the Controlling and risk department.
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The Executive Credit and Investment Committee is acquainted with valuations and approves their recognition in the financial statements, subject to additional consent from the Board Credit and Investment Committee.
The effects of the valuations are recognised in the financial statements on an annual basis.
C) METHODOLOGY FOR VALUATION OF REAL ESTATE The internal real estate valuation methodology applies to inventory of propertyand real estate collateral. It is compliant with International Valuation Standards and is a Level 3 valuation in the fair value hierarchy. It has features of unobservable inputs, which reflect assumptions using the best information available in the circumstances, including the entity’s own data and taking into account all information about market participant assumptions that is reasonably available.
Key unobservable inputs in the valuation process are adjusted market rent and adjusted market price of real estate, investment costs, liquidity discount (i.e. time to sell).
Regardless of the methodology stated above, the BAMC use the transaction value/price of assets as the fair value, in case the outcome of the sale transaction is very likely (i.e. contract signed, down-payment received etc.)
The Market approach is the most common method of estimating real estate values and provides the most realistic proxy of values. It is commonly used when sufficient quality data about transactions (Trgoskop, own database) or offers (nepremicnine.net, bolha.com) exists.
When using the market comparison approach the adjusted market price of the appraised real estate is calculated by adjusting market prices of real estate taken into the sample for factors such as: condition of property, size of property, age of property, location, etc. Then the average of those adjusted market prices is used as the value of appraised real estate.
During the valuation process using this methodology the building is always valued together with the functional part of the land plot (land plot needed for the building to serve its purpose). As an entire property may also include a land plot larger than needed to form a sellable unit, this is also taken into account in the adjustment of the value.
Before market data is used it needs to be verified: were transactions among unrelated parties, has all the tax been included, do the surface areas match the GURS data etc.
The income approach is used in two different ways. If a constant annual return is expected until the expiration of usefulness of the real estate, the approach of capitalization of the stabilized annual return is used. If the return is expected to be limited for a specific number of years, the discounted cash flow approach is used.
Before the values using this method are derived, the adjusted market rent for the valued real estate needs to be assessed. The adjustment is performed through comparison of rents, which need to be comparable from the perspective of gross/net rent, comparable cost structure etc.
After the determination of the effective profit, which is a product of market rent and the property’s surface area, an additional discount factor is applied for vacancy and indirect costs of the investment (studies, appraisals, and
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technical documentation), investor profit, cost of financing, time to complete the project and assumption of time to sell are included.
A simplified approach is used for real estate, with an estimated value lower than €100 thousand.
Similar to the Market approach, a relevant sample of transactions within 1 year is gathered. If the number of transactions within that period is not sufficient, the period is gradually prolonged and older transactions are adjusted accordingly, with the value increase index for each specific type of real estate. Based on an appropriate sample, the appraiser calculates the mean of the price, age and size of the sample. The appraised real estate is then adjusted for these factors and the derived value represents the estimated market value. To determine the fair value under special assumptions, such market value is discounted for the period of the estimated “time to sell”, and potential adjustments for significant physical, economic or functional deteriorations are made.
Discount rates used in valuations of real estate For the calculation of the discount rates, the build-up approach is used. Generally the following discounts are applied: . risk-free rate; . market risk discount; . liquidity discount; . management discount; . retention of capital discount (if the capitalization rate is used).
The risk-free rate is calculated using the Fisher equation based on the 3 year average yield of the 10 year Slovenian bond and using the three year average inflation.
The market risk premium/discount is calculated based on market data. This rate is adjusted for market price changes defined in the semi-annual report of GURS.
The liquidity discount is a market rate reflecting the time to sell.
The management discount represents the cost of ownership which is pre-defined for certain real estate types and reflects actual costs related to real estate, owned by the BAMC.
The retention of capital discount is added to the discount factor to attain a capitalization rate, which is calculated according to the Ringo method.
Valuation process and controls applied According to internal rules, the BAMC performs a valuation of real estate once per year, namely, as at 31 December every year. A full in-depth valuation of the real estate is usually performed every 3 years. In the interim, valuations are performed periodically once a year only taking into account changes in market conditions, changes in real estate management costs and changes in the estimated time to sell. The full in-depth valuation is performed by certified appraisers in the Business Analysis and valuations Department.
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The estimated value is re-assessed to check the appropriateness of the value for financial reporting purposes at year end, if this valuation is performed during the calendar year. If the re-assessed value falls within a 5% margin, it is presumed that the value is still appropriate, if the re-assessed value falls within a 5% margin. During the 3 year period from the last in-depth valuation, the following adjustments are made once a year: . market conditions: the real estate values are adjusted through the use of a statistical index for various real estate types, which is published by GURS, semi-annually; . time to sell: Estimated time to sell is re-assessed and the present value of the real estate is adjusted accordingly; . costs: Average costs of managing different types of real estate in a one year period are calculated and compared to the costs assumed in the valuation. If substantial differences are identified, costs are adjusted; . change in discount rate: when larger changes in general market conditions occur, the discount rate reflecting the market sentiment, also changes.
The Business Analysis and valuations Department is responsible for valuation of inventory of real estate and real estate collateral. The reviewer is employed in the Real Estate Management Support Department who reviews the valuations from a logical and technical point of view.
The valuation report is signed by the valuator and reviewer. Additional logical and technical controls are performed and documented by the Controlling and risk department.
The Executive Credit and Investment Committee is acquainted with valuations and approves their recognition in the financial statements, subject to additional consent from the Board Credit and Investment Committee.
The effects of the valuation, if any, are recognised in financial statements on an annual basis.
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NOTES TO THE BALANCE SHEET
NOTE 5: BANK DEPOSITS
in € thousand 31 Dec 2019 31 Dec 2018 Pledged deposits 3.522 3.521 Other deposits 21.001 0 Total 24.523 3.521
BAMC pledged deposits to banks as collateral for the bank guarantees issued to BAMC’s debtors. Pledged deposits are due in November 2020.
Other deposits are intended to repayment of financial obligations and are due from March to June 2020.
NOTE 6: FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS – LOANS
in € thousand 31 Dec 2019 31 Dec 2018 Loans and receivables 401.922 552.500 restructuring 214.062 255.816 recovery 187.859 296.684 Other (collective valuation) 5.161 7.215 Total 407.083 559.715
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MOVEMENT IN THE LOAN BALANCES FROM 1 JAN TO 31 DEC in € thousand 2019 2018
Opening balance 1 January 559.715 660.237
Increase in loan portfolio 16.835 28.004 Purchase from other banks 7.769 18.594 New loans, granted by the BAMC 7.828 7.172 Guarantees paid 1.034 1.752 Other 203 485
Repayments -225.665 -206.076 Cash repayments -165.928 -175.175 Conversion to real estate (Note 8)* -12.684 -2.820 Conversion to trade receivables 2.226 -2.400 Loans sold -4.413 -15.434 Conversion to equity (Note 7) -44.866 -10.247
Increase/decrease on revaluation (Note 20) 7.252 37.943 Increase/decrease for realised capital gains/losses 40.982 33.987 Other 7.964 5.620
Closing balance 31 December 407.083 559.715
NOTE: *From the total amount €12.684 thousand is as D/RE conversion recognised amount of €12.768 thousand, difference in amount of €6 thousand is recognised as advance payment for inventories of property. Difference in amount of €91 thousand was as D/RE conversion recognised in 2018, but as inventory ownership in 2019.
The increase in loan portfolio represents new loans, granted by the BAMC, purchase from other banks, increases for recoverable court costs and guarantees paid. New loans are granted to existing borrowers and companies, in which BAMC has a significant ownership stake. Granting new loans represent one of the restructuring instruments under the ZUKSB.
The table below presents the movement in loan balances with a separate analysis for debtors, which were classified as debtors with a restructuring and recovery strategy as at 1 January 2019.
106 BAMC ANNUAL REPORT 2019 FINANCIAL REPORT
MOVEMENT IN THE LOAN BALANCES FROM 1 JAN TO 31 DEC 2019 Recovery in € thousand Restructuring debtors Debtors and collective Total valuation
Closing balance 31 December 267.552 292.163 559.715 Movement between both strategies -11.736 11.736 0 Opening balance 1 January 255.816 303.899 559.715
Increase in loan portfolio 7.675 9.160 16.835 Purchase from other banks 0 7.769 7.769 New loans, granted by the BAMC 7.674 154 7.828 Guarantees paid 0 1.034 1.034 Other 0 203 203
Repayments -54.560 -171.105 -225.665 Cash repayments -53.309 -112.620 -165.928 Conversion to real estate 0 -12.684 -12.684 Conversion to trade receivables 2.400 -174 2.226 Loans sold -3.651 -762 -4.413 Conversion to equity 0 -44.866 -44.866
Increase/decrease on revaluation 10.941 -3.690 7.252 Increase/decrease for realised capital 5.779 35.203 40.982 gains/losses Other 146 7.817 7.964
Closing balance 31 December 214.062 193.021 407.083
The table below presents the movement in loan balances with a separate analysis for debtors, which were classified as debtors with a restructuring strategy as at 31 December 2018.
107 BAMC ANNUAL REPORT 2019 FINANCIAL REPORT
MOVEMENT IN THE LOAN BALANCES FROM 1 JAN TO 31 DEC 2018 Recovery in € thousand Restructuring debtors Debtors and collective Total valuation
Closing balance 31 December 264.562 395.675 660.237 Movement between both strategies 17.899 -17.899 0 Opening balance 1 January 282.461 377.776 660.237
Increase in loan portfolio 8.114 19.890 28.004 Purchase from other banks 0 18.594 18.594 New loans, granted by the BAMC 6.874 298 7.172 Guarantees paid 1.240 512 1.752 Other 0 485 485
Repayments -71.169 -134.907 -206.076 Cash repayments -59.400 -115.775 -175.175 Conversion to real estate 0 -2.820 -2.820 Conversion to trade receivables -2.400 0 -2.400 Loans sold -4.900 -10.534 -15.434 Conversion to equity -4.469 -5.778 -10.247
Increase/decrease on revaluation 11.545 26.398 37.943 Increase/decrease for realised capital 6.376 27.611 33.987 gains/losses Other 590 5.030 5.620
Closing balance 31 December 255.816 303.899 559.715
NOTE 7: FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS – EQUITY INVESTMENTS
in € thousand 31 Dec 2019 31 Dec 2018 Equity shares of listed companies 20.601 24.475 a) Shares 20.601 24.475 Equity shares of unlisted companies 94.019 65.399 a) Shares 81.233 35.845 b) Ownership stake 12.786 29.554 Total 114.620 89.874
Equity investments as at 31 December 2019 are not pledged.
108 BAMC ANNUAL REPORT 2019 FINANCIAL REPORT
MOVEMENT IN THE EQUITY INVESTMENTS AND BONDS FROM 1 JAN TO 31 DEC 2019 in € thousand Equity investments Opening balance 1 January 89.874 Acquisition 147 Debt to equity conversions (Note 6) 44.866 Revaluation (Note 21) 7.081 Disposal -27.348 Closing balance 31 December 114.620
DETAILED LIST OF BAMC EQUITY INVESTMENTS AS AT 31 DECEMBER 2019: Net result Shareholding Company name and address Share capital Industry Country 2018 (*), 2019 (v %) ALPINA, tovarna obutve, d.o.o. 9.042.915 EUR -897.000 EUR Manufacturing Slovenia 86,88% Strojarska ulica 2, 4226 Žiri ARGOLINA d.o.o., 13.147.650 EUR -593.497 EUR Construction Slovenia 100,00% Slovenska cesta 58, 1000 Ljubljana AVTOTEHNA Zagreb d.o.o. Wholesale and 509.005 EUR 1.975 EUR Croatia 100,00% Nova cesta 109, Zagreb retail Wholesale and AVTOTEHNA Varaždin d.o.o.- v likvidaciji 33.698 -1 EUR Croatia 100,00% Supilo Frane 10, Matulji retail AVTOTEHNA Croatia d.o.o.- v likvidaciji Wholesale and 600.661 153 EUR Croatia 100,00% Murini7/D, Rijeka retail Wholesale and AVTOTEHNA Beograd d.o.o.- v likvidaciji 214.016 -629 EUR Serbia 100,00% Lazarevićeva br. 2/25, Beograd retail HYUNDAY AVTO BG Wholesale and 1.395.046 EUR -6.102 EUR* Serbia 46,00% Milutina Milankovića 7V, 11000 Beograd retail DRUŽBA ZA NEKRETNINE d.o.o. Real estate 100,00% 146.000 HRK -942.062 HRK* Croatia Šetalište Sv. Bernardina bb, Krk, Hrvaška activities DUP Pohorje d.o.o. Professional 10.000 EUR -81 EUR Slovenia 100,00% Davčna ulica 1, 1000 Ljubljana activities DUP 1 d.d., Professional 24.919 EUR -896 EUR Slovenia 100,00% Davčna ulica 1, 1000 Ljubljana activities STNA d.o.o. 7.500,00 -42 EUR Tourism Slovenia 100,00% Davčna ulica 1, 1000 Ljubljana DUTB D.O.O. – Beograd Real estate 10.802.913 EUR 32.428 EUR Serbia 100,00% Milutina Milankovića 7v, 11070 Beograd activities DUP SARAJEVO d.o.o. Real estate 1.124.602 KM -4.550 KM BIH 100,00% Ul. Vrazova broj 3, Sarajevo activities FACTOR PROJEKT d.o.o. 11.168.100 Real estate Šetalište Svetog Bernardina bb, Krk, Republika -381.300 HRK Croatia 100,00% HRK activities Hrvaška Istrabenz d.d. 21.615.758 EUR -3.725.098 EUR* Holding Slovenia 21,7% Obala 33, 6320 Portorož Istrabenz turizem d.d. 22.744.442 EUR 1.996.504 EUR* Tourism Slovenia 100,00% Obala 33, 6320 Portorož BR89 d.o.o.(prej FARME IHAN d.d.) 25.000 EUR -178.529 EUR Agriculture Slovenia 100,00% Breznikova 89, 1230 Domžale FUNDUS d.o.o.- v likvidaciji Real estate 340 EUR -7.016 EUR Serbia 100,00% Milutina Milankovića 7v, 11070 Beograd activities
HIT d.d. Nova Gorica 28.328.468 EUR 1.809.000 EUR* Tourism Slovenia 21,4% Delfinova ulica 7A, 5000 Nova Gorica RAVNE PRESSES d.o.o., 1.703.701 EUR -749.625 EUR Manufacturing Slovenia 88,67% Koroška cesta 15, 2390 Ravne na Koroškem
109 BAMC ANNUAL REPORT 2019 FINANCIAL REPORT
Net result Shareholding Company name and address Share capital Industry Country 2018 (*), 2019 (v %) MERKUR nepremičnine, d.d. Real estate 25.609.000 EUR 756.257 EUR Slovenia 62,76% Cesta na Okroglo7, 4202 Naklo activities MK Založba d.d. 5.141.149 EUR -372.154 EUR* Publishing Slovenia 51,23% Slovenska cesta 29,1000 Ljubljana MLM d.d., 3.035.740 EUR -1.334.126 EUR Manufacturing Slovenia 100,00% Oreško obrežje 9, 2000 Maribor NIGRAD d.d. 3.679.235 EUR 303.489 EUR* Public utilities Slovenia 24,91% Zagrebška cesta 30,2000 Maribor
PROLEASING d.o.o.- v likvidaciji 7.350.000 HRK 34.654.277 HRK Leasing Croatia 100,00% Prolaz Marije Krucifikse Kozulić 2, Rijeka PY&CA d.o.o., Beograd Real estate 2.040.095 EUR --3.894 EUR* Serbia 100,00% Milutina Milankovića 7v, 11070 Beograd activities RIOSI INŽENIRING d.o.o., Professional 304.624 EUR -27.285 EUR* Slovenia 39,18% Šlandrova ulica 10, 1231 Ljubljana- Črnuče activities THERMANA d.d. 12.000.225 EUR 1.590.590 EUR Tourism Slovenia 100,00% Zdraviliška cesta 6, 3270 Laško Professional SALOMON d.o.o. 10.334.374 EUR 330.948 EUR Slovenia 45,4% Vevška cesta 52, 1260 Ljubljana - Polje activities
The table above presents equity investments in companies where the BAMC hold more than a 20% ownerships stake and the companies are not in bankruptcy procedure. With respect to all equity investments, the BAMC is only a temporary owner.
