Privredna banka Zagreb dd Annual report 31 December 2017 PRIVREDNA BANKA ZAGREB dd Table of contents Introduction ............................................................................................................................................... 3 Report from the President of the Supervisory Board ................................................................................ 6 Management Board report of the Status of the Bank ................................................................................ 8 Management Board report for the Group ............................................................................................... 12 Macroeconomic developments in Croatia in 2017 ................................................................................. 16 Business description of the Bank ............................................................................................................ 22 Business description of the Group .......................................................................................................... 36 The statement on the implementation of corporate governance code .................................................... 40 Separate and consolidated financial statements and Independent Auditor's report Responsibilities of the Management and Supervisory Boards for the preparation and approval of the separate and consolidated financial statements and other information ................................... 57 Independent Auditors’ report to the shareholders of Privredna banka Zagreb dd ........................ 58 Income statement ........................................................................................................................... 65 Statement of comprehensive income ............................................................................................. 66 Statement of financial position ...................................................................................................... 67 Statement of cash flows ................................................................................................................. 69 Statement of changes in equity ...................................................................................................... 71 Notes to the financial statements ................................................................................................... 74 Appendix 1 - Supplementary forms required by local regulation ........................................................ 227 Appendix 2 - Supplementary financial statements in EUR (unaudited) ............................................... 253 2 PRIVREDNA BANKA ZAGREB dd Introduction The Management Board of Privredna banka Zagreb dd has the pleasure of presenting its Annual report to the shareholders of the Bank. This comprises a summary of financial information, Management Board reports for the Bank and the Group, the audited financial statements and the accompanying audit report, supplementary forms required by local regulation and unau- dited supplementary statements in EUR and other information. Audited financial statements are presented for the Group and the Bank. Croatian and English version This document comprises the Annual Report which also includes separate and consolidated financial statements of Privredna banka Zagreb dd for the year ended 31 December 2017 in the English language. This report is also published in the Croatian language for presentation to shareholders at the Annual General Meeting. Legal status The separate and consolidated financial statements are prepared in accordance with International Financial Reporting Stand- ards as adopted by European Union (hereinafter: EU) and audited in accordance with International Standards on Auditing. The Annual Report is prepared in accordance with the provisions of the Companies Act and the Accounting Law, which require the Management Board to report to shareholders of the company at the Annual General Meeting. Abbreviations In this Annual Report, Privredna banka Zagreb dd is referred to as “the Bank” or “PBZ” or as “Privredna banka Zagreb”, and Privredna banka Zagreb dd, together with its subsidiaries and associates undertakings are referred to collectively as “the Group” or “the Privredna banka Zagreb Group”. The central bank, the Croatian National Bank, is referred to as “the CNB”. The European Bank for Reconstruction and De- velopment is referred to as “EBRD”. In this report, the abbreviations “HRK thousand”, “HRK million”, “USD thousand”, “USD million”, “CHF thousand”, “CHF million”, “EUR thousand”, “EUR million” and "BAM thousand" or "BAM million" represent thousands and millions of Croatian kunas, US dollars, Swiss francs, Euros and Bosnian convertible marks