Survey of key data Survey of key data Raiffeisen Group (IFRS compliant) Monetary values in HRK milions 2011 Change 2010 2009 Income statement Net interest income 1,341 2.37% 1,310 1,165 Net commission income 413 (6.35%) 441 385 Trading profit (loss) (64) (146.38%) 138 329 Administrative expenses (1,287) (12.75%) (1,475) (1,373) Profit before tax 387 (26.98%) 530 500 Profit after tax 305 (29.07%) 430 390 Consolidated profit 302 (28.94%) 425 379 Balance Sheet Loans and advances to banks 1,851 (49.86%) 3,692 2,273 Loans and advances to customers 27,049 1.86% 26,556 25,715 Deposits from banks 766 0.66% 761 588 Deposits from customers 23,245 3.70% 22,415 21,192 Borrowings 9,562 (20.14%) 11,974 13,943 Equity 5,743 (1.24%) 5,815 5,538 Balance-sheet total 41,184 (4.24%) 43,009 42,621 Regulatory own funds Total own funds 5,420 (2.69%) 5,570 5,269 Own funds requirement 3,887 (2.90%) 4,003 3,784 Excess cover 39.45% 0.30p.p. 39.15% 40.25% Core capital ratio 16.92% 0.06p.p. 16.86% 14.03% Own funds ratio 16.73% 0.03p.p. 16.70% 13.92% Performance Return on equity (ROE) before tax 7.01% (2.69p.p.) 9.70% 9.31% Cost/income ratio 61.85% 1.82p.p. 60.03% 57.47% Earnings per share (HRK) 83 (29.06%) 117 102 Return on assets (ROA) before tax 0.92% (0.32p.p.) 1.24% 1.16% Provisions for possible loan losses/risk weighted assets 5.30% 1.66p.p. 3.64% 2.19% Resources Number of stuff on balance-sheet date on December, 31 2,393 (4.96%) 2,518 2,502 Banking outlets on balance-sheet date on December, 31 73 (2.67%) 75 75 2 www.rba.hr Contents Contents Introduction 4 Letter from the Management Board Chairman 4 Statement by the Supervisory Board Chairman 7 Macroeconomic climate 9 2011 Business Developments 17 Officers of the Bank 18 Market position 20 Bank operations 23 Group operations 26 Raiffeisen Bank International Group 29 Glossary 34 Financial Statements 35 Statement of the Management and Supervisory Board’s responsibilities 36 Independent auditors’ report 37 Consolidated statement of financial position 39 Consolidated statement of comprehensive income 41 Consolidated statement of changes in equity 42 Consolidated statement of cash flow 43 Unconsolidated statement of financial position 45 Unconsolidated statement of comprehensive income 47 Unconsolidated statement of changes in equity 48 Unconsolidated statement of cash flow 49 Notes to the financial statements 51 Appendix I Regulatory forms requested by the Croatian National Bank 151 Supplementary financial statements 162 Contacts 169 Branch network in Croatia 170 Addresses and contacts for Raiffeisen Bank International Group members 174 www.rba.hr 3 Letter of the Management Board Chairman Letter of the Management Board Chairman It is my pleasure, on behalf of the Management Board of Raiffeisenbank Austria d.d., to present the key figures from the 2011 Annual Report, which has been audited by Deloitte international auditors. The results achieved by the Bank and the local Raiffeisen Group are a statement of the business policy adjustment to changes in market conditions. Specifically, the business results of financial institutions largely reflect the difficulties faced by the economy. At the end of yet another year without economic growth, we find that a difficult environment is becoming a somewhat permanent feature of business in the Croatian financial market. Demand for financial products and services has weakened while the share of non-performing loans in the banks' total loan volume has increased. However, the results achieved in the first half of the year gave no indication of a new deterioration of business conditions that was to follow in the second half. Financial markets in the region were stable in the first half of 2011, with an unhampered movement of capital across borders. In June, Croatia successfully ended its long negotiations on accession to the European Union. The accession treaty was signed late in the year, and July 2013 confirmed as the definite membership date to follow a ratification of the accession treaty by all member states. The completion of negotiations at the end the first half led to a surge of optimism among entrepreneurs, previously reinforced by a stabilisation of risk premiums on Croatian debt instruments. The entrepreneurial optimism reflected itself in the confidence of foreign investors. The terms of financing of the central government and the financial sector in international markets improved, as did the supply and cost of capital in the domestic financial market. As a result, lending rates declined, enabling a slight increase in production and employment in the economy after two years of recession. The second half of the year was marked by growing instability in international financial markets. The debt crisis in the peripheral eurozone member states fuelled renewed fears among investors, who seek "safe havens" for their capital these days instead of investing