MOVEMENT IN THE EQUITY INVESTMENTS FROM 1 JAN TO 31 DEC 2018 in € thousand Equity investments Opening balance 1 January 99.005 Acquisition 9.468 Debt to equity conversions (Note 6) 10.247 Revaluation* (Note 21) -8.308 Disposal -20.538 Closing balance 31 December 89.874
NOTE: *Revaluation effect in amount of €4.268 thousand was recognised in equity as a transaction with owner, €4.040 thousand in income statement as revaluation result.
DETAILED LIST OF BAMC EQUITY INVESTMENTS AS AT 31 DECEMBER 2018: Net result Shareholding Company name and address Share capital Industry Country 2017, 2018(*) (v %) ALPINA, tovarna obutve, d. o. o. 9.042.915 EUR 2.051.075 EUR Manufacturing Slovenia 86,88% Strojarska ulica 2, 4226 Žiri ARGOLINA, d. o. o. 13.147.650 EUR -587.769 EUR Construction Slovenia 100,00% Slovenska cesta 58, 1000 Ljubljana AVTOTEHNA, d. o. o. Wholesale and 10.000.000 EUR 93.214 EUR Slovenia 100,00% Litijska cesta 259, 1261 Ljubljana – Dobrunje retail HYUNDAY AVTO BG Wholesale and 1.395.046 EUR -6.102,EUR* Serbia 46,00% Milutina Milankovića 7V, 11000 Beograd retail DRUŽBA ZA NEKRETNINE, d. o. o. Real estate Šetalište Svetog Bernardina bb, Krk, Republika 146.000 HRK -6.577.970 HRK* Croatia 100,00% activities Hrvaška DUP Pohorje, d. o. o. Professional 10.000 EUR 0 Slovenia 100,00% Davčna ulica 1, 1000 Ljubljana activities DUP 1, d. d. Professional 24.919 EUR -1.777 EUR Slovenia 100,00% Davčna ulica 1, 1000 Ljubljana activities
110 BAMC ANNUAL REPORT 2019 FINANCIAL REPORT
Net result Shareholding Company name and address Share capital Industry Country 2017, 2018(*) (v %)
DUTB, d. o. o. – Beograd 10.802.913 EUR 258.751 EUR* Serbia 100,00% Milutina Milankovića 7v, 11070 Beograd
DUP SARAJEVO, d. o. o. Real estate 1.124.602 KM -526 KM* Bosnia 100,00% Ul. Vrazova broj 3, Sarajevo activities FACTOR PROJEKT, d. o. o. Šetalište Svetog Bernardina bb, Krk, Republika 11.168.100 HRK -875.135 HRK Croatia 100,00% Hrvaška BR89, d. o. o. (prej FARME IHAN, d. d.) 25.000 EUR -189.178 EUR Agriculture Slovenia 100,00% Breznikova 89, 1230 Domžale FUNDUS, d. o. o. Beograd Milutina Milankovića 7v, 11070 340 EUR -7.750 EUR* Serbia 100,00% Beograd RAVNE PRESSES, d. o. o. 1.703.701 EUR 47.929 EUR Manufacturing Slovenia 88,67% Koroška cesta 15, 2390 Ravne na Koroškem HOTELI Bernardin, d. d. Portorož 66.962.736 EUR 892.272 EUR Tourism Slovenia 35,30% MENINA, d. d. 3.562.195 EUR 143.751 EUR Manufacturing Slovenia 20,28% Trg padlih borcev 3, 1241 Kamnik MERKUR nepremičnine, d. d. Real estate 25.609.000 EUR 2.322.000 EUR Slovenia 62,76% Cesta na Okroglo7, 4202 Naklo activities MK Založba, d. d. 5.141.149 EUR 52.750 EUR Publishing Slovenia 51,23% Slovenska cesta 29,1000 Ljubljana MLM, d. d. 3.035.740 EUR -3.956.719 EUR Manufacturing Slovenia 100,00% Oreško obrežje 9, 2000 Maribor NIGRAD, d. d. 3.679.235 EUR 32.559 EUR Public utilities Slovenia 24,91% Zagrebška cesta 30,2000 Maribor NPL PORT, d. o. o. Professional 25.000 EUR 43.559 EUR* Slovenia 100,00% Trg Leona Štuklja 12, 2000 Maribor activities PPS - PEKARNE PTUJ, d. d.- v prisilni poravnavi 82.383 EUR 83.623 EUR Manufacturing Slovenia 100,00% Rogozniška cesta 2, 2250 Ptuj PY&CA, d. o. o., Beograd 2.040.095 EUR -4.408 EUR* Serbia 100,00% Milutina Milankovića 7v, 11070 Beograd RIOSI INŽENIRING, d. o. o. Professional 304.624 EUR -196.744 EUR Slovenia 39,18% Šlandrova ulica 10, 1231 Ljubljana- Črnuče activities THERMANA, d. d. 12.000.225 EUR 1.166.512 EUR Tourism Slovenia 100,00% Zdraviliška cesta 6, 3270 Laško TINK, d. o. o. Wholesale and 1.720.000 EUR -382.305 EUR Slovenia 100,00% Kosovelova 16, 3000 Celje retail
The table above presents equity investments in companies where the BAMC hold more than a 20% ownerships stake and the companies are not in bankruptcy procedure. With respect to all equity investments, the BAMC is only a temporary owner.
111 BAMC ANNUAL REPORT 2019 FINANCIAL REPORT
NOTE 8: INVENTORIES OF PROPERTY AND EQUIPMENT
in € thousand 31 Dec 2019 31 Dec 2018 Real estate 168.401 173.041 Equipment 2.168 2.042 Advance payments for inventories of property 4.525 5.381 Total 175.094 180.464
The majority of inventories of property and equipment in the amount of €170.569 thousand were recognized as a result of debt to real estate conversions or purchases at auctions from the BAMC’s debtors.
Of the total carrying amount of €168.401 thousand of real estate inventories, €83.555 thousand is valued at costs (31 December 2018 €98.086 thousand) and €84.846 thousand at net realizable value (31 December 2018 €74.955 thousand).
The estimated net realisable value of all real estate inventories at year-end is €208.625 thousand (31 December 2018 €209.242 thousand).
Residential real estate and land represented the largest part of the real estate inventory by type of real estate. Real estate as at 31 December 2019 are not pledged.
NET REALISABLE VALUE OF REAL ESTATE INVENTORY BY TYPE OF REAL ESTATE in € thousand 31 Dec 2019 31 Dec 2018 Residential 40.100 46.938 Land 96.914 82.126 Industrial 19.288 21.419 Office 35.334 33.916 Retail 10.440 6.898 Tourism 6.549 17.945 Total 208.625 209.242
NET REALISABLE VALUE OF REAL ESTATE INVENTORY BY VALUATION METHOD in € thousand 31 Dec 2019 31 Dec 2018 Transaction value 19.410 6.015 Market approach 151.197 140.955 Income approach 38.018 62.272 Total 208.625 209.242
112 BAMC ANNUAL REPORT 2019 FINANCIAL REPORT
NET REALISABLE VALUE OF REAL ESTATE INVENTORY BY LOCATION OF THE REAL ESTATE in € thousand 31 Dec 2019 31 Dec 2018 Slovenia 195.701 202.899 Central Slovenia 78.116 72.876 Drava 36.519 36.096 Coastal-Karst 26.498 43.066 Gorizia 23.227 19.952 Upper Carniola 13.700 15.656 Savinja 9.183 9.520 Southeast Slovenia 2.345 1.749 Mura 2.084 1.863 Lower Sava 1.397 1.339 Littoral-Inner Carniola 1.702 53 Carinthia 922 721 Central Sava 8 8
Abroad 12.924 6.343 Bulgaria 6.628 657 Croatia 5.999 5.391 Serbia 297 295 Total 208.625 209.242
MOVEMENT IN INVENTORIES OF PROPERTY AND EQUIPMENT (WITHOUT ADVANCE PAYMENTS) FROM 1 JAN 2019 TO 31 DEC 2019 in € thousand Real estate Equipment Total Opening balance 1 January 173.041 2.042 175.083 Partial settlement of debts (repossessions) (Note 6)* 12.767 1 12.768 Acquisitions 13.957 406 14.363 Disposal (Note 22) -24.860 -264 -25.124 Write-down to net realizable value and reversals of write- -6.504 -18 -6.522 downs (Note 22) Closing balance 31 December 168.401 2.168 170.569 NOTE: *Of the total amount, €12.684 thousand is as D/RE conversion recognised in the amount of €12.768 thousand, the difference in the amount of €6 thousand is recognised as advance payment for inventories of property. The difference in the amount of €91 thousand was as D/RE conversion recognised in 2018, but as inventory ownership in 2019.
As acquisitions in 2019 and 2018 are presented those real estate, which are purchased at auctions by BAMC.
113 BAMC ANNUAL REPORT 2019 FINANCIAL REPORT
MOVEMENT IN INVENTORIES OF PROPERTY AND EQUIPMENT (WITHOUT ADVANCE PAYMENTS) FROM 1 JAN 2018 TO 31 DEC 2018 in € thousand Real estate Equipment Total Opening balance 1 January 178.825 1.950 180.775 Partial settlement of debts (repossessions) (Note 6)* 2.695 34 2.729 Acquisitions 32.842 329 33.171 Disposal (Note 22) -31.207 -271 -31.478 Disposal (contribution in-kind DUTB Beograd) -8.812 0 -8.812 Write-down to net realizable value and reversals write-downs -1.302 0 -1.302 (Note 22) Closing balance 31 December 173.041 2.042 175.083 NOTE: *Of the total amount, €2.820 thousand is as D/RE conversion recognised in the amount of €2.729 thousand, the difference in the amount of €91 thousand is recognised as advance payment for inventories of property.
NOTE 9: TRADE AND OTHER RECEIVABLES
ANALYSIS OF TRADE AND OTHER RECEIVABLES in € thousand 31 Dec 2019 31 Dec 2018 Rental receivables 1.762 1.552 Advance payments 1.532 2.238 Receivables for other taxes 213 298 Claims for payment deposits with the notary public 3.500 0 Other receivables 211 2.410 Total 7.218 6.498
CURRENT AND NON-CURRENT PORTIONS OF TRADE AND OTHER RECEIVABLES in € thousand 31 Dec 2019 31 Dec 2018 Current portion 7.218 6.498 Non-current portion 0 0 Total 7.218 6.498
NOTE 10: RENTAL RECEIVABLES
ANALYSIS OF TRADE AND OTHER RECEIVABLES in € thousand 31 Dec 2019 31 Dec 2018 Trade receivables 1.627 1.940 Claims for payment deposits with the notary public 89 388 Total 1.716 2.328
CURRENT AND NON-CURRENT PORTIONS OF TRADE AND OTHER RECEIVABLES in € thousand 31 Dec 2019 31 Dec 2018 Current portion 399 444 Non-current portion 1.317 1.884 Total 1.716 2.328
114 BAMC ANNUAL REPORT 2019 FINANCIAL REPORT
NOTE 11: RECEIVABLES FOR INCOME TAX In 2019, the Company recognised deferred tax assets in the amount of €2.638 thousand, as the management estimated (form the experience of the last three business years) that there is a high probability that taxable profits will be realized in the future against which unused tax losses will be recovered. Other tax credits were not taken into account in the calculation of deferred tay assets, as they are not significant given the value of unused tax losses.
The deferred tax asset was determined based on assumptions of taxable profits, planned in the three following financial years, 2020-2022.
NOTE 12: OTHER CURRENT ASSETS
in € thousand 31 Dec 2019 31 Dec 2018 Deferred costs 281 384 Accrued income 0 44 VAT from advanced payments 2.412 21 Total 2.693 449
NOTE 13: CASH AND CASH EQUIVALENTS
in € thousand 31 Dec 2019 31 Dec 2018 Cash in banks 1.699 536 Call deposits 44.600 18.299 Over-night deposits 9.732 21.862 Short-term deposits 29.000 26.001 Other deposits 104 41 Total 85.135 66.739
The BAMC pledged deposits to banks as collateral for the bank guarantees issued to BAMC’s debtors. The amount of pledged deposits as at 31 December 2019 amounts to €104 thousand (at 31 December 2018 €41 thousand).
NOTE 14: EQUITY The BAMC’s share capital registered with the court and defined in its articles of association amounts to €104.118 thousand and is divided into 104.117.500 ordinary freely exchangeable no-par-value registered shares. Each no-par-value share has the same corresponding amount in share capital. All shares issued were fully paid.
The BAMC does not hold any treasury shares.
in € thousand 31 Dec 2019 31 Dec 2018 Share capital 104.118 104.118 Legal reserves 2.008 0 Retained earnings 135.959 95.742 Total 242.085 199.860
The Company used 5% of the net profit of the financial year 2019 to form statutory reserves.
115 BAMC ANNUAL REPORT 2019 FINANCIAL REPORT
NET PROFIT AS AT 31 DECEMBER in € thousand 2019 2018 Net profit of the financial year 40.159 57.700 Retained earnings 95.742 42.311 Increase of statutory reserves -2.008 0 Net profit 133.893 100.011
MOVEMENT OF RETAINED EARNINGS FROM 1 JAN TO 31 DEC in € thousand 2019 2018 Opening balance 1 January 95.742 42.311 Transactions with owner 2.066 -4.268 Equity investment disposal 0 -4.268 The effect of simplified procedure without winding-up of two companies 2.066 0 Net profit / loss for the period 40.159 57.700 Formation of statutory reserves from net profit -2.008 0 Closing balance 31 December 135.959 95.742
In 2019, the BAMC carried out dissolution of two companies under a simplified procedure without winding-up that were 100% owned. On the day of the dissolution of the companies, it took over the assets and liabilities of both companies. The effect of this transactions in the amount of €2.066 thousand was recognised in equity.
Based on General Meeting decision dated 21 March 2018 the total negative effect amounting to €4.268 thousand from disposal of an equity investment was recognised as a transaction with the owner.
NOTE 15: BORROWINGS AND OTHER FINANCIAL LIABILITIES
in € thousand 31 Dec 2019 31 Dec 2018 Loans from banks 548.285 695.017 Deposits received 920 1.620 Lease liabilities 963 0 Other financial liabilities 9 9 Total 550.177 696.646
The BAMC did not obtain any new loan in 2018 and 2019.
The balance of lease liabilities as at 31 December 2019 amounts to a total of €963 thousand, there of €893 thousand for business premises and €70 thousand for vehicles.