respectively. Exchange rates The following mid exchange rates set by the CNB ruling on 31 December 2017 have been used to translate balances in foreign currency on that date: CHF 1 = 6.432 HRK USD 1 = 6.270 HRK EUR 1 = 7.514 HRK BAM 1 = 3.842 HRK 3 PRIVREDNA BANKA ZAGREB dd Introduction (continued) Who we are and what we do We are a leading Croatian financial services group engaged in retail and corporate banking, credit card operations, investment banking, private banking, leasing, investment management services and real estate activities. We operate in the entire area of Croatia, Slovenia and in Bosnia and Herzegovina and employ over four thousand people. Our mission is to permanently and effectively utilize all of the resources at our disposal to continuously improve all aspects of our business activities, including human resources, technology and business processes. Our vision is to be a model company and centre of excellence in creating new value, as well as provision of high-quality service in all of our activities for the benefit of our clients, the community, our stakeholders and our employees. 2,020 thousand HRK 103.8 billion 668,882 TOTAL CUSTOMERS TOTAL CUSTOMERS’ INTERNET BANKING FUNDS* USERS 1,078 thousand CURRENT ACCOUNTS HRK 14 billion 301 ASSETS UNDER TOTAL BRANCHES CUSTODY 962 HRK 71 billion 2,823 thousand ATM MACHINES TOTAL GROSS LOANS TOTAL CARDS ISSUED 1,215 HRK 13.8 billion 41,719 DAY AND NIGHT VAULTS TOTAL HOUSING LOANS EFT POS *Comprises customers deposits, assets under management and assets under custody 4 PRIVREDNA BANKA ZAGREB dd Introduction (continued) Five year summary and financial highlights (in HRK million) 2017 2016 2015 2014* 2013* Group Income statement and statement of finan- cial position Total gross revenue 5,782 6,294 6,047 5,355 5,234 Net interest income 2,974 2,950 2,895 2,454 2,257 Net operating income 4,908 5,224 4,625 3,938 3,726 Net profit for the year 1,346 1,739 461 989 821 Total assets 102,912 99,708 95,791 78,328 70,117 Loans and advances to customers 64,900 65,177 62,305 51,187 48,557 Due to customers 78,157 74,284 71,745 55,346 47,729 Shareholders’ equity attributable to equity holders of the Bank 15,549 15,626 14,292 13,983 12,772 Other data (as per management accounts) Return on average equity 8.10% 10.83% 2.90% 7.19% 6.44% Return on average assets 1.20% 1.68% 0.44% 1.17% 1.07% Assets per employee 20.4 20.1 20.4 18.9 17.2 Cost income ratio 42.70% 38.66% 43.79% 46.72% 45.41% * Presented information does not include Intesa Sanpaolo Banka dd Bosnia and Herzegovina (subsidiary acquired in 2015) and Banka Intesa Sanpaolo dd Slovenia (subsidiary acquired in 2017) in a common control transaction. (in HRK million) 2017 2016 2015 2014 2013 Bank Income statement and statement of finan- cial position Total gross revenue 4,315 4,532 4,087 4,052 4,351 Net interest income 2,374 2,335 2,193 2,132 2,145 Net operating income 3,815 3,839 3,161 2,944 3,039 Net profit for the year 1,443 1,605 193 643 615 Total assets 75,497 72,050 69,214 68,876 65,617 Loans and advances to customers 44,562 45,667 44,186 44,543 45,106 Due to customers 57,173 54,108 52,815 50,387 46,427 Shareholders’ equity attributable to equity holders of the Bank 13,755 12,769 11,424 11,660 11,499 Other data (as per management accounts) Return on average equity 11.10% 13.44% 1.67% 5.57% 5.30% Return on average assets 1.80% 2.13% 0.26% 0.88% 0.86% Assets per employee 21.8 21.3 21.7 20.4 17.7 Cost income ratio 35.30% 38.36% 43.73% 48.01% 46.95% 5 PRIVREDNA BANKA ZAGREB dd Report from the President of the Supervisory Board On behalf of the Supervisory Board of Privredna banka Zagreb dd., I am honoured to present you the business results of the Bank and Group for the year 2017. Positive macroeconomic trends continued in 2017, resulting in a 3 percent growth of domestic economy. However, the econ- omy was shaken and is still at risk due to major issues of the largest private food and retail concern. Most of the said risks were successfully mitigated in 2017 by applying the Damage Control Measures conducted through the adoption of the so- called lex Agrokor, but negative impacts are expected to emerge in 2018 when Agrokor will remain the largest negative risk to achieving the expected economic growth. Although we anticipate a continuation of positive movements in 2018, the absence of effect of the tax reform from early 2017 will somewhat slow down the dynamics of wage growth and consequently private consumption, whereas a positive contribu- tion of exports (goods and services) might be nullified by a stronger growth of imports. As in the previous year, foreign economic environment was encouraging due to the expansionary monetary policy of the European Central Bank, as well as the loose monetary policy conducted by the Croatian