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K O M E R C I J A L N A B A N K A A D B U D VA AANNNNUUAALL RREEPPOORRTT 22000099 Budva, April 2010 Komercijalna banka ad Budva Annual Report for 2009 Budva, 30 April 2010 ANNUAL REPORT FOR 2009 In accordance with the Law on Banks, the Statute, the Bank’s business policies, as well as International Accounting Standards, we hereby adopt the Annual Report on Operations for 2009, together with the Audit Report on the Financial Statements for 2009, with the expressed external auditor’s opinion and consideration of the key operating indicators for 2009. The Bank’s operations during 2009 can be characterized as very difficult and complex, operating under financial crisis conditions. The effects of the global economic crisis which is gripping the entire world economy were felt in Montenegro in the last quarter of 2008. Increased credit growth during 2007 and the first half of 2008, coupled with unparalleled growth in stock exchange operations, multiplied the effects of the financial crisis in the country. There is a marked reduction in foreign direct investments and an increase in the price of funding sources. This led to a slowdown in economic activity, low liquidity of entities and delays in settling liabilities. The psychological effects of the financial crisis resulted in increased withdrawal of deposits, particularly retail deposits. This impacted the Bank’s liquidity and operation of the banking system as a whole, impacting our Bank’s operations. The effects of the world economic crisis spilled over into 2009 to the real sector, so that the recession, whose effects are felt in the economies of many countries, is also being reflected in the macroeconomic business conditions in Montenegro. According to the Montenegrin Government’s Ministry of Finance and based on IMF estimates, the gross national product registered a drop of 7% in 2009, while the GDP dropped by 5.3%, which is significantly above the forecasted drop of 2%. Also, a significant decrease in industrial production was registered, with a decrease in economic activities, construction, forestry, transport and trade. In its report the IMF estimated the GDP drop in Montenegro to be 7 percent. Where the Montenegrin economy is concerned, the banking and industrial sectors were hardest hit. Although the banking sector maintained its stability, credit activities registered a negative trend that contributed to stagnation of the economy. For this reason renewal of this segment will largely be determined by tendencies in the real sector, as well as by room for realising economic policy objectives for 2010, through adoption of new finance legislation and new models for jumpstarting credit activity, the economy, but above all, through strengthening of aggregate demand and investment spending. On a global level, the epicentre of the global financial and economic crisis is the banking sector. Governments and central banks reacted to the grave challenges facing the banking sector through determined actions with a view to renewing stability of the banking sector and of the economy. Unfavourable business trends at macroeconomic level caused by the global financial crisis impacted the operation of the banking sector as a whole. The first half of the year was marked by negative trends in the principal operating indicators of banks, which continued into the third quarter of 2009, but with a slight drop in particular balance sheet items, with a halt in the drop and increase in particular balance sheet items in the fourth quarter. The negative effects on the banking sector were reflected in the operating indicators of our Bank during 2009. Due to withdrawals of deposits and a drop in foreign direct investments, the lack of liquid assets 1 Komercijalna banka ad Budva Annual Report for 2009 at the end of 2008 and 2009 impacted the increase in the price of funding sources. This led to a slowdown in economic activity, worsening liquidity and delays in settling liabilities by corporate and retail clients. Significant worsening in client classifications led to an increase in risk placements, matured liabilities and costs of credit losses. This impacted the increase in costs and the Bank’s operating result, so that during the year the Bank reported a loss for the first time since its opening, but disclosed a profit by the end of the year. In accordance with business policy and the founder’s policies, in response to significant events caused by the effects of the financial crisis at macroeconomic level and at the level of the banking market in Montenegro, the Bank initiated the drafting of a Business Plan for the Period 2010-2012, and adjusted forecasts of the Bank’s operations up to 2011 as indicated in its Business Strategy. The basic characteristics of the current and future operations of the finance sector in Montenegro significantly determine the Bank’s strategy and future operations, and are closely linked to: - Programs and measures of the Montenegrin Government; - Effective statutory regulations; - Effective policies of the Central Bank of Montenegro and its decisions; - Business environment and activities of competitors; - Expected future activities of competitors; - Business activities of companies and their liquidity; - The majority shareholder’s business policy and strategy. The Bank’s business plan in the upcoming period will be directed at operating under market conditions, with observance of fundamental principles of banking. The strategic decision is for the Bank to operate as a stable and profitable institution that will contribute to the stability of the Montenegrin banking system. Market and macroeconomic conditions in Montenegro largely determine the Bank’s development policy, which inevitably leads to the need for improving operations and overcoming the negative effects of the financial crisis. The Bank’s basic objective in the upcoming period, in view of the conditions on the banking market, stiff competition and operating in the midst of the global financial crisis, is to maintain its current market position in 2009, with a tendency of increasing credit activity, and therefore slight increase in balance sheet assets and market share, as set out in the Bank’s Business Plan up to 2012. Achieving the targeted market share through growth in balance sheet assets requires funding sources to be secured in 2010 though increase in deposits, securing additional funding through long-term loans and through capital increase of the Bank, with extending loan funds to profitable projects of medium and small sized companies, and to attractive, large projects through joint ventures with the founders. Key measures to be undertaken for realising the Bank’s objectives in the coming period for maintaining stability of market position and profitability of operation will comprise: Satisfying client needs and requirements with higher level of quality; Introducing new and modernised products and services; Developing business networks; Maintaining competitive interest rates. In terms of objectives that impact the income statement, it is crucial for the Bank to maintain its competitiveness in terms of interest rates on assets and liabilities, with a tendency toward reducing net interest margins, but with a significant increase in business volume, with a similar trend being projected 2 Komercijalna banka ad Budva Annual Report for 2009 for commission income. On the other hand, increase in the Bank’s profits primarily depends on provision expenses for loan losses that are directly dependant on statutory regulations and the client’s creditworthiness. The Bank’s basic objective is to achieve positive financial results by the end of the projection period and to realise satisfactory indicators of return on assets and equity within limits set by statutory regulations and the Bank’s and founder’s business policy, with increase in overall business volume, efficiency and profitability. With a view to achieving set financial targets in terms of asset quality and deposit potentials, the Bank increased interest on term deposits as of September 2008 in order to balance maturities of its assets and liabilities. This trend was attended by a reduction in the loan period of newly approved loans, as well as by interest rates, depending on sources of assets and creditworthiness of the loan applicant. In order to ensure matching maturities between assets and liabilities based on the new Decision on Liquidity Risk Management, at the end of 2008 the founder’s short-term deposits were transformed into long-term loans in the amount of 17 million EUR. During 2009, owing to a stable liquidity position, liabilities related to the founder’s loan were reduced by 6 million EUR, with resultant decrease in interest expense. On the other hand, worsening liquidity of the Bank’s clients created problems in respect of collection and led to a deterioration in their credit rating. This was reflected in the increase in provisions expenses for loan losses, with resultant decrease in profits. With a view to overcoming the negative effects related to the effects of the economic crisis, the Bank undertook the following measures during the previous year: maintaining the liquidity position, through a policy of retaining deposits and attracting new ones, restrictive policy of short-term loan approval that reflects maturities of funding sources and the loan beneficiary’s credit worthiness, intensifying collection measures for matured and unsettled liabilities through warnings, activating guarantees and initiating court procedures, activating

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