CURRENT AND NON-CURRENT PORTIONS OF BORROWINGS AND OTHER FINANCIAL LIABILITIES in € thousand 31 Dec 2019 31 Dec 2018 Current portion 129.497 136.261 Non-current portion 420.680 560.385 Total 550.177 696.646
116 BAMC ANNUAL REPORT 2019 FINANCIAL REPORT
MOVEMENT IN LOANS FROM BANKS FROM 1 JAN TO 31 DEC in € thousand 2019 2018 Opening balance 1 January 695.017 876.237 Interest accrued (Note 23) 2.489 3.862 Interest paid -3.290 -3.099 Repayments -145.931 -181.983 Closing balance 31 December 548.285 695.017
MOVEMENT IN LEASE LIABILITIES 1 JAN TO 31 DEC in € thousand 2019 2018 Opening balance 1 January - 0 Initial recognition as at 1 January 2019 (according to the IFRS 16) 1.406 0 Repayments -344 0 Increases 45 0 Decreases -144 0 Closing balance 31 December 963 0
The balance of lease liabilities as at 31 December 2019 amounts to a total of €963 thousand, where €354 thousand falls due in 2020, and the remaining part (€609 thousand) falls due in years 2021 and 2022.
NOTE 16: TRADE AND OTHER PAYABLES
in € thousand 31 Dec 2019 31 Dec 2018 Trade payables 924 1.935 Security deposits 2.418 1.395 Payables to employees 611 568 Payables to the state and other state institutions 2.701 605 Payables to others 120 1.242 Total 6.774 5.745
CURRENT AND NON-CURRENT PORTIONS OF TRADE AND OTHER PAYABLES in € thousand 31 Dec 2019 31 Dec 2018 Current portion 6.774 5.745 Non-current portion 0 0 Total 6.774 5.745
Trade payables in the amount of €924 thousand (at 31 December 2018 €1.935 thousand) relate mainly to payables for the acquisition of assets in bankruptcy proceedings and for other costs.
The security deposits amounting to €2.418 thousand (as at 31 December 2018 €1.395 thousand) relate security deposits with lease contracts and the potential buyers' payments made in the bidding process involving the submission of binding bids on real estate, loans and equity investments.
117 BAMC ANNUAL REPORT 2019 FINANCIAL REPORT
Payables to employees represent the liability for salary for December 2019 paid out in January 2020.
NOTE 17: CONTRACT LIABILITIES FROM CONTRACTS WITH CUSTOMERS
in € thousand 31 Dec 2019 31 Dec 2018 Advance payments received 15.575 477 Total 15.575 477
Advance payments received in the amount of €15.575 thousand as 31 December 2019 (as at 31 December 2018: €477 thousand) relates to payments of the already concluded real estate sale contracts, for which sale transaction has not been finalized yet.
All contractual liabilities from contracts with customers are current.
NOTE 18: PROVISIONS
in € thousand 31 Dec 2019 31 Dec 2018 Provisions for lawsuits 3.185 3.165 Provisions for severance payments 533 415 Provisions for guarantees on sold apartments 180 229 Provisions for bank guarantees issued 1.420 2.036 Other provisions 1.804 197 Total 7.122 6.042
MOVEMENT IN PROVISIONS FROM 1 JAN TO 31 DEC 2019 Provisions Provisions Provisions for for bank Provisions for Other in € thousand guarantees guarantees Total for lawsuits severance provisions on sold issued payments apartments Opening balance 1 January 3.165 415 229 2.035 198 6.042 Raised 1.803 188 111 0 1.804 3.906 Provisions used -174 -7 -79 -615 0 -875 Provisions released -1.609 -63 -81 0 -198 -1.951 Closing balance 31 December 3.185 533 180 1.420 1.804 7.122
118 BAMC ANNUAL REPORT 2019 FINANCIAL REPORT
MOVEMENT IN PROVISIONS FROM 1 JAN TO 31 DEC 2018 Provisions for Provisions for Provisions for Other in € thousand severance guarantees on Total lawsuits provisions payments sold apartments Opening balance 1 January 341 3.115 0 2.628 6.084 Raised 171 142 229 0 541 Provisions used -55 -9 0 -628 -692 Provisions released -42 -83 0 233 109 Closing balance 31 December 415 3.165 229 2.233 6.042
A) PROVISIONS FOR LAWSUITS Several lawsuits were filed against BAMC or the merged banks. The estimates and assumptions to raise provisions for lawsuits against the BAMC took into account the knowledge of individual proceeding, past court practice and other criteria. Nevertheless actual results of lawsuits might differ from the BAMC’s estimates, for that reason all the estimates and assumptions are regularly reviewed and duly recognized in the financial statements.
For the lawsuits for which the probability of a negative outcome of the lawsuit was assessed as more than 50%, provisions were raised in the total value of the currently estimated liability. The estimations of the result of lawsuit together with potential damages is prepared by management of the BAMC in cooperation with the legal department. In 2019 €1.803 thousand of provisions were raised for lawsuits and €1.609 thousand were released.
B) PROVISIONS FOR SEVERANCE PAYMENTS Provisions for termination benefits and other employee earnings represent termination benefits under the Slovenian Employment Law (ZDR-1), for termination of contracts by the employer (Article 108).
The actuarial calculation of provisions considers: . demographic assumptions (mortality tables of the population of the Republic of Slovenia in year 2007, reduced by 10%); . employee turnover due to termination of employment by the employee (15% for year 2020, which then increases by 1% per year until the end of company’s existence in 2022); . the share of termination of employment by the employer with the severance payment (4,7% in 2020, 3,5% in 2021 and remaining in 2022); . growth of salaries (3% in 2020 and 2021, 2% in 2022; additional growth in the amount of 5% due to promotions and 0,5% due to length-of-service supplement); . discount rate 0% (due to short duration of liabilities and low interest rates).
Provisions for termination benefits and other employee earnings were raised and measured due to the limited life-span of the BAMC as stipulated by the ZUKSB-A. This is reflected in the Company’s plans as a gradual decrease of its activities, as well as a gradual decrease of the number of employees.
The liabilities for long-term employee benefits are discounted and their present value of liabilities for the year 2019 amounts to €533 thousand as at 31. December 2019.
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SENSITIVITY ANALYSIS OF ACTUARIAL ASSUMPTIONS Actuarial assumption 0,5 percentage point Change of current obligation adjustment of the (in € thousand) assumption 31 Dec 2019 31 Dec 2018 Profitability increase -7 -7 reduction 0 2 Salary growth increase 6 7 reduction -6 -7 Employee turnover increase -8 -8 reduction 8 8
C) PROVISIONS FOR GUARANTEES ON SOLD APARTMENTS In 2018, the BAMC raised provisions in relation to the Protection of Buyers of Apartments and Single Occupancy Buildings Act (ZVKSES), under which the seller is liable for latent defects which could not be detected at the time of acceptance of the real estate, for defects which become manifest within two years from handover of the real estate.
The provisions are scaled based on past experience, depending on the number of apartments subject to guarantee by the BAMC as the seller.
D) PROVISIONS FOR BANK GUARANTEES ISSUED With the merger of Factor banka and Probanka in 2016, the BAMC took over the provisions for issued bank guarantees. The two banks raised the provisions for off-balance sheet items, e.g. issued guarantees and letters of credit, granted overdrafts and assets management related potential liabilities. The provisions were raised based on past experiences and in accordance with internal methodology.
In 2019, since the merger with the two banks, provisions for issued bank guarantees decreased to €1.420 thousand due to the release of provisions for expired guarantees.
The full amount of valid guarantees issued is presented as a contingent liability and disclosed in note 32.
E) OTHER PROVISIONS The provision, which was disclosed among other provisions as at 31 December 2018, was released in 2019.
As at 31 December 2019, two types of new provisions were raised, namely: . Provision for guarantees given to borrowers in the amount of €1.704 thousand. The BAMC pledged a deposit with the bank in the amount of €3.521 thousand, for a bank guarantee issued to one of the BAMC’s debtors. The amount of the provision is calculated based on the probability of realization of the given guarantee by the bank. . Provision for guarantees given to buyers in sale procedures of equity investments in the amount of €100 thousand. In sales procedures, BAMC gives buyers a guarantee for the return of a specified part of the purchase prices if it would be justified to prove that certain negative effects could not be foreseen/addressed in the due diligence procedures.
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NOTE 19: OTHER LIABILITIES
in € thousand 31 Dec 2019 31 Dec 2018 Accrued costs 881 1.093 Deferred revenue 1.112 122 Other liabilities (VAT from advance payments for inventories) 9 6 Total 2.002 1.221
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NOTES TO THE INCOME STATEMENT
NOTE 20: INCOME FROM LOANS
in € thousand 2019 2018 Realised capital gains/losses 41.032 33.987 Net revaluation (Note 6) 7.252 37.943 Other income /expense from loans 1.973 1.145 Total 50.257 73.075
Realised capital gains/losses relate to differences between net carrying value according to last valuation and realized value at sale or conversion of loans to other asset classes or repayments which exceed previously recognized net carrying amount.
Other income from loans includes fees, release of provisions for guarantees, foreign exchange differences.
NOTE 21: INCOME FROM EQUITY INVESTMENTS
in € thousand 2019 2018 Realised capital gains/losses 3.606 2.833 Net revaluation (Note 7)* 7.081 -4.040 Dividends 3.847 7.045 Total 14.534 5.838
NOTE: *Revaluation effect in amount of €4.268 thousand in 2018 was recognised in equity as a transaction with owner, €4.040 thousand in income statement as revaluation result.
NOTE 22: INCOME FROM INVENTORIES OF PROPERTY AND EQUIPMENT
in € thousand 2019 2018 Rental income 2.275 2.154 Income from inventories sold 34.483 46.222 Cost of inventories sold (Note 8) -25.124 -31.477 Revaluation of inventories to lower net realizable values and release of -6.522 -1.302 revaluation (Note 8) Total 5.113 15.597
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INCOME FROM INVENTORIES OF PROPERTY AND EQUIPMENT ACCORDING TO THE TYPE OF REAL ESTATE in € thousand 2019 2018 Residential 16.035 17.908 Land 8.946 11.277 Industrial 3.970 5.620 Tourism 3.385 5.698 Office 1.808 1.515 Retail 244 1.670 Parking 95 378 Other 0 2.156 Total 34.483 46.222
INCOME FROM INVENTORIES OF PROPERTY AND EQUIPMENT ACCORDING TO THE LOCATION OF REAL ESTATE in € thousand 2019 2018 Slovenia 31.246 44.666 Coastal-Karst 25.099 17.749 Central Slovenia 1.991 10.798 Savinja 1.224 1.177 Upper Carniola 1.021 3.617 Gorizia 842 2.249 Drava 461 6.338 Southeast Slovenia 366 254 Mura 120 67 Lower Sava 115 216 Littoral-Inner Carniola 7 26 Carinthia 0 2.174 Central Sava 0 1
Abroad 3.237 1.556 Croatia 3.064 992 Bulgaria 173 491 Serbia 0 73 Total 34.483 46.222
All income from inventories sold are recognised at the moment of the handover of real estate to the customer.
NOTE 23: FINANCIAL EXPENSES
in € thousand 2019 2018 Interest expenses on borrowings -2.489 -3.862 Guarantee fees -6.407 -7.943 Total -8.896 -11.805
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NOTE 24: OTHER INCOME
in € thousand 2019 2018 Release of long-term provisions 1.951 175 Contractual penalty received 42 545 Other income 539 412 Total 2.532 1.132
NOTE 25: COST OF SERVICES
in € thousand 2019 2018 Real estate management cost -3.617 -4.463 Costs of professional services -2.302 -3.794 Accounting and back office services -962 -1.300 Legal, valuation and advisory services -1.340 -2.494 Other services -2.184 -2.741 Total -8.103 -10.998
NOTE 26: PAYROLL COSTS
in € thousand 2019 2018 Salaries (including bonuses) -5.421 -5.946 Pension contributions -469 -526 Health and social insurance -385 -415 Other payroll costs -1.167 -1.189 Total -7.442 -8.076
REMUNERATION OF BOARD MANAGEMENT MEMBERS IN 2019 in € thousand Gross Fringe Period Position Other Total Name income benefits Barba Silvela Juan 01.01. - 31.03.2019 Non-executive director 20 0 0 20 Križaj Mitja 01.01. - 31.12.2019 Non-executive director 60 0 0 60 Juhart Miha 28.01. - 07.12.2018 Non-executive director 1 0 0 1 Besek Tomaž 01.01. - 31.12.2019 Non-executive director 82 0 0 82 Tišma Marko 01.01. - 31.12.2019 Non-executive director 60 0 1 61 Lozej Aleksander 21.06. - 31.12.2019 Non-executive director 25 0 1 26 Jaklin Jože 01.01. - 16.04.2019 Executive director 53 2 42 97 Prebil Andrej 01.01. - 31.03.2019 Executive director 47 3 1 51 Balogh Imre 01.01. - 27.01.2019 Executive director 53 1 7 61 Pirc Matej 28.01. - 31.12.2019 Executive director 162 0 7 169 Gantar Bojan 27.05. - 31.12.2019 Executive director 74 4 2 80 Grum Andraž 27.05. - 31.12.2019 Executive director 74 0 1 76 Total 712 10 62 784
Non-executive directors are not salaried but are compensated through a management agreement.
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REMUNERATION OF COMMITTEE MEMBERS IN 2019 in € thousand Gross Period Position Name income Jerman Tamara 01.01. - 31.12.2019 Member of Audit Committee 6,5 Orel Martina Member of Expert Group 3 Prijović Irena 01.01. - 31.12.2019 Member of Remuneration committee 11,5 Šmuc Sonja 01.01. - 31.12.2019 Member of Accreditation committee 3 Vavti Stefan Member of Expert Group 3 Verhovnik Marovšek Andrej Member of Expert Group 3 Žumer Aljaž Member of Expert Group 3 Total 33
NOTE 27: OTHER EXPENSES
in € thousand 2019 2018 Provisions raised -3.718 -371 Court costs related to loan collections -1.187 -742 Operating expenses from revaluation -595 -44 Other expenses -895 -300 Total -6.395 -1.457
NOTE 28: INCOME TAX EXPENSE
in € thousand 2019 2018 Current tax expense -3.522 -5.401 Deferred tax 2.638 0 Total -884 -5.401
The BAMC recognized a deferred tax asset for unrecognized tax losses on 31 December 2019 in view of the profit, realised for three years in a row and, in addition, with due regard to the considerable certainty of achieving a positive tax base in the future (until the end of BAMC’s lifespan, at the end of 2022).
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Presentation of the calculation of the effective tax rate in € thousand 2019 2018
Accounting profit / loss 41.043 63.101 Income tax rate 19% 19%
Tax at the applicable tax rate (19%) -7.798 -11.990
Tax effect of: tax exempt income 757 1.390 not deductible expenses -48 -225 Tax credits 0 33 Usage of / recognition of previously unrecognised tax losses 3.567 5.391 Tax expense (current tax) -3.522 -5.401
Recognition of previously unrecognized deferred tax assets from tax losses 2.638 0 Total -884 -5.401
Effective tax rate 2% 9%
As at 31 December 2019, the amount of unused tax losses for which no deferred tax asset is recognized amounted to €673.531 thousand. The accumulated tax losses of the BAMC as at 31 December 2019 amounts to €687.414 thousand (31 December 2018 amounts to €706.167 thousand). Accumulated loss represents tax losses of BAMC, of the two merged banks and five subsidiaries. The tax loss of merged companies could be used by the BAMC against future taxable profits. The tax loss can be passed on indefinitely.
NOTE 29: EARNINGS PER SHARE
2019 2018 Profit / loss for the year (in € thousand) 40.159 57.700 Number of ordinary shares issued at the end of the year 104.117.500 104.117.500 Weighted average number of ordinary shares 104.117.500 104.117.500 Earnings per share and diluted earnings per share (in €) 0,385 0,554
NOTE 30: FINANCIAL INSTRUMENTS – FAIR VALUE AND RISK MANAGEMENT Effective risk management is one of the important elements for sound and stabile business operations of the BAMC. By following best practices and general standards, the BAMC ensures the best possible response to identified risks. Both senior management and operational organizational units are actively involved in risk management processes. The function of risk management is strictly separated from business units. Strategic decisions and strategy together with correspondent policies of risk management are adopted by the Board of Directors, which monitors efficiency and adequacy of risk management.
The BAMC is exposed to several risks and the ability to address these risks and their successful management have a direct impact on the stability and performance of the BAMC. The BAMC’s approach in forthcoming years will be changed to prevent any fire-sale situations at the end of BAMC’s mandate. The risk management system is developed such that it will be capable to support the BAMC to exit all its assets and to terminate all its activities and operations in an orderly manner. Organizational unit controlling and risk provides a comprehensive overview of the risks to which BAMC is exposed, together with their measurement and management.
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Risk management in 2019 continued with the already introduced and implemented risk management system. Activities were focused on improvement of key business processes and mitigation of identified loss events.
The financial risk, which the BAMC is most exposed to, is credit risk. BAMC measures its loans and receivables based on fair value through profit and loss, according to the future expected cash flows by borrowers. Special attention has been given to improvement of credit risk management process, both in the process of measuring creditworthiness of borrowers and approving their exposures as well as in the process of monitoring, managing and collection of credit collateral.
The BAMC has continued with a conservative approach towards market risk. Slovenia recorded positive economic growth; in 2019, GDP grew by 2,4% in real terms (4,1% in 2018)16. Yield to maturity of 10-year Slovenian government bonds as at end of 2019 amounted to 0,267% (0,993% in 2018)17. The yearly change of SBI TOP was 15,0% with an average daily turnover on the Ljubljana stock exchange at €1,3 million (2,7% decrease in comparison to 2018), capitalisation of shares grew by 11,3%18.
Managing operational risks, the BAMC continued with regular preventive activities to reduce the likelihood of loss events. According to the database of loss events, human errors were the most common cause of the loss events in 2019, therefore BAMC paid additional attention to prevent these causes of operational risks.
A) CORPORATE GOVERNANCE AND ORGANIZATIONAL STRUCTURE OF RISK MANAGEMENT The process of risk management is organized by different scopes, which achieve successful management of these risks: . identification and measures of risks, which enables BAMC to fully understand different types of risks, to measure potential effects and timely recognize potential trends, which could significantly impact the business environment of BAMC; . risk mitigation, which includes strategic decisions regarding type and amount of risks, regarding risk appetites and strategies to mitigate risks (either to accept, transfer, reduce or avoid these risks); . monitoring of risk, once it is mitigated, which includes control and reporting to the relevant bodies of BAMC.
The following structures are included in the risk management process:
COMMITTEES Audit Committee assists the Board of Directors in fulfilling its supervisory responsibilities. The Committee acts independently from executive management with the aim to ensure that the interests of the shareholders are properly protected in relation to financial reporting, internal controls, risk management, auditing, and compliance. The Committee is accountable for monitoring the statutory audit of the annual accounts and monitoring the impartiality of the statutory auditors.
16 Source: Statistical office of the Republic of Slovenia. 17 Source: Bloomberg. 18 Source: Ljubljana Stock Exchange, Yearly Report – Year 2018, Trading Summary.
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Risk Management Committee is an advisory Committee on an executive level in the area of risk management. It consists of responsible and competent persons from field of risk management, compliance, internal audit and main business units. The Committee performs business activities of risk management and supports identifying, monitoring, assessment and mitigation of risks, within acceptable risk levels.
Credit and Investment Committees are decision-making Committees and are established to decide on matters, related to credit and other exposures held or managed by the BAMC within their delegated authority from the Board. This includes the approval of debtor asset management, credit strategies, restructuring measures liquidation of collateral, decisions on initiating insolvency procedures. BAMC has established three levels of Credit and Investment Committees according the importance of managing credit or market risks and according to the exposure of a group of borrowers or type of assets.
ORGANIZATIONAL UNITS The Board of Directors defines and manages risks and implements the risk management system in a structured, consistent and coordinated way. The main competences of the Board include supervision over the Company's operations, giving consent to the decisions/proposals of credit and investment committees, approving financial plans, appointment of members of the Audit Committee and adoption of the business strategy and policy, among others.
Controlling and risk provides a comprehensive overview of all risk exposures (credit, market, liquidity and operational, among others). The unit prepares regular reports for different parties, is custodian to the Risk Management Committee and prepares regular risk reports for the Audit and Board Committees. The organizational unit includes the risk management function, which is responsible for the risk management system as a whole, its management, mitigation and monitoring. An important priority of the risk management function is raising the level of risk awareness in the Company.
Treasury has primary responsibility for managing liquidity and funding risks, which are mitigated by regular monitoring of expected liabilities and planned inflows.
Compliance advises senior management on Compliance with laws, compliance rules and standards and informs them of developments in this area. The unit informs employees of changes in the relevant legislation, in internal regulations and also in internal procedures, cooperating and reporting to several government bodies e.g.: Ministry of finance, Court of Audit, Commission for Prevention of Corruption, law enforcement agencies, Information Commissioner, Stock exchange, etc. It prepares an integrity plan and measures for identification and prevention of corruption and the risk of other wrongdoing or unethical conduct.
Internal audit ensures an independent, objective assurance and consulting activity, designed to add value and improve an organization’s operations. It helps the organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. Besides following the accepted plan of Internal Audit’s work, the internal audit function is involved in day-to-day operations of the BAMC through open discussions with employees who are seeking advice, wish to discuss internal control and risk management issues or try to test their ideas with someone who can respond to informed questions and suggest workable solutions.
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B) ACCOUNTING CLASSIFICATIONS AND FAIR VALUES The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It do not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value.
The majority of BAMC financial assets and liabilities are classified in Level 3 of the fair value hierarchy as at 31 December 2019, except for shares of the Petrol, d. d. , which are as at 31 December 2019 classified in Level 1.
There were no transfers between Level 1 and Level 3 during the year 2019. There are some equity investments that are listed on the stock exchange however the BAMC still classifies them at Fair Value Level 3, when there is not enough liquidity on the market or the stock market is not functional.
In the tables below, the BAMC has disclosed the fair value of each class of financial assets and financial liabilities in a way that enables comparison of the information regarding the carrying amounts. Financial instruments are classified as financial assets and liabilities in accordance with IFRS 9 Financial instruments: Recognition and Measurement.
ACCOUNTING CLASSIFICATIONS AND FAIR VALUES OF FINANCIAL INSTRUMENTS AS AT 31 DECEMBER 2019
in € thousand Carrying amount Fair value Designated Designated at at fair amortised Total Level 1 Level 2 Level 3 Total value costs
Financial assets measured at fair 521.702 - 521.702 2.121 - 519.581 521.702 value Loans 407.083 - 407.083 - - 407.083 407.083 Equity Investments 114.620 - 114.620 2.121 - 112.498 114.620
Financial assets not measured at - 116.876 116.876 - - - - fair value Trade and other operating - 8.934 8.934 - - - - receivables Bank deposits - 24.523 24.523 - - - - Cash and cash equivalents - 85.135 85.135 - - - -
Financial liabilities not measured - 556.951 556.951 - - 537.708 537.708 at fair value Trade and other payables - 6.774 6.774 - - - - Borrowings measured at - 550.177 550.177 - - 537.708 537.708 amortized cost
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ACCOUNTING CLASSIFICATIONS AND FAIR VALUES OF FINANCIAL INSTRUMENTS AS AT 31 DECEMBER 2018
in € thousand Carrying amount Fair value Designated Designated at at fair amortised Total Level 1 Level 2 Level 3 Total value costs
Financial assets measured at 649.589 - 649.589 1.754 - 647.835 649.589 fair value Loans 559.715 - 559.715 - - 559.715 559.715 Equity Investments 89.874 - 89.874 1.754 - 88.120 89.874
Financial assets not measured - 76.758 76.758 - - - - at fair value Trade and other operating - 6.498 6.498 - - - - receivables Bank deposits - 3.521 3.521 Cash and cash equivalents - 66.739 66.739 - - - -
Financial liabilities not - 702.391 702.391 - - 677.712 677.712 measured at fair value Trade and other payables - 5.745 5.745 - - - - Borrowings measured at - 696.646 696.646 - - 677.712 677.712 amortized cost
C) MEASUREMENT OF FAIR VALUE
C.1) VALUATION TECHNIQUES AND SIGNIFICANT UNOBSERVABLE INPUTS The tables below represent the valuation methods used for financial instruments measured at fair value classified in Level 3, using key unobservable inputs. The related valuation process is described in Note 4.
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Financial instruments measured at fair value SIGNIFICANT UNOBSERVABLE INPUTS Inter-relationship between Financial Valuation technique Significant unobservable inputs significant unobservable inputs instrument and fair value measurement Individual valuations: Individual valuations: Discounted cash flows, where - The probability of restructuring future cash flows are estimated attached to each scenario (0% The estimated fair value of loans separately for restructuring and for recovery cases, 50%-100% increases (decreases), if: recovery scenario. Probability of for restructuring cases). each scenario is set by the use of - Discounting factor: weighted Individual valuations: DPS model. Cash flows of both average cost of capital (WACC). - The estimated cash flows scenarios are discounted with 2019: 3,28%; 2018: 2,62% increase (decrease), weighted average cost of capital - The discount factor decreases (WACC). Collective valued exposures: (increases), Loans - PD as determined in one of the - The probability of restructuring Collective valued exposures: banks which assets were scenario increases (decreases), valuation estimated for a pool of merged to BAMC according to on condition restructuring cash borrowers (with exposures, the days in delay (3,86%, if days flows exceed (do not exceed) lower than € 300 thousand), in delay 0-30; 10,60%, if days in recovery cash flows where segments are set delay 31-90; 38,54%, if days in according to the days in delay of delay 91-180; 100%, if days in Collective valued exposures each borrower. Probability of delay exceed 180) - PD decreases (increases) default is applied on a loss given - LGD: subtracting the collateral - LGD increases (decreases) default value (exposure less value form outstanding amount collateral value). The enterprise value increases when revenues are growing Discounted cash flows Inputs that affect free cash flow and/or costs are increasing less, Net asset value and subsequently the enterprise are fixed or are decreasing, Multiples value, such as: projected Equity resulting in higher gross profit Dividend discount model revenue growth, gross profit investment margin. Inversely, increases in margin, capex, working capital the capex and negative cash Market price and terminal growth rate in the flow from changes in working Transaction price free cash flow to the firm (FCFF). capital decrease enterprise value.
Although the BAMC believes that its estimated fair value is appropriate, the use of different methodologies or assumptions could lead to different estimates of such a value. Key inputs used in the valuation model for the loan portfolio are the determination of the probability of restructuring and recovery scenario and the recovery value. Components of the recovery value are the value of the underlying collateral (mainly real estate and shares), restrictions and conditions derived from the legal position (mainly pledge ranking, pledge values and outstanding exposures of pledge holders). For more details, see Note 4.
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FAIR VALUE OF EQUITY INVESTMENTS AS AT 31 DECEMBER 2019 AND 2018 in € thousand 31 Dec 2019 31 Dec 2018
Level 1 2.121 1.754 Market price 2.121 1.754
Level 3 112.498 88.120 Discounted cash flows 110.142 71.539 Net asset value 674 14.963 Multiples 98 86 Indicative auction price - 49 Dividend discount model 1.584 1.483
Total 114.620 89.874
The main increase in fair value classified in Level 3 using discounted cash flows represents the valuation of the equity investment in Istrabenz Turizem, d. d. , which was not part of the portfolio as at 31 December 2018.
Financial instruments not measured at fair value SIGNIFICANT UNOBSERVABLE INPUTS Inter-relationship between Valuation significant unobservable Type Significant unobservable inputs technique inputs and fair value measurement Trade and other At amortised operating Not applicable Not applicable costs receivables At amortised Bank deposits Not applicable Not applicable costs Cash and cash At amortised Not applicable Not applicable equivalents costs Credit margin, used as a discount factor for calculation of net present value of borrowings. Fair value of borrowings BAMC used interest rate of 10-year government increases (decreases), if At amortised Borrowings bond that was issued at the time that the BAMC discount factor (interest rate costs raised loans: RS79 (1,25%) for loans, raised in of government bonds) December 2016 and RS80 (1,00%) for loans, raised decreases (increases). in December 2017. Trade and other At amortised Not applicable Not applicable payables costs
C.2) MOVEMENTS BETWEEN LEVEL 1 AND LEVEL 2 OF THE FAIR VALUE HIERARCHY There were no movements between Level 1 and Level 2 of the fair value hierarchy in 2019.
C.3) MOVEMENTS IN LEVEL 3 OF THE FAIR VALUE HIERARCHY The following table represents movements in Level 3 of the fair value hierarchy.
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MOVEMENT IN LEVEL 3 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS IN 2019 AND 2018 in € thousand 2019 2018
LOANS Opening balance 1 January 559.715 660.237 Increase in loan portfolio 16.835 28.004 Debt to equity conversion -44.866 -10.247 Debt to real estate conversion -12.684 -2.820 Conversion to trade receivables 2.226 -2.400 Loans sold -4.004 -15.434 Repayments -165.928 -175. 175 Capital gains/losses 40.955 33.943 Revaluation 7.252 37.943 Other changes 7.582 5.620 Closing balance 31 December 407.083 559.715
EQUITY INVESTMENTS Opening balance 1 January 88.120 86.425 Acquisition 49 9.468 Movements from Level 1 to Level 3 - 7.318 Debt to equity conversions 50.013 10.247 Revaluation 1.757 -8.308 Disposal -27.442 -17.030 Closing balance 31 December 112.498 88.120
NOTE: There were no movements between Level 1 and Level 3 of the fair value hierarchy in 2019.
D) FINANCIAL RISK MANAGEMENT
D.1) RISK MANAGEMENT FRAMEWORK The Board of Directors of the BAMC has an overall responsibility for the establishment and oversight of the Company’s risk management framework. The Board of Directors has established the Risk Management Committee, which is responsible for developing and monitoring the BAMC’s risk management policies. The Committee regularly reports to the Audit Committee and Board of Directors on its activities.
The risk management policy of the BAMC is established to identify and analyse the risks faced by the BAMC, to set appropriate internal controls and to monitor risks and adherence to these controls. Risk management policies and systems are regularly reviewed in the scope of the risk management framework to reflect changes in market conditions and the BAMC’s activities. The BAMC, through its training and management standards and procedures, aims to maintain a disciplined and constructive control environment in which all employees understand their roles and obligations.
The Audit Committee monitors the appropriateness of the risk management framework in view of the risks to which BAMC is exposed. In its oversight role, the Audit Committee is assisted by the internal audit and the risk management function. The internal audit and risk management function prepares risk analyses and performs internal controls, which are regularly reported to the Audit Committee.
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D.2) CREDIT RISK Credit risk is the risk of financial loss to the BAMC if a customer or counterparty to a financial instrument fails to meet its financial obligations in full or on time, and arises mostly from the BAMC’s loans or trade and other operating receivables. Credit risk is, based on volume and business operations of the BAMC, the most significant financial risk.
In the following table, total exposure to credit risk as at 31 December 2019 and 2018 is presented.
EXPOSURE TO CREDIT RISK AS AT 31 DECEMBER 2019 AND 2018 in € thousand 31 Dec 19 31 Dec 18
Credit risk of on-balance exposures 523.959 636.473 Financial assets at fair value through profit or loss (loans) 407.083 559.715 Trade and other operating receivables 7.218 6.498 Cash and cash equivalents 85.135 66.739 Bank deposits 24.523 3.521
Credit risk of off-balance exposures 5.402 5.700 Contingent liabilities (guarantees) 3.585 5.700 Contingent liabilities (guaranteed given to borrowers 1.817 -
Total exposure to credit risk 529.361 642.173 NOTE: Exposure of contingent obligations (guarantees and guarantees given to borrowers) is presented at net value (outstanding exposure, less provisions).
BAMC does not have any other potential financial obligations that could increase the credit risk of off-balance exposures as at 31 December 2019 and 2018.
In the following tables, exposure to credit risk is presented according to the type of borrowers. Borrower “Republic of Slovenia” includes exposures to municipalities and law courts. Category “Private individuals” includes exposures per physical persons and entrepreneurs.
Credit exposure is presented at fair value for loans and at the carrying amount for cash and cash equivalent and bank deposits. Exposure to contingent obligations (guarantees and guarantees given to borrowers) is presented at net value (outstanding guarantee, less provisions).
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EXPOSURE TO CREDIT RISK PER TYPE OF BORROWER AS AT 31 DECEMBER 2019 (WITHOUT TRADE AND OTHER OPERATING RECEIVABLES) Private Republic of in € thousand Corporate Banks Total individuals Slovenia Loans 393.208 9.993 3.881 0 407.083 (share in total exposure) (91%) (9%) (0%) (0%) (100%)
Cash and cash equivalents 0 0 0 85.135 85.135 (share in total exposure) (0%) (0%) (0%) (100%) (100%)
Bank deposits 0 0 0 24.523 24.523 (share in total exposure) (0%) (0%) (0%) (100%) (100%)
Contingent obligations (guarantees and 5.400 2 0 0 5.402 guarantees given to borrowers) (100%) (0%) (0%) (0%) (100%) (share in total exposure)
EXPOSURE TO CREDIT RISK PER TYPE OF BORROWER AS AT 31 DECEMBER 2018 (WITHOUT TRADE AND OTHER OPERATING RECEIVABLES) Private Republic of in € thousand Corporate Banks Total individuals Slovenia Loans 541.273 14.120 4.320 3 559.715 (share in total exposure) (97%) (3%) (1%) (0%) (100%)
Cash and cash equivalents 0 0 0 66.739 66.739 (share in total exposure) (0%) (0%) (0%) (100%) (100%)
Bank deposits 0 0 0 3.521 3.521 (share in total exposure) (0%) (0%) (0%) (100%) (100%)
Contingent obligations (guarantees and 5.700 0 0 0 5.700 guarantees given to borrowers) (100%) (0%) (0%) (0%) (100%) (share in total exposure)
LOANS The loan segment represents the largest exposure to credit risk. The BAMC values loans at fair value through profit or loss. The fair value of loans (and thus exposure to credit risk) depends primarily on the characterisation of the borrowers.
The BAMC manages loans at the group of borrowers’ level. All borrowers whose gross (total) exposure exceeds €300 thousand at the group of borrowers’ level are valued individually; remaining borrowers are valued collectively in a pool of borrowers with similar characteristics. For each individually valued debtor, a strategy is defined – restructuring or recovery. The determination of the strategy depends mainly on loan and collateral analysis. For more details regarding valuation methodology, see Note 4.
Classification of credit exposure Individually valued portfolio (borrowers, whose total exposure per group of borrowers exceed €300 thousand) is categorised into two main strategies – restructuring or recovery. In both cases, fair value of loans is calculated as net present value of future cash flows. The discount factor, used for calculation, is the BAMC’s weighted
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average cost of capital (WACC). As at 31 December 2019 WACC amounted to 3,28% and as at 31 December 2018 2,62%.
The restructuring strategy is determined according to the scoring model (Default Probability Scorecard, DPS) classifying different business risk element in the 7-point scale from low to high risk. The probability of the restructuring scenario decreases, if some element of business risk results in higher risk. The risk factors are determined according to company-specific observations. According to the assigned risk classes, an average risk profile of restructuring scenario is set and distributed linearly on the probability scale.
For the recovery strategy, the value is calculated solely based on the collateral value. This most often applies for valuation of borrowers in bankruptcy or enforcement procedures.
Collective valuations are performed in smaller exposures (whose total exposure per group of borrowers does not exceed €300 thousand) and are calculated according to the Expected loss model. Expected loss is influenced by the estimated probability of default and the value of the potential fall-back scenario if a default occurs. The latter represents the value of the collateral pledged for the loans of each borrower. The expected loss is calculated as a product of the probability of default (predefined by the days in delay) and the loss given default, which is then applied to determine the valuation of each loan. The book value of such loans is therefore calculated as the difference between the gross value of the loan and the expected loss. Additionally the BAMC assesses loans overdue in excess of five years as having a zero fair value regardless of their formal collateralization. Borrowers, valued collectively, are presented in the category “Collective valued exposure”.
EXPOSURE PER STRATEGY AS AT 31 DECEMBER 2019 AND 2018 in € thousand 31 Dec 2019 31 Dec 2018 Number of Number of Fair value Fair value borrowers borrowers Restructuring 214.062 39 255.816 57 Recovery 187.859 522 296.684 552 Collectively valued exposure 5.162 473 7.215 516 Total 407.083 1.034 559.715 1.125
STRUCTURE OF LOANS Maturity of expected cash flows For individually valued borrowers future expected cash flows are predicted at a borrower’s level. For borrowers where restructuring strategy is selected, future cash flows are predicted according to the amortisation plans and according to the time and value of liquidation of collateral (or sale/refinancing of loan itself in some cases). Contractual cash flows according to the amortisation plan are used only if borrowers have a valid repayment agreement and the BAMC has assessed that the agreement could be fulfilled. For borrowers where recovery strategy is selected, future cash flows are predicted according to the time and value of sale of collateral or the loan itself.
In the tables below, the structure of loans is presented according to the contractual maturity of future expected cash flows. Contractual maturity of cash flows are often not the most relevant information for the majority of the loans of BAMC, since the majority of loans are already overdue. In recovery cases, for example, where the majority of loans are already overdue (and debt is collected in enforcement proceedings), timing of cash flows
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represents the period of expected cash flows from sale of underlying collateral. Current cash flows represent expected cash flows in 2020, non-current in years from 2020 onwards.
MATURITY OF EXPECTED CASH FLOWS AS AT 31 DECEMBER 2019 AND 2018 in € thousand 31 Dec 2019 31 Dec 2018 Current 83.696 159.654 Non-current 323.387 400.061 Total 407.083 559.715
Overdue portfolio In the tables below, fair value of loans is presented according to contractual days overdue (according to the amortisation plans).
FAIR VALUE OF LOANS ACCORDING TO THE MATURITY AS AT 31 DECEMBER 2019 AND 2018 in € thousand 31 Dec 2019 31 Dec 2018
Restructuring 214.062 255.816 Not due 120.475 174.674 Overdue 93.587 81.143 Overdue up to 90 days 823 13.479 Overdue between 90 days and 1 year 17.865 23.912 Overdue between 1 and 3 years 23.517 4.123 Overdue over 3 years 51.382 39.628
Recovery 187.859 296.684 Not due 10.284 63.475 Overdue 177.576 233.209 Overdue up to 90 days - 163 Overdue between 90 days and 1 year 10.673 2.039 Overdue between 1 and 3 years 6.900 11.432 Overdue over 3 years 160.003 219.575
Collective valued exposure 5.162 7.215 Not due 3.222 3.758 Overdue 1.939 3.458 Overdue up to 90 days 258 1.022 Overdue between 90 days and 1 year 469 547 Overdue between 1 and 3 years 415 691 Overdue over 3 years 797 1.197
Total 407.083 559.715
Sectoral analysis of loan portfolio The vast majority of loans were transferred or acquired through merger to the BAMC, without BAMC having the ability to select the respective loans. Sectoral analysis in the table below is presented according to the type of borrowers. For corporate borrowers the primary sector is defined according to the Standard Classification of
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Activities. BAMC manages concentration risk in terms of loans to a specific borrower or group of borrowers regardless of the specific sectors in which the borrower conducts its business.
Borrower “Republic of Slovenia” includes exposures to municipalities and law courts. The category “Private individuals” includes exposures per physical persons and entrepreneurs.
FAIR VALUE OF LOANS ACCORDING TO THE SECTORS AS AT 31 DECEMBER 2019 AND 2018 in € thousand 31 Dec 2019 31 Dec 2018
Corporate 393.173 541.273 Construction 69.054 87.563 Manufacturing 110.813 116.213 Wholesale and retail 26.066 51.262 Tourism 32.150 51.594 Professional activities 23.002 37.797 Financial activities 18.402 64.934 Real estate activities 21.371 31.614 Other 80.042 73.941 Foreign corporate 12.272 26.355 Private individuals 10.027 14.120 Republic of Slovenia 3.882 4.320 Banks - 3 Total 407.083 559.715
Geographical analysis of loan portfolio The table below represents the fair value of loans according to the location of the headquarter of the borrowers at 31 December 2019 and 2018 for corporate borrowers. Borrower “Republic of Slovenia” includes exposures to municipalities and law courts. The category “Private individuals” includes exposures per physical persons and entrepreneurs.
FAIR VALUE OF LOANS ACCORDING TO THE BORROWERS’ LOCATION AS AT 31 DECEMBER 2019 AND 2018 in € thousand 31 Dec 2019 31 Dec 2018
Corporate 393.173 541.273 Slovenia 380.902 515.012 EU countries 9.463 21.051 Other European countries 2.809 4.282 Non-European countries 0 928 Private individuals 10.027 14.120 Republic of Slovenia 3.882 4.320 Banks - 3 Total 407.083 559.715
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Collateral value of loan portfolio Loans are collateralized with one or more types of collateral or can be totally uncollateralised. The majority of collateral was transferred or acquired through merger to the BAMC, without the BAMC having the ability to select the respective loans and collateral. The BAMC’s role is more active in acquiring additional or new collateral as is the case for financial restructuring when contractual obligations of the BAMC’s borrowers are redefined.
Fair value of loans, which are individually valued, is calculated as the discounted cash flows from restructuring and recovery scenario (weighted according to the probability of each scenario). The recovery scenario includes only the value of collateral of the specific borrower.
The expected value of collateral, used as an input to evaluate the recovery value, is always only an estimation, based on formal internal valuation and additional knowledge of the conditions for the liquidation of such collateral. Individual assessment of the value of collateral may result in a different value than in internal valuations, since it can include specifics of each loan (such as pre-lien mortgages), usage of haircuts (connected to costs to sell this collateral), exposure, collateralized exposure, etc.
In the tables below, the recovery value according to each strategy is presented. Recovery value represents expected cash flows per each borrower (according to scenarios), discounted at the weighted average cost of capital. It should be noted, that the fair value of loans is calculated as a weighted average of recovery value (recovery scenario) and restructuring value (restructuring scenario). Recovery values can sometimes exceed the loan exposure (in case of over-collateralization). Therefore, internal control are in place to prevent fair value exceeding the total outstanding amount of all loans per borrower.
Revaluations on collectively valued exposures are calculated based on the value of collateral and the delays in repayment of the outstanding debt. The value of assets pledged as collateral for these loans is estimated according to the internal valuations with an additional 10% haircut to ensure prudence. This haircut represents the costs that are usually incurred when BAMC seeks to redeem collateral for the payment of the debtor’s overdue liabilities. The haircut is determined by the professional experience of liquidation of such collateral and is consistent with haircuts used for the same purposes in individual valuations.
FAIR VALUE ACCORDING TO THE RESTRUCTURING AND RECOVERY SCENARIOS AS AT 31 DECEMBER 2019 in € thousand Value of Value of Share of value of Scenario non-weighted non-limited to Fair value restructuring recovery recovery value in total outstanding amount scenario scenario fair value Restructuring 214.062 229.565 238.175 111% Recovery 187.859 0 189.436 101% Collectively valued exposure 5.161 - 22.936 444% Total 407.083 229.565 450.546 111%
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FAIR VALUE ACCORDING TO THE SCENARIOS RESTRUCTURING AND RECOVERY AS AT 31 DECEMBER 2018 in € thousand, Value of Value of Share of value of Scenario non-weighted non-limited to Fair value restructuring recovery recovery value in total outstanding amount scenario scenario fair value Restructuring 255.816 293.044 256.201 100% Recovery 296.684 0 299.499 101% Collectively valued exposure 7.215 - 24.115 334% Total 559.715 293.044 579.814 104%
LOAN PORTFOLIO RISKS Risk of change in the probability of a restructuring scenario The Default probability scorecard (DPS) is a scoring model classifying different business risk elements in seven- point scale from least to most risky. The probability of the restructuring scenario decreases, if a single element of business is assessed with a higher risk. Depending on the assigned risk classes, the average risk profile for the restructuring scenario is determined and then linearly distributed on the probability scale for the restructuring strategy.
Although DPS measures business risk of each individual company, its change has a direct impact on the fair value of loans of borrowers and therefore has a direct impact on the exposure to credit risk. In the tables below, exposure is presented according to the restructuring probability classes (DPS probability). All recovery exposures have a probability of restructuring 0%, for collectively valued exposure, DPS on an individual level is not determined.
RESTRUCTURING CLASSES ACCORDING TO THE RESTRUCTURING PROBABILITIES AS AT 31 DECEMBER 2019 AND 2018 in € thousand 31 Dec 2019 31 Dec 2018 Share in total fair Share in total fair Fair value Fair value value value Restructuring 214.062 53% 255.816 46% P (restructuring) 100% 38.427 9% 55.508 10% P (restructuring) 90–99% - - - - P (restructuring) 80–89% 14.220 3% 0 0% P (restructuring) 70–79% 9.791 2% 43.934 8% P (restructuring) 60–69% 44.537 11% 56.316 10% P (restructuring) 50–59% 109.159 27% 100.057 18% Recovery 187.859 46% 296.684 53% Collectively valued exposure 5.161 1% 7.215 1% Total 407.083 100% 559.715 100%
Sensitivity analysis of changes in restructuring probabilities Changes in the restructuring probability (DPS probability) have a direct effect on change in the assessed exposure to credit risk. Therefore, the following is the sensitivity analysis of the effects of the change in the probability of the restructuring scenario to be realized by 10 percentage points (hereinafter referred to as p.p.) and 5 p.p. The probability change range is prepared by analysing the restructuring cases as at 31 December 2019 compared to restructuring cases as at 31 December 2018. The arithmetic mean of the DPS probabilities to realize the restructuring scenarios as at 31 December 2019 amounted to 75,1% (as at 31 December 2018: 67,5%), therefore the BAMC estimates that the choice of sensitivity range of DPS probability change is large enough to prepare a
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sensitivity analysis. Such calculation of the arithmetic mean of the DPS probability is used for statistical purposes only and does not reflect all the risks in the portfolio of restructuring cases. The DPS model measures a business risk and can only be calculated at the individual borrower level. The purpose of the DPS model was never intended to expand individual values to the entire portfolio of debtors, since not all debtors are exposed to the same business risks as the DPS model measures.