in high-risk markets. Greater risk aversion widened the gap between the risk premium of the countries with lower credit ratings and those of first-rate borrowers. Croatia's risk premium doubled compared to the average level in the first half of the year. An increase in the cost of external funding scattered any signs of recovery seen in the summer and pushed the economy back towards a new wave of recession. Therefore, positive effects of the government subsidies for working capital loans to businesses were erased by the negative trends spilling over from international financial markets to the local market. In 2011, Raiffeisenbank maintained its position as one of the leading banks in the Croatian market. Together with the local Group, we provide a complete range of financial products and services to our clients. Through an extensive distribution network, consisting of 73 outlets and alternative electronic distribution channels, we enable access to competitive products and services to clients of all profiles. In the corporate segment, state incentives to the financing of working capital were relaunched and modified 4 www.rba.hr Introduction 2011 Business Developments RBI Group Financial Statements Suplementary Financial Statements Contacts Letter of the Management Board Chairman under the so-called Model A+. Their modifications were aimed at further reducing the credit risk of enterprises while boosting their demand for bank loans. The year's first half saw a decline in average interest rates on corporate loans. However, small and medium-sized enterprises found it increasingly difficult to meet the banks' credit criteria. Therefore, we sought ways to boost their financing within the local Raiffeisen Group via factoring for working capital purposes and via leasing for investments in fixed assets. A contraction of household sector demand for loans continued to plague last year. It stems from an increasing aversion to borrowing in that segment. As demand shrank, Raiffeisenbank invested additional efforts into business process improvements and enhancing the service quality while at the same time maintaining the stability of its loan portfolio by intensifying collection activities with regard to non- performing loans. Client fear of further borrowing is based on recent experiences. As currency risks materialised, borrowers faced an increasing burden of loan repayments. A continued employment decline coupled with an expected drop of real wages to reinforce fears among potential borrowers. Following the summer appreciation of the Swiss franc against the kuna, the Swiss central bank intervened in September to halt the franc exchange rate advance against the euro, therefore also halting its advance against the kuna. However, this only helped reduce the level of uncertainty of the borrowers exposed to the franc exchange rate rather than actually easing the burden of loan repayment. Thanks to the persistent efforts of the Croatian National Bank to maintain the kuna stable against the euro, the burden of repaying the loans indexed to the euro did not worsen significantly, but long-term loan demand in this segment did not recover either. Prevailing fears among already indebted citizens of a further decline in living standards and the potential inability to make loan repayments in the future leads to a postponement of durable goods purchases. The operations of other members of the Raiffeisen Group depend on the potential of the market segment in which they operate to absorb specific financial products or services. The leasing business is affected by demand for fixed assets. The absence of demand growth in the goods and services market has prompted companies to postpone planned investment in capital goods. Therefore, the demand for long-term financial products, and leasing products in particular, has also weakened. The performance of investment and pension funds is related to developments in capital markets. Most of the portfolio of pension funds is invested in debt instruments of the Republic of Croatia. Rising sovereign risk premiums in the second half of 2011 resulted in a reduction in the price of government debt. This reduced the funds' net asset value. The dominant share of sovereign risk in the overall portfolio of pension funds has led to negative returns at the end of the year. A decline in the value of financial assets has heightened investor uncertainty, reducing the assets value of investment funds too. The Raiffeisen Group's 2011 profit after tax was 305 million kuna. Smaller trading profit and other non- interest income had the greatest impact on the business results in the reporting period. Declining market prices of financial assets contributed to a profit fall of 125 million kuna compared to the previous year. The fee income of non-bank members of the Group depends on the movements of assets under management.