The impact of a parallel change in the DPS probability on the realization of the restructuring scenario The tables below show the fair value of loans given the parallel change in the DPS probability of realizing a restructuring scenario with unchanged residual assumptions. Collectively valued exposures do not reflect the risk of a change in the DPS probability, since the DPS probability is not one of the inputs of the valuation for these exposures. The recovery portfolio also cannot be impacted by a change in the DPS probability, since such portfolio does not include the restructuring value in the fair value calculation (in such cases, the BAMC most often recovers debt in legal proceeding).
A parallel decrease in the DPS probability would have a significant impact on the fair value of the loans as at 31 December 2019, as 27% of the fair value of the restructuring cases fall in the DPS class between 50% and 59%. A large proportion of such debtors (subject to the rule that all debtors with DPS of less than 50% are automatically classified as a recovery cases) would thus be reclassified as recovery. An increase in the DPS is unlikely to have an effect on the recovery portfolio; the impact of a parallel change in the DPS probability is therefore not linear.
SENSITIVITY ANALYSIS OF DPS PROBABILITY FOR THE IMPLEMENTATION OF THE RESTRUCTURING STRATEGIES AS AT 31 DECEMBER 2019 The effect of a parallel change The effect of a parallel Fair value of in € thousand of DPS by 10 p.p. to the fair change of DPS by 5 p.p. loans value of loans to the fair value of loans Increase Decrease Increase Decrease Restructuring 214.062 4.130 -112.611 2.065 -79.515 Recovery 187.859 0 103.034 0 75.073 Collectively valued exposure 5.161 - - - - Total 407.083 4.130 -9.577 2.065 -4.442
SENSITIVITY ANALYSIS OF DPS PROBABILITY FOR THE IMPLEMENTATION OF THE RESTRUCTURING STRATEGIES AS AT 31 DECEMBER 2018 The effect of a parallel change The effect of a parallel Fair value of in € thousand of DPS by 10 p.p. to the fair change of DPS by 5 p.p. to loans value of loans the fair value of loans Increase Decrease Increase Decrease Restructuring 255.816 8.638 -102.589 4.319 -88.767 Recovery 296.684 0 94.450 0 85.120 Collective valued exposure 7.215 0 0 0 0 Total 559.715 8.638 -8.139 4.319 -3.648
A change in the fair value of loans due to a change in the DPS probability to realize the restructuring scenario would also have an impact on the income statement. A change in fair values of loans would lead to a change in loans due to revaluation and consequently a change in profit or loss.
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DPS PROBABILITY SENSITIVITY ANALYSIS - IMPACT ON THE INCOME STATEMENT 2019 AND 2018 Profit or loss Profit or loss before tax, if DPS Profit or loss before tax, if DPS in € thousand before tax changes by 10 p.p. changes by 5 p.p. Increase Decrease Increase Decrease 2019 41.043 45.173 31.466 43.108 36.602 2018 63.101 71.739 54.962 67.420 59.453
Risk of failure of the restructuring strategy One of the most important credit risks is the risk of failure of the restructuring strategy of all borrowers where the BAMC pursues the restructuring strategy at one time (within one year). As a result, all such debtors would be reclassified into a recovery strategy and the BAMC would be unable to recover the loans from their operating cash flows. As a result, the BAMC could only expect recovery cash flows, which could be lower than the cumulative inflows from regular repayments.
The tables below show the difference between fair values if the entire portfolio of individually valued debtors was identified as a recovery strategy (should all restructuring cases fail). The risk of failure of the restructuring strategy is, technically, not relevant for collectively valued exposures.
The fair value of individually valued loans would fall by €32.734 thousand, if all restructuring borrowers were to fail. This risk declined in 2019 compared to the end of 2018, when the failure of all restructuring cases would lead to a decrease in the fair value of individually valued loans of €52.959 thousand.
RISK OF FAILURE OF THE RESTRUCTURING STRATEGY AS AT 31 DECEMBER 2019 Recovery fair value in € thousand Fair value of loans of loans, if all Difference restructurings failed Restructuring 214.062 0 -214.062 Recovery 187.859 369.188 181.328 Collective valued exposure 5.161 5.161 0 Total 407.083 374.349 -32.734
RISK OF FAILURE OF THE RESTRUCTURING STRATEGY AS AT 31 DECEMBER 2018 Recovery fair value in € thousand Fair value of loans of loans, if all Difference restructurings failed Restructuring 255.816 0 -255.816 Recovery 296.684 499.542 202.858 Collective valued exposure 7.215 7.215 0 Total 559.715 506.757 -52.959
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IMPACT OF FAILURE OF THE RESTRUCTURING STRATEGY ON THE INCOME STATEMENT 2019 AND 2018 Profit or loss before tax, in € thousand Profit or loss before tax if all Difference restructurings failed 2019 41.043 8.309 -32.734 2018 63.101 10.142 -52.959
Risk of change in weighted average cost of capital (WACC) The fair value of the BAMC loans represents expected future cash flows, discounted at an interest rate, based on the weighted average cost of capital (WACC) of the BAMC. As at 31 December 2018, the WACC amounted to 3,28% (as at 31 December 2017 2,62%). The change of the discount factor has a direct impact on the fair value of loans, with all other assumptions remaining unchanged, on the income from loans and therefore on the income statement.
A sensitivity analysis of the change in the WACC was prepared with respect to the change of WACC by 0,5 percentage point and 1 percentage point (hereinafter p.p.). The actual change in WACC at the end of 2019 compared to the end of 2018 was 0,66 p.p. Thus, the BAMC estimates that the simulated amount of WACC change is sufficient to prepare a potential impact analysis. Collectively valued exposures are not sensitive to changes in WACC.
SENSITIVITY ANALYSIS OF THE CHANGE IN WACC AS AT 31 DECEMBER 2019 Impact of change in Impact of change in WACC Fair value of in € thousand WACC by 0,5 p.p. on the fair by 1 p.p. on the fair value of loans value of loans loans Increase Decrease Increase Decrease Restructuring 214.062 -2.296 3.293 -5.024 6.146 Recovery 187.859 -2.327 1.403 -4.141 3.266 Collective valued exposure 5.161 0 0 0 0 Total 407.083 -4.623 4.696 -9.165 9.413
SENSITIVITY ANALYSIS OF THE CHANGE IN WACC AS AT 31 DECEMBER 2018 Impact of change in Impact of change in WACC Fair value of in € thousand WACC by 0,5 p.p. on the fair by 1 p.p. on the fair value of loans value of loans loans Increase Decrease Increase Decrease Restructuring 255.816 -3.589 3.625 -7.127 7.300 Recovery 296.684 -2.888 2.948 -5.726 5.956 Collective valued exposure 7.215 0 0 0 0 Total 559.716 -6.478 6.573 -12.853 13.257
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TRADE AND OTHER OPERATING RECEIVABLES CURRENT AND NON-CURRENT PORTIONS OF TRADE AND OTHER RECEIVABLES AS AT 31 DECEMBER 2019 AND 2018 in € thousand 31 Dec 2019 31 Dec 2018 Current portion 7.218 6.498 Non-current portion 0 0 Total 7.218 6.498
CASH AND CASH EQUIVALENTS AND BANK DEPOSITS The BAMC adheres to the principle of risk aversion in the management of liquidity reserves when making investment decisions. The BAMC therefore manages cash and its equivalents in accordance with the Investment policy on the management of liquidity reserves. This allows free cash to be invested in deposits with credit institutions in the Republic of Slovenia, an EU Member States or an OECD Member state.
Since cash and cash equivalents are held with “investment grade” financial institutions and taking into account the materiality BAMC does not recognise Expected Credit Losses’s (“ECL’s”) for cash and cash equivalents.
As at 31 December 2019, the BAMC held cash and cash equivalents in the amount of €85.135 thousand (as at 31 December 2018: €66.739 thousand). As at 31 December 2019, the BAMC held bank deposits in the amount of €24.523 thousand (as at 31 December 2018: €3.521 thousand). The BAMC estimates the credit risk from these financial instruments as rather low risk.
OFF-BALANCE EXPOSURES (GUARANTEES AND GUARANTEES GIVEN TO BORROWERS) With the merger of Factor banka, d.d. and Probanka, d.d., the BAMC also assumed off-balance exposures (guarantees). In 2019, the BAMC pledged a deposit with tha bank in the amount of €3.521 thousand for a bank guarantee issued for one BAMC borrower. The amount of the provision is calculated based on the probability of realization of the given guarantee by the bank. The BAMC manages this exposure according to their expected maturity. The decision to extend an individual guarantee is always an individual business decision and is subject to assessment on a case-by-case basis. An assessment depends on the existing collateral and possibility of obtaining additional collateral or, for example, the status of the originator.
OFF-BALANCE EXPOSURE AS AT 31 DECEMBER 2019 AND 2018 in € thousand 31 Dec 2019 31 Dec 2018 GUARANTEES Total outstanding amount 5.005 7.735 Provisions -1.420 -2.035 Credit exposure of off-balance exposure 3.585 5.700
GUARANTEES GIVEN TO BORROWER Total outstanding amount 3.521 - Provisions -1.704 - Credit exposure of off-balance exposure 1.817 -
Total outstanding amount of contingent liabilities 8.526 7.735 Credit risk of off-balance exposures 5.402 5.700
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OUTSTANDING AMOUNT OF GUARANTEES AND GUARANTEES GIVEN TO BORROWER BY EXPECTED MATURITY AS AT 31 DECEMBER 2019 AND 2018 in € thousand 31 Dec 19 31 Dec 18 Total outstanding amount expected to expire in 1 year 5.108 1.296 Expected to expire in Q1 of the following year 3.918 206 Expected to expire in Q2 of the following year 188 184 Expected to expire in Q3 of the following year 648 467 Expected to expire in Q4 of the following year 354 439 Expected to expire in 2 to 5 years 3.293 5.189 Expected to expire in more than 5 years 125 1.251 Total outstanding amount of contingent liabilities 8.526 7.735
D.3) LIQUIDITY RISK The liquidity risk is defined as the risk of losing earnings or capital due to an inability to meet obligations in time or in full when they fall due. The BAMC manages liquidity risks according to the Investment policy on the management of liquidity reserves. In managing liquidity risk, the BAMC adheres to the principle of prudence, risk aversion, optimal liquidity and profitability. In order to ensure sufficient liquidity reserves, the BAMC prepares weekly projections of expected cash flows.
In 2019, the BAMC repaid €132 million, in accordance with the current loan amortization plans, with an additional €15 million of early principal repayment, totalling €147 million.
The tables below show the maturity of BAMC’s liabilities as at 31 December 2019 and 2018.
MATURITY OF LIABILITIES AS AT 31 DECEMBER 2019 Contractual Carrying Up to 12 in € thousand undiscounted 1 to 2 years 2 to 5 years amount months Cash flows Liabilities with contractual 556.022 560.720 137.670 130.646 292.405 undiscounted cash flows Loans from banks 548.285 552.983 130.542 130.037 292.405 Trade and other operating liabilities 6.774 6.774 6.774 0 0 Rental liabilities 963 963 354 609 0
Liabilities without contractual 8.051 - - - - undiscounted cash flows Deposits received 920 - - - - Other financial liabilities 9 - - - - Provisions 7.122 - - - -
Total 564.073 560.720 137.670 130.646 292.405
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MATURITY OF LIABILITIES AS AT 31 DECEMBER 2018 Contractual Carrying Up to 12 in € thousand undiscounted 1 to 2 years 2 to 5 years amount months Cash flows Liabilities with contractual 700.762 701.113 140.377 269.263 291.474 undiscounted cash flows Loans from banks 695.017 695.368 134.632 269.263 291.474 Trade and other operating liabilities 5.745 5.745 5.745 0 0 Rental liabilities 0 0 0 0 0
Liabilities without contractual 7.671 - - - - undiscounted cash flows Deposits received 1.620 - - - - Other financial liabilities 9 - - - - Provisions 6.042
Total 708.433 701.113 140.377 269.263 291.474
D.4) MARKET RISK Market risk is the risk that changes in market prices – such as foreign exchange rates, interest rates and equity prices – will affect the BAMC’s results or the value of the BAMC-owned financial instruments. The objective of market risk management is to effectively manage and monitor market risks. The BAMC is exposed to market risk in the segment of financial assets measured at fair value through profit or loss, both in the loan portfolio and portfolio of equity investments. In addition, the BAMC is exposed to market risk through financial liabilities – borrowings and other financial liabilities due to interest rate risk.
Currency risk Currency risk is the financial risk of changes in the value of an investment due to foreign exchange rate changes. The BAMC is exposed to currency risk through a low portion of loans denominated in foreign currency, transferred and acquired from banks.
Only 0,3% of the carrying value of all the BAMC’s loans (€1.246 thousand out of €407.083 thousand) are denominated in foreign currencies, the vast majority of which are in Swiss francs. The BAMC assesses currency risk as very low and does not prepare a sensitivity analysis of changes in foreign exchange rates on profit or loss.
All the BAMC’s financial liabilities are denominated in EUR.
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EXPOSURE TO CURRENCY RISK AS AT 31 DECEMBER 2019 in € thousand EUR CHF USD RSD RUB JPY Total
Total exposed assets 522.713 1.134 76 1 1 34 523.959 Loans 405.837 1.134 76 1 1 34 407.083 Bank deposits 24.523 - - - - - 24.523 Trade and other operating receivables 7.218 - - - - - 7.218 Cash and cash equivalents 85.135 - - - - - 85.135
Total exposed liabilities 558.953 - - - - - 558.953 Trade and other operating liabilities 6.774 - - - - - 6.774 Borrowings and other financial liabilities 550.177 - - - - - 550.177 Other liabilities 2.002 - - - - - 2.002
Net Exposure 36.240 -1.134 -76 -1 -1 -34 34.994
NOTE: Label presentation: EUR: Euro; CHF: Swiss Franc; USD: US Dollar; RSD: Serbian Dinar; RUB: Russian Rouble; JPY: Japanese Yen.
EXPOSURE TO CURRENCY RISK AS AT 31 DECEMBER 2018 in € thousand EUR CHF USD RSD RUB JPY Total
Total disclosed items of assets 605.883 26.523 2.342 16 3 1.707 636.473 Loans 529.125 26.523 2.342 16 3 1.707 559.715 Bank deposits 3.521 0 0 0 0 0 3.521 Trade and other operating receivables 6.498 0 0 0 0 0 6.498 Cash and cash equivalents 66.739 0 0 0 0 0 66.739
Total disclosed items of liabilities 703.612 0 0 0 0 0 703.612 Trade and other operating liabilities 5.745 0 0 0 0 0 5.745 Borrowings and other financial liabilities 696.646 0 0 0 0 0 696.646 Other liabilities 1.221 0 0 0 0 0 1.221
Net Exposure 97.729 -26.523 -2.342 -16 -3 -1.707 67.139
Interest rate risk Interest rate risk is the risk of loss due to changes in market interest rates. The tables below show the structure of financial assets and liabilities according to fixed and variable interest rates. All variable interest rates are defined as EURIBOR or LIBOR + mark-up. Much of the loans that make up the largest portion of financial assets are already past due, as presented in the credit risk section of these disclosures. The key risk for the BAMC is the risk that the BAMC will not fully recover the value of the loans due to the low creditworthiness of the borrowers or insufficient collateral, and not due to changes in interest rates. Thus, the BAMC estimates interest rate risk as relatively low, and does not prepare a sensitivity analysis of changes in interest rates on profit or loss.
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INTEREST RISK EXPOSURE AS AT 31 DECEMBER 2019 Fixed interest Variable in € thousand Total rate interest rate Interest-bearing financial assets 352.144 164.596 516.740 Loans 242.487 164.596 407.083 Restructuring 97.233 116.829 214.062 Recovery 143.455 44.404 187.859 Collective valuation 1.798 3.363 5.161 Cash and cash equivalents 85.135 0 85.135 Bank deposits 24.523 0 24.523
Interest-bearing financial liabilities 0 548.285 548.285 Borrowings 0 548.285 548.285
INTEREST RISK EXPOSURE AS AT 31 DECEMBER 2018 Fixed interest Variable in € thousand Total rate interest rate Interest-bearing financial assets 469.164 160.811 629.975 Loans 398.904 160.811 559.715 Restructuring 145.115 110.701 255.816 Recovery 251.958 44.726 296.684 Collective valuation 1.831 5.384 7.215 Cash and cash equivalents 66.739 0 66.739 Bank deposits 3.521 0 3.521
Interest-bearing financial liabilities 0 695.017 695.017 Borrowings 0 695.017 695.017
On the other hand, in terms of financial liabilities, the impact of the change in the interest rate is an important factor for the loans taken out with banks at the end of 2016 and 2017. All loans taken have a variable interest rate, EURIBOR + mark-up. A change in EURIBOR would thus have a direct impact on the paid interests and on the income statement. The tables below provide a sensitivity analysis of one year’s change in EURIBOR on BAMC’s borrowings as an impact on interest expense as estimated as at 31 December 2019 and 2018.
EFFECT OF CHANGE IN INTEREST RATE ON INTEREST EXPENSES AS ESTIMATED AS AT 31 DECEMBER 2019 in € thousand Effect of change in interest rate on interest expenses Change in interest rate Increase Decrease 100 b.p. change 3.414 0 50 b.p. change 670 0 10 b.p. change 0 0
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EFFECT OF CHANGE IN INTEREST RATE ON INTEREST EXPENSES AS ESTIMATED AS AT 31 DECEMBER 2018 in € thousand Effect of change in interest rate on interest expenses Change in interest rate Increase Decrease 100 b.p. change 4.870 0 50 b.p. change 1.393 0 10 b.p. change 0 0
Borrowings are not sensitive to a decrease in interest rates, as loan agreements include a zero floor clause.
ELASTICITY OF COLLATERAL VALUE DUE TO MARKET CHANGES Sensitivity analysis of loans, collateralized with real estate Real estate, submitted as loan collateral plays an important role in determining the fair value of loans. The methodology for real estate valuation is described in Note 4.C and also applies to the valuation of real estate collateral.
Changes in the value of real estate presented as loan collateral also affect the fair value of loans; a sensitivity analysis of the change in the value of loans as at 31 December 2019 and 2018 is presented below.
SENSITIVITY ANALYSIS OF REAL ESTATE COLLATERAL AS AT 31 DECEMBER 2019 Impact on fair value of loans if Impact on fair value of loans if in € thousand Fair value of value of real estate changes by value of real estate changes by loans 10% 10% (in %) Increase Decrease Increase Decrease Restructuring 214.062 2.418 -2.590 1% -1% Recovery 187.859 13.803 -13.972 7% -7% Collective valued exposure 5.161 19 -27 0% -1% Total 407.083 16.240 -16.590 4% -4%
SENSITIVITY ANALYSIS OF REAL ESTATE COLLATERAL AS AT 31 DECEMBER 2018 Impact on fair value of loans if Impact on fair value of loans if Fair value of in € thousand value of real estate changes by value of real estate changes by loans 10% 10% (in %) Increase Decrease Increase Decrease Restructuring 255.816 2.713 -2.738 1% -1% Recovery 296.684 13.579 -13.615 5% -5% Collectively valued exposure 7.215 153 15 2% 0% Total 559.715 16.445 -16.338 3% -3%
IMPACT OF CHANGES IN THE VALUE OF REAL ESTATE COLLATERAL ON THE INCOME STATEMENT 2019 AND 2018 Profit or loss Profit or loss before tax, if value of real Profit or loss before tax, if value of real in € thousand before tax estate changes by 10% estate changes by 10% (in %) Increase Decrease Increase Decrease 2019 41.043 57.283 24.454 40% -41% 2018 63.006 79.451 46.668 26% -26%
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Loans with recovery strategy are significantly more sensitive to changes in the value of real estate collateral than restructuring cases. Such sensitivity is a consequence of the structure of expected future cash flows, since the majority of fair value of recovery cases comes from the liquidation of real estate and equity investments.
Sensitivity analysis of loans, collateralized with equity investments Equity investments, submitted as loan collateral also play an important role in determining the fair value of loans. The equity valuation methodology is described in Note 4. B and also applies to the valuation of equity collateral.
Changes in the value of equity investments presented as loan collateral also affect the fair value of the loans; a sensitivity analysis of the change in the value of loans as at 31 December 2019 and 2018 is presented below.
SENSITIVITY ANALYSIS OF EQUITY COLLATERAL AS AT 31 DECEMBER 2019 Impact on fair value of loans if Impact on fair value of loans if Fair value of in € thousand value of equity investment value of equity collateral loans collateral changes by 10% changes by 10% (in %) Increase Decrease Increase Decrease Restructuring 214.062 2.503 -2.503 1% -1% Recovery 187.859 1.251 -1.251 1% -1% Collectively valued exposure 5.161 - - - - Total 407.083 3.754 -3.754 1% -1%
SENSITIVITY ANALYSIS OF EQUITY COLLATERAL AS AT 31 DECEMBER 2018 Impact on fair value of loans if Impact on fair value of loans if Fair value of in € thousand value of equity investment value of equity collateral changes loans collateral changes by 10% by 10% (in %) Increase Decrease Increase Decrease Restructuring 255.816 756 -756 0% 0% Recovery 296.684 5.037 -4.669 2% -2% Collective impaired exposure 7.215 0 0 0% 0% Total 559.715 5.793 -5.425 1% -1%
IMPACT OF CHANGE OF EQUITY COLLATERAL BY 10% ON THE INCOME STATEMENT 2019 AND 2018 Profit or loss Profit or loss before tax, if value of equity Profit or loss before tax, if value of equity in € thousand before tax changes by 10% changes by 10% (in %) Increase Decrease Increase Decrease 2019 41.043 44.797 37.289 9% -9% 2018 63.101 68.894 57.676 9% -9%
Sensitivity analysis of equity investments, owned by BAMC BAMC measures its equity investments at fair value through profit or loss. Equity investment are subject to market risk only where fair value of equity investments is determined according to the market prices (in case of Fair value Level 1).
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SENSITIVITY ANALYSIS OF CHANGES IN MARKET PRICES OF EQUITY AS AT 31 DECEMBER 2019 in € thousand Fair value of Impact on fair value of equity if Impact on fair value of equity if equity market price changes by 10% market price changes by 10% (in %) Increase Decrease Increase Decrease Equity with valuation based 2.121 212 -212 10% -10% on market price Other equity 112.498 0 0 0% 0% Total equity 114.620 212 -212 0% 0%
SENSITIVITY ANALYSIS OF CHANGES IN MARKET PRICES OF EQUITY AS AT 31 DECEMBER 2018 in € thousand Fair value of Impact on fair value of equity if Impact on fair value of equity if equity market price changes by 10% market price changes by 10% (in %) Increase Decrease Increase Decrease Equity with valuation based 1.754 175 -175 10% -10% on market price Other equity 88.120 0 0 0% 0% Total equity 89.874 175 -175 1% -1%
IMPACT OF CHANGES IN MARKET PRICES OF EQUITY BY 10% ON THE INCOME STATEMENT 2019 AND 2018 Profit or loss Profit or loss before tax, if market prices Profit or loss before tax, if market prices in € thousand before tax of equity change by 10% of equity change by 10% (in %) Increase Decrease Increase Decrease 2019 41.043 41.255 40.831 1% -1% 2018 63.101 63.276 62.926 0% 0%
NOTE 31: RENTS In 2019, the BAMC had various lease agreements to lease business premises and vehicles.
in € thousand Business premises Vehicles Total Balance 1 Jan 2019 1.222 184 1.406 Increase 0 45 45 Amortisation -330 -14 -344 Derecognition 0 -144 -144 Impairment 0 0 0 Balance 31 Dec 2019 892 71 963
The following amounts are presented below in respect to leases:
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in € thousand
Leases in respect to IFRS 16 2019 Interest expense on lease liabilities 36 Income from sublet assets, recognized in other operating income 0 Expense relating to short-term leases 99 Expense relating to lease of low-value assets (without expense relating to short-term lease of low-value assets) 0 Gains and losses from sell-and-lease back transactions 0
Leases in respect to IAS 17 2018 Expense of operating lease 374 Contingent expense of operating lease 0 Income from sublet assets, recognized in other operating income 0
NOTE 32: EVENTS AFTER THE REPORTING PERIOD From 31 December 2019 until the date of issue of the auditor’s report, apart from the one, presented below, there were no other significant business events that would affect the amounts in the financial statements for the financial year 2019, or would require additional disclosures in the financial statements.
On 16 March 2020 BAMC repaid €26,2 million of long-term loans according to the amortisation plans.
On 2 June 2020 the Government, acting in the capacity of the BAMC General Meeting, recalled Tomaž Besek and Mitja Križaj from their positions as non-executive directors and appointed Alenka Urnaut Ropoša and Boris Novak as non-executive directors with their mandate lasting from 3 June 2020 to 31 December 2022.
On 15 June 2020 BAMC repaid €38,2 million of long-term loans according to the amortisation plans.
IMPACT OF THE COVID-19 EPIDEMIC On 11 March 2020, the World Health Organization declared an outbreak of the Covid-19 virus a pandemic; also, on 12 March 2020, the Government of the Republic of Slovenia declared an epidemic of Covid-19. Numerous measures have been taken to control the outbreak, all with the aim of slowing down the further spread of virus infection. As a result, since March 2020, some trade, tourism and manufacturing activities have slowed down or even stopped, and major automotive manufacturers and companies associated with it have temporarily suspended their operations.
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Due to the declaration of an epidemic, the Company faced the following challenges: . the implementation of real estate sight-viewing was prohibited by a government decree from 13 March 2020 to 4 May 2020; . inflows from realization of assets, sales and rents decreased significantly; . real estate buyers in the already approved sales have asked for an extension of payment deadlines due to uncertain situation; . refinancing of certain major borrowers, already announced and approved by commercial banks, was cancelled, especially in the tourism sector; . borrowers requested moratoriums and additional liquidity loans; . the interest of potential investors in purchasing receivables and equity investments has decreased, as an access to financing sources is difficult due to additional uncertainty; . due to restrictive measures, sales in bankruptcy and enforcement proceedings also stalled, and the proposed commencement of insolvency proceedings was suspended.
BAMC did not stop its operations during the epidemic, the management carried out a number of activities, including the following: . performing work from home for all employees; . consideration of applications for additional funding and / or moratoriums on borrowers with changed business conditions due to declaration of an epidemic; . preparation of a new plan of expected inflows and sales, as the basis for the supplementary financial plan 2020-2022; . cancellation of the early partial payment of the received loans from banks, which was planned for June 2020; . limiting costs to the minimum necessary and, in particular for the real estate owned, to those than cannot be deferred, and which will result in easier sales and / or higher selling price; . active preparation of new sales procedures and coordination of already agreed sales of owned real estate.
The duration of the epidemic and the associated cessation of certain trade, tourism and production activities, as well as uncertainty about the impact of economic and fiscal policies that will be and are already being implemented by the Government and the wider European community, are key elements of uncertainty for the Company.
Taking into account the analysis of the Bank of Slovenia (Analysis of the Effects of Covid-19 on the Slovenian Economy, March 2020) and the structure of BAMC’s portfolio as at 31 December 2019 and as at the date of approval of these financial statements for issue (especially equity investments and loans and receivables), we estimate the greatest impact of Covid-19 in service activities (especially tourism and in hospitality sector) and in manufacturing (mainly activities related to the automotive industry). Management assess that the above- mentioned effects at the time of issuance of the financial statements are reflected in a decrease in the fair value of equity investments (due to lower medium-term revenues, falling profitability, etc.) and fair value of loans and receivables (main factors being delay in repayment of operating liabilities (moratoriums) and decreased probability of realization of restructuring scenario/increased probability for recovery scenario (lower DPS probabilities as one of the input in the model for loans fair value valuation).
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Assumptions used in assessing potential impacts Any decrease in expected inflows from the realization of collateral (real estate and equity investments) and increased business risk of the borrowers, and their exposure to the effects of the outbreak, would be reflected in the fair value of loans and receivables.
Where restructuring scenario has been considered in arriving at fair value of a loan, reduced probability of realization of the restructuring scenario/probability for recovery due to the current outbreak would also have an adverse effect on the fair value of the loan.
In equity investments, we assumed that the fall in industry stock indices is the best indication of the potential decline in the value of the Company’s investments since the beginning of the outbreak, as we assume that that the value of entities in the same industry should generally follow that of its peers.
In the area of real estate, we observe a decrease in liquidity in the market, which is reflected in the delay in the realization of transactions. The real estate market reacts with a lag to the fall in GDP, and its condition varies significantly depending on the type of real estate, hence we assessed that the fall in GDP has not yet impacted real estate values included in the financial statements at the year-end by the time of issuance of financial statements.
Loans and receivables As at 31 December 2019, BAMC had loans and receivables in its portfolio at total fair value of €407.083 thousand, segmented into portfolios of restructuring, recovery and collective valued exposures as presented below.
in € thousand 31 Dec 2019 Fair Value Number of borrowers Restructuring 214.062 39 Recovery 187.859 522 Collectively valued exposure 5.162 473 Total 407.083 1.034
During the epidemic, BAMC experienced significant demand for the approval of moratoriums, deferrals or additional debt repayment agreements by borrowers included within the restructuring portfolio. In such cases, BAMC individually assessed (on the basis of the disclosed financial data or business projections) whether there is a negative impact of the epidemic on the given borrower’s operations. In some cases, where BAMC is both a creditor and an owner, it has also decided on additional liquidity assistance to ensure sustainability of borrower’s operations. Within the restructuring borrowers, the impact of the epidemic is mainly reflected in the delay of previously planned payments by borrowers at least for the period specified in the newly concluded debt repayment agreements.
In the recovery portfolio, the majority of inflows generally come from insolvency proceedings (mostly enforcement and bankruptcy proceedings). In such cases, the Company faced a temporary suspension of the work of the courts, which meant a delay in the implementation of insolvency proceedings. The delay in the implementation of otherwise already adopted court decisions affected significantly lower inflows from the realization of pledged collateral. No new insolvency proceedings were initiated during the epidemic, and bankruptcy trustees also had considerable difficulties in their work (inability to start an auction for pledged assets). Accordingly, BAMC sees the impact of the epidemic mainly in the delay of previously planned inflows
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within the borrowers' portfolio. So far, the BAMC has not detected a drop in the prices of pledged assets sold in insolvency proceedings.
Within the portfolio of collectively valued exposures, BAMC does not experience significant effects of the epidemic, as the portfolio represents a pool of smaller borrowers, where inflows come mostly from liquidating collateral, so the impact of the epidemic is similar to the one described above for the recovery portfolio.
Management recognizes the probability that due to the negative impact of the Covid-19 epidemic, any of the debtors with the assigned restructuring strategy could face additional business difficulties, so it prepared a simulation of a 10 percentage point drop in the probability of the restructuring strategy (DPS probability, more about DPS probability see under Note 4 Critical Accounting Estimates and Judgements / A Methodology for valuation of loans / Individual valuation on Borrower basis). Management believes that such a scenario is most likely in the context of an epidemic and at the same time demonstrates a high level of impact on the borrowers' portfolio with a restructuring strategy.
DPS SENSITIVITY ANALYSIS The effect of change of The effect of a change of Fair value of loans as at in € thousand DPS by 10 p.p. to the fair DPS by 10 p.p. to the fair 31 December 2019 value of loans value of loans (in %) Restructuring 214.062 -112.611 -52,6% Recovery 187.859 103.034 +54,8% Collectively valued exposure 5.161 - - Total 407.083 -9.577 -2,3%
Therefore, an assumed 10 percentage points drop in the DPS likelihood of restructuring would lead to a decrease in the fair value of loans in the amount of €9.577 thousand as at 31 December 2019. BAMC would lose the projected inflows from the restructuring scenario, but at the same time gain additional ones from the collateral realization scenario, so that the net effect would be an estimated net decrease in total fair value of 2,3%.
Equity investments When assessing the effects of Covid-19 epidemic on the fair value of equity investments, we considered the performance of stock exchange indices for specific industries (in the first half of 2020), in which individual companies from our equity investments portfolio operate and for the remaining smaller equity investments, general local stock exchange indices were used.
Since the Company prepares fair value valuation for equity investments at the annual balance sheet date only, we assessed using indices is a reasonable approximation of impact of trends in value until time of issuance of financial statements.
For the purpose of illustrating the expected effects of the outbreak on fair values of equity investments, we performed the segmentation of fair value of the investments portfolio by industries as at 31 December 2019 (no major changes occurred in the structure and size of the portfolio till the time of the issuance of the financial statements) supplemented with the information about the development in the stock exchange indices observed in first half of 2020:
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Stock exchange indices in € thousand 31 Dec 2019 perceived in 1-6/2020 Fair value in % Companies with headquarters in Slovenia 105.209 Tourism 71.718 -36% Production and manufacturing (mostly chemical) 19.578 -2% Energy other 2.121 -13% Media 7.158 -17% Electricity and water supply 2.399 -8% Professional services 332 -8% Financial activities 319 -8% Other 1.583 -8%
Companies with headquarters abroad 9.410 -8% Total 114.620
Real estate The outbreak is also expected to have an impact on the real estate market, but we have not observed a significant drop in prices between the onset of the epidemic and the date these financial statements were authorized for issue, however, in our view, this is in part due to the decline in the number of real estate transactions. While same market participants predict a fall in real estate prices in the foreseeable future, due mainly to the past correlation between GDP decline and falling real estate market segments, in management’s view, it is not unreasonable to assume that the ECB's expansionary monetary policy may cause the liquidity in the market to be directed to various investment classes and lead to a marked increase in value both in the capital markets and in the real estate market. Therefore, e.g. currently, European REIT indices are at double-digit growth, despite existing forecasts of economic contraction.
The actual level of BAMC’s sales of owner real estate in the first half of 2020 was close to the level of such sales for the full-year of 2019. Demand for real estate has not changed significantly, but potential buyers are much more cautious in their final purchase decisions or postpone the purchase decision due to current uncertainty, as many stakeholders believe that prices will fall in the future. However, the prices of transactions, which have been finalized in the current conditions, are at a similar level as before the epidemic.
High interest remains in real estate intended for logistics and land for development, as such buyers show long- term interest, and the offer of such real estate is limited. There is a smaller decline in demand from individuals, mainly due to stricter restrictions on access to sources of financing.
The most noticeable impact of the Covid-19 epidemic was reflected in the difficulties of certain major investors in obtaining financial resources, as a result of which BAMC was forced to extend payment deadlines in certain cases. Liquidity problems were also encountered by a number of tenants who were forced to suspend operations due to the government restrictions during the epidemic.
Regardless of the trends in the first half of the year, there is significant uncertainty as to the market’s direction in the second half of the year. We expect the most affected industry to be tourism, and consequently we also expect lower demand for real estate for this purpose.
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Proceeds from asset realization Inflows from the realization of all types of assets were well below their planned level in the first five months of the year. In April and May 2020, only a little over €4 million were realized. Cumulatively, the amount of inflows in the first five months of 2020 approximated €47 million, which is 32% of the projected value for the whole of 2020.
With the development of circumstances related to the Covid-19 pandemic, the situation is volatile for most borrowers and companies owned by BAMC and consequently for the Company itself. The lower inflows are due to both stagnant demand for assets that are for sale or in bankruptcy proceedings, as well as requests from borrowers for repayment moratoriums, tenants for rent reductions, and requests for additional liquidity funding. Thus, a revision of the company's financial plan was prepared, which addressed the new business circumstances. The ultimate amount of lost inflows, revenues and their impact on the company's business results will depend on the duration and changes in severity of the epidemic and resulting government measures, and on the shape of the economy’s recovery after the outbreak.
Liquidity risk According to the existing amortization plans for the loans received, in 2020, € 128,6 million of principal with accrued interest is scheduled fall due. The principal is repaid quarterly or semi-annually, the instalments in March and June 2020 have already been repaid, which means that another €64,3 million of loan principal must be paid by the end of the year.
Given the balance of already available funds (either in a transaction account or in the form of bank deposits), we estimate that the Company will be able to settle liabilities to banks and other outflows related to the company's operations in the foreseeable future, regardless of reduced expected inflows, that is also under severe but plausible scenarios considered by management.
The above-mentioned revision of the financial plan was based on re-examined expected inflows for all three portfolios, in the case of real estate and equity investments for the period beyond the end of the planned operation of the company, and for receivables, in changing circumstances, until the end of the current year. The projections were prepared in a baseline and conservative scenario, and in both BAMC had a sufficient level of liquidity in the current and in the coming years to cover all its liabilities.
Conclusion In the months since the outbreak of the epidemic, the Company has seen significantly reduced inflows from the realization or sale of assets, but we expect that the risks to which the Company is exposed due to the epidemic represent a threat to its uninterrupted operations. However, we do anticipate that the year 2020 will end with lower amounts of inflows from the realization of funds and poorer business results compared to those achieved in 2019.
In management’s view, the above factors support the assertion that the Company will have sufficient resources to continue for a period of at least 12 months from the reporting date. Management concluded that the range of possible outcomes considered at arriving at this judgment does not give rise to material uncertainties related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern.
Management cannot however preclude the possibility that reimposed lock down periods, an escalation in the severity of other government measures, or a consequential adverse impact of such measures on the economic
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environment the Company operates in will have an adverse effect on the Company, and its financial position and operating results, in the medium and longer term. We continue to monitor the situations closely and will respond to mitigate the impact of such events and circumstances as they occur.
NOTE 33: RELATED PARTY TRANSACTIONS The ownership interests as at 31 December 2019 are presented in Note 7. Related parties are, in addition to the Government of the Republic of Slovenia as a 100% owner, deemed to be the following companies: . Subsidiaries and associates; . Companies associated with the management and members of the Board of Directors, including the Audit Committee members and their close family members; . Companies associated with the Government of the Republic of Slovenia.
FROM JANUARY TO DECEMBER 2019 BAMC DID BUSINESS WITH RELATED PARTIES Companies in € thousand Subsidiaries Associates associated with the owner (RS)
Financial assets at fair value through profit or loss (loans) Opening balance 1 Jan 2019 68.608 11.228 18.121 Increase 28.107 55.981 6.133 Decrease -23.044 -58.211 -4.213 Closing balance 31 Dec 2019 73.671 8.998 20.041
Deposits Opening balance 1 Jan 2019 0 0 3.521 Closing balance 31 Dec 2019 0 0 3.521
Financial assets at fair value through profit or loss – Equity investments Opening balance 1 Jan 2019 52.007 9.002 0 Increase 53.156 3.852 0 Decrease -19.156 -7.470 0 Closing balance 31 Dec 2019 86.007 5.384 0
Borrowings Opening balance 1 Jan 2019 0 0 477.474 Decrease 0 0 -82.526 Closing balance 31 Dec 2019 0 394.947
Income from loans 1.744 3 0 Income from equity investments 315 88 3.527
Interest expense from borrowings Interest expense from borrowings and guarantee given to the 0 0 -8.234 borrower
Other income and costs Other costs 0 -40 -456 Other income 2 0 15
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As at 31 December 2019, the amount of guarantees granted to subsidiaries amounts to €3.591 thousand.
FROM JANUARY TO DECEMBER 2018 BAMC DID BUSINESS WITH RELATED PARTIES Companies in € thousand Subsidiaries Associates associated with the owner (RS)
Financial assets at fair value through profit or loss (loans) Opening balance 1 Jan 2018 81.794 34.326 29.614 Increase 12.384 19.365 3.134 Decrease -25.570 - 42.463 -14.627 Closing balance 31 Dec 2018 68.608 11.228 18.121
Deposits Opening balance 1 Jan 2018 0 0 3.521 Closing balance 31 Dec 2018 0 0 3.521
Financial assets through profit and loss – Equity investments Opening balance 1 Jan 2018 25.019 6.445 0 Increase 8.502 0 0 Decrease 0 -4.089 0 Closing balance 31 Dec 2018 33.521 2.356 0
Borrowings Opening balance 1 Jan 2018 0 0 607.332 Decrease 0 0 -129.858 Closing balance 31 Dec 2018 0 0 477.474
Income from loans 2.531 839 3.721 Income from equity investments 3.694 16 6.147
Interest expense from borrowings Interest expense from borrowings and guarantee given to the 0 0 -10.692 borrower
Other income and costs Other costs -1.111 0 -587 Other income 50 0 0
The BAMC did not undertake business activities with companies that are associated with the BAMC Board members, including the Audit Committee and their immediate family members.
NOTE 34: AUDIT COST The cost of the audit of the financial statements for the financial year 2019 amounted to €81.015 plus VAT (for 2018 €81.015 plus VAT).
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Cost of other non-audit services charged by KPMG for financial year 2019 to the BAMC is €0 (in 2018 €18.600 plus VAT).
NOTE 35: CONTINGENT LIABILITIES
in € thousand 31 Dec 2019 31 Dec 2018 Contingent liabilities for lawsuits 63.661 0 Contingent liabilities for bank guarantees issued 5.005 7.566 Contingent liabilities for guarantees given 4.894 0 Contingent liabilities for guarantees given to buyers in sale procedure of equity 3.700 0 investments Total 77.260 7.566
A) CONTINGENT LIABILITIES FOR LAWSUITS Contingent amounts in connection with unresolved legal proceedings in the amount of €63.661 thousand represent legal claims, increased by €10 thousand in each individual lawsuit. We estimate that €10 thousand is the appropriate average amount, which in the event of the loss of the lawsuit covers the litigation costs of the average litigation and the related default interest, which the BAMC should reimburse to the opposing party. In the case of labour disputes, we estimate the average litigation costs, which should be reimbursed to the plaintiff, at €3 thousand.
An amount of €3.185 thousand of probable liabilities for lawsuits is recognised as provisions for lawsuit (see note 18).
B) CONTINGENT LIABILITIES FOR BANK GUARANTEES ISSUED in € thousand 31 Dec 2019 31 Dec 2018 From the merger of Factor banka 1.458 2.895 From the merger of Probanka 3.495 4.619 Other 52 52 Total 5.005 7.566
Recognised in provision for bank guarantees issued -1.420 -2.036 Contingent liabilities 3.585 5.530
The table shows contingent liabilities with respect to approved but yet unredeemed or unexpired guarantees. All outstanding guarantees were assumed in the merger with Factor banka and Probanka.
CURRENT AND NON-CURRENT PORTIONS OF CONTINGENT LIABILITIES FOR BANK GUARANTEES ISSUED in € thousand 31 Dec 2019 31 Dec 2018 Current portion 1.587 1.126 Non-current portion 3.418 6.440 Total 5.005 7.566
The amount of €1.420 thousand of provisions recognised for guarantees is based on past experiences and is in accordance with internal methodology (see note 18).
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C) CONTINGENT LIABILITIES FOR GUARANTEES GIVEN in € thousand 31 Dec 2019 31 Dec 2018 Guarantees in the form of pledged deposits 3.625 - Guarantees from issued bills of exchange 1.269 - Total 4.894 -
Recognised in other provisions -1.704 0 Contingent liabilities 3.190 4.894
Of the total amount of contingent liabilities, the amount of €1.704 thousand is recognized on the balance sheet, among other provisions (see Note 18).
D) CONTINGENT LIABILITIES FOR GUARANTEES GIVEN TO BUYERS IN SALE TRANSACTIONS OF EQUITY INVESTMENTS Contingent liabilities for guarantees given to buyers in sale procedure in the amount of €3.700 thousand represent maximum amounts, to which buyers of equity investments are entitled in the event of established violations of warranties given by the seller at the time of concluding the sales contract. The total amount of contingent liabilities relates to three equity sale transactions.
Of the amount of contingent liabilities for guarantees given to buyers in sale procedure of equity investments, the amount of €100 thousand is recognized on the balance sheet, among other provisions (see Note 18).
NOTE 36: ACQUISITION OF ASSETS OF 100% OWNED COMPANIES WHICH DISSOLVED AFTER A SHORTENED PROCEDURE WITHOUT WINDING-UP In 2019, the BAMC carried out the dissolution of two companies under a simplified procedure without winding- up that were 100% owned (14 May 2019 Avtotehna, d. o. o. ; 26 November 2019 NPL Port , d. o. o. ). On the day of the dissolution of the companies, it took over the assets and liabilities of both companies.
GENERAL DATA OF THE COMPANIES Name of the acquired company Avtotehna d.o.o. NPL Port d.o.o. Litijska cesta 259, 1261 Ulica Vita Kraigherja 5, 2000 Business address of the acquired company Ljubljana - Dobrunje Maribor Identification number 5004209000 6850782000 Ownership DUTB d.d. (100%) DUTB d.d. (100 %) Date of entry of company’s termination in the 14.05.2019 26.11.2019 court register Book value of the assets on the date of dissolution €18.743 thousand €1.133 thousand Book value of equity on the date of dissolution €15.222 thousand €1.065 thousand
The assets and liabilities of the dissolved companies were taken over by the BAMC and recognized in the BAMC’s books as presented below:
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SIMPLIFIED BALANCE SHEETS OF THE TWO COMPANIES ON THE DATE BEFORE DISSOLUTION: in € thousand Avtotehna NPL Port Total
Total assets 18.743 1.133 19.876 Cash and cash equivalents 15.035 604 15.639 Other assets Equity investments 42 0 42 Property, plant and equipment and Intangible assets 94 501 595 Trade and other receivables 3.572 21 3.593 Deferred costs 0 7 7
Liabilities total 3.521 68 3.589 Trade and other operating payables 21 55 76 Provisions 3.500 13 3.513
Difference between total assets and total liabilities 15.222 1.065 16.287
in € thousand Avtotehna NPL Port Book value of equity investment in BAMC financial statements on the date of 13.801 420 termination of the subsidiary Difference between total assets and total liabilities of subsidiaries 15.222 1.065 Total effect recognised in equity 1.421 645
The total positive effect recognized in the financial statements for 2019 and resulting from acquisition of assets and liabilities of Avtotehna, d. o. o. and NPL Port, d. o. o. amounts to € 2.066 thousand